Strategies for Buying Foreclosed Properties
Formulate a plan for the strategies you'll use when buying foreclosed properties and be ready to act when you locate a good piece of real estate. Understand the advantages and disadvantages of each type of investment strategy.
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Use Hard Money to Buy
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Form an LLC that you can transfer title of your property to once the purchase is complete. If you're buying some properties to flip and others for long-term gains, you need two LLC's. Because the best deals go fast, you should arrange a "hard money" loan to acquire your properties in essentially a cash deal, and then refinance the property later if you intend on holding it more than a year. You'll find lists of properties on bank websites as "REO properties" or "bank-owned" properties. You can find an additional sources of foreclosed properties by locating real estate wholesalers in your community.
Long-Term or Short?
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Whether you acquire foreclosures by yourself or with a group of investors, don't hold properties that you're keeping for long-term appreciation in the same entity (LLC) you use to do flips. The IRS may label the entity you are doing flips in as a "dealer in real estate" and tax that entity at a higher rate. Keep the two investment strategies separate by doing business with separate LLCs. Long-term strategies may include lease-to-own rentals, long-term leases, development properties or buy and hold. Fix and flips or wholesaling properties are short-term strategies. Know which strategy you're going to use before you buy the foreclosure.
The Whole Spectrum of Foreclosures
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Search beyond the single-family and condo listings when looking for foreclosures. Commercial properties including apartment buildings, developed lots, raw land and mobile homes also become available through bank foreclosures. Keep an open mind if bargain hunting, as long as you can devise a good exit strategy for unloading the property. Remember, your exit strategy is where you get paid, so give plenty of thought to how you are going to get out before you get in.
Using Your IRA
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You can buy foreclosed properties in a self-directed IRA or self-directed Roth IRA, with a custodian or administrator, that allows real estate investment as part of the portfolio. PENSCO Trust Company, at www.penscotrust.com, will give you the general idea of how this type of IRA works. This is one way to utilize the funds you have built up over the years and step away from the volatility of the stock market. Purchasing a foreclosed single-family home in a nice neighborhood at 60 percent of its fair market value is one way to quickly regain some of the losses you may have incurred in recent years.
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