Ralph Roberts is a Realtor who has written many books about the real estate market and flipping homes, such as Foreclosure Investing for Dummies. U.S. News talked with Roberts about some of the first things a potential investor should know before getting into the foreclosure market. Excerpts:
Investors are understandably skittish about getting into the real estate market. Why do you think now is the time?
If you can afford to buy a piece of real estate, there's never been a better time in my 30 years of business than now. We have good prices, and unbelievably great interest rates. For a ma and pa investor, if you're willing to buy a rental property, you can leverage it, and 10 years from now it will be worth double what you paid for it. All the people who have been displaced because they can't afford to pay $2,500 a month, they surely can pay $1,500. If everybody had bought a 30-percent-cheaper house, we wouldn't have had as many foreclosures as we have now. There are a lot of tenants out there who are displaced and were at one time living the American dream of owning a home, but they still need a nice home. People who are displaced become renters.
What about the concern that the market may only get worse before it gets better?
There's always a boost in real estate after an election. I know all those people who are saying there's going to be change. Well for sure there's going to be change—George is not running. By January of 2009, you're going to see the market turning the other direction and showing appreciation again. So between now and 2009 is a great window of opportunity to buy. The best plan is to buy it, fix it, hold it, and sell it 12 months and one day or further in the future, and you will get another benefit of getting a tax rate of long-term capital gains versus ordinary income. The long-term capital rate is only 15 percent.
How does foreclosure investing differ based on your locality?
Whatever city or county you're going to invest, you've got to check what inspections they have. What do they require before you can put the house back on the market to rent it, or back on the market to sell it? You are responsible to follow those rules whether you know about them or you don't. You must at least contact the city hall or the township hall before you make an investment.
What are some misconceptions about foreclosure investing?
Just because it's a foreclosure does not mean it's a good deal. Some people pay too much for a property if it's a foreclosure because they think it's automatically a home run. You should go to your broker and run the comps in the neighborhood. The most important thing is what's selling right now. What's your competition? That gives you a range. The next thing you want to do is check how many houses have sold in the past 90 days. You need to have your house priced the best for the condition that it's in because you don't want it to be the fourth house if only three are bought in your time frame.
Why is having a time frame so important?
Time is money. The average holding cost on a house is $100 per day. You've got to have a B plan. If it doesn't sell in X amount of days, you've got to rent it until the market improves.
Most of the people doing foreclosure investing are not doing it as their primary source of income. How do you do it and balance the rest of your life?
First you make sure your spouse is completely on board. You want to have support from your family. You're doing this to improve your lifestyle; you're not doing this to take quality time away. Then you draw a circle on a map, and mark where you work at, where your wife works at, where your school is at, and put those items inside that circle. That's your target area. If you drive 20 minutes to work one direction, and then you drive back home, and then 20 minutes the other direction to your investment property, you're 40 minutes away from it versus if it was in your target area. Some people go too far out of their marketplace and that's how they get into trouble.
How do you avoid taking advantage of people in this business?
Treat the people with dignity and do what's best for them. Let's say they tell you they have a rich uncle who could help them, but they're just too embarrassed to tell him. Help them tell the rich uncle. By doing the right thing, it's going to come back to you 10 times.