- The Washington Times - Friday, July 6, 2001

Periodically, I hear from readers who want to make a million in real estate with no money down. Obviously, they are talking about foreclosure properties. I've participated in a couple of these type deals, and I'm now working on my second million. I gave up on the first.

Foreclosure properties can be a good place to invest for exponential growth or loss. There are some deals out there for little or no money down, but potential investors should take some precautions first.

There are various ways to invest in foreclosure properties. The first and probably most popular is to buy a property, fix it up and then rent it out, creating a positive monthly cash flow. The investor also becomes a landlord at this point, having to be available for house repairs or hiring someone to do so.

The second way to invest is seeking out foreclosures or handyman specials, buying them, investing more money to fix them up and then selling them, taking the profit once the house is sold.

The third way is to buy a foreclosure that is underpriced by say 30 percent or so and "flipping" the house immediately by wrapping another loan around the property by selling it to a second buyer. The investor then holds onto the second mortgage and makes money on a monthly basis.

For example, let's say a house worth $100,000 on the open market is sold at a foreclosure auction to an investor for $50,000. The investor may put down 10 percent and assume or create a new mortgage for $45,000. The investor then advertises the property at a discount, say for $80,000, offering 100 percent seller financing. Remember, it's worth $100,000.

He hopes to create a sense of urgency by underpricing the house and pulling in buyer calls. If he's successful, the investor takes a promissory note from the new purchaser for $80,000. He has now created a $35,000 note for himself. The buyer makes payments to the investor for an $80,000 loan and the investor makes payments on the original loan for $45,000. In real numbers, here's what it would look like.

If the original loan is for $45,000 at 8 percent over 30 years, the principal and interest is $366.88. When the second buyer takes a note for $80,000, the investor may charge a bit higher interest since he's offering 100 percent financing, which is normal in the mortgage world. Let's say he offers an $80,000 loan, 9.5 percent over 30 years. The monthly payment is $672.68, creating a positive cash flow of about $306 per month.

If the borrower stays in the house for 30 years, the investor will make $88,295 in interest and $30,000 in capital gains after he has paid his own interest on the first note for a total return of $118,295. Not a bad return on a $5,000 down payment.

Keep in mind here that not all mortgages allow an owner to wrap around a second mortgage to his original loan. Many loans contain a due-on-sale clause, meaning that if the property is sold, the first trust must be paid off immediately. This type of financing is popular when investors buy foreclosed Veterans Affairs (VA) properties as the VA allows wraparound loans.

Before you go out, checkbook in hand, ready to bid away, take some advice first.

If you're deciding to invest in foreclosure properties with a husband-wife team, be sure that both of you are sold on this avenue of investing. You are about to enter a world of high finance, property management, calls in the night from tenants and other risks that a regular homeowner will never experience. But if you have the willingness to break away from the normal investment route and seek out real estate investment as part of your portfolio, it also can be rewarding.

Second, get educated. Reading this column does not constitute preparing the first-time investor to start bidding on properties. There are plenty of real estate agents and auctioneers who do this on a daily basis and would be happy to educate you in the world of foreclosure properties. Also, visit the bookstore for books on the subject from reputable authors who know the intricacies of this type of investing.

Don't worry, all the foreclosure properties are not about to disappear. Unfortunately, the mortgage industry is already reporting that delinquencies on mortgage payments are up these days in the latest economic slowdown, meaning, if anything, we'll be seeing more foreclosures on the auction block.

M. Anthony Carr has covered the real estate industry for more than 12 years. Send your comments and questions via e-mail ([email protected]).

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