Often beginning Investors ask me, “Jason, what kind of foreclosure deals should I focus on?”
The answer depends on what kind of market you’re investing in. There are four major market types, and every market has a “success formula” that allows you to buy and sell successfully in that market.
For example, if your market is going up in value, it’s a rising market. A rising market means there are more buyers than sellers, and demand is driving the value up.
In a rising market, there are more deals on the Preforeclosure and Short Sale side of the business, and fewer on the Auction/REO side. Sellers are more likely to have enough equity in the property, to sell it before losing it to foreclosure.
Holding properties as they go up allows you to cash in on equity and appreciation, and you can make a few mistakes and still do well.
After a market has been rising for several years, it will eventually get so expensive that fewer people can or want to buy. When that happens, the number of buyers and sellers evens out, and a Top Flat market starts.
A Top Flat market is when values are high, but they are not getting any higher. It is more balanced between Preforeclosures and Foreclosures, and rents rarely cover mortgages. It’s a great market for flipping houses (but not holding them!).
After values peak, they inevitably fall. In a falling market, there is a huge flood of foreclosures, and the majority of deals begin to move from the Preforeclosures and Short Sales side to the Reo’s and Auction side of the business.
A falling market is an easy market to find deals if you move fast. Bargains come up almost every day it seems. The key to success in this kind of market is to get rock bottom price deals and flip them quickly, so you’re never “stuck” with a house while it goes down in value.
Flipping foreclosures is a great way to build up business cash flow and a cash base for the next step in the cycle- a Bottom Flat market.
In a Bottom Flat market, properties are the least expensive they are likely to ever be, and usually that leads to the best cashflow possible. REO and Auction deals are everywhere and easy to find, and if the market has been at the bottom for a little while, Short Sales are plentiful too.
This is the best market type to buy long term cash flow properties in. And if you’ve built up a cash base by flipping properties in previous markets, or you’ve taken the time to learn the art and science of funding deals, you should be able to convert that into a reliable cash flow, Net Worth, and equity base for future appreciation when the market turns back up.
And of course, once the ultra-low prices of a bottom flat market get Investors, and then Owner Occupants’ greed glands going, the number of Buyers increases, the values start to creep back up, and the whole process repeats itself!
So the best kind of foreclosure deals to focus on depends on what kind of market you’re investing in!