Sucker: Free Properties Aren't Cheap

Gina Loudon
|
Posted: May 28, 2011 12:01 AM

Bank of America has announced it will give away as many as 150 vacant and abandoned properties in the Chicago metro area. This is part of a new effort to help the city clean up neighborhoods littered with vandalized, vacant homes.

But before you run out and grab some free houses, think about it first. There’s probably a reason the bank can’t sell them. 

Vacant homes are often enjoyed by vagrants, drug addicts and gangsters. Too often people forget that location is everything when it comes to real estate. If that weren’t the case, you’d be buying land on the moon and the government would be collecting property tax from it.

Bank of America’s idea is not new. Detroit has been giving away vacant, inner-city homes  since their market tanked in 2008. You can get homes for $1 in Kansas City, Indianapolis, St. Louis and Memphis.

Initially when the real estate market tanked, investors were lining up for these deals. After all, there must be some value, right?  Wrong!

As soon as these folks took title to the properties, the nightmare began. They brought in repair crews with high hopes of renovating for a quick sale and high profits.  Instead, they discovered their tools and materials were getting stolen. They learned to board up the homes and take the tools home at night.

Once the properties were finished and ready for sale, the boards came down and a sign went up. In these neighborhoods, a for-sale sign is an invitation to enjoy an empty house full of new things.

Did you know a home can be stripped from floor to ceiling within hours? Drug addicts will take carpets, air conditioners, appliances, fixtures, toilets and anything else they can quickly exchange for their next fix.

In these high-crime areas, owners are forced to renovate again, only to face the same losses as soon as the property is done. At some point, they are willing to do what the banks did and give the head-ache away.

In high crime areas, you’ll be hard pressed to find anyone who will work on your property or manage it for you. This information is left out when banks are trying to unload their junk REO homes.

Why did the banks lend in these high crime areas in the first place? Actually, they had little choice. Banks that tried to avoid lending in certain areas were accused of “redlining” and discrimination. Now they are stuck with hundreds of thousands of vandalized homes they can barely give away  - another example of political pressure gone bad.

Greed is certainly also to blame. As real estate became a hot commodity, Wall Street wanted in on the action. They came up with CDO’s (collateralized debt obligations) full of mortgage-backed securities.  Somehow they thought bundling a bunch of sub-prime loans would make them safer to trade on the market. They failed to consider what happens when all the loans in the bundle go bad.

Real estate cannot be traded like a stock. Every home is unique and its value depends on location and how well the inhabitants take care of it.

Hedge funds didn’t learn from the CDO crisis. Once the loans went bad and property values dropped to nearly nothing in sub-prime neighborhoods, fund mangers rushed in to buy the homes for pennies on the dollar. These were stock guys, not real estate investors, so they didn’t understand the fundamentals.

After losing millions on repairing on-going vandalism and high turn-over rates with tenants, these hedge fund managers are trying to unload this nightmare to anyone who will take it.

Don’t be the next in line!

Stay away from cheap or free homes. And be aware that bank “tapes” are full of junk properties. (Tapes are hundreds of bank owned properties sold as one bundle.) Investors are often looking for these, without realizing what they are really getting.

Certainly, not all foreclosures are junk. Bank-owned properties in good neighborhoods are in high demand and perform well. There is a wait-list for these because smart real estate investors know what to look for.

If you hope to buy discounted REO property, work with an experienced real estate investor. Make sure it’s someone who's successfully done what you're trying to do.

With the right team, you can discover incredible opportunities to acquire discounted properties that will help you create passive cash-flow now and amass tremendous wealth for your future.

Kathy Fettke is the CEO of www.Real Wealth Network.com, an educational resource for new and experienced real estate investors.


More top stories:

Email, Hate Mail and Comments from Readers: John Ransom
Government Blames Banks for Housing: Mike Shedlock
Obama's Energy Policy and Flyover Country: Lincoln Brown
Bring Foreign Profits Home Now: Jack Bouroudjian
Sucker: Free Properties Aren't Cheap: Kathy Fettke

Catch Ransom's Daily Market Commentary at the Ticker

Email Ransom: thfinance@mail.com Facebook: @bamransom Twitter: @bamransom