It has been said many times that the Chinese have one word that means both opportunity and crisis. Since I don't speak Chinese, I don't have any idea if this is true. Having read about the balance of the yin and the yan, it makes sense that the Chinese would think this way.
The current economic climate is really both an opportunity and a crisis.
If you are in the market to buy a business, commercial real estate, rental properties or just a great deal on a house, there are plenty of deals out there. I found it funny just yesterday when I ran into a guy who wasn't at all happy with his “deal”. He bought a foreclosure house and had no idea how the process worked or what he was getting into, and thought he got ripped off.
In some cases, when a family is experiencing a crisis and is losing their home, they will “strip” the house. A home that was recently foreclosed in my area had a very interesting yard sale the week before the homeowners were escorted out by the sheriff. I later found out they had no where to go and that is why they didn't “walk away” as some homeowners did in the same area.
When I passed the house on my way into town on the day of the yard sale, everything was on the lawn including the kitchen sink, cabinets and all. This family stripped the house to the bare walls. Interior doors with the frames attached were propped up by toilets, bathroom cabinets and topped with ceiling fans and light fixtures. While walking the house for the pre-auction review, I noticed that all the metal rails for the garage door were also missing and two nails held the garage door in place. I have a whole new mental image of the saying “everything goes” now.
In the case of foreclosure houses, the old saying that “anything not bolted down grows legs” is always correct and many times even the items that are bolted down grow legs. So how do you make sure you really get a deal and are able to turn the current economic situation into a opportunity for you? Like all situations involving money, specifically spending lots of money, open up your box of keys to success and pull out your planning key.
My wife and I sat down and made a checklist of features that a home must have for us to consider it. In fact we made two lists, one for investment property and one for our next personal home. The list took up every single line on a college ruled sheet with two features on most of the lines. Features like Granite counter tops, view of water, hills or valley, 3 car garage, 3 bedrooms with office or 4 bedrooms and walk in closets were among the features we listed for our home. We never put a price to the home because you never know what you'll find and what the bank will take for it. Always think it is a great opportunity and try, all they can say is no.
When making the list of what you expect from a true opportunity, separate the items into three categories. The first and most important is the must haves or deal breakers. For us a 3 car garage or larger is a requirement. I like cars and I don't like cars outside. Next is the “like to haves” or negotiating points such as a stainless steel topped Wolf Culinary stovetop. If the house has it great, if not use that as a lever to lower the price or get the seller to pay for one. Finally you have the “wants”. Wants are those items that while desirable won't break the deal and are clearly not something a bank or seller could easily add if the house doesn't have it. For us a pool was one of those items. We would like a pool, but won't lose a great location or well built house over it.
When my wife arrived in California to go "opportunity hunting" or as some people call it, "house shopping", we had a list of a dozen homes in the areas we wanted to live that were currently for sale. The public MLS doesn't ever give the whole story so we like to drive the areas during the day and again after six pm to see what the areas and homes are really like. Within 10 minutes we found a house that wasn't even on the MLS yet and was clearly a foreclosure from the condition. As we approached the house we saw the bank notice in the window.
The gates were open so we walked around the house and looked in the windows, We liked what we saw, and decided this could be an opportunity. After we finished shopping for the day, we both already knew we had a contender. A little internet research and we found out that the house met all but two of our checklist items. Neither of them were deal breakers. The house didn't have a pool or an outdoor kitchen. That was it and both can easily be added to the right house, and this house had the space to do it. We did notice that they did take all of the light fixtures, ceiling fans and cabinet hardware. There was also a massive red paint stain on the carpet in the living room. None of this was critical to us, rather these defects were an opportunity to install fixtures, hardware and carpet that we liked. The trick now was going to be the price. After you find the house with the features you want and can asses then condition, only then do you sit down and asses your maximum price. Basically like any business transaction you decide what the value of that house in that condition is to you regardless of what banks, tax assessors and homeowners think.
The one item that might have been a deal breaker was in fact the price. When we saw the tax records with the original sale price and the loans the homeowner walked away from we were a little concerned. The previous owner owed more than double what we were willing to pay for that house, in that area. When we reached the manager at the bank handling the sale of the home we found out the bank was very realistic about the value, and they would be asking something very close to what we had priced the house at.
As we looked over the papers the bank sent over we knew we had a house worth pursuing. The bank manager told us it would be two weeks or so before they would publish a price and entertain offers. The bank manager also told us that due to the nature of the mortgage crisis, the bank needed to start moving some of these bad loans quickly. In the mean time we are going to keep looking for a back up house just in case this one doesn't go as planned.
Before looking for this house, we have lived in five other homes that were “distressed” as the banks call them. The first was a model home the builder needed to get rid of to finish out the tract. We made several neighbors angry when the price published since we paid $50,000 less than anyone else for the same model. Another was a VA repo house. VA repossessed homes can be a great starter home opportunity if you do your homework. My current home was distressed due to the death of a family member and the family inability to cover the loan. The good part for me was the family paid cash for all of the upgrades so the loan was reasonable for the home. We simply renegotiated the loans and saved the family from bankruptcy.
As the old saw goes “there is no free lunch”. In an economic crisis, being able to create opportunity takes some research, a little work and a lot of patience. Happy hunting.
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Thank you for your insights.