- If you know what to expect, investing in foreclosures can be a great way to get into real estate investing.
- Buying foreclosed homes requires special finances and the ability to recognize and adapt to varying house conditions upon purchase.
Buying a foreclosed home can provide a great way to diversify your investment portfolio and is especially relevant for seasoned real estate entrepreneurs. Turning a profit in foreclosure investing is an art that requires knowledge in some key areas. We’ll give a high-level overview of some of the key points in this article.
Why Invest in Foreclosure Homes?
When buying a foreclosure property, it’s important to know what’s happening in the process of the home(s) you are buying. If a home is in foreclosure and going up for sale, the sellers (usually banks) are motivated to sell these properties as it’s not in a bank’s job description to upkeep, fix & flip, or do anything with a home besides finance it. Pre-foreclosure properties are also owned by sellers who are more motivated, as they’ve lost the ability to keep up with payments and are looking for a way out as quickly as possible.
Who Should Buy a Pre-Foreclosure Home?
Because foreclosures are often terrific bargains, they are popular with real estate investors looking to use them as rental properties or flip them for a quick profit. Competing with these investors, who have the cash (which is required at auctions), can be challenging for first-time homebuyers.
To come out ahead on a foreclosure property it takes someone with the know-how to do the inspections (title search, property history, location statistics, comparisons, etc.) On top of being able to bring a cashier’s check to an auction, any person buying a foreclosed home should conduct their due diligence prior to auction day.
Foreclosure properties that are fixer-uppers have become synonymous with attractive profit margins that aren’t typically seen in non-distressed properties. For a better idea of what to expect over the course of a foreclosure deal, please visit this link.
How to Find Foreclosed Homes for Sale
Depending on the health of the residential real estate market, the ease of finding foreclosures can fluctuate. However, there are some general strategies buyers can usually rely on.
PROPERTY AUCTIONS
Property auctions may be the best way to find foreclosures. Since property auctions typically feature numerous homes, they can also provide a better variety of foreclosure opportunities for buyers. In fact, finding foreclosures through property auctions has become even easier thanks to the internet. Though most foreclosure auctions take place in-person, sites like Auction.com allow buyers to search for foreclosure homes in their area and set alerts to keep them updated on any new properties entering the market.
ONLINE RESOURCES
Auction.com offers a convenient place to search for REO and foreclosure properties nationwide, so you know where and when to attend public auctions.
ADVERTISING
Foreclosed and REO homes can be advertised for sale through newspaper advertisement, online, and social media. Sites like Auction.com have a database of properties from banks and other vendors that qualify as foreclosure and REO properties.
REAL ESTATE AGENTS
One of the lesser-known specialties of real estate agents is that they sometimes have knowledge of the foreclosure property market. If you find the right agent, they can help you find the right property and complement that with a unique knowledge of the geographic area for which you are searching.
The Types of Distressed Disposition
It is important to know the stage any property is in before investing in it. There are different statuses for properties that fall behind on payments that we will approach below, each one with its own special approach to purchasing:
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Pre-foreclosures
A property is in pre-foreclosure after the mortgage lender has notified the borrowers that they are in default but before the property is offered for sale at auction. If a homeowner can sell the property during this time, they may be able to avoid an actual foreclosure.
Pre-foreclosures are typically listed in county and city courthouse buildings.
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Short Sales
In a short sale, a lender is willing to accept less for a property than the amount that is owed on its mortgage. In these cases, the home is likely to be worth less than the outstanding mortgage balance. To qualify as a short sale, the lender must agree to “sell the property short” by accepting less than is owed, and the home must be listed for sale.
Purchasing a short sale property is in most regards the same as a traditional purchase, but the language in the contracts will differ, specifying that the terms are subject to the lender’s approval.
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Foreclosure Auctions
A foreclosure auction occurs after the lender has notified the borrower of default and allowed a grace period for the borrower to catch up on mortgage payments. An auction is designed to help the lender get repaid quickly for a loan that is in default.
These auctions often occur on a city’s courthouse steps and can be managed by local law enforcement authorities, trustees, or other auction vendors. The property is auctioned to the highest bidder at a publicly announced place, date, and time.
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REO Properties
Properties not sold at auction revert to the bank and become Real Estate Owned (REO) properties. These are sometimes also referred to as bank-owned properties. Auction.com has a bank-owned properties section where interested parties can shop for available options.
Foreclosed Homes Seem Well Priced. What’s the Catch?
The price of a foreclosure home won at auction can be less expensive than other houses in the area, but we are often not comparing apples to apples when making that comparison. Foreclosure properties are sold as-is, meaning that a property owner is not likely to have completed upkeeping tasks done in an ordinary real estate transaction. This is why most foreclosure home buyers specialize in fixing up homes once they are purchased to then turn around and sell them for more than the initial cost and fix-up.
Foreclosed homes are usually sold as-is. As with many other items sold under that status, there is a discount behind the adage.
Risks of Buying Distressed Properties
What will I likely need to deal with when buying a foreclosed home?
Property Problems
Distressed real estate might not be kept up as well as something you would find on the traditional market. Expect to update and fix a good percentage of foreclosed homes. Renters could be occupying a property and it takes a special process to get them out depending on the State and locale the property is in.
Hidden Costs
Do your research. Auction properties can have delinquencies such as back taxes and liens attached to them by senior lienholders, federal, or local governments. This can add further costs to an otherwise desirable house.
Whatever is owed, the liens must be paid before the buying process can proceed.
This applies mainly to properties being auctioned off through foreclosure auction. Lenders pay off any liens attached to a property before reselling it.
Time is Money
If you are buying a foreclosed home to fix and flip it, you have to take into consideration the time value of money. If you are taking out a short-term loan for cash to buy a foreclosed home, then you are on the clock to fix the property up and sell it as fast as possible. This process can be especially stressful for the uninitiated. If you find something wrong with the house that will take extra time to fix, that is a cost above and beyond the straight cost of the repair.
Purchasing a Foreclosed Home
To learn more about how to purchase a foreclosed home, including State by State requirements and step by step content on what you need to succeed, visit the Auction.com help center.
The Bottom Line
On the surface, foreclosed homes can seem awfully appealing. However, the time and money behind investing in them can be highly unpredictable, so come prepared.
For many investors, foreclosed homes can wind up being incredible deals. Buyers have the unique opportunity to pay below-market value for homes that may not be available to them under normal circumstances. That sounds like a good deal.
