How To Take Advantage Of Warren Buffett's #1 Investment Idea

Earlier this week, Warren Buffett suggested that the top investment right now is in housing—specifically, buying distressed houses with cheap leverage and renting them out.

We wanted to talk to someone in the know about just how good an idea this really is.

So we spoke with Lester Argus—President of the Argus Real Estate Development Company based in Southern New Jersey—and he told us that simply rushing into making a distressed home investment would be a really bad idea.

"Just because you can buy it doesn't mean you should buy it," Argus points out. "The big problem with Warren Buffett's advice is that a lot of people who did this the last time and got into trouble. They took out home equity loans and ran that all the way up, got a mortgage on the new property for a higher [interest] financing, and then they ran into a glitch and got themselves knee-deep in a bear trap."

That said, he thinks it's a wonderful time to invest in distressed homes—if you do so intelligently.

"Rents are starting to [rise] again where they didn't before," he told Business Insider. "You also have the added advantage that a lot of people can't purchase right now, a lot of people have had issues with their credit because of the economic crisis, so a lot of people aren't buying they're becoming renters, which is making the landlord business fairly strong right now."

And circumstantial experiences—as well as his belief that we've just passed a housing bottom (at least in his own locale)—lead Argus to believe that would-be investors will face some competition in getting the best deals. "I probably say [give advice] twice a week to different investor purchasers that come into my office, and a lot of first-time homebuyers are trying to come into the market right now, too."

First, there are three different times of distressed home purchases...

And they have very important differences for the buyer.

1) Short sale: "A short sale means that the owner still owns the property and the bank has said, you owe us $100,000, you're not going to be able to put any money in your pocket, but if you show us a diligent effort to sell your property for $80,000 because our broker price opinion says that's all it's worth...[we'll] release [you] from this mortgage and you can just get out of this thing...if we approve [the deal]."

2) Purchase directly from the bank: This takes place when a bank has already closed foreclosure proceedings and now owns a property, or when the past owner has offered the bank a deed in lieu of foreclosure.

3) Sheriff's sale: Usually, a foreclosure auction is a Sheriff's sale, and occurs when the U.S. government steps in to satisfy a judgment made by the court system, or to liquidate a mortgage or tax violation.

Argus elaborates, "Usually [foreclosures] are not defended because there's no reason to defend it. The person who owes the money owes it. It's cut and dry." But when it's not or the occupant fights the foreclosure, the bank (or a tax authority) seeks to help of the state, "to go through the removal process to take possession, and that's where the sheriff sale comes in."

"Purchasing directly from a bank is pretty safe if the property has already been foreclosed on."

"As far as buying from banks, it's just like purchasing from a private seller.

Now you may do a closed bid [where potential buyers will offer bids blindly and the bank will choose the best one], which means they'll say, 'We don't want to get into a negotiation. We don't want to spend a lot of time. Here's our minimum bid, everybody gives their best bid. And most of the time, those will be sold through a real estate company...

If the average Joe came in off the street...he would walk in[to this kind of arrangement] and probably get his best deal. But invariably it's going to be competitive, and it's going to be a situation where an investor will have to know what his maximum dollar is and doesn't get sucked up above his potential to purchase."

Short sales can be frustrating, but are straightforward.

"If you see an advertisement that says, 'Asking 299K, subject to lender approval,' that means that the owner actually owes more than what they're asking for the property...

It's important to remember that when you make a contract, you're making a contract with the seller not the bank, so it is contingent upon lender approval. Different banks are taking a really long time to approve short sales," and they don't approve every offer.

Please follow Money Game on Twitter and Facebook.

See Also:

• WARREN BUFFETT: 'Hormones' Will Help Spark A Housing Recovery
• Remember The Last Time Everyone Thought Warren Buffett Was An Idiot?
• WARREN BUFFETT: The Truth About Bonds: Investors Have Gotten Clobbered, And They Should Come With A Warning Label