Investors perform fix-up work that banks can't afford to do
"To buy, you have to be able to finance through HUD because until recently there has been no other financing available, as there is very little conventional financing," said McPherson.
"In order to sell to a HUD buyer, you have to have a move-in property. It has to pass HUD's appraisal standards. You can't buy a property 'as is.' You can't buy a property that doesn't have working appliances, missing countertops or chipped paint."
On the other hand, investors prefer the beat-up home. They pay cash, try to close quickly and will take care of rehab themselves.
According to Zuluaga, "the investors are making the margins that the banks are not making now," which is good business for companies like HR&R.
"The private guys are hiring us; they are buying these homes at a very low price and hiring us to do the remodeling," Zuluaga said.
When a cash buyer steps in, he is going to expect the (mortgage) servicer to "take a haircut," McPherson said.
Then comes the remodeling. Investors are either going to fix the homes up and resell, or fix it up and lease. The key for investors is getting the proper valuation to ensure, at minimum, a least a dollar-for-dollar return on the investment.
Investors have to do a valuation on both repaired and as-is sales, because that's how they determine their repair margin. For example, a home is worth $90,000 as is, but after repair could be sold for $100,000. The owner, bank or investor gets a repair bid, which comes in around $7,000. The margin of $3,000 is generally enough to go ahead with the repairs.
"I would contend," McPherson said, "based on our results, you are still going to sell the house faster -- even if it is only a dollar-for-dollar return -- if you fix it up. In a market such as Phoenix, where there is an immense amount of foreclosed homes, you might see five or six REO properties on the same street. If you want to compete, you need to have the best-looking house on the block."
Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade," has been ranked as a top-selling real estate investment book for the Amazon Kindle e-reader.
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