Got Foreclosure! - Blog

“Public sentiment is everything. With public sentiment, nothing can fail. Without it, nothing can succeed.”

Can you guess who said this? Sounds pretty policial, right? But I thought about the real estate market and foreclosure opportunities when I read it today.

In real estate and foreclosure investing, the only way to succeed in this market environment is by being a true “contrarian investor”.

“A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks, and understates its prospects for returning to profitability.” - Wikipedia.com

Let’s re-write this for real estate:

“A contrarian believes that certain crowd behavior among investors/buyers can lead to exploitable mispricings in real estate markets. For example, widespread pessimism about real estate can drive prices so low that it overstates the asset’s risks, and understates its prospects for returning to profitability.”

So, the key question here that you have to answer with clarity and certainty is: “Are current prices of foreclosure and REO properties already so low that they could be considered ‘mispriced’ relative to the actual ‘value’?”

Sometimes, we see references to “fundamentals” such as rental values of properties, and how that relates to a return on investment and cash flow of the property. While this works in certain areas, price ranges and uses of single family homes, you’d be missing the whole picture if you only go by these numbers.

Except for some “blue-collar” areas, single family homes almost never make sense as a cash-flow investment if you buy them at “fair market value”. They always have some aspect of “appreciation play” to really make sense as a long term investment.

And - that’s only for INVESTING in real estate. If you’re talking about a home you want to move in and raise your family, the consideration of “value” vs. “price” takes on a whole new dimension.

However, you can find good bargain deals to move in as well. My best advice: Be value conscious at first and affordability conscious as well. With price declines of available listings at 25% or more, and interest rates still at historic lows, affordability has improved a lot. At the same time, price declines are not equal to value declines. You can pick up your home with a large chunk of “built-in equty” now.

And by the way, one of the best ways to handle “built-in equity” is by just keeping it that way! Don’t leverage it at this time! Just use it to build your creditworthyness, and a few years from now you will be really wealthy.