Japan
Investing in Tokyo Distressed Properties: A Beginner’s Guide
What is a Foreclosure?
A foreclosure occurs when the mortgage holder—usually a bank—has not received loan payments from the borrower over an extended period of time. The three most common reasons for nonpayment leading to foreclosure are divorce, loss of employment, and death.
When the mortgage holder decides to foreclose, the property owner (or, if a death is involved, the person who has inherited the property) is typically several months behind in payments. The mortgage holder will not negotiate, because exemptions cannot be made for every owner going through difficult times. While that may seem oppressive, a foreclosure can actually be a relief to the property owner. Foreclosure removes the pressure and usually allows the owner to live in the property for up to several months free of charge.
Foreclosed property is handed over to the courts, which appraise its value. Appraisers are asked to perform ten to twenty appraisals in a single week, far more than can be done with the degree of accuracy associated with a “normal” assessment. The sheer number of these distressed properties therefore results in countless properties being undervalued and sometimes overvalued. Most distressed properties are sold for the appraised value at the time of foreclosure. It is therefore not unusual for a foreclosed property to be valued below what it would bring in the market.
Foreclosure Buying Hints
• Determine which distressed property best suits your short-term and long-term needs beforehand. You will then be able to make quicker, more informed decisions.
• Resist the urge to override your long-term goals in the pursuit of short-term ones.
• Never be in a rush to purchase a distressed property. Another deal is just around the corner, and you can learn as much from the ones you don’t pursue as you can from the one you do.
• Dreams are great, but you should always keep your resource limits in mind. Know what you want to pay for the property and the current market value.
When you find a foreclosed property that is obviously overvalued, remember that there is bound to be another one that was undervalued. You can profit from the mistakes the government agencies make: In addition to the potential savings, you may also be able to buy a larger and more valuable property than you could ordinarily afford.
Japan’s Bidding System
Japan’s property auction system differs from that in many other countries. For example, all bids on distressed properties use the “closed” bidding format: You submit your bids on paper, deposit 20 percent of the bid price, and then wait for the draw date. If your bid fails, your 20 percent deposit is refunded. Your chances of winning a bid are relatively high.
Building Your Portfolio
If you’re just beginning to build your real estate portfolio, be sure you understand the choices you need to make now that will affect your flexibility later. For example, ask yourself:
1) What is my short-term real estate investing goal (e.g., how many foreclosure properties can I buy the first year)?
2) What are my long-term real estate investing goals?
3) Do I want to be a landlord?
4) How strong is my credit? (If you need to improve your creditworthiness, do it now.)
5) How much cash do I have to work with?
6) Do I want to generate revenue from my properties immediately, or in the future? How much?
7) How easily can I get a bank loan?
Goals and priorities inevitably change, so you should ask yourself these questions even if you already have investment properties. Make sure you are still on track with your long-term real estate investing goals. Write your answers down and refer to them before making any decisions on purchasing.
Know Your Target Real Estate Marketplace
Real estate markets can differ from area to area, ward to ward, and even block to block. It is important that you know the quirks of your target real estate market.
First, however, you should be familiar with the foreclosure home market in your own “backyard.” For example, what does the average property sell for in your area? Knowing the answer will enable you to determine the spread between the future target purchase price of a foreclosed property and the average sales price (your equity). Using the top-end selling price for that area might make you feel good, but it won’t give you an accurate picture. Hope for the best, but prepare for less.
Shop for Equity First
Many would-be investors make the mistake of blindly following what they’ve heard about real estate investment. For example, a lot of people believe that a three-bedroom, two-bath apartment is the only investment worth making.
This is not true. What you are looking for is equity. If one-bedroom mansions are common in your area, then they are every bit as valuable as a single family, freestanding home. Shop for equity first, then for marketability; you don’t want to end up with an oddball property that is difficult to sell.
How Much Should You Bid?
One of the major considerations when bidding on a foreclosed property is determining how to bid just enough to win the bid. Do not be afraid to bid below the mortgaged amount for a property. A discount of 15-20 percent is the most you can expect, and the bank may still not be this flexible regarding price. If you do not offer the full asking price for the property, be prepared to lose it to another buyer.
Remember, Foreclosures = CASH
You’ll have to have cash readily available when buying through the foreclosure system. For example, you’ll need to deposit 20 percent of the starting bid price the court sets. If you win the bid, you have one month to pay off the balance. If your bid fails, the courts return your money, usually within seven working days. The balance owed does not have to be paid in cash; it can be covered with a bank loan if necessary. We suggest getting any loans pre-approved beforehand. You should realize, by the way, that getting advance approval from a bank on these types of properties is generally not easy.
What to Do with Your New Property
Many investors do not fully understand their post-purchase options. There are a number of strategies to help you maximize your equity depending on your short- and long-term investing goals. Designing your exit strategy is just as important as the property purchase itself. Here are some strategies that can potentially increase your return when investing in real estate.
Buy and Cash Out
Buying to cash out is the most easily understood form of real estate investment. Here are some useful strategies for increasing your return:
• Begin advertising and showing the foreclosure property the day the contract is settled
• Decide how you want to present your offer to potential buyers, including closing costs and the mortgage amount
• Determine your break-even point and build it into your profit
Buy to Rent
A great way to make a long-term profit in real estate, especially in a large city like Tokyo, is to buy property and then rent it out. In most cases your tenant’s rent money will pay down the mortgage for you.
Article from Real Estate Japan
