How to Find and Buy Foreclosures
Often in real estate the #1 place to invest is in
foreclosures
Many market circumstances can make it a great time for small to
medium real estate investors to buy one or more foreclosure homes for
their own residence, resale or rental. During downturns in the economy,
more higher end properties go into foreclosure, so the belief that
foreclosure properties are only available in high crime areas is faulty.
Beachfront and properties in affluent areas are always part of the mix
of foreclosed properties available.
You can
purchase foreclosures for as cheap as 50% under market, but a large
percentage of foreclosures sell for just 10% under market. Nonetheless
the savings may be larger if the property is bought from the mortgage
lender who carries the mortgage loan that is in default. Certain
mortgage lenders may be willing to waive many of the
closing
costs, maybe even provide a break on the interest rate or the down
payment.
Information is King
The beginning investor needs to
learn how to navigate the foreclosure process. If you put the time
and effort in, it will translate to savings. If you spend five hours a
week researching, it is well worth it.
For many consumers the foreclosure process can prove frustrating.
Good properties are obtainable, but
finding these properties demands research, preparation, doggedness
and patience.
The foreclosure process begins when a homeowner falls in arrears on a
mortgage loan. Numerous owners of homes that fall into foreclosure have
been fighting financially for a year or more before they give up, which
commonly means that the house has not been getting general maintenance
for a while.
This can include everything from missing doors to ripped out kitchen
sinks. Remember front yards, broken appliances and windows, and dirty
floors, carpet and walls are found in even the wealthy areas of
foreclosures. This could be a positive or a negative for a home buyer.
Homes in bad condition might fetch bargain prices, but if you make the
repairs and then resell the property you might just make a small
fortune.
The first three unwritten rules of real estate are location,
location, location and does apply to these situations. If you walk into
the home and trash is everywhere, but the foreclosure is in a good area
with high resale values, just hold your nose, walk through the entire
house and consider making an offer well under asking.
Investing in Foreclosures
When a mortgage lender determines to foreclose on a home, a default
notice is usually filed. Default notices are public record and for
buyers the first step in locating a home in foreclosure. A buyer
looking for foreclosures can also purchase magazines or better yet
subscribe to a website that does all the work for you and list all
defaults in your area.
Once a home has been located,
search public records. You'll need to look for outstanding liens on
the home, since these will often drive up the price of the purchase
price. Liens are typically placed on a property for unpaid property
taxes. Be sure to also pull comps (sales in the area) to help asses a
true value and the possible profit.
Explore local state
foreclosure laws. Some states such as Pennsylvania and Ohio do call
for the mortgage lender to sue the borrower and get a court order to
sell the home, a process known as judicial foreclosure. There are other
states including Texas and California which observe the non-judicial
foreclosure process, which does not demand a lawsuit to sell.
For beginner investors, buying from the mortgage lender is the safest
way to buy. Nearly all foreclosures are returned to the bank or investor
during auctions. While homes in great locations and in good shape
generally do not sell to far below market, rundown homes, however, can
be picked up well below market.
Safest Way to Purchase Foreclosures
Lender owned homes offer the safest deal for buyers who are new to
foreclosures. There's no risk on taxes, liens or tenants to evict, only
what shape the property is truly in. A mortgage lender who is anxious to
sell just might be willing to extend very attractive terms.
The mortgage lender might offer to finance the property at interest
rates under the market or even provide a lower than normal down payment.
If the mortgage lender has already ordered an appraisal and their deal
includes title insurance, which is normal, then much of the risk related
with buying foreclosures early in the process can be averted.
Finding Hidden Foreclosures
Foreclosures do not have to be previously owned homes, a few
foreclosed properties are brand new. These homes are not as easy to find
and rarely appear on national lists. In many areas, when the economy
slows it leaves many builders of new mid to upper end homes over
extended with few buyers or prospects.
When this happens, the banks that supplied the construction loans
take possession of the properties and then attempt to sell them. These
are the famous invisible foreclosures because no one associated with the
sale of these properties will refer to them as foreclosed homes.
Innovative investors often find homeowners who are about to go into
default and are attempting to keep some of the equity in the property.
If found in time the homeowner is normally prepared to receive a small
portion of the difference between the equity and the home's market
value.
Pre-foreclosure purchases do offer serious bargains but they require
persistence most of all. Creditors are often hounding homeowners at this
stage, so it can be very trying to actually get through to the
homeowner.
If the homeowner is contacted, the investor could be in for a big
surprise. Homeowners in default might not have phones or electricity,
and they may have a mixture of personal and legal problems. What's more,
they more than likely need some place to live before they can move out
of the home the investor wants.
This can be a high risk, high reward proposition, and is not for
first-time foreclosure buyers.
The Auctioneer
Many auctions happen on the county courthouse steps, and they pose
two distinct disadvantages: Investors may not be able to inspect the
property, and they will have to put up the entire purchase price the
same day.
HUD runs auctions to help it unload
homes it has acquired through defaults on federally backed mortgages.
The tremendous deals are hard to find if you go this route, but the cost
of getting started with good credit can be very low as many mortgage
lenders will loan the full price of the foreclosure or more. If the home
is to be used as a rental, many banks may require as little as 10% down.
Foreclosure properties purchased in good areas at below market values
that appreciate yearly can be a solid investment strategy for many
investors. Homes used as rental properties give many investors valuable
tax deductions while the home increases in value and builds equity.
Learning how to
find and buy foreclosures is an art, don't expect to make enough to
retire on off the first foreclosed house you buy. Use the information
gathered here and elsewhere to further your knowledge on buying
foreclosures.