REO/Preforeclosure investment questions for a novice

[Phil M.]

I would really like to start out investing in foreclosures or pre-forclosures, and would like some advice. I think this is a really good topic.

Have you found more success on finding REO for a great price or pre-foreclosures for a straight sale?

How often do your tenants actually work out in a lease/purchase?

Have you ever experienced an un-expected negative cash flow? If so how did you prevent that in the future?

When buying either REO or Pre-Foreclosure do you typically put money down? Are you able to work off the appraised value to get a lower LTV when purchasing either type of property?

I have recently found an reo in my area that seems to be a good deal, I just don't have any money and I have average credit. Is there anything I can do?

[Jon Holdman]

I'll try a few of your questions.

No matter what you're trying to buy, it will be a lot of work. Plan on looking at hundreds of houses and making dozens of offers to buy one. Having found one REO means you're on your way. Now go find 50 more and make offers on 20 of them.

If you don't have any money you don't want to be in the landlord business. You need to have a few grand in cash in the bank to handle any unexpected thing that pops up.

Read in the Rental Property forum about true rental expenses. If you fall for the "cash flow = rent - PITI" lie, you'll certainly be in a world of hurt very quickly. You cannot prevent "unexpected negative cash flow". I take it by that you mean a two month vacancy where the tenant bugs out and leaves a big mess and damage you have to repair. There's nothing unexpected about that. Irritating and unpredictable. But rest assured things like that do happen. So you plan for them by having cash reserves and being realistic about your cash flow projections.

Very tough to buy REOs or Pre-foreclosures with no cash. One approach is to use hard money to buy and fix the house, then refinance into conventional loans. However, that's expensive with the hard money costs and the refinance costs. And both the hard money lender and the permanent lender will want to see cash reserves. Fannie Mae guidelines require six months PITIA (A = anything else like HOA fees) for the property you're financing or refinancing.

If you really have no cash, and want to get into this business, stop spending and start saving every penny. Dave Ramsey's "Total Money Makeover" is a great place to start.

Conventional lenders will use the lower of either the appraised value or the purchase price. Hard money lenders will look at the value when its fixed up, but only do short term loans 6-12 months at very high rates 12-18%, up to 4-6 points. Conventional lenders are going to limit you to a 75% LTV. Maybe 80% if you find the right lender. Certainly no higher. Appraisals are tighter and tighter. Plan on holding at least six months before you can refi, and even then you'll need to find the right lender. Most banks will want you to hold it a year before refinancing.

Average credit would be 720 or higher. If you're credit is lower than that, start working on your credit.

You might want to look for properties you can buy with owner financing, subject to, lease options, or other creative techniques.