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Dr. Kalinda Rose Stevenson
If You Are Thinking About Buying Foreclosures, Ask Yourself This Question
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Are you thinking about buying foreclosed properties? If you are thinking about this, know that you are not alone. Anyone who has even the slightest interest in real estate investing is probably thinking the same thoughts.
All across the United States, and in other places around the world, property owners are losing their properties to foreclosure. Blame it on corrupt mortgage brokers, greedy bankers, and unqualified, irresponsible buyers, if you want. Whatever happened to cause foreclosure for any particular property owner, the harsh reality is that one person’s loss can be another person’s gain.
As foreclosed properties lie empty across the land, thousands of people see the potential for wealth in buying foreclosed properties.
And so, you are right to recognize that this is a time of tremendous opportunity to lay the foundation for wealth creation by buying foreclosures.
If you get out your calculator, you can get excited about the possibilities as you crunch your numbers. If you can buy some of these foreclosed properties at a fraction of their market value only a year or two ago, just think of how much money you will make when the market rebounds and prices go up—as they surely will, sooner or later.
While so many other potential buyers are too afraid or too broke to buy, or they can’t get credit to buy, you can scoop up prime properties at bargain basement prices.
How do you do this? If you have the cash, or if you have excellent credit , and if you can get a mortgage, or if you can get private funding, this is the ultimate buyer’s market. If you can hold the properties, while so many other owners are losing their properties to foreclosure, and if you can rent them to responsible tenants who pay the rent on time, you can use the rents to pay off your mortgages in a record time. By the time the markets rebound, and the market value of your properties climbs up again, in the next real estate boom, you can be the landlord of an empire of real estate holdings.
This vision is certainly possible, and will very probably turn into reality for at least some of the real estate investors who see the potential of thousands upon thousands of foreclosed properties.
But….before you begin to calculate your future profits, there is more to consider. Before you seriously consider buying any foreclosed property, ask yourself this question:
What are you going to do with any property after you buy it?
Expressed another way, the question is: What is your strategy for foreclosure properties?
A strategy is a plan to accomplish a particular result. Strategy always looks at the intended outcome.
Especially now, when there are so many foreclosed properties available in the marketplace, it is especially critical to understand clearly that a decision to buy property is never a complete plan. It is a tactic, rather than a strategy.
Consider the difference between a tactic and a strategy.
Tactics are about what to do, and how to do it. Strategy begins with the question: Why? Why are you going to do something?
When it comes to real estate investing, buying property is a tactic. It is never a complete strategy, because you have not clearly defined “why” you are buying the property. Buying real estate becomes more than a tactic and becomes part of a strategic plan when you know “why” you are buying the property, and what you intend to do with the property after you buy it.
In the boom years of real estate investing, much emphasis was placed on buying property. In my chapter on “No Money Limits Selling,” in my book, No Money Limits For Real Estate Investors, I made this observation.
One of the greatest deficiencies of real estate training targeted toward beginners is the emphasis on buying without equal attention to selling. I have heard too many gurus exhorting their students to go out and make a deal. And so people rush out, determined to make a deal—any deal—and end up making bad deals. No Money Limits for Real Estate Investors, page 74.
The common wisdom of the real estate boom era was: “You make your money when you buy.” Because market values were climbing so fast, and credit was so easy to get, investors often made a lot of money by buying property without having a clear plan of what they were going to do with the property after they bought it. In those heady days, investors could buy property and then decide if they wanted to use tactics such as “flipping,” “rehabbing,” and “lease options.” Even without clear strategies when they bought, many investors did very well.
These are different times. You can buy property well below prior market value, but that doesn’t mean you can easily turn around and make a profit using the same tactics that worked so well during the boom times.
The reason lies in one simple word, “if.” Did you notice all the “ifs” in this paragraph?
If you have the cash, or if you have excellent credit, and if you can get a mortgage, or if you can get private funding, this is the ultimate buyer’s market. If you can hold the properties, while so many other owners are losing their properties to foreclosure, and if you can rent them to responsible tenants who pay the rent on time, you can use the rents to pay off your mortgages in a record time. By the time the markets rebound, and the market value of your properties climbs up again, in the next real estate boom, you can be the landlord of an empire of real estate holdings.
But the list of “ifs”—and this isn’t even a complete list of “ifs”—is formidable at a time when mortgage lenders are doling out mortgages only to borrowers with excellent credit and substantial down payments. This is also a time when people who might buy or rent from you are not only losing their homes, they are also losing their jobs.
Even if you have the cash, credit, or financial partners to buy the property, this doesn’t mean that potential buyers or renters will be able to buy or rent your property. In addition, you will need to hold the property long enough for the market to turn around, which can be months or years. You will also need to be able to pay taxes, insurance, and maintenance. If you can’t do all of these things, you could very quickly find yourself in a position where you are facing foreclosure of your investment properties.
In all of this, I don’t mean to throw cold water on anyone’s plan to seize the wealth creation opportunity created by the foreclosure epidemic. My goal is to encourage you to start at a different place than the idea of buying foreclosures at bargain prices. Make sure that you have a strategic plan that includes both how you will buy the properties and what you intend to do with them after you buy them.
Dr. Kalinda Rose Stevenson
Discover the secret of making money in No Money Limits For Real Estate Investors, 2007 Best Books Award Winner in Business: Real Estate Category
Tags: buying foreclosures, foreclosed properties, foreclosure, No Money Limits, real estate, real estate investing, strategy, tacticsRelated posts
The Lending Game Gone Bad: The Money Reason Why Banks And Corporate Giants Are In Trouble
One of the factors creating turmoil in the economy is the blurring of financial roles.
In the Monopoly Game®, the rules are clear. The players have a clear set of rules, which determine what they can and cannot do with money. The banker also has a clear set of rules, which allows the banker to use money differently than the players do.
This distinction between the money rules for players and the money rules for bankers is a critical element in No Money Limits.
In the real economic world, we have experienced significant blurring of roles among various institutions, as the rules have changed and evolved over time.
Banks are a prime example. It used to be that the lines between different types of banks were clearly defined. In broadest terms, commercial banks served businesses, thrifts served consumers by taking deposits and originating home mortgages, and investment banks help businesses acquire capital. In recent years, through a series of legal changes, these lines have become so blurred that most of us have only the vaguest idea of the difference between various types of banks.
During the same period of time, there has also been significant blurring of the lines between bankers, non-banking companies, and private lenders related to lending.
One particular example concerns large companies that have become both sellers and lenders.
Analysts point to two key reasons why some of the nation’s largest companies have unraveled in the current downturn. One is that they had come to rely on providing financing to their customers, lending money for sales of their own products. When the credit markets ground to a halt in mid-September, it set off chain reaction of pain, hurting consumers and manufacturers alike. Corporate America’s Giants Crumbling
As we analyze what went wrong with the economy, to lead us to this state of economic crisis, one theme keeps recurring. The economic crisis originated with lending practices gone bad.
Lending money can be extremely profitable. To get in on the profits, various types of banks kept expanding their services and their capacity to make loans. At the same time, big corporations realized that they could increase their profits if they became lenders for consumers who wanted to buy their products.
In the process, bankers made risky mortgages to people who could never repay them, because the lending process itself was highly profitable. Meanwhile, big companies set up their own lending divisions. Instead of sending car buyers to the bank to get car loans, why not provide financing directly to your customers? As a result, a company such as General Motors became both the maker of cars and financer of cars through its financing arm, GMAC.
In retrospect, [Ed] Yardeni said, the business model was essentially flawed. When companies like GM and GE financed customers, the loans must have been cheaper than what the customers could get elsewhere and must have meant that the risk of lending to them wasn’t being reflected in the loan rates. Corporate America’s Giants Crumbling
Self-financing by big companies led to the same trap that ensnared the banks that got caught up in making subprime mortgages.
“Self-financing is inherently a dangerous game,” Yardeni said. “You’re biased. You want to convince yourself that the borrower is good for it, and you want to make the sale. You’re not going to be an objective lender. That may be one of the problems here.” Corporate America’s Giants Crumbling
The driving force behind the expansion of their traditional roles—both for banks and large companies involved in self-financing—is the intention to create profit by increasing transactions. This is the essential goal of any business.
Ultimately, the nature of money made all of this possible. Money is not a commodity in limited supply. Money is created in transactions. By creating more transactions, banks and self-financing companies could make more money. The more transactions they made, the more money they would make.
The primary insight of No Money Limits is that the only limit to money is the belief that money is limited. What we are seeing in the current economic crisis is the result of people who took this insight too far.
In the desire to increase profits, banks and self-financing companies made more and more bad loans, throwing prudent lending practices out of the window, until the whole financial structure teetered on the edge of collapse.
Dr. Kalinda Rose Stevenson
Tags: bad loans, banks, lending, Monopoly, No Money Limits, recession, self-financingRelated posts
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