The real estate market is in turmoil and most real estate agents are finding it difficult to make ends meet. On the other hand, any savvy real estate investor with some foresight will see the tremendous opportunity in buying a foreclosed home. You can buy a foreclosed property for less than 50% of the market value. Let us take a closer look at foreclosed home buying and see how it is possible with the right real estate agent to buy a foreclosed property at less than market value.
What exactly is a foreclosure?
Foreclosure simply refers to the process of repossessing real estate for non payment on the mortgage. Real estate owned can also be foreclosed for non payment of property taxes. Presently, the list of foreclosed properties keeps growing and mortgage banking lenders are looking for real estate investors or first time home buyers to take over these foreclosed homes at a huge discount.
The foreclosure process
Pre-foreclosure is usually the beginning of the foreclosure process. If you own real estate and you miss one to three payments, you’re technically considered to be in pre-foreclosure. You will start getting overdue letters with bold headings like “long over due – foreclosure pending”. Any real estate owned is salvageable during pre-foreclosure. You can make the late payments and all will be fine or you can ask the bank for other financial alternatives like refinancing or payment extensions.
Homes in pre-foreclosure are easier to make a deal on, but you might not get the best discount compared to real estate owned by banks. At this stage, it easier to take over the mortgage or just strike a better deal with the bank after getting the okay from the present owner of the real estate. The homes are usually in better shape and it is sometimes a win, win for both you, the present owner and the bank. Buying a property at pre-foreclosure is easier and gives the most satisfaction and can also be profitable if done right!
Buying a Foreclosed Home – Using short sale
A short sale is when a real estate investor buys real estate usually with the agreement of the present owner and the bank for less than what is owed on the mortgage. With real estate values dropping like flies, banks are willing to listen to any reasonable offers. As a homeowner in distress and going through foreclosure, make sure you ask an attorney before agreeing to a short sale.
The bank might sue you for the difference or the IRS might consider the difference as a gift that requires taxation. Many ways to structure a short sale to mitigate those issues. Basically, you want the bank to lower what you owe to the selling price or you can give the new buyer a second mortgage that does not have to be paid back and sell the foreclosed property at the mortgage amount. Better get an accountant on this one, because the IRS can be merciless even in your distress condition.
For the savvy real estate investor, make sure the bank agrees to the short sale before beginning the process. I think the bank would agree, is not an agreement and would just waste your time. Start very low at the price you’re willing to pay, because the bank will always come back demanding a higher offer or you just might get lucky and they just accept the lower price offered. Put a time limit on your offer and request a firm closing date. If paying cash or financing through the same bank, ask for a much bigger discount. Cash is king and if financed through the same bank, they will make more profit from you.
Buying a Foreclosed Home – Auction process
I hate auctions, as many things can go wrong and you will be stuck with the bad real estate. Before the foreclosed property auction, you will get a chance to inspect the property. If the real estate is occupied, be careful as you will be responsible for evicting the tenants. Eviction proceedings are not clear cut and can tie up your foreclosed property purchased for months and that can be costly.
If the foreclosed property is empty, bring your flash light and a contractor knowledgeable in construction matters. Take a look at every inch of the foreclosed home. Flush the toilet, turn on the water and if any is non functioning, make provisions in your bidding accordingly regardless of what the real estate agent or auctioneer might say.
Climb on the roof and assess any damages. A lot of foreclosed homes are vandalized by the previous owners before leaving. I have seen pipes removed, walls broken into, heating systems striped bare etc. Just looking at the house from the outside is a gross mistake and would cost you eventually.
At the foreclosed homes buying auction, trust no one. Some auctioneers are known to bring in people to bid up the property. Be observant and you might spot the trend. I have seen old couples working with the auctioneer and no one else suspected otherwise.
Read thoroughly, what you will be getting if you have the winning bid. Sometimes the auction is just to sell the mortgage and you will be responsible for clearing up any back taxes, mechanics lien etc. At the least, make sure a clean title is also been conveyed and if not, you need to do your own title search. This is not for the novice real estate investor unless you have money to burn.
Buying a Foreclosed Home – Bank owned Properties
If the foreclosed home does not sell at the auction, the bank takes ownership and that is done through a shell corporation to mitigate any legal issues. Banks hate owing real estate and this is when you can get the biggest discount. You need cash and you can buy these foreclosed properties at 50% or less than their market value. Assume everything about the property is messed up. As a way of getting a huge discount, insist on inspecting every inch of the real estate owned by the bank that you’re interested in purchasing.
Document every damage to the property and include the damage report to your bid. If the bank wants $100,000, start at $20,000. If you have a real estate agent involved, be careful as they will be able to give you rosy pictures of how much the property would be worth once fixed up. If the home is worth $150,000 fixed up, make sure your investment is not more than $75,000 to $80,000 fixed up. Do not get emotionally attached to any property and you will do fine.
While buying a foreclosed home offers the real estate investor great financial savings, one must be mindful of the risks involved. Foreclosed homes buying is a very profitable venture as long as you do proper due diligence, by having less trust in humans with words and put your trust in verifiable original documents and stringent foreclosed property inspections.
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