Problem Properties = Real Estate Opportunities

Let’s talk for a minute or two about problem properties. In terms of working a playing field that isn’t level, this is a prime example. Making money in real estate is hard work, no matter what your plan of attack. And believe me, in my 20+ years, I’ve tried them all.

What separates the good ones from the bad are those strategies that recognize weak spots or angles that investors can exploit. If the system does not identify and take advantage of these kinds of situations, then it likely isn’t much of a system to begin with.

Anyone can send out a thousand postcards that ultimately result in a deal coming together. What separates that person from a true investor is that the investor first figures out precisely to whom the postcards should be sent. Big difference!

Strike while the iron is hot

Knowing where to send the postcard gives us the advantage. We recognize there are factors that will affect the likelihood of our offers being accepted. If we can identify those factors, we can determine who is being impacted by those very factors and target the person. In other words, we can strike while the iron is hot.

Years ago, I wrote The Ultimate Lease Option Strategy: Targeting the Tired Landlord. If have read it, you know it’s all about identifying landlords who are currently in the process of evicting tenants and making a play for their property at the very moment they’re experiencing the most pain–in eviction court.

Do you see why a proposal to buy a property in that moment has a huge advantage over a proposal that comes in while he’s experiencing no pain and has a perfect “pays on time and takes care of the place like it’s his own” tenant? The difference is night and day. We look for factors that will impact an owner’s motivation, and then we jump on that situation.

First scenario to consider

Imagine you’re a lender who has just foreclosed on a property, and it now sits in your “real estate owned” portfolio. The property is only a few years old, and the former owner, the borrower, purchased the home brand new. Unfortunately, the owner’s situation had turned from bad to worse, and he and his family could no longer make the mortgage payments on your loan.

But they didn’t just give up and abandon the place without trying to avoid foreclosure. Foreclosure was the very last thing they wanted to see happen. They had perfect credit for years, paid their bills on time, and that was important for them and still is today.

In fact, they made every effort possible to sell the home and avoid foreclosure. They listed it with an agent who held several open houses, and even though the house looked as good as it did the day they bought it, their timing couldn’t have been worse. They’d hit a slow market and houses just weren’t moving.

Finally, they had no choice but to give up. But before leaving they cleaned and vacuumed, and now the house sparkles. Okay, you’re the new owner, having just foreclosed. You send your guy out to take a look at the place and he reports back that there’s absolutely no clean up required; it’s perfect and ready for market. Feeling any pain? I doubt it.

This is your dream repo situation, and you know you’ll likely come out pretty close on this one, and pretty close is great. Your motivation to avoid this one at all costs? Zip. This is an easy one that you will walk through the system, knowing full well that in the end you’ll be just fine.

Still, you get an unsolicited offer in the mail from some local investor you’ve never heard of, and he’s proposing to buy the place from you at sixty cents on the dollar. You interested? Not in the least! There’s no motivation for you to do anything other than run that property through your normal pipeline, and that’s precisely what you’ll do.

Now, let’s shift gears

Today you get word your two-year foreclosure ordeal with some crazy gal is finally over. She lives out in the sticks on some ten-acre parcel with a dozen dogs running wild and more than a couple biker dudes have taken up residency in out buildings that have just been thrown together.

She’d fought the foreclosure in court without an attorney and filed dozens of motions claiming “common law” defenses like disavowing her United States citizenship and arguing the loan itself being uncollectible because it was not based on anything but a journal entry in some lender’s account ledger that had no gold standard on which to back it up. Oh, joy!

Finally, the judge agreed to ignore any further motions from her and allow the foreclosure to take place. You check out your expenses and determine that instead of spending a couple thousand in fees to process a typical foreclosure, you’re into this thing $27,000. Already, you know this one is going to bury you.

The foreclosure goes through, finally, and you send your guy out to take a look. You’re hoping they’re long gone, but in your gut you know that’s not likely. Sure enough, your guy reports back to you that there’s now a padlocked gate with big, “No Trespassing” signs and a “Protected by Smith and Wesson” sign is clearly visible on their front door.

And yes, the bikers are still there, as are the dogs, and a recently added old school bus now parked there as well and someone is clearly living in it because there’s a wood stove chimney in the back of it emitting plenty of smoke. What do you do now, Mr. Repo Owner? No matter what you do, this one is a loser.

Turn the lender’s headache into your opportunity!

It’s the mother of all losers, and you know you’ll never recover anything near what you’re owed. You also hesitate spending the additional money you know it will take to get them out of there and get the place on the market, but you have no other choice. Talk about a no-win situation? Heck no, talk about an opportunity! (Note to self: It is the no-win situation I need to be seeking out.)

Whenever a lender is getting crushed under the weight of all kinds of ugly problems, he’s feeling the pain that provides the impetus to get my proposal accepted. Now, out of the blue an offer lands on your desk, and some crazy investor apparently is offering to buy this place and take you out of it completely.

Great news, you think. But when you get to the bottom of the page, you realize he’s only willing to pay a tenth of what you’re into it. You wince; you feel the pain right there in your gut; but you sign the thing just the same. Heck, you’re worried if you counter offer, you’ll lose the investor completely, so instead you get him on the phone immediately and let him know he’s got himself a deal.

Joe Kaiser, Problem Property Specialist

“We are selling it to you, as is, right?” “Right,” I reply. Now, why is this? Why would I choose to deal with a property that’s so problematic, some repo owner is willing to wash his hands of the thing and walk away from it for as little as ten cents on the dollar? Dude, it’s my job. I am a problem property specialist. It’s how I earn a living (and a pretty good one at that).

And because of this, I’m equipped to handle situations others, including this particular repo lender, are not. I love problem properties when (and only when!) they’re someone else’s problem. To me, that spells opportunity.

A $100,000 property that’s been trashed and disasterized is a problem for the lender who’s a $120,000 into it. That’s a big problem and a huge loss is imminent. But how big a problem is that property for me if that lender agrees to sell it to me for $25,000 or $30,000? Not a problem at all.

Sure, I’ve acquired the problem property, but the real problem here is the loss the lender suffers by taking it in the shorts. Getting the property squared away and back on the market now is just a matter of me going through the motions and writing a few checks. A problem? At $25,000, not in the least.

Of course, this presumes I’ve done my homework and recognize what I’m getting into. I’m a firm believer of “due diligence” as opposed to “screw diligence” and will have a good idea what it will take to get the property into shape. Still, I know certain investors struggle with this problem property concept.

In our crazy gal, hello bikers scenario, what happens next is a physical eviction that requires the county sheriff. The sheriff will actually drag the people out of the property if they don’t move out voluntarily and will stand guard the entire time my crew is there to remove anything still in the place out to the curb.

Those belongings will sit there until they either move them to a new place or more likely, until the neighborhood kids get a chance to peek under those tarps later that night. And animal control will arrive with their mobile kennel trucks and remove any remaining animals, taking them off to the pound where the owner will have to come and claim them.

Sound like a huge problem? Coordinating with the sheriff, animal control, assembling a six-man crew to remove what remains–it’s not a lot of fun, believe me. But what does it take to pull that all together? A single phone call. Problem properties simply require problem-solving skills, and this is a perfect example.

A phone call and a check–problem solved!

There’s a guy in our town (and in almost every town) whose company does evictions for a living. He’ll handle absolutely every bit of this mess for me, and will even have a bid into me to clean up what’s left at the place once the dust settles and the former owners are well on their way down the road. A phone call and, of course, a check. Difficult? Not in the least.

Problematic, stressful, makes you want to pull your hair out and scream? Hardly. Sure, there’s always something that comes up and it’s never completely trouble free, but it’s hardly some big problem I’ll lose sleep over. It’s simply a normal part of my business. And knowing there will be a great big check waiting for me once it’s all done, I can’t imagine not being involved.

This particular eviction is based on one we just now completed. There’s still some clean up to be done, but the former owners and their “friends” are long gone and my padlock is now securing that front gate. It’s listed at $119,500 and will likely sell for somewhere around $100,000. What am I into it? I paid exactly $20,000 to buy out the lender and have less than $5,000 in foreclosure and eviction costs and fees.

I imagine another $5,000 or so to clean it up (lots of junk cars to remove), but in the end we’ll be into it no more than $35,000 tops. The difference, I suppose, is the lender had absolutely no interest in the place and wanted nothing more than to get out from under it. Emotionally, I suspect it hurt just to think about it and having the property completely out of his life was priority number one.

Sure, he could have called up my guy and done everything I had to do in order to get the property on the market, but doing so would have meant spending more time, energy, and dollars on a property that ruined his day every time he opened that file. And who needs that? Much better, in his mind, to peddle it to me and never have to think about it again.

Losses happen, and when you’ve completely written off the thing as uncollectible, any money you end up with feels like a bonus. The $20,000 I paid that lender was almost like found money and snatching it up seemed like hitting the jackpot.

So, the real problem has little to do with the condition of the place or the unruly tenants that remain. The real problem with problem property? Plain and simple, losing money! Get it clear in your head. We see a junker, we see a dump, we see a disaster, do we think “uh oh” or do we think “yee haw!”? Make sure you’re the one doing the “yee haw” thing.

Now remember and let me be very clear: I’m only interested in pursuing problem properties–ones that have been disasterized, vandalized, or stigmatized. I have no choice but to focus on the properties that present the biggest fear factor to their foreclosing lenders. Remember, the bigger the mess, the bigger the profits.

But the real reason I’m so interested in these properties is that lenders write them off as “no win” situations and are willing to practically give them away. This is important to understand.

By CREOnline Contributor

A content contributor to the original