How to Buy Foreclosures, REO’s and HUD Properties Without Ever Seeing Them!

A busy rehabber and real estate investor does not have the time to view every foreclosure that comes on the market and work out the detailed costs of every purchase.  That approach is not an effective use of the real estate investor’s time and resources.  You will miss out on many good deals trying to analyze the cost of every rehab prior to submitting an offer.  Let’s make life as simple as possible here.

Follow these steps to start submitting multiple offers on foreclosures, REO’s, and HUD properties without ever seeing the property.  Learn to submit offers based on price points and spend that quality time with family and friends instead.

1.  Learn the neighborhood

The first thing an investor must do is learn the neighborhood inside and out that is going to be targeted for flipping homes.   The best way to do this is to view at least 25 foreclosed properties, mostly REO’s, which meet your predefined property selection criteria.  I actually looked at about 50 foreclosures before submitting my first offer – I was pretty gun shy.  Investors that know their neighborhoods well, will know if a house is on a good block or bad a block and what it’s after repaired value is just by its address.  With this kind of knowledge, real estate investors are able to react quickly to new deals and beat out the competition on the really good ones.

2.  Learn How to Estimate Rehab Costs

Go to your local Home Depot or Menards and study the cost of common items that will need to be replaced.  After a while you will learn the general cost of a hot water heater, furnace, kitchen sink, wood floors, tile, etc.  Then find a contractor (read the article on How to Find a Contractor) and schedule a day where the two of you can look at 4-5 distressed properties in detail together (this will require buying him dinner).  Have the contractor explain step by step what he would do in each room and how much it would cost.  By the fourth or fifth home you should be getting an idea of the range of the repair costs you will be experiencing.  Use rules of thumb, such as a full bathroom rehab is approx $3,500, a full kitchen rehab is $6,000, a re-shingle on a roof is $1,500, etc.

TIP:  It’s wise to apply a 10%, “Oh Shit Contingency” onto the rehab estimate for a little extra breathing room.

After estimating enough properties, you will be able to come up with the standard repair cost for a typical foreclosure in your target neighborhood.  Depending on which neighborhood I was targeting, I knew that my average rehab cost was $20-$25K for one neighborhood and $40K for the other.  The first neighborhood ($20K average repair cost) was mostly brick homes, with little exterior work needed and not as many deferred maintenance issues.  The second neighborhood ($40K average repair costs) generally had much older homes in much worse condition that were not treated with any respect as they went into foreclosure. Those were the numbers I used when working backwards to develop my price points for placing offers on a potential rehab homes.

3.  Add-in typical Financing, Closing, and Holding Costs

These costs will not vary much from project to project.  Factor in the cost of your hard money lender or which ever way you plan to finance your rehab purchase and construction costs.  Make sure to include the cost of rehab insurance (builder’s risk), utilities, title company closing costs, and the refi costs if needed.  The rehab should take no more than 30 days to complete (if properly managed) which means minimal holding costs should be incurred.  All together, these soft costs will be anywhere from $5K to $10K depending on the financing.

4.  Determine how much Profit or Cash Flow you desire

Are you shooting for $10K, $20K, or $30K in quick flip profits? Aim for a $25K profit but don’t be afraid to accept less if your presented with a solid offer to purchase your rehab.  A quick and solid purchase offer that will generate a $10K – $15K profit is better than a creative offer with a 30K profit, trust me.  Remember, the profit isn’t real until its in your checking account.  This business can be rough sometimes, so don’t be too proud to accept a $10K profit when the offer is from a reputable investor that you know will close on the deal and not back out at the last second.  If the property will be held for cash flow, then determine what end loan amount is needed to provide the desired cash flow using the Quick Cash Flow Calculator.

Here’s an example of how to calculate the purchase price point for a quick flip:

Purchase price point = $95K (ARV sale price) – $25K (standard rehab cost) – $5K (soft costs) – $25K profit

Using these numbers, the price point for this neighborhood would be $40K.  Any property that can be obtained for $40K or less is a deal worth doing.

Here’s an example of how to calculate the purchase price point for a rental targeting a monthly cash flow of $250 per month:

Purchase price point = $67K (end loan needed for a $250/month cash flow*) – $25K (rehab costs) – $7K (soft costs)

*See below for the assumptions used to calculate the end loan amount that will provide $250 per month cash flow using the Cash Flow Calculator.

The purchase price in this example comes out to $35K.  So any property that meets your predefined criteria that can be obtained for $35K or less is a deal worth pursuing.  Comment below if you want me to explain this further.

What if the assumptions are wrong?

What happens when your offer is accepted and when you see the inside of the property for the first time you find out that the rehab costs are much higher than anticipated?  This shouldn’t happen very often if you evaluated your target neighborhood correctly; otherwise, you need to reevaluate your assumptions.  When the numbers on a deal will definitely not work, you have to walk away from the deal even if this means losing your earnest money. I’ve only had to do this twice on over 60 rehab foreclosure projects.

If you love flipping real estate, whether it is for quick cash or long term cash flow, you will eventually have desires to quit your job and do this full time.   Plan carefully and submit offers frequently.  Your not making any money until your submitting offers.  Don’t look for the home run on every deal.  Focus on developing a system to put your rehab business on auto pilot so you can actually enjoy some of the money you make.  As Tim Ferris says, author of the 4-hr Work Week, “the new rich define their wealth by how much free time they have in life to do whatever they want whenever they want”.

QUICK CASH FLOW CALCULATOR Image How to Buy Foreclosures, REO’s and HUD Properties Without Ever Seeing Them!

 How to Buy Foreclosures, REO’s and HUD Properties Without Ever Seeing Them!

Comments

  1. buyfixandprofit says:

    Feel free to quote any info here as long as you provide credit back to http://www.buyfixandprofit.com.

  2. Sherry says:

    Here’s an example of how to calculate the purchase price point for a rental targeting a monthly cash flow of $250 per month:

    Comment below if you want me to explain this further.

    Please explaing the above further, I am new at investing and would like more explaination.

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