Residual Income Through Real Estate - What You Can Expect on Your Investment

Purchase price: $100,000
Total Rental Income = $1,000
Taxes & Insurance = $250
Leftover per month on ongoing basis is then $750, or $9,000 per year.
9,000 / 100,000 = 9% return

Cash-on-Cash Return or Equity Dividend Rate

Divide pre-tax or after-tax cash flow divided by the required equity investment. So:

Equity investment = $10,000
Annual after-tax (28%) cash flow = $6,480 = 65%!!!!! Cha-ching!!!!

Attending the Foreclosure Auction:

If you prefer, you can go to the actual foreclosure auctions. If you choose to go this route, here are a few pointers:

Attend several so you become familiar with the process.
You need to do your appraisal work properly, because at auction, the lender will probably come in with the first bid. This is probably at least as much as the foreclosed loan balance plus interest and expenses. If you bid, you want to make sure you bid over that amount, but substantially less than market value. Why? Because you don’t want to eat your PROFITS!!!!!!
Also check for your state’s Rights of Redemption, or the original owners right to satisfy the loan before, and even sometimes after foreclosure (Statutory Rights of Redemption). Original borrower may delay your plans, depending on her or his rights.
Contact local county courthouse or county clerk’s office (see list below).
You can also contact some of the auctioneers themselves. Inquire at county clerk’s office as to who the auctioneer would be, or look them up on the Internet.
Bidding may be verbal or through sealed written offers.
Usually 10% needed up front, with the remaining 90% due at closing within 30 days.
Regular deed or Torrens title? One of them is required properly convey the property. If lost by the original owner, replacement of a deed is a relatively short process. Just go down to the local county clerk and pay for a copy. Not so simple with a Torrens title. This title lists what are called “memorials”, or the listing of all legal instruments ever associated with the property, e.g., liens, mortgages, etc. Torrens title copies must be ordered by a court and can take months. Thus, the Torrens may give you, the borrower/investor, more time to arrange financing. You find out about the Torrens title by searching the file at the county clerk’s office, or via the foreclosure search originated by the lending institution.
You bid on the mortgage balance, not the market value. Caution: Don’t overbid! The difference between the mortgage balance and market value is your current profit margin.

After the Foreclosure Sale, or Buying Bank Owned (Real Estate Owned or “REO”) or Government Agency Owned Property

Real estate owned means that ownership goes to the bank or government agency, maybe because the property did not sell at foreclosure, or the bank bid on and won the property back.

I will say that one of the best skills you can acquire here is the art of schmoozing. Get to know who the players are at the banks. Keep a list of whose job it is in the individual banks to handle this task. REOs are sold in a variety of methods: directly with the bank/government agency, listing with real estate brokers, auctioneer companies, and even some on mailing lists and web sites. Also get to know the housing stock in your target area.

Advantages

Lower interest rates
You may get the lender to offer a discounted price.
You have access to the property for inspection.
Lender has probably evicted current tenants in advance of the sale.
More time to set up favorable financing.
Lender can restructure loan with more favorable terms and financing.

Disadvantages

Price will probably be closer to market value, as opposed to mortgage balance at auction. This is biggest disadvantage here, but negotiate! So what if you make a $10,000 profit, as opposed to a $20,000 gain. Ten bills is a just as green as twenty! Don’t be greedy.
Broker or agent can kill the deal.
Repairs may be numerous.
Lender may not provide financing
Lender may not be flexible with terms.

Each bank and government agency will have its own nuances and procedures for obtaining REOs. Learn what the procedures are and use them!

Part 6: System for Picking Foreclosures

Part 8: Tax Liens