Buying Foreclosures as an Investment Strategy
Buying Foreclosures
The laws and processes governing foreclosure sales vary greatly by state, so depending on the state in which you live, the procedure may take a few months or up to a year. Basically, though, a property foreclosure involves a lawsuit in which a bank, mortgage company, or other lien holder seeks to take an owner's property to satisfy a debt. If a homeowner fails to pay their mortgage loan on time, after a few months, the lender that holds the mortgage on the house can bring a foreclosure action against the homeowner. The lender may actually take ownership of the property or have the property sold to pay off the debt. As a result of foreclosure sales, the owner loses all rights to the property. Again, the timeframe and rules governing house foreclosures vary by state, but after the process is complete and the lender has taken back the property, the home is now referred to as an REO, or real estate owned. Lenders are not in the business of owning property, therefore, they need to sell it quickly, which can result in good buying opportunities for real estate investors. Lenders generally offer a property foreclosure below market value to ensure a quick sale. Investors who have the knowledge and resources to buy these discounted properties, can then use them as buy-and-hold rentals or flip them for a more immediate profit.
Buying Foreclosures
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3 Phases of a Property Foreclosure
A property foreclosure goes through three phases. As a real estate investor, you'll want to be aware of the pros and cons of each phase so that you can make informed decisions:
Click here for United States Foreclosure Laws by state.
- Pre foreclosure phase. When the homeowner gets behind in the loan repayments and the loan goes into default, the lender will start foreclosure proceedings against them. It is during this phase that you can approach the owner with an offer to buy the property before it goes to auction. The advantage of this is that the owners are usually motivated to sell so they can settle their debt with the lender before the property is auctioned, thus avoiding the big black mark on their credit report. The only negative to buying in this phase is that you may feel a little uncomfortable approaching owners with your offer. If you feel awkward, keep in mind that you may very well be doing them a favor because selling privately saves them the embarrassment of foreclosure sales.
- Auction phase. A property foreclosure auction is usually held on the steps of the county courthouse and the property is sold to the highest bidder. The starting price is usually well below market value— the opening bid is the amount that is owed on the property plus auction fees, so you have a chance to grab a real bargain at these foreclosure sales, if you do your homework and find out everything you can about the property. The disadvantage here is that if you've never participated in a public auction you may feel overwhelmed by the proceedings. If you choose to purchase house foreclosures this way, first go to a few public auctions to see how the bidding process is carried out so you'll know exactly what to expect. You truly are buying as-is, so be prepared for potential repairs you cannot physically see.
- Real estate owned phase. This phase of house foreclosures is often referred to as the REO phase. When a property is not sold at public auction it is taken back by the lender. The lender then usually lists house foreclosures with a real estate agent. The benefit of buying in this phase is that any liens on the property have been removed and any back taxes on the property are paid in full. You can do inspections and more information about property will be readily available. Some repairs or clean-up might even have occurred as well. The downside is you may end up paying a higher price on this type of property foreclosure because of the real estate agent's commission and to cover any of the make-ready expenses.
Click here for United States Foreclosure Laws by state.
Buying Foreclosures
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Buying Foreclosures
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Is Buying House Forecloses at Auctions
More Reward or Risk?
Property Foreclosure
A common way to buy house foreclosures is to buy them at auctions held by the court. Investors at the auctions bid for each house and the highest bidder gets to purchase it. Buying houses in this manner is considered to be the most rewarding, as well as the riskiest, way to buy a property forclosure.
The REWARDS
• Good deals: most of the houses up for sale are basically in good condition and can be kept as your primary residence, as rental property, or flipped for profit after some repairs and updates are completed.
• Below market value: there are a lots of discounts offered on these house foreclosures and investors can get a 35% to 45% discount or more on the present market values.
• Time savings: an investor doesn't have to go hunting for a deal, auctioned properties are widely available if you are interested in buying foreclosures.
The RISKS
• No chance of inspection: it is nearly impossible to do a physical inspection of the property interior before foreclosure sales, other than to peek through windows, and sometimes investors cannot get close enough to the property to perform even a cursory exterior inspection.
• Money required up-front: the buyer has to pay at least 10% of the purchase amount through a certified check while at the auction, with the balance being due in cash and very quickly.
• Lack of research: lack of opportunity to do a title search, to find out if back taxes are owed, and inability to do other types of research you would normally want to do before buying foreclosures.
The REWARDS
• Good deals: most of the houses up for sale are basically in good condition and can be kept as your primary residence, as rental property, or flipped for profit after some repairs and updates are completed.
• Below market value: there are a lots of discounts offered on these house foreclosures and investors can get a 35% to 45% discount or more on the present market values.
• Time savings: an investor doesn't have to go hunting for a deal, auctioned properties are widely available if you are interested in buying foreclosures.
The RISKS
• No chance of inspection: it is nearly impossible to do a physical inspection of the property interior before foreclosure sales, other than to peek through windows, and sometimes investors cannot get close enough to the property to perform even a cursory exterior inspection.
• Money required up-front: the buyer has to pay at least 10% of the purchase amount through a certified check while at the auction, with the balance being due in cash and very quickly.
• Lack of research: lack of opportunity to do a title search, to find out if back taxes are owed, and inability to do other types of research you would normally want to do before buying foreclosures.