Terence Ong of Real Estate Philippines News Blog came out with this great article on How to Choose: PRE-SELLING vs FORECLOSED vs SECONDARY PROPERTIES where he created a chart that shows what one should expect when buying pre-selling , foreclosed, and secondary properties.
With this post, I’ll add my own insights which should give you an idea of what to expect when buying foreclosed properties, and how they compare with other properties out there.
It’s good to note that foreclosed properties win hands down in terms of price in Terence’s article.
Interesting points were also raised in terms of the disadvantages that foreclosed properties may have as compared to the other types of properties one can buy.
I did some deeper analysis on these disadvantages and I would like to share these along with my opinions below:
Quality: Foreclosed properties usually have plenty of repairs to be done
These are very true in a lot of cases. In my opinion however, having the need for repairs can actually give investors plenty of room to make money. The selling price of foreclosed properties that need repairs are often way below market value and it’s a given that the repairs may cost a lot.
Image by Michael Slatoff via Flickr
After repairs are done however, the property’s market value should also go up, which is what we can refer to as the After Repair Value (ARV).
The ARV is more often than not equal to the current market value of similar/comparable properties at the same location. Though repairs may cost a lot of money, did you know that if done properly, for every peso spent on repairs, one may realize returns from 2 to 5 times of the money invested?
To illustrate, lets say a 53 sqm. foreclosed condo unit in Makati that needed repairs was bought for Php1,000,000 from a certain bank. It turned out that a similar/comparable unit at the same building that was ready for occupancy (RFO) has a current market value of 1,800,000 or about Php35K,000 per sqm. (this appraisal value came from banks as shared to me by a fellow real estate investor).
Estimates for repairing the condo unit range between Php100,000 to Php200,000, as given by candidate contractors.
Since I want to calculate for Profit (projected), and the property was already bought for 1,000,000…
Profit = ARV less Cost to buy property less cost of repairs less cost for acquiring, carrying, and selling a property (I’ll assume this as 10% of the ARV or 180,000)
Profit = 1,800,000 – 1,000,000 – 200,000 – 180,000
Profit = 420,000
As you can see, Php200,000 was spent on repairs but the projected profit was Php420,000 which is a return of more than 2 times or 200% of the money invested for repairs. I hope you can see my point here. Take note that these are conservative estimates.
What if the investor already had a reliable contractor that does repairs at a very reasonable cost and it went down to Php100,000? The Profit would have been Php520,000, which is more than 5 times or 500% of the Php100, 000 spent for repairs.
Availability Of Use: After Repairs (unless it needs none which is very very rare)
In my opinion, an investor just has to make sure that they already have repair estimates that include duration of repairs before deciding to buy a foreclosed property.
I personally would stay away from properties that would take a long time for repairs to get completed. Ideally, repairs should be finished in 30 days or less. Anything beyond would require one to consider the additional holding costs one may incur like additional monthly amortizations, property management costs, etc.
Worst Traits: Tons of Repairs, Time needed.
I for one would avoid these types of foreclosed properties. I’ve seen a lot of properties like these and it scares the hell out of me just thinking how much and how long repairs could take. Maybe I should start saving pictures of properties like these so I can post them here just to give you an idea of what we all need to avoid.
Obviously, properties that needs tons of repairs would take months to finish, which translates to high holding costs and long periods of negative cash flow, which is not what investors are looking for. Instead, one must focus on finding those diamonds in the rough that require some repairs that can be done in a reasonable amount of time and cost.
Let me summarize my insights below:
- Foreclosed properties may often need repairs but these may actually provide a greater opportunity for investors to make money as the repairs can add value many times over the amount of the money spent. Come to think of it, even home-buyers could benefit from this as they can get significant savings if they are willing to have repairs done and once completed, the property’s market value increases which translates to greater equity.
- Due to the time it would take for repairs to be done, a foreclosed property may not be available for immediate use, but the key is to find foreclosed properties that can be repaired in a reasonable amount of time. Most people would usually have some minor repairs done anyway if they buy a property, new or otherwise.
- For foreclosed properties that may require extensive repairs, one just has to be on the lookout for them so that they can be avoided. These are the so called money pits and if you see a property like this, just walk away and move on to the next.
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Rose
21 Feb 2011Dearest Sir Jay,
I deeply appreciate your generosity in sharing your knowledge and expertise in real estate. I really thank you that you have a heart for people like me who craves for more knowledge on financial abundance and real estate is one of the greatest avenue.
May I inquire please, can I attend an auction with participating since honestly, I have no means for participating yet. Also may I ask please…. how would you be so kind to answer my query please?:
1) if one loses in auction, will the bank return the money with the 2% interest?
2) if one wins in auction, will the money auctioned be the payment of the property already or have also to pay the balance?
Thank you very much.
Rose de Guzman
0917-8870958
rosedeguzman2005(at)yahoo(dot)com
Zandro
14 Nov 2010Its difficult pala to come in a situation where a foreclosed property has a pending case and the bank loses it so you get to get nothing in return.. Tsk Tsk. Some properties i think have red tags or notices that they are pendong litigations and we whould be very careful of those pala. Nice read!
rodelyn c bicol
9 Sep 2010thanks for the nice article ,mr jay! may i ask, if i buy a foreclosed bank property and it has a pending court case, what happens to the 10 percent downpayment i made And the monthly amortization i paid, once the bank lost in the said pending case?-bambi
Jay
18 Sep 2010Hi Rodelyn,
As far as I know it is not refundable. This is one reason why I don’t recommend buying properties with pending cases. There are just too many other properties that have no problems like this.
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Anonymous
6 Jun 2009sir jay., pag cnabi po ba na 'SPECS" ng property is it the specific info.?? thanks., ive been collecting some of the bank's foreclosed copies., need ko pa ng puhunan to buy since i have no means as of now., but i already attend the think rich last may 2.. if ever na i act as an agent muna for foreclosed, pumapayag ba ang banks na mag pa Agent? or you need to be Broker first??
Anonymous
10 May 2009Hi Jay,
I have a personal question regarding the property I want to buy. I need your advise.
Can you please e-mail me so that I can post my question.Thanks a lot! Hope to hear from you.
E-mail: entrap777@yahoo.com
Jay Castillo
9 May 2009Hi Jun, funny I just answered a similar question sa PMT forums. =) Anyway, for properties that always remain unsold, even with attractive prices, one factor could be the numbers still don’t work, maybe the cost to renovate would be high, leaving no room for enough profit. Other possibilities can include having a bad location, the title has a problem, or it may even be occupied. If the underlying problem is only repair cost related, the property might become a good buy at a certain price. Otherwise, it would be best avoided if the problem is one of the other reasons I mentioned.
Anonymous
29 Apr 2009Hi, Jay. There are properties which keep getting unsold in public auctions. Do you think it would normally be safe to assume that these aren’t good buys or there are problems w/ the property, and we should avoid them, even if the prices are attractive?
Jun
Jay Castillo
10 Apr 2009Hi eric, your welcome and thank you also for visiting! Pag-ibig loans are great but most banks don’t allow financing through pag-ibig. What one can do would be to go for bank financing first and then have it refinanced through pag-ibig later. Pag-ibig and bank appraisals should not be far from each other.
eric
6 Apr 2009hi sir jay,thank you for this very helpful site.
i have a question about pag-ibig fund loans, would you advice it? im planning to buy a foreclosed property, do they usually appraise lower than the banks apprased value? thank you.
Jay Castillo
2 Apr 2009Hi Dandy, yes, I was also there! I remember you were the one who was invited by Thea right? I hope we’ll bump into each other soon.
Dandy Abellanosa
30 Mar 2009Hello Jay,
Thank you for the response.
Yes, I attended the Think Rich Pinoy Investors’ luncheon at Messe Bistro last December 13, 2008. Were you also there?
With passion in real estate investing,
Dandy Abellanosa
Cebu City
Email: dandy.abellanosa@gmail.com
Jay Castillo
30 Mar 2009Hi Danny, you’re most welcome and thank you for visiting my blog. I like what you said about having passion in real estate investing. We all need this to succeed, not just in real estate but with whatever it is we want to achieve. By the way, did you attend the Think Rich Pinoy Investors’ luncheon at Messe Bistro last December 13, 2008?
Investment Services UK
27 Mar 2009Many thanks for sharing your views. Its really a nice blog. I agree with you that however buying foreclosures needs some knowledge and skill, once you have acquired some experience and know-how, it can be an outstanding way to invest in property.
Dandy Abellanosa
27 Mar 2009Hi Jay,
First of all, I would like to thank you for creating this great blog. I am very fortunate to have found this great source of information for investing in foreclosed properties.
I am based in Cebu City and a student of Trace Trajano also. I am just starting to look for those diamonds in the rough. Your blog is a great help and guide for me.
Looking forward always to your up coming posts…
Again, thank you very much.
With passion in real estate investing,
Dandy Abellanosa
Cebu City
Email: dandy.abellanosa@gmail.com