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Thursday
Dec092010

Real Estate Investing For Physicians: Part 2 - Real Estate Auctions

Forclosure properties may be the place you want to be for bottom line ROI.

In my last post, I commented on the importance of timing when it comes to investing in real estate.  In my not-so-humble opinion, I believe that timing can be more important than the oft-quoted mantra of real estate gospel, i.e. location, location, location.

For example, when the market is experiencing red-hot acceleration, even mediocre locations can do extremely well. On the other hand, when national real estate trends are doing their best imitation of Jacques Cousteau diving to new depths, even the most attractive locations may not be able to weather the down-draft.

Timing to me is not just figuring out the best time to buy or sell, but more practically, the true significance of timing is concerned with figuring out what is actually working at that moment in time. To help assess this all-important issue, I'd like to review the Five Stages of the Real Estate Cycle. These are:

1) flat to minimal growth
2) starting appreciation
3) accelerating appreciation
4) topping, and
5) depreciation.

This cycle historically repeats itself ad infinitum (and occasionally ad nauseum), with a general tendency towards upward growth - namely, the trough of the next cycle typically is higher than the trough of the cycle you're currently in.

So what stage are we in now?  In most instances, I would respond that it would depend on your geographic location. However, as you can read in any newspaper, regardless of where you look on the map, we are decidedly firmly mired in the fifth and scariest stage—that of depreciation and falling property values.

Real estate transactions that were uniformly successful in stage 3 could be doomed to failure in stage 5. For example, in the mid-2000's, I had great success with condo conversions as well as buying multiple properties from a developer and selling the individual units. Other time periods called for buying and holding homes for cash flow.

About now, I'm sure you're asking, "Well genius, what's working now?"  The answer in a word - foreclosures. I know that's not some unheard of news but the simple truth is that foreclosure properties represent not only the best value for your purchasing dollar but also offer the best protection against continued depreciation of property values.  And the highest profit margins on foreclosed properties are found in foreclosure and bankruptcy auctions.

But such auctions are not for the uninitiated - for the inexperienced investor, it can be costly place to get an education. Also, you like most doctors probably don't have the time, patience or knowledge to play in this extremely lucrative  but equally hostile arena. Is there a way to take advantage of this unique opportunity to access dramatically discounted properties and still keep your day job, your sanity and your bank account intact? I believe the answer is getting involved with limited partnership syndications that specialize in buying and selling these foreclosure properties.

In my next post, I'll give you more details on this type of investment, that even though it is passive in nature, can be extremely dynamic in terms of the bottom-line return-on-investment.

Reader Comments (10)

Google Maps keeps evolving, expanding the ability to drill down into granular detail. The latest updated trick? Mapping foreclosures for sale. This great and terrible Google trick has been around at least since 2008 -- but it seems to have become much more robust earlier this year:

1. Punch any US address into Google Maps.
2. Your options are Earth, Satellite, Map, Traffic and . . . More. (Select "More")
3. The drop down menu gives you a check box option for "Real Estate."
4. The left column will give you several options (You may have to select "Show Options")
5. Check the box marked "Foreclosure."

I wanted to demonstrate the full extent of Foreclosures in the US, so after setting GMaps on foreclosure listings, I slowly zoomed out of the map. Voila! Most foreclosures that are for sale in the USA are now showing on your screen. (Note: This map does not reveal any of the millions of REOs that have already been sold by the banks that hold them).

Great article. I have been toying with the idea of investing in real estate over the last few years. Can you give me your opinion on the Vegas market? The deals are amazing, but some of my colleagues lost their shirt there.

Dec 9 | Unregistered CommenterMonroe, MD

Very interesting read, Gary. I also liked your comment, Jeff. I had no idea Google Maps could be used like you described. Gary, I'm looking forward to your future posts on this subject.

TO: MONROE, MD

Thank you for your comments. I have invested, about 5 years ago, in Las Vegas, actually in Henderson, and they were the WORST deals I'd ever done. Just another example of not paying attention to the timing of real estate cycles. I know there are great deals there, but there are great deals in a lot of places. I also am aware that there's still excellent growth potential in LV. I'm just a little nervous personally about getting involved in a market with such wild cyclical changes - i.e. high growth then overbuilt, etc., etc.

Gary

When should you get a realtor involved with any of this?
It's been my experience that online mapping searches like Zillow and Google Earth are outdated and vary significantly from market values.

Hi Arlen,

Once you've decided on the geographic market that you potentially interested in, then it's time to get a realtor and property manager in your camp. Research at least 3 realtors and 3 property managers. Tell them the type of property, price range, etc. and have them start looking for you. There's no need to narrow down the selection beyond 2 of each. Have them both work for you - what and when they bring you properties to look will tell you a lot about what it will be like working with them. I added property managers to the list, because I frankly feel that property managers will give you a more honest and accurate read on the rental potential of the properties you might purchase. Since at least break even cash flow is a must if you're going to stay in the real estate business, then the ease of renting and at what monthly rate will be the one of the keys to your success.

Thanks for the question.
Gary

Thanks, Gary. Here's another one.
Suppose you buy a condo then rent it to someone.
What is the best way to deal with the Homeowner's Assn Dues? Suppose the dues are in arrears?

I understand that the Homeowners Assns, in that circumstance, can foreclose and usually win in court.

Arlen, if you buy a foreclosure at the courthouse sale the condo fee's are wiped clean (if the association was mentioned in the "legal notice of sale"). We've been doing foreclosures since 2005 and things have changed dramatically; now many banks are deeply discounting at the sale. In the end its a "cash-flow" game; does the rental income support the note or the rate of return you want (if you paid cash).

Hey Arlen,

Jim is right in regards to how the past due HOA dues are wiped out with a courthouse steps foreclosure purchase.

Leaving that scenario, if you are purchasing a condo unit under other circumstances, more often than not, you will have to bring the arrears HOA dues current through escrow during the purchase process.

After the purchase, the HOA dues are paid by the owner - you, not the tenant. The HOA dues are just another monthly expense item, in addition to mortgage principal and interest and property taxes. The HOA dues typically cover common area expenses such as water, sewer, garbage, common area electricity and maintenance/repairs. One important item is the insurance. The HOA policy covers from the "studs out", so the inside of your condo unit which includes tenant liability issues and contents are NOT covered by the HOA policy. You will need to purchase another renter-type policy that covers such items. The good news is that this extra policy is much cheaper than a similar full coverage policy you would get for a single family house.

My only other suggestion is to purchase a home warranty policy, such as through American Home Shield. This covers repairs situations, with a typical per-repair co-pay of about $ 60. These policies cost about $ 600 per year and are worth their weight in gold. I had a water heater leak that got in to the foundation slab and cost $ 16,000 - my cost was $ 60.

Gary

Thanks for the great article. I particularly agree with your comment about getting involved with limited partnership syndicators. After seven frustrating years of residential properties, we started investing in large multifamily apartment buildings through fractional ownership. Its very important to do the due diligence and find an experienced asset manager with a proven track record. Our returns have been so much better this way and now we have none of the managment headaches.

May 8 | Registered CommenterDennis

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