Foreclosure Investing, Is It Right For You?
Unless you are very new to real estate investing, you must know the impact that foreclosures have had on the real estate market. One of the big misconceptions people have about foreclosures is that they are all the same. In reality, there are a few different stages to foreclosures, each with their own pros and cons. The key differences are the levels of control that the homeowner has over the property at different stages. When they’re simply in default, they can sell without any restrictions. Once the lender takes control though, you are forced to deal with them instead of the homeowner.
Despite the difficulties in foreclosure deals, there is still a chance for them to yield strong returns, if you do things right. Here are a few ways to tell, if foreclosure investing is right for you.
- Pre-Foreclosure Stage. The whole process begins in pre-foreclosure, which is when the homeowner is late on a mortgage payment, but not yet in foreclosure. After a few days without payment, the homeowner begins receiving phone calls and letters from the lender, if after 120 days’ payment has still not been received the lender can initiate foreclosure. There can be many reasons why a homeowner is late on payments, they could have suffered a major injury which has dried up savings, suffered a loss of employment or any other unexpected expense. The exact reason why they are late on payment will have a lot to do with whether they are looking to sell or not. If it’s a short-term problem they may wish to hold out until they can find the funds or arrange a loan modification with the lender. If the problem is long-term though and they have no way to make payments, then they might want to explore short sale or other sales options. You can find pre-foreclosure leads in the 30, 60 and 90 days’ lists from various sources. It will be a lot easier to deal with the homeowner than the lender, which makes this a good time to make enquires.
- Short Sale. A common alternative to foreclosure is a short sale. In this case, the lender agrees to receive less than the amount owed to take ownership of the property. The problem with this is that the lender still has to agree to the transaction and there will be a few hoops to jump through for everyone involved. In most cases, a property in foreclosure is an expensive proposition that most lenders would not like to deal with. For the homeowner, a short sale is a better alternative to foreclosure. Foreclosures can damage a person’s credit report and take several years to recover from, while a short sale can take only a year or two depending on the homeowner’s credit profile. For the buyer, a short sale is an opportunity to acquire a property at a discounted rate, though there will still be a few difficulties to overcome. Both the homeowner and the home’s value need to be approved first and the whole transaction can take anywhere from 30 days to 12 months.
- Auction. The foreclosure laws for the District of Columbia state that after the time for a homeowner to pay a lapsed mortgage has passed a deed of trust is then drawn up to pass the property to the lender. The lender will then usually put it up for public auction to pay off the loan amount with the sales proceeds. These auctions can be both exciting and very profitable, if you do your research. There will usually be a minimum bid and if the property has any defects that will require more investment, then you can get it at a discount. The biggest problem with an auction sale is that you can’t see the site yourself, before you buy. This is where any research you can make on potential properties before the auction can make a difference. You also need to be weary of getting too excited in the auction process and bidding more than you anticipated.
- REO Properties. The final option, though far from the best, is purchasing an REO (Real Estate Owned) property. This is when the lender takes possession of a property rather than going through the foreclosure process. Most lenders are not in the business of managing properties and would rather get rid of it as soon as they can. Most REO’s are listed on the market and sold through a local real estate agency. Because there will be a lot of competition, the discount won’t be as great as with the other three options, but it’s still possible to get a good deal. The upside to this is that you can be sure the title is clean. It could take a lot of searching, to find a good REO property.
Foreclosure deals need to be approached with caution and an understanding of the market and your state’s laws. Done right you can scoop up a property at a great price and make your time and effort worth it.