“Is it Better to Buy Foreclosures or From Distressed Sellers?” – ASK the P.I.G.

Posted by on Jan 20, 2015 in Blog | 4 comments

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James, one of our subscribers, recently posted the following question on our website: “Would it be better to purchase homes from distressed sellers, or to buy foreclosures?” As always, an excellent and insightful question, which is why I chose to answer it as a part of this month’s “ASK the P.I.G.” series.

This is definitely an easy question in my book, because I think it is undoubtedly far and away better to purchase from motivated sellers, and NOT homes that have been foreclosed on. The biggest and most compelling reason is because purchasing from motivated sellers gives you so many more options in regards to both purchase and exit strategies.

When you find homes with distressed sellers BEFORE they have gone to foreclosure (a.k.a. PRE-foreclosures), you have a litany of options that you could pursue. If it’s overleveraged, you could do a short sale, which allows you to have influence on the appraisal and gives you a 4-6 month time frame to try and find another buyer. If the seller is only a few months behind on payments, another option could be taking it subject to the existing mortgage, making up the back payments, and either renovating for resale or renting it out for cash flow. If there is equity in the property, you have the option of wholesaling for an assignment fee, or negotiating partial or full owner financing, a lease option, and the list goes on and on.

However, when you purchase an REO property from the bank (typically listed by a Realtor), you basically have one option, and that’s to buy it or not buy it. They will perform a BPO and/or appraisal, and will set the price at the current market value, which leaves little to no equity for most buyers. You also typically need to have cash, because you are oftentimes competing with other cash buyers, and the Realtor will require a proof of funds letter AND an earnest money deposit. That’s not exactly what you call creative real estate investing.

Another key benefit to dealing with motivated sellers is the lack of competition. Even the neophyte entrepreneur understands the basics of supply and demand, and so if you have hundreds or thousands of buyers looking at a small supply of good deals on the MLS, the competition will inevitable drive up the price. However, if your marketing has generated a motivated seller lead that no one else knows about and isn’t on a public MLS website, it gives you a great deal of control to structure the deal in a way that is most advantageous to you and your investing business.

To check out my full response to James, watch the video above…and then leave your thoughts or comments below.

4 Responses to ““Is it Better to Buy Foreclosures or From Distressed Sellers?” – ASK the P.I.G.”

  1. Todd Gorrell says:

    Hi Matt…everything you said is true…but…it still depends…early 2014 I bought and reo…Garden Club Dr…mage a DEAL with the bank…purchased the home and in 93 days total…cleared over $95K. So, it depends…there are still great deals in the REO market and there was no need to be so called creative…and I have 95000 reasons to prove it 🙂 Sometimes banks are just going to get their property back and it is the only way you will have a chance…
    Thanks
    Todd
    850 865 7540

    • Matt Robinson says:

      Todd, it’s so funny that you responded so quickly, because when I wrote to leave a comment…I KNEW you would be the first to respond. Ha ha! Just to clarify for you though, the question was “Which is better…REO or distressed seller?” At no point did you hear me say you CAN’T MAKE MONEY on REO deals, or that you can’t make money with AUCTION deals. My point was which was BETTER. Remember, I deal with a lot of students/members who have no money, no credit, and no private lenders (at least not yet) and so they depend on the creativity that is available with working directly with distressed sellers, which undoubtedly provides more creative options. I’m sure all of my members would love to have the resources you have, and to come face to face with the “95,000 reasons”, but they have to crawl before they walk, walk before they run…and they don’t have the EMD, proof of funds, or buying power that my more experience investors have. But as always, I appreciate your input! And, GO BUCKS!

  2. Jim Riley says:

    I have done both and if you can get the buyer to realize he can possible walk away with money in his pocket and the bank satisfied it can be good for everyone. One of the problems I have had is the owner mentally freezing up and they will not make a decision. Eventually they loose everything and it’s unfortunate. Banks have also started taking a lot of the profit margin out of foreclosures. Most of the larger banks are now installing new carpet, paint and appliances and the market price goes up. There are still deals out there but they are much harder to find.

    • Matt Robinson says:

      Very true, Jim! I think the bank’s saw the additional profit that could be made by doing a minimal amount of work. The word on the street was always that “banks don’t want to be in the real estate business”, but the market crash and glut of foreclosures forced them to try even harder to mitigate loss.

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