If you have not read the introductory posts on Getting a Mentor and First Steps, I suggest you read them first, so that we have a flow.
Yield Play and Value Play
After you find an agent, as talked about in First Steps, you will sit down to talk about what options exist in your area. Broadly speaking, when you are looking to buy, there are two kinds of properties: ready to go and long way to go! All kidding aside, one is more technically called “yield play” and the other, “value play”. Yield play is when you buy something that can be put into service (making you money) in a short amount of time. Value play is one that needs significant repairs before it can be put into service. As you can imagine, yield play is going to cost more than value play.
Frankly, I don’t like either. I like deals that are yield play at value play prices! Who doesn’t. We all do and yes, you can find them. There are plenty of yield plays out there masquerading as value plays. The secret is to change how you look at things.
When I buy to invest, I almost invariably look at foreclosures exclusively. The reason is that I like dealing with banks, an entity that’s not emotionally tied to the property. In my opinion it makes negotiations easier. However, there are pitfalls. Laws in many states exclude them from “Seller Disclosure” requirements. So you need to develop an acutely critical eye. You need to be able to tell what’s behind that wall. Also, when the price is right, there’s fierce competition. Low-balling won’t get you anywhere.
Let’s talk about the foreclosure buying process. Again, we are talking about Dallas, Fort Worth, Denton area, though I would expect this to apply to most places in Texas. There are broadly two ways to buy a foreclosure:
- Go to the county auction
- Skip the auction and buy when it’s listed
So, what’s the difference? At the county auction you are most likely competing with the major lien holders, like the mortgage company. Furthermore, you are buying the property without perhaps even visiting it, not to mention inspecting it. You may even have to evict the people who are living in it after you get possession rights. If there’s a mortgage lien on the property, the mortgage company will mostly repossess the property at these auctions anyway. I don’t think the price at which you can get a property is worth all the risk. That’s just me. I am a conservative investor. I first worry about return of my investment before I worry about return on my investment. So I wait till the property is listed.
There are two places where I look for listed properties. First, the local MLS. Your agent should be able to pull up foreclosures listed in the MLS. If your mentor has an active real estate license, your mentor should be able to pull it up as well. The second place is the HUD store. When you buy from one of these sources, some amount of work has been done already; like evicting the previous residents, securing the property (somewhat), removal of any bio-hazards (or at least making the public aware of them) to mention a few. Furthermore, when you buy from HUD or you buy from the bank as a foreclosure, other liens have been taken care of. You will get clear title.
Now, let’s get back to our discussion of yield play vs value play – but we’ll do that in our next post.
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