Foreclosures of the Previously Wealthy
Upscale homes in million dollar neighborhoods on the north shore of Long Island are even being foreclosed on in this economy. Investing in foreclosures to house flip has always appealed to me, but I have always been afraid of the maintenance concerns that go with buying a run down house. However, when looking at homes in wealthier neighborhoods many of the homes appear to be in pristine condition and well below market value. It appears that someone can make a decent amount of money with a lot less effort by focusing on the high-end foreclosure market.
Does anyone have experience in this market? Any thoughts or comments?
My personal thoughts are that it is interesting, but what's your exit strategy?
I don't think that given the market you can reasonably expect to flip the house in a short period of time. So, in my mind the only play is to buy the home, rent it and then possibly sell at a later time. I'm not willing/able to do that on high end home, but I'm considering it in blue collar areas with single family homes and possibly townhomes. The question I'm still not sure of is if I'm ready to take the risk and work to be a landlord.
The profit margin on those blue collar homes is a hell of a lot easier to work with too. It's not hard to buy a 35,000 dollar house do a couple things and turn it into a 60,000 dollar home. Conversely, if you buy a 600,000 dollar home that is, as you said, in prestine conditon, it's going to take a lot more work to increase it's value.
There has never been a market such as this one so all prognosis is based on nothing but opinion. Keep in mind there's no reason to believe that these homes have come close to hitting bottom.
Agreed. Housing data has been trash as of late. Maybe a headline number here or there might be good, but dig deeper and you'll see all is not well in housing. The street wet itself today because housing starts came in a tad over expectations: too bad they are at all time lows since the 50's. Permits were down too. Don't you think if the home builders could, they'd build as much as they could to make $$$. Instead they are building smaller developments and scrapping projects because they don't know if they can sell into this mess. I'd be careful with an investment like this, particularly for homes such as these.
Its a risky strategy, but could be worth your wild - particularly if you have excellent credit and can get obscenely low numbers on your mortgage. Just like any other real estate investment though, you really need to KNOW the market. You cannot listen to a broker or anyone else who says what values were and should be. If its a neighborhood in LI or anywhere else that's close to where you're from and you've seen ups and downs in the market there WITH YOUR OWN EYES and have a good sense of value, etc, then its a go... if you're just randomly heading out to the burbs to do some vulture work on a place with a "vibrant local polish community and convenient subway access", then I'd pass.
I do have a friend that started doing this in late 2008 in suburban chicago (he's from the city, but know's the north side pretty darn well) and he's had a lot of success... I think he targeted houses selling for about 300k that he was aiming to cell for 500-600k after 20-30k of renovation. He has a property manager (that does this for a number of similar vulturing investors and actually has a good business now because he manages/rents the apartments of like 9 investors who own 20 properties) that handles the renting and shit.
As you're on this site you probably know this... but also keep in mind that you're exposing yourself to RE market through this, so you might want to cut out RE stocks / REITS (certainly housing / multifamily or whatever) from your investment portfolio. If these foreclosure investments are going to account for a larger percentage (more than 30%) of your total assets, I'd be extremely weary. LOTS of risk - even for a young person.
I am a RE investor... and I would stay far, far away from the high end.
A few reasons why: The cost of carrying McMansions is very high. Taxes on LI are insane, especially for new construction. The cost of heating and landscaping these beasts is also very high.
You say these houses are below market value. That isn't true, because they are on the market, and they haven't been sold. If a house sells in less than a week, then it was below market. If it is out there for a month, it IS the market. It sounds like you are still stuck in a 2007 mindset, where this whole real estate downturn is just a speed bump, and the market is going to come back any day now.
If the houses are pristine, its going to be very hard to spruce them up and flip them. One thing I learned in this business is that people get very turned off by cosmetic issues. The houses I have bought (and later rented) all looked like shit and lacked basic amenities like washer/dryers. A little paint, reglazing in the bathroom, change some light fixtures, maybe reface the cabinets or re-tile the kitchen floor, and for a few thousand dollars I turned a $55k house into a $100k house fetching $1400/month in rent. "Turn key" houses in move-in condition always command a premium rent.
I am not sure what kind of deal you think is out there, but if you think these guys are selling low because they have the foreclosure brand on them, consider the fact that transaction costs are going to run you about 12% of the total price you buy and sell for. This includes RE agent fees, lawyers, taxes, mortgage fees, recording fees, etc. You need a high margin just to break even. Include some of your projected numbers, and I can give an opinion on how feasible your plan is.
I started in RE around 2002 and planned to buy one a year until I was a tycoon sitting around collecting checks. In 2004 though, the prices stopped making sense, and I stopped. My biggest mistake is not cashing out when my 2002 55k house could have sold for about 170 in 2007. Its nice to have a second stream of income, but as my salary and other assets have grown, they really seem like big liabilities to me now. One slip on an icy walkway could lead to a lawsuit that will probably take away any money I ever made on the place. I will probably either sell in the next few years and just take the tax hit, or double down on a legit apartment building that will grow into what I consider "real" income.
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