A few days ago, while eating lunch, I caught an “infomercial” on television sponsored by Armando Montelongo of “Flip This House” fame. Armando was promoting his course that is described as teaching how to make millions in the residential foreclosure market. He refers to his list of bankers who will lend money for transactions and suggests that it can be done without having any money of your own. He refers to his sources for finding foreclosure sales that are not generally available to the public. These claims are supported by a cast of people purporting to have made tons of money, on a repetitive basis, following his teachings, including people who were involved in multiple deals simultaneously.

The fact that people pay good money to attend these courses is a testimonial to the belief of gullible people that there is really a “tooth fairy” and that taking a “smart pill” is all that is necessary to unleash riches. Teaching people “how to get rich quick” has been around forever. What is absolutely astounding is the fact that people are willing to pay money to attend these kinds of courses without undertaking any kind of research to find out whether or not what is being advertised has a reasonable chance of working.

The first “red flag” is the inference that the strategy can be implemented without using ones own money. That may have worked in the years leading up to 2006 when zero” down payments, liberal loan terms, no-document loans and relaxed loan underwriting standards were in vogue. But, since he collapse of the mortgage market it is general knowledge that lending standards have changed and zero down – no-doc loans are no longer de rigueur. So, question number one, before paying money for a course, should be to ones banker asking if these claims are reasonable.

The next question should be addressed to an experienced residential real estate broker to ask if the market is such that it is easy to identify and buy foreclosed properties with little or no down payment as well as to find out if the broker (brokers) had any knowledge of the “Flip This House” strategy working in the present market.

Finally, research needs to be done to determine whether lenders selling foreclosed properties are required to make the same disclosures relative to condition that a typical seller is required to make or whether a sale would be “as is”. Anyone buying homes in California, with the intention of “flipping” should be aware of the disclosure required of sellers and their brokers. Failure to disclose could result in costly remedies after the sale has closed. Buying “as is” becomes a very dangerous undertaking for the inexperienced buyer. Before buying “as is” a purchaser should have a thorough home inspection to identify any serious problems like mold, lead paint, termites, and wood destroying organisms, as well as structural problems, major deferred maintenance (like roofs) etc. The cost of putting the home in salable condition may erase any potential profit. “Fixing” the home to “flip” it may well involve much more than just a coat of paint. When purchasing foreclosed property, the buyer should assume that the foreclosed owner who couldn’t meet the required debt service payments also couldn’t afford to take care of any maintenance problems.

Going into the business of buying foreclosed properties should be approached in the same manner as going into any other business. First and foremost the buyer must learn the business. Learning the residential real estate business can not be done in a short “get smart quick” course. There are capital needs. The money to make the initial purchase, the money to ready the property for re-sale and the money to hold the property during the time between acquisition and final re- sale. It may be possible to buy with nothing down and, if so, what about the rest of the capital needs? Next, how does one learn the market? It can not be learned in a short course. What is needed is a fairly intensive study of neighborhoods and recent sales within those neighborhoods in order to develop the necessary judgment that will allow identifying a “bargain”. This takes a lot of perusing of “For Sale” ads, visits to “Open Houses” and follow up on closed sales. There is no “smart pill” for this.

When one sees a picture of a classroom full of budding real estate speculators one should consider what will happen if all of these people go out into the market at the same time and are ready, willing and able to buy. That amount of activity would cause at least a temporary excess of demand over supply which in turn would tend to destroy bargain prices. The answer is that the strategy most probably can not be implemented by everyone for one reason or another.

Before spending hard earned money on a “get rich quick” promise be very skeptical that the “promise” may be nothing more than to induce the spending of money to register for a course and may lead to nothing more than a few interesting lectures that may resonate like the selling of “snake oil”. There is no quick way to riches other than lots of luck. Otherwise becoming rich takes a long time and much hard work and study. Buying and fixing homes for re-sale should not be expected to be done on a part-time basis and successfully implementing a strategy is a time consuming process. That is not to say that someone couldn’t start from scratch and buy foreclosed property and successfully “flip” the property. It is just very unlikely that lots of people could do it without substantial training. Just ask – if it were so easy why wouldn’t every real estate broker who spends 40-60 hours a week in the market be doing it too, in competition with the inexperienced buyers? If you feel lucky and want to get rich quick – buy a lottery ticket but don’t quit your day job.

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