House Flip…More like House Flop! how an Investor becomes a distressed property owner!

As a Maplewood NJ Real Estate Broker I work with all kind of buyers in my day to day activities. I work with move up buyers who are looking for a little more space

, downsizing buyers who just sent the kids off to college and now need less space

and let’s not forget the first timers who are soooo excited to purchase their first home, those couples add a little something extra to our lives don’t they

But recently, I have met with investors who are looking to climb that property ladder and invest in rehab and resale properties in our area.In our area we have homes that range from 250k-1 million+ so its not your typical 50k purchase, 50k rehab and resale for 250k, its a much higher risk involved.

I met one investor in particular who purchased a home in Jan. 2011 with what I found out to be “hard money” later on. If your unfamiliar with hard money; here is a quick explanation. A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are almost never issued by a commercial bank or other deposit institution.

So this investor purchased the home for 285k with hopes to renovate the property for around 50k and thought that he would be able to resale for around 450k, so if you were keeping up with the numbers that’s a potential profit of 115k (now that’s a great incentive to take the risk) but here’s the problem; The housing market continues to be on a slight decline and he has been on the market for 160+ days and to make matters worse, now the real investor (the one supplying the actual money) is calling and looking to collect. Not to mention the monthly carrying cost, taxes, insurance and budget overages which has not only sunk his bottom line but has caused the investor to go into his own pocket to make due. He got in over his head and with no more money left…he has went from an investor to a distressed property owner.

This investor now has an unfinished property that sits vacant and now has requested our firm (GoodBuy Homes NJ Realty) to list and short sale the home, but here is the problem; a short sale is always subject to the lenders approval and in this case the lender is a private hedge fun investor and does not seem interested in any reduced payoff of the amount due. This story is to be continued…

Here’s some tips for Agents/Home owners dealing with Investors:

• Make sure you double check the proof of funds letter (we prefer bank statements so we know that it is the investors money and not someone Else’s)
• Be weary of Transactional funding investors; they are usually looking to buy, hold for one day (sometimes a few hours) and resale a day or two later. (not saying that I disagree with this practice but you must be careful) Some states shy away from this practice all together, so check with your local board and State laws. One more thing about transactional funding; do not participate in the back to back closings, some investors will offer you 3 sides of the transaction (dual agency on A to B closing and listing side on closing B to C side) bad idea…really bad idea
• Be careful with Investors who want you to write offers on multiple properties at one time. We feel that this “throw mud at the wall and hope it sticks” approach is not healthy for business because if they all get approved, will they be able to perform and close on them all. My suggestion, try one first and then another, this way you build confidence and see how it goes.
• Lastly Do not make promises on resale values; some investors will ask you what could I resale this for? be careful because some investors take your words as law and we all know values change almost daily. So what I am saying is practice the age old rule of

I work with a lot of investors as well as regular buyers and I have been victim of a lot of things in my time. So if I could help another Agent avoid some of these pitfalls then I have done something. In this market we are all working longer hours and it takes much more effort to get a deal closed so be weary and make sure your working both harder and smarter! and stay away from the