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How To Buy 200 Houses A Year

Written by Posted On Tuesday, 18 September 2007 00:00

For many people it's not the best time to be in real estate. Markets have slowed or declined in most local areas and financing is tougher to get than a year ago. Chicago's Joseph Varan is also cutting back -- this year he expects to buy no more than 200 homes.

Varan is the president of GoIn Realty , a brokerage based in Woodridge, IL, just outside Chicago which deals in bulk sales and foreclosed properties.

Varan is a bulk real estate purchaser and what's known as a "third party buyer." As a wholesale real estate purchaser he buys homes by the bunch from lenders who want to get rid of REOs -- real estate owned by lenders, insurers and investors which did not sell at foreclosure auctions. Varan is also believed to be the largest "third party buyer" in Chicago, meaning that Varan bids at foreclosure auctions, looking for discounts and bargains.

Varan started in real estate as an agent in 1982 and within a year made his first REO purchase -- a HUD foreclosure property. By 1986 he had his first successful auction bid.

Varan explains that before 2002 he rarely was in the market to buy, however since then he has purchased more than 1,500 properties, typically 250 to 300 units per year.

Varan is the king of foreclosures in the Chicago area, and at first it might seem as though he fits the mold of no-money-down buyers hawked in get-rich-quick seminars. But Varan has been in the real estate business for a quarter of a century, has more than 50 employees, evaluates thousands of properties every month and requires substantial amounts of investor capital to underwrite his purchases. Why does Varan need large amounts of financing? One reason is to buy properties for cash, but Varan also has other costs such as property protection, insurance, property taxes and losses -- that's right, not every property is a winner and most produce only marginal profits. If you're a real estate investor with insufficient capital then a single weak purchase can doom your entire enterprise.

This year Varan expects to make fewer bids.

"Although I'm always buying, this year I am holding back on purchasing marginal deals to see what happens to the market," says Varan. "We are still buying, but on track for about 175-200 units for the year. I always need to adjust my pricing based on what the market is doing. I purchase on a scavenger basis and 90 percent of my inventory is sold to investors on an as-is basis who then repair the property and market it on a retail basis."

As has reported , foreclosures for the first six months were up 55 percent over the same period a year ago and one of every 134 homes is now in the process of foreclosure. These numbers are central to understanding turmoil in the mortgage marketplace -- and change in the new world of loan servicing.

Varan was one of more than 2,000 attendees at the Five Star Default Servicing Conference held in Dallas last week, an event attracting a growing number of people and with good reason: Loan servicers have a key role to play in the foreclosure marketplace.

Loan servicers typically collect mortgage payments and pay out property tax and insurance payments. In effect, they manage the practical side of mortgage debt for investors who own such paper.

However, loan servicing becomes enormously important when borrowers have financial problems. Should the servicer work out a loan modification with the borrower or foreclose? If the property is foreclosed and does not sell at auction, then what? Should the servicer sell the property "as is" or fix-it-up to get a better price? Meantime, who protects the property, takes care of utilities, orders title work, etc?

The Five Star conference attracts loan servicers as well as an array of people who work various part of the business -- big property owners, specializing brokers, lenders, lawyers, title experts, foreclosure services and wholesale buyers such as Varan. Given the growth of the foreclosure marketplace during the past few years, the Five Star is the epicenter of the loan servicing world.

Sale prices in the Chicago area as of the second quarter were actually up, says the National Association of Realtors. Its figures show that the typical home in Chicago/Naperville/Joliet was priced at $283,200, 1.7 percent above a year earlier.

More recently, however, real estate activity in the Chicago area has begun to turn.

"The market has dramatically slowed down," says Varan. "In fact, the total number of sales for the last six months is down about 20 percent. The numbers for the most recent month have been dropping down to as low as 23 percent. Additionally, the inventory supply is now at 10 months."

People usually lose their homes because of illness, accidents, divorce or the death of a spouse. But for Varan, there are now new factors in the marketplace: Fraud and get-rich-quick investors. "Most homes that I purchase are already vacant, and I often do not know the reason for foreclosure," he says. "It appears, however, that many of these properties were involved in some type of fraud. The reason for this conclusion is that the previous sales prices of the properties are substantially above the area's market price. Furthermore, the loan(s) have usually been taken out in the last year or so. The other type of property that I frequently buy at foreclosure is one that has tenants; namely, homes that were bought for investment purposes and end up having negative cash flow. While some foreclosures are caused by illness, accidents or death, in my experience, those loans do not have a great impact on the foreclosure rate of the homes that I purchase."

Varan's marketplace strategy is dictated by investor requirements, investors who allow him to purchase properties for cash. Most want to re-sell a property within six months.

As to Varan's buyers, they could be people who just want a residence, but typically they're investors who buy homes in "as is" condition, fix 'em up and then rent or re-sell them. A look at properties for sale by Varan as of this writing shows prices that range from those requiring an initial bid of $10,000 to a commercial property priced at $3.5 million.

Looking toward the future, Varan says "buyers will continue to exercise the 'wait and see' approach. Consequently, values and sales will continue to decline. It will take some time for the economy to absorb the consequences of the mortgage industry overly extending itself. With the Fed's assistance, however, including lowering rates, the mortgage market will have more liquidity, and therefore, money available to loan out."

For more articles by Peter G. Miller, please press here .

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