Unless you have been living under a rock for the last decade you are aware of the impact foreclosures have had on the real estate market. Fortunately, things have improved dramatically since the market collapsed but there are still foreclosure deals available. One of the big misconceptions is that all foreclosure deals are alike. The reality is that there are a few different stages to investing in foreclosures each with different pros and cons. The biggest difference is the control that the homeowner has at the various stages. When they are simply in default they can still sell without any restrictions. Once the lender takes ownership of the property you are forced to deal with them as opposed to the homeowner. Despite the reduction in foreclosure deals in most markets they can still be a home run under the right scenario. Here are a few ways to tell if foreclosure investing is right for you.
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- Pre-Foreclosure Stage. Just as it sounds the pre-foreclosure stage is when the homeowner is late on their mortgage but not in foreclosure yet. As soon as the homeowner is a few days late they will start receiving phone calls and letters from their lender. Once they hit four months, or 120 days, the lender can start the foreclosure process. There are various reasons why a homeowner becomes late on their mortgage. There could be a serious injury that has dried up all their savings, a loss of employment or an unexpected expense. The specific reason for the late has a lot to do with how motived they are to sell. If the issue is short term and fixable they will try to find the finds on their own or in the worst case seek out a loan modification from their lender. If the problem is long term and they feel can’t be resolved they will explore short sale or other sales options. Pre-foreclosure leads can be found in 30,60 & 90-day lists from various sources. By eliminating the lender you will deal exclusively with the homeowner which in theory should make for a smoother transaction.
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- Short Sale: A popular alternative to a foreclosure is a short sale. The catch with this is that even if the homeowner wants to sell and move on the lender still needs to approve the transaction. With a short sale, the lender agrees to receive less than the amount owed to take ownership of the property. They do this because the homeowner has stopped paying and the property is facing foreclosure. In most cases, a property in foreclosure is an expensive proposition for lenders that they would rather not want to deal with. For the homeowner, a short sale is the lesser of two evils on their credit report. Where a foreclosure can take several years to recover from a short sale can take a year or two depending on the rest of their credit profile. On the buyers side a short sale represents an opportunity to buy a property at a slight discount but not without hoops to jump through. Not only does the homeowner need to be approved but the value needs to be approved as well. On top of that the timeframe can take anywhere from thirty days to twelve months.
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- Auction. If you are interested in foreclosures it is essential that you know and understand all the specific rules and regulations. Depending on the state the foreclosure rules can be completely different. In some states once the house hits foreclosure it is brought to an open auction where anyone can bid on it. These auctions can be exciting but they can also be profitable. There is typically a minimum bid but if the house needs enough work or has other unique flaws it can be bought at a discount. The biggest downside with foreclosure auctions is the risk of buying sight unseen. When you take ownership of the property you do so without the ability to see the interior. This is the where you need to weight the risk versus the reward. It is also important to avoid getting caught up with the excitement of the auction and bidding higher than you anticipate. Walking away is the hardest part of dealing with auctions.
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- REO Properties. An REO (real estate owned) property is one where the lender takes possession instead of going through foreclosure. Lenders are not in the business of being property managers and would rather have the asset off their books. Most REO properties are listed on the market and sold through a local real estate agent. Because there is open competition the discount is not as great as the previous three options. This doesn’t mean you can’t find a good deal but as an investor the discount may not be as deep. The positive is that since the lender has ownership you can be confident that the title is clean and there is nothing to worry about on that end. It is possible to find an REO needle in the haystack but it will certainly take some digging.
Foreclosure investing requires patience, knowledge of the local procedure and persistence. All it takes is one good foreclosure deal to make it worth it.
