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.
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.
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.
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.
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.
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.