Spoiler Alert: Not all foreclosed properties are cheaper. A better question to ask is “How do you separate the good from the bad?” which is what I’ll try to answer here…
I believe it’s common sense that not all foreclosed properties are cheaper compared to other sources. You don’t need to be a rocket scientist to know this.
However, based on the number of times I’ve been asked the same question, I feel a lot of people out there have a misconception about foreclosed properties.
Let me make it clear, NOT all foreclosed properties are cheaper, and it would be foolish to think all of them are.
A lot of foreclosed properties are bad investments…
Don’t ever expect all foreclosed properties to be good investments because if you do, you are setting yourself up for frustration, disappointment, and failure, especially when you start finding foreclosed properties that turn out to be horrible deals. More on this later.
“Hey Jay, are you saying foreclosed properties are no good?”, you might be asking.
I’m not saying ALL foreclosed properties are no good. It depends on a lot of factors. However, fact remains, majority of foreclosed properties will make bad investments.
What foreclosed properties can turn out to be “bad” investments?
When I say bad investment, it means they are overpriced, it has problems that cost too much to fix (or worse, it has problems that cannot be fixed), it has a pending court case, it may have illegal occupants, or all of the above!
Sometimes the problem is tied to your goal. For example, if you want to do quick flips, it would be next to impossible if the title is not yet consolidated.
No, I’m not discouraging you, I’m just trying to help with managing your expectations.
However, I still believe there are hidden gems out there that can make worthy real estate investments.
The key is finding them.
One needs to look at a lot, and when I say a lot, I mean a huge number of properties (at least a hundred… more on these later), to find those hidden gems.
What are foreclosed properties that have good investment potential?
What are those “hidden gems”? For me, I look for the following:
- Foreclosed properties that are significantly cheaper than comparable properties in the same location, where the discount is more than enough to offset the cost for repairs/renovation, transfer costs and expenses… or cost of ownership if you will buy and hold. Ideally, it should have room for profit (see #2 below)
- Foreclosed properties that can provide your target Return On Investment or ROI. In other words, there must be enough room for your target profit.
- It must be within my target location/niche. I believe it would be pointless to buy a good property that will cause “burn-out” because it is located too far away (unless you have a property manager and there is still room for profit even with the additional cost).
As you can see, a cheap selling price is just one aspect. You should also consider the “essentials” I have listed above.
With these “essentials”, you can expect that only a few properties will end up having the potential to become good investments…
Actually, there are more things to consider, which I covered in the following article: Top 5 Things to Consider when Buying Foreclosed Properties
As mentioned earlier, you may have to look at a huge number of properties to find a few that are promising… investing in foreclosed properties is a numbers game.
Cheaper foreclosed properties exist … but it’s a numbers game
I’ve said it before and I’ll say it again, investing in foreclosed properties is a numbers game.
The greater the number of foreclosed properties you look at, the greater the chance that you will find those good enough deals, and even some great deals.
However, you will find a lot of bad deals in the process, but that’s just part of the game. It’s okay to find horrible deals, as long as you find out before you bought the property, so you can move on and continue looking for better properties.
Keep in mind that one cannot just give up after looking at a few properties. I often hear people get frustrated with foreclosed properties after looking at just one or a couple of properties, or even with just one listing that really did not have many properties to begin with.
And then they give up and say things like…
“I’ll never find any good deals…”
or
“The numbers will never work…”
or
“This is too hard…”
or
“I’m just wasting my time…”
Sorry, nobody said foreclosed real estate investing is easy! It may sound simple, but it isn’t easy.
The 100-10-3-1 Rule
You basically need to look at a significant number of properties to find those properties that are worth a second look.
How many would that be? The general recommendation would be to find about 100 properties worth a second look, after doing initial shortlisting.
Out of those 100 properties, you will probably find 10 worth inspecting.
Out of those 10 worth inspecting, you might find 3 properties that are worth giving offers for or bidding for, if they were for sale through a public auction.
Out of the 3, you may end up buying 1.
That’s a brief overview of the 100-10-3-1 rule.
I’ve read many variants of this rule from books and also from some of my mentors but they are basically the same.
You analyze 100 properties, inspect 10, submit offers on 3, and end up buying 1. These are just average numbers, but you’d be surprised how accurate this average can be in real life. Been there, done that!
Anyway, I’ll probably write a dedicated article about this in the future.
Other numbers to consider
Of course there are other numbers to consider when applying the 100-10-3-1 rule and when “doing the numbers”.
Numbers like After Repair Value (ARV), projected repair costs, target profit, Maximum Allowable Offer(MAO), Cash on Cash Return (CCR), Return-On-Investment or Return Of Investment(ROI), Net Operation Income(NOI), Cashflow, etc., to name a few, also need to be considered.
For each of these numbers, you as the real estate investor will ultimately have to decide what is acceptable for you. These numbers will determine if a foreclosed property is a good deal or not.
If this sounds too daunting and tedious for you, I would be the first to say that investing in real estate might not be for you.
But there’s no harm in trying, right?! Imagine what could happen if you consistently did this until doing the numbers became a habit and then you actually became good at finding properties that have good investment potential!
No, I won’t have time to explain all of these numbers now, but one by one, they will be covered here soon.
Sometimes it’s all in the mind
What happens around us can mess up how we think. For example, a bad experience can “blind” us in a way, let me explain…
I still remember during the early part of 2008 when I found myself unable to find any good deals in any of the listings of foreclosed properties that came my way.
I was still recovering from feelings of being betrayed after how Dinna Revilla, a former real estate mentor, got arrested and became a “fallen real estate guru”. I was overly optimistic with investing in foreclosed properties when I invested in one of her deals.
I was disgusted with what she allegedly did (as far as I know, the case is still pending, which is why I still use the word “allegedly”). The complainants were people who trusted her (some of which were people I know… myself included, although my monetary loss was insignificant compared to others’).
Because of this whole incident, I lost all confidence in foreclosed property investing, and I decided to invest in mutual funds instead of real estate.
So from being overly optimistic, I became the exact opposite and I could not see any good deals.
However, my respite from real estate investing was short-lived because I eventually met another mentor, Doctor Jon Abaquin, who was also featured in Larry Gamboa’s book “Think Rich Pinoy”(see page 155).
In one meetup, Doc Jon challenged me and a couple of my friends… each of us must buy a “Good” property within 90 days.
Lo and behold, from the same listings lying on the table in my bedroom where I could not find any suitable properties, all of a sudden I was able to pinpoint at least 3 very promising foreclosed properties from 3 banks.
I ended up submitting an offer for the most promising one. Later, that one offer got accepted. 🙂
That experience opened my eyes…
From that point onwards, deep inside I knew that there really are good, and great deals out there, I just have to look a little bit harder!
What if I found a promising foreclosed property but lack money to invest?
My take on this: Financial literacy is a prerequisite to real estate investing.
Being financially literate leads to proper management of one’s money and finances, which should then help one save enough capital for investing. When that right deal comes, you will be ready.
I also believe that being financially literate means not biting off more than you can chew. Establish your target price range and focus on properties you can truly afford while consistently building your capacity to earn/capital…
If you think that would take too long, then another option would be to find investors for your deal, although personally, I would recommend that beginning investors do it by themselves, especially on the first few deals.
I believe you should build your track record with your own money first before risking other investors’ money. If you can’t even handle your own money, how do you expect to be able to handle the money of investors?! Sorry if I may sound harsh, but hey, this is just my opinion.
So how many properties have you looked at?
Have you looked at 1, 2, 3… and have given up already? If yes, you are NOT looking hard enough.
Remember, the more you look and do the numbers, the greater the chance that you’ll find that real estate investment for you.
Conclusion
Now you know what to answer the next time someone asks you, “Are foreclosed properties good investments?”
Simply tell them NOT all foreclosed properties are good investments. Majority are bad, but there are still a few good deals out there. You just have to be patient and look for them.
I’m pretty sure most of you out there will eventually encounter this question once you decide to invest in foreclosed properties and people learn what you do.
Well, I hope to help save you the trouble of coming up with your own answer, which can turn out to be a very long one, just like mine. If you want, you can just send them over here, and I hope my answer above will be of help.
Got more questions about investing in foreclosed properties? Let me know by leaving a comment below.
Good luck and happy investing!
~~~
To our success and financial freedom!
Jay Castillo
Owner and founder, ForeclosurePhilippines.com
Text by Jay Castillo and Cherry Castillo. Copyright © 2024 All rights reserved.
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Note: This article was first published last August 30, 2010 and I updated it a bit after more than a decade. 🙂
Image courtesy of Stuart Miles / FreeDigitalPhotos.net
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Hi Jay, me and my officemate are planning to buy foreclosed properties this coming September or October, we will do partnership and will just buy a low cost property which has good value, this is for just the sake of learning how foreclosure works and also less money that will come out of our pockets, since we will do 50/50. My question is, do we need to hire a foreclosed agent or a real estate agent to help us close the deal and give us some tips if the property is a good deal or not? What are your views on this? Thanks in advance.
Hi Rey,
First of all, I would like to commend you for your plan. The best way to learn is to do, which is what you plan to do, while minimizing your risk with a low cost property. Awesome!
As for getting a real estate agent/broker, you can get one to represent you and help close the deal by doing legwork for you, but don’t expect advice if a property is a good deal or not unless that agent/broker is also an investor (I remember I would be the first to advice a would-be buyer to avoid buying a property because of issues I found).
The only problem with getting an agent/broker who also invests is brokering properties is not their highest and best use because they are also looking for good deals themselves (hint: this is one reason why my wife and I no longer to act as brokers for a majority of listings we feature here, but this will be fixed when I already have a team to do this under my supervision).
Jay, thanks for the prompt response. Anyway, does it mean much better if we just do it by ourselves na lang? The problem is because we are not yet familiar with the laws, real estate rules and taxes, maybe magka-problema kami. But do you think we can manage it without an expert? Hopefully its not the complicated hehe. But do you think the bank will give us advice or tips that we need to do if we buy foreclosure properties on their branch? Like they will have lawyers to help us when it comes to titles and other stuffs.
Yes, I believe the banks would be able to assist you. No need for a lawyer unless you are buying a property under litigation.
My suggestion is to familiarize yourself with the bank’s purchase process before you close on a property. I there is anything unclear, don’t be afraid to ask questions/clarifications.
hi jay,
for foreclosed vacant lots (for end-use by buyer), can we also bid lower than the stated price (40% or a certain percentage)?
as walang after repair value that we can mention sa bank as reason for our bid, how much lower can we bid and can we just say na for our own use naman ung property? thanks!
also, can we already include sa same bank ung house construction loan application?
thanks!
is it right for a BANK to SELL a foreclosed property to a known buyer despite the redemption period isn`t expired yet?thanks!
I could be wrong , but as far as I know, banks can sell a foreclosed property even if the redemption period has not yet expired, but the buyer must be made aware that the former owner still has the right to redeem the property. However, I noticed that all the banks I know only sell their foreclosed properties AFTER the redemption period has expired. There must be a good reason why… 🙂
hello jay,
possible ba bilihin ng boyfriend ko ung foreclosed property ng brother ko within the redemption period?parang magloan sya sa other bank para lng ndi makuha ng bank ung property…please advice po….pwede ko ba sabihin kay bank na ibenta ko sa iba?
Sa pagkakaalam ko Ms. Jeanette, pwede yan. Ang importatnte kasi sa bank is masettle yung loan. Kausapin niyo napo agad ang bank, magsama din kayo ng abogado niyo para pag nagsabi sila ng legal terms, maiintindihan niyo rin.
hi jay,
it is my first time to visit your site. I was wondering if there is still a chance for me to be accommodated in the PRC licensing without examination. i just read that july 2011 was the deadline. I took the DTI sponsored exams in the 90’s. went to work for some real estate companies for a while and had short stint working abroad . i worked in the gaming industry for quite a while. in 2007 went to study law in the province and has taught in college handling accounting & business subjects. I had been isolated from the real estate industry since then, that is why i was really alarmed when i read some of the articles and real estate news. will i be required to take the prc licensure examinations just in case im interested to revive my work as a broker.? kindly help i need more info. im interested with your advocacies. I’d like to learn more from you. im now based in marikina hope to have a career in Real Estate. Im quite old to be employed. thanks
lrae josef anogrob
0935241777
good day jay.. Im just new to real estate investing.. i wanted to find a mentor i can start with. or either groups etc thanks in advance email: [email protected]
Hi Jay,
I’m from Singapore, some investors here have ask me for Philippines properties potential. what is the average ROI (return of investment) in your country. Thanks
that’s truly an inspiration, Cynthia. i shall follow the tenet of analyzing 100 & inspecting, at least, 10 of them. thanks for your feedback! kudos to this great article by Jay.
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Hi Jay!
Once again, I love your article! I like the fact that you mentioned that financial literacy is a pre-requisite for investing in real estate. I like what you said that, “If you can’t even handle your own money, how do you expect to be able to handle the money of investors?!”
Regards bro. Kelan tayo meet ulit? Malamang October 14 na? Hehe…
Hi Bryan, thanks for the compliment! Well, we really have to face reality that earning more money, whether through real estate investing or other means, will not solve anything if someone is really not able to manage his/her money well. And that problem can be magnified many times over when someone who is financially literate uses other people’s money.
Dapat before pa, marami tayong kailangan i-check. 🙂
I personally like the cash on cash return calculation because it helps me measure the return on cash invested in a real estate investment property. Thus allowing me easily to compare against other non-real estate investments to see if my money is better employed someplace else. Your post gives me another angle on how to employ it more efficiently.
Good post
Hi Realbench, thanks for the comment! CCR is really one of the best gauges to see if an investment is any good as compared to others. Thanks for visiting!
As always, great insights my friend. It’s really refreshing to hear you make your point with actual experiences and honest feedback without all the hype associated with real-estate investing. More power!
Thanks a lot Allan! I really enjoy looking back and sharing my learning experiences here. 🙂
You got that right, I believe it is not healthy to be OVERLY optimistic, not just with real estate investing, it applies to just about everything. Better to remain grounded and realistic, but still hoping for the best and with a healthy dose of optimism.
Cheers and congrats on your new aweber powered newsletter, very nice!
I totally agree!!! Browsing through acquired asset listings is now a hobby for me… I would note potential good deals and sometimes recommend them to friends and relatives or inspect them myself. Through the years I have browsed around a hundred listings and inspected too many pieces of property. I ended up buying 4 foreclosed property.
I could say that all my acquisitions are great deals!!! Although 2 of them are not yet income-generating, i know that their value will be ten-folds years from now….
I am now looking forward to my fifth acquisition, hopefully next year. I am already eyeing a particular property, visited it several times already, just awaiting the redemption period to expire…
Good luck to all foreclosed property hunters!
Hi Cynthia! Now this is what I’m talking about! Thank you so much for sharing, I’m sure this will help inspire a lot of aspiring investors out there, good luck on your next deals and I wish you more blessings and success!
100-10-3-1. If these numbers aren’t daunting enough, I don’t know what is.:)
But like you said, Jay, real estate investing is really a numbers game. And like any math problem, from cradle to grave, it needs figuring out the long and tedious way. No shortcuts here. A mentor, an aspiring investor would need a really good one to guide his steps through the process. Someone capable of breaking it down into little digestible pieces. That way, the numbers don’t appear as daunting anymore. Thank God, I found not just one but two of the best in the trade. You and Trace.
Kudos, as always!
Hi Lynn! Wow, thanks for the compliment, glad to be of help! As Bo Sanchez would say, “Bite-size” it! One need not “analyze” 100 deals all at once, maybe one can analyze 1 a day, or 5 per week… and end up with a good deal in a little over 3 months. I believe that’s a realistic goal. 🙂
Great post Jay!
Thanks Ian!