Lower Priced Houses, Part 3

This article is the third or fourth in a series. See the bottom for links to the other articles. This article discusses purchasing a foreclosed house, a 403k loan, and considerations on small, medium, and large multifamily home buying.

I. Buying a Foreclosure

I previously didn’t know you could finance a foreclosure. You can. You can even get a low down payment FHA loan! Here is an interesting anecdote from one guy, but here is a discussion on the foreclosure market by Wells Fargo. Key quote from the Wells Fargo article:

On average, approximately 60% of our foreclosed homes purchased are financed.

Be aware of the differences between a short sale, a foreclosure, and a Real Estate Owned (REO) property. I believe Wells Fargo and many others refer to REOs as foreclosures. This person was able to get 75% financing on a short sale!

At first glance, foreclosed properties sell for 18-59% less than comparable properties. At second glance, many foreclosures are distressed properties. Whether or not you ought to buy a foreclosure depends on a number of questions including whether you intend to rent or occupy the property. It might be OK for you to personally live in a 3/2 where one of the bathrooms is busted up and you just don’t use it, but you are going to have a hard time leasing that unit.

Repairing a distressed property can sometimes be done on a convenient timeline. It might be OK for you to live with one bathroom for six months or so while you get the other fixed. Other times the kind of distress the property has suffered requires immediate attention. Broken walls, roof, windows, no AC, missing or damaged stove or appliances, and so on. In these cases you may ultimately end up paying market price for the home, or less, or higher. Whether the foreclosure is a good deal depends on:

  1. Whether the property is intended for lease or occupancy
  2. The level and kind of distress
  3. Owner time preference
  4. Bank pricing

The last one is hard to gauge, and that’s kind of the point. Banks know that distressed properties are worth less than non-distressed properties, but the market for distressed properties is thin in many places so banks have a hard time accurately pricing contingent on distress. In some cases you may run into a genuinely below-market deal. I wouldn’t be confident that you, the buyer, can price better than the bank, but some real estate experts claim that sometimes they have found such a deal.

Notice that even if you end up paying above market price overall, it may be a good investment because you are able to get started earlier, cheaper, or with more units.

Here’s one cool thing about distressed properties: You can get an FHA 403(k) loan on these properties. Like other FHA loans, it is a 3.5% down payment. It’s really not very different, but there may be situations where you could use this loan and you couldn’t have used some other low down payment option.

II. Considerations on Small, Medium, and Large Multifamily Home Buying

Large multifamily properties are technically five or more units. They will no longer be considered residential by lenders. For commercial buyers, though, a large property is often used to mean a property of 100+ units. To make matters complicated, I am using the term to mean neither thing.

My wife and I both currently work. She’s a real estate property manager, which is part of the reason we are interested in real estate investment. For us, a large property is a property with enough units such that she could stop working and manage units our own properties full time. A small property would be one which we could manage while we both work, and a medium-sized property would be one which is in between.

We would be comfortable with an owner-occupied 4-plex, and maybe up to 8 units, while we both work. More than that, we estimate, will begin interrupting our ability to work. Looking at rent per unit and other factors in our markets of interest, Tina could possibly manage our own properties full time with as few as a couple dozen units, but we would probably prefer no less than 32.

We actually have enough money that we could pick up 12 or so pretty nice units, of even 24-32 crappy units, or possibly 24-32 decent units by bringing in a partner or two. While all of that is possible, it seems to get risky and complicated. In addition, several of these markets would require our physical relocation and we would be lacking a decent bit of familiarity. For these reasons, it seems smart to go small to start with. This would be our first multifamily investment, so I don’t think a partnership would be a good idea.

III. Related Links: Some Places to Buy Multifamily Properties

  1. LoopNet
  2. Redfin
  3. realtor.com
  4. Trulia
  5. Zillow
  6. Homes.com
  7. Maybe Reonomy if you have money? I’m not sure.

IV. Related Articles

  1. Finding Extra Dollars to Finance Real Estate
  2. Lower Home Prices, Part 2
  3. Lower House Prices
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