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Buy Foreclosures, Make Some Money, Save the World

Any un- or under-employed and enterprising real estate professionals out there looking for an opportunity to take advantage of this stage of the boom-bust cycle? Rising single-family home rental rates just may be your answer.

At the end of last month, we wrote about the shift in vertical development away from condo towers to apartment buildings as rising rental rates are allowing developer to get financing to build apartments. Now the same economics are at work in the single-family home market. Rental rates are on the rise, and homeowners are finding they can rent houses for great sums that otherwise wouldn't budge on the for-sale market. Our intricate shadow CA network has reported several owners in the past few weeks renting their homes in popular in-town neighborhoods for amounts sometimes far above their carrying costs. When rents exceeds ownership costs, it's time to make some moves. To this market movement add the next factor- foreclosed houses.

A glut of foreclosures (with a clogged pipeline behind it) offers an untapped housing supply. And as the WSJ article notes, large organizations have shied away from this opportunity largely because its a very local business and, frankly, can be a giant pain in the ass. The absence of big players has left a large hole in the market.

Before you call up your Rich Old Uncle Herbert and ask for a slug to get your company started, note the reasons the big boys haven't jumped in. Buying foreclosures can be a risky, laborious process. The banks have been overwhelmed by the sheer volume of foreclosures and seem quite inept at dealing with them generally, so working with a beleaugured REO officer at a bank can be frustrating and time-consuming. Many have opined that the chronic weakness of the residential market is in part due to the failure of the big banks to unclog their pipeline and move foreclosures through the system (although an unfettered wave of foreclosed homes hitting the market as opposed to the present trickle might have sunk home values into the same deep, black hole that also houses Lindsay Lohan's career, Ireland's national net worth, and Milli Vanilli).

The location of foreclosed homes is also a risk factor. Many of the available foreclosures are concentrated in less desirable and/or suburban fringe neighborhoods which aren't experiencing the same levels of rental competition seen in more desirable in-town neighborhoods (which conversely see less troubled homes come on the market).

If you are able to procure some decent homes and can fix them up and make them presentable, the next step is marketing and signing some tenants to leases. Then, the real fun starts. If you've owned a house, you know what houses do. They- and everything in them- break. And when you are the landlord, all of those broken fridges, clogged toilets and peeling paintscapes are your responsibility. You are going to need tools and a lot of time on your hands or a healthy handy man line item in your budget projections.

Those first few homes will be a good start, but the real opportunity to make money requires scale, and an attractively profitable business will require a substantial, diversified portfolio of homes with solid leases in place.

But you can do it, and once you've built your residential real estate empire you have options for your exit strategy. Find a big boy to buy your portfolio in toto or collect rent checks until home values come back. Then hire a good broker and sell off the properties one-by-one and follow the Royals to the Seychelles to count your money in peace. In doing so, you'd be doing your nation a great service by helping to bring the residential housing market back to functionality, and in the process, restoring the health of the larger national economy which leads to stability, free will, and democracy abroad*.

No question there is an opportunity for a real estate entrepreneur willing to pound the pavement and get their hands dirty. You just need a willing attitude and capital -- and that's what Uncle Herbert is for. If you don't call him, we will.

*excluding North Korea. It's just too weird for democracy or anyone not born under a double rainbow.