Many real estate investors dream of swooping in to get a great deal. It's possible, but it helps to know the landscape.
The 3 stages of foreclosures
Regardless of the state of the housing market, Americans will always cling to the foreclosure dream - to buy that dream home for pennies on the dollar.
Some want to flip them right away; some want to play landlord. In both cases, bargains are out there, but it's not easy.
If you decide to look for a foreclosed property, there are several points in the foreclosure process, and after, during which you can make your move.
Stage 1: Default
Your first opportunity comes in the "pre-foreclosure" stage, when owners have already defaulted on their mortgage payments but actual foreclosure hasn't happened yet. To find out about houses in default, visit the local courthouse where defaults are registered. You can then make offers directly to the defaulting homeowner.
However, few pre-foreclosure bargains exist among the most desirable homes. Many of those will sell for near their appraised values.
Properties that sell at a 20 percent to 40 percent discount usually need repair or are in unstable communities.
At this stage you have about 90 days to act after the default notice is posted.
Stage 2: Sheriff Sales
If a property doesn't sell in pre-foreclosure, and the home owner actually defaults on his mortgage, the home goes to sheriff sale in
Here's some of what you're up against:
- Many sales are canceled at the last moment as the property has been sold or payments reworked.
- The sheriff’s office only accepts cashiers' checks or certified funds.
- Winning bidders are required to put down 10% the day of the sale with the remaining 90% due within thirty days.
- There are costs and fee’s associated with the sale that may not be clear or published which could add an additional 1-5% to the purchase price.
- There's little time to arrange inspections, so bidders may have no clear idea of what they're buying.
- Properties are sold "as is," without warranties. Sellers needn't disclose problems. Buyers may find themselves with unexpected -- and expensive -- repairs.
Financing is not the only obstacle for buyers at a foreclosure auction. The homes may still be occupied by the delinquent owners, and it is up to the high bidder to deal with the messy question of eviction. In some states, the former owners have up to a year after the sale to buy back their home for the amount they owe plus foreclosure costs.
Also, don't expect a clean title search or title insurance to accompany a sheriff sale property. It is not uncommon for a winning bidder to be unpleasantly surprised by an unpaid $6,000 bill from a roofer or a claim by a third cousin who has an interest in the property or utility liens and other charges.
Stage 3: REOs
Here's the investor's last chance. If the foreclosure didn't sell at sheriff sale, it has nowhere else to go but back to the lender, where it takes on a new name: real estate owned.
Lenders hate REOs. An empty house is a nonperforming asset on their books. The longer a house sits unoccupied, the more its value depreciates. Meanwhile, the lender is spending money for its upkeep -- or not, in which case it faces the possibility of a thorough trashing and an "as is" sale price.
If the loan was guaranteed by the
These properties are not the bargains some potential investors think they are. For one thing, there's a lot of competition.
Most large lending institutions won't deal with investors directly, preferring to hand over properties to real estate agents.
This may be the best chance for "mom and pop" to buy a foreclosure.
Banks do want to maximize profits, though. So buying from a lender may not result in big savings. When a bank hires a Realtor to handle their asset they will most likely require 2-3 proffessional opinions of value by way of bpo (broker price opinion) one by the assigned agent and one fee based in addition to an appraisal. Just like any other seller, the bank wants the most they can get and they are NOT required to sell for what was owed if they can sell for more.
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