How To Buy A Foreclosure

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Foreclosures can be a real estate investor’s best friend. This is because most homes that are in foreclosure can sell on the cheap.  We bought our very first home as a foreclosure!  We got a heck of an deal.  I’m not just saying that because we loved the home either.

Foreclosures happen when a homeowner misses out on their mortgage payments and is unable to come up with the money to repay the lender.   Most of the time, the lender chooses to foreclose a home when there are several consecutive missed payments and infrequent communication with the borrower. Foreclosure can help the lender minimize losses on the loan.

Why are Most Foreclosures Selling At Discounts?

Most lenders are of course banks, and it is not their ordinary course of business to make a profit on real estate.  Banks want you to keep making payments to them.  They are in the business of loaning money not, owning houses.   So when a bank forecloses a home or any other real property, this becomes a non-performing asset for them. This is the reason why banks are eager to get rid of these properties.

Another reason why foreclosures are cheap is when the owner themselves are desperate to sell so that they can at least make a little profit before the bank acquires their property. Most homeowners would even allow buyers to assume their loan just to save them the headache of being constantly hounded by banks.   If a buyer assumes the loan of a person who would ultimately go through foreclosure the seller can save themselves a trip to credit purgatory.

Steps in Buying A Foreclosure

Buying a foreclosure isn’t as easy as it seems. There are a lot of factors to consider and more often the not, the situation is different for every property.   Plus, state laws are different when it comes to buying a foreclosed property. There is really no set of concrete steps when buying a foreclosure, but below are the general measures every investor has to take in order to start the process of buying a foreclosed property.

Do Intensive Research

This is the first step in getting your feet wet in the business. Foreclosures aren’t exactly widely advertised so it is important to do your research yourself to find a good deal. You can find properties in a multiple listing service however, the cheapest foreclosures can be found in places such as a trustee’s or sheriff’s auction, private auction, and from the bank itself.   Banks usually have a newsletter or magazine that lists the properties that they have foreclosed. When you do find a property, don’t be shy to make an offer, most banks are very welcoming to those who show interest in buying their properties.

Another way of getting leads is by affiliating with real estate agents. Since they are in the business, they are the first to know when a cheap foreclosure is available.  We used the real estate agent method to identify our foreclosure.   Our agent was crafty and lightening quick.   Just be prepared to pay them a finder’s fee (sometimes). And finally, you can also attract sellers by advertising yourself as a buyer. You can go online and post ads such as “Need to Buy A House Now!” You’d be surprised at how many calls you can get.

Perform Due Diligence

Buying a foreclosure can be tricky. There are usually a lot of issues that surround a foreclosed property. Before submitting an offer (and before buying the property of course!) it is important to do your due diligence.   The first step is to inspect the property. If the property is in need of repairs, bring a seasoned contractor with you that can estimate just how much you will be spending on repairing the property.

Then, check the title for any other liens and encumbrances. If there are any, ask your bank and your lawyer how these liens will affect your purchase in the future.   There are some necessary questions that you need to ask and are usually forgotten. Asking these questions can save a lot of time and money on your part should you buy the property and realize that there’s something wrong with it. Some of these questions are:

  • Is the property occupied?
  • How much is the annual real property tax and is it updated?
  • Are there any arrears on monthly dues? (For condominiums and subdivision houses)
  • Is the power and water already connected?
  • Are there any details about the property that would affect finding potential tenants? (For rental properties)
  • Is there any bad history of the property? (Such as suicides, murders, etc.)
  • Can the previous property owners buy the property back?

Buying Foreclosures

Wherever you may be, there are three ways to buy a foreclosed property. First is in a presale (before the lender forecloses), second is in an auction, and third is directly from the bank.   Although buying directly from a seller can give you the largest discount (about 30-40%), it can also be the riskiest method of all because most deals usually fall through and there are several instances of problematic titles. Pre-foreclosure buyers also have to add in the cost of property inspection and looking over real estate tax.

Auction buyers can expect a discount of 10-25%, but this can have some problems too such as not being able to inspect the interior of the house. Buying from the bank can allow more time for inspection and flexible payment terms such as taking on a mortgage. However, the prices in banks can are usually at market price but it’s nothing that an aggressive investor can’t negotiate.   Despite the many challenges it presents, buying a foreclosed property can result in massive savings for real estate investors and home buyers. The important thing is to always explore all avenues and to remain unfazed when obstacles come your way.

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