How Investing in Foreclosures Became Big Business

Buying up foreclosures and renting them out is not just a business model for smaller investors, but increasingly for big businesses. The decline in the industry and the rise in the number of foreclosures has created misery for some, but opportunity for others, who are well placed to take advantage of the market to profit. Investing is not about buying everything you see, but rather knowing what your buying criteria are and being in a position to buy when opportunities arise.

Foreclosure Notice April 14, 20101 © by stevendepolo

On what sort of scale is big business buying?

That’s exactly what Waypoint Real Estate is doing – buying up thousands of distressed properties to rent out. It’s not your typical venture from a real estate investment business, but it sure works. In fact it works so well that the company has just sgned a new funding deal with a private equity firm which will see it purchase up to an additional 15,000 homes by the end of next year.

This company employs inspectors, buyers and researchers to buy around 5 houses a day – which may well explain why real estate inventories are so low. The thing about this type of business is that it hasn’t really been done on such a large scale before to my knowledge (and we searched). It’s a lot different from your usual foreclosure buyers – generally flippers or buy and hold investors on a much smaller scale.

How does it work exactly?

The benefit of running such a massive business in this way is that you can treat it basically like a production line – employ staff to do each part of the process very well and soon you have a well-oiled machine. In a segment of the industry that is generally viewed as being a bit of a headache, Waypoint have seen a vast opportunity.

Buying houses in bulk has not really been such a popular idea until now – partly due to the initial investment required to get into the market, and also because of the poor health of the industry. However with the market now showing signs that a recovery may be just around the corner, it might be a great time to source some properties.

So it turns out that the many people out there who are doing the hard work buying foreclosures and renting them out are onto a good thing. The yields are strong and appreciation is a factor for the future (though you shouldn’t count on it). The single most telling thing for me is that businesses like Waypoint don’t jump into a massive buying spree like this without good reason. More importantly, the private equity group that is putting up the money doesn’t either – there is clearly profit to be had in applying this business model – even on a smaller scale.

What does this mean for smaller investors?

Smaller investors who are looking to buy a foreclosure or short sale property to rent it out can take comfort in the fact that big business is doing the same. As a result of such a large player in the field there is a lot of competition in buying these distressed properties – which we expect to increase over the next 12 months before the recovery gains momentum.

What this means on the ground is that there will be greater competition for less available properties as inventories are already very low in some areas. This problem won’t really be fixed until confidence in the industry returns, and that won’t be until we see some better data in terms of increasing property prices. At the end of the day, if your investment business plan involves you buying foreclosure properties, you now have at least one large scale competitor in the auction room.

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