Opportunities abound in the real estate market regardless of the boom or bust cycles that reflect the complicated dynamics at work in this sector. While demand and supply affect housing trends as a whole, there may be other factors at play for individual property owners that could trigger the foreclosure process. Foreclosure properties present unique challenges as an investment asset, depending on whether they are short sales, foreclosure auctions or bank-owned.
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The Foreclosure Process
Foreclosure is a process, and can be a lengthy one, rather than a straightforward result. When property owners default on their mortgage payments, lenders take the necessary steps to protect their financial interests in the mortgaged asset. The initial steps typically include notifying the borrower on record of the default and requesting that mortgage payments and penalties be brought up-to-date immediately.
In most states, lenders do not file the Notice of Default until borrowers are at least 90 days in default on their monthly payments. This early stage is called the pre-foreclosure stage where borrowers may have the option of re-negotiating payment terms and exploring ways to bring their account into good standing. Depending on the lender, borrowers in default may be able to take advantage of private or federal programs that offer help to homeowners. Selling the house as a pre-foreclosure or short sale at a lender-approved price may also be an option.
Once the lender files a Notice of Trustee or Notice of Sale, the property is officially in foreclosure. This notification advises the borrower that the lender will take over the property to recover its financial interest. The notice may specify an auction date, which may occur as little as 21 days after the notice. Foreclosure laws vary by state, and the auction date may be scheduled further than three weeks away. Foreclosures may be judicial, which means going through the court system to seize and sell the property. Or they may be non-judicial, where the foreclosure does not involve the courts and are usually processed much faster.
When the lender fails to sell the property at auction, ownership reverts to lender, and the property is now referred to as a bank-owned asset or REO. There are many benefits of purchasing bank owned properties, but there are pitfalls as well if you do not put in the necessary work to research the property.
Dealing with Bank Assets
When the property is entered as an asset in the lenders’ books, it may be referred to as real-estate owned or REO. These assets are usually managed by the loss mitigation department at the financial institution. To be clear, these institutions are not in the business of owning property. They will take the necessary steps to secure the property to prevent further damage and loss, but they rarely undertake more than basic clean-up and repairs to make the house marketable.
Aside from physical preparation, financial institutions may take the essential steps to clear the title to establish ownership and facilitate the selling process.
The lending institution will take steps to determine who else may have claim to the title including:
• Heirs, in cases where foreclosure was due to the death of an owner or co-owner
• Other lenders such as secondary lenders
• Liens that may be due to unpaid contract work performed on the property
The presence of liens create a cloud on the title and will hinder a real estate sale from proceeding. If the current owner owes payments on a second mortgage or owes contractors for labor and supplies for working on the property, the new owner may be responsible for these liens attached to the asset. The property may still be sold while liens are active, but the title would be encumbered and may cause problems for the new owner. It is important for anyone considering REO properties to perform due diligence to ascertain that a foreclosed home has credible title.
Benefits of Buying Bank Owned Properties
According to seasoned investors, a sound investment in real estate is made at the buying stage. Post-foreclosure properties that have reverted to bank assets offer some of the best upside potential for buyers who put in the work required to research the property and do the necessary upgrades after closing.
- The houses are sometimes unoccupied at this stage because the bank may have taken the necessary steps to evict occupants to prepare the property for sale.
- Basic cleanup has been undertaken.
- Aside from inspections, some contingencies could also apply although the house is sold in as-is condition.
Due Diligence
REOs are a unique set of properties with a potentially significant property potential for the right investors. Due diligence is one of the critical steps that every investor must make when considering these properties.
- Start a preliminary review of the title. The bank may offer a title report based on their own research, but you should also be prepared to conduct your own title search, using reliable professionals.
- When available, property inspections should be conducted by professionals who are experienced in this property type. While these assets are sold as-is, your home inspection report will give you a better idea of repair and upgrade costs.
- Conduct a neighborhood inspection to determine if the location suggests a community transitioning upward or downward. Even when the property is located in an area with a high foreclosure rate, there may still be reasons to invest in the area such as changing employment demographics, improving school districts and gentrification.
- Review price trends, demand situation and inventory levels for this particular market and identify the factors influencing these trends.
- If you have a particular purpose in mind for the subject property, make sure that this meets zoning regulations for that area. Neighborhoods may be explicit about their rules for short-term rentals.
How to Buy Bank-Owned Houses at Auction
Auction.com is the nation’s largest online marketplace for foreclosed homes, covering various cities and neighborhoods in the country. Buying properties owned by a bank on Auction.com can ease the complicated process of investing in high-potential distressed properties. The site has thousands of these properties under the REO category.
Step-by-Step Process:
- Go to Auction.com homepage where you have the option of accessing a video tutorial. You can also go directly to the site location page.
- At the header bar, click on the BUY option to show the drop-down menu.
- Click on the BANK OWNED option.
- Enter your preferred location in the search bar, and the site will present REOs for that specific city or zip code and nearby areas.
- The list will include an address, a standard description, pricing information and an auction date if available.
- The listings may also include other information such as vacancy status, no buyer’s premium and interior access.
- Do your due diligence, and be prepared to bid on the specified auction date. Comply with pre-auction requirements such as site registration.
- If you offer the winning bid, make sure to complete all of the closing requirements within the specified time.
Purchasing a bank-owned property on Auction.com is convenient even for new investors. The process is streamlined, straightforward and user-friendly with online help available. Start searching for bank owned properties from the convenience of your home right here.
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The information in this blog post is being provided for informational purposes only and not for the purpose of providing legal or real estate investment advice, and no liability is assumed by Auction.com LLC with respect to such information.
