Investing in Foreclosures
Buying a foreclosure is not an easy process. There is no guaranteed way to get a good deal without hassles. Like any other investment, foreclosures should be approached with the understanding that you'll need to invest time and effort in order to be successful. There are 3 types of opportunities that we'll discuss here, but first let's outline the process of foreclosure:
These steps are a very simple illustration of the process*:
- Default means loan payments were missed.
- The pre-sale step is the initiation of the foreclosure process with the NED.
- To cure is the owner's right to pay off the deficiency prior to the "sale".
- The sale is an auction where bids are taken for the property. This shall be scheduled from 45-60 days from the filing of the NED.
- Redemption is the 75 day period after the sale , in which the owner can redeem the property but will now incur additional costs.
- Once the redemption period expires, the property belongs to the new owner.
Banks will normally work with a home owner for months before resorting to the costly foreclosure process. Typically, they will send numerous notices and make attempts to collect back payments prior to taking legal action. They do have the right to proceed more quickly, however, and many predatory lenders do practice this type of business. Once the bank feels that all hope is lost, a Notice of Election and Demand, or NED, is filed and the process officially begins. The owner still has many options to remedy the situation but the foreclosure process is now underway.
1. Pre-foreclosure or short sale properties:
>Buying a home from someone who is early in the foreclosure process, which is before the auction, can be a good investment opportunity. They will benefit because they'll be able to stop the foreclosure process, prevent further damage to their credit, and get a fresh start. An owner in this position has much to gain by selling early but you'd be surprised at how many won't face the facts and take action to avoid more trouble.
If you approach an owner in this position, be friendly and un-intimidating. Don't insult or offend them with patronizing comments or you'll most likely get nowhere. Remember that they're in a bad position and you're trying to buy their home. You're trying to show them how your offer is a win/win proposition. If they're not willing to sell now, take the time to educate them and discuss all their options with them. Keep the door open for future discussions, because you never know when things will change.
If they do decide to sell their home to avoid further damage, and you've established a relationship, they'll most likely call you. This relationship must be fostered early on, starting with your first contact and reinforced through repeated visits. The number one reason investors do not succeed in buying pre-foreclosure properties is that they simply do not follow up. Don't make this mistake!
If you are able to purchase the home you'll need to have cash available. This will be needed to make up their back payments (to stop the foreclosure), plus give them some money in order to close the transaction and move them out. The amount of cash you pay is negotiable.
The best part of buying directly from the owner is that you have an exclusive deal. There is rarely any competition when you buy a home directly from the owner in foreclosure. Sellers want to get the process over with and they rarely call multiple investors to get the best price. You won't have to deal with the pack of bidders that you'll often encounter at the foreclosure auction, either.
Many owners will list their home with a Realtor early in the process to avoid the legal process and save their credit. This can save you the trouble of looking for owners and talking to them directly. Work with a real estate agent to find short sale opportunities on the market.
There is a great deal that goes into evaluating a foreclosure opportunity and we would love to guide you through the process when you're ready to take that step. Contact us to learn more about how to buy a short sale property!
2. Foreclosure auctions
If the owner doesn't take correct action, a public auction is held. As with any auction, the property is sold to the highest bidder. The opening bid is set by the lender and is based on the full amount owed on the loan (including principal, interest, late charges, penalties, and foreclosure fees allowed by law) as of the date of the auction.
An auction date is often rescheduled. Check with the lender's representative the morning of the auction to confirm that it is still scheduled and to confirm the amount of the minimum opening bid. You'll also need to do extensive research prior to attending an auction. A home might seem like a good deal if the primary mortgage is less than what the home is worth, but often there are other issues with the property that will quickly eat away at this equity. Understanding the complete picture prior to bidding is essential.
A title search will explain the history and trail of debts on the property but they can be very tedious to read and understand. We would suggest hiring a professional. Your Realtor is experienced in understanding title documents and will normally help you if you've contracted to work with them on the purchase. You can also hire a title professional or attorney if you're purchasing the home on your own.
When bidding for a first mortgage, most junior liens will be wiped out at the auction, and the highest bidder will not be responsible for them. This can be a way to purchase the home for less than it is worth. Some liens aren't wiped out, however. Property or federal tax liens will not be dropped. There are other exceptions but this would be another report in and of itself.
You will need to inspect the property. Many foreclosed properties will be distressed and need repairs in order to be saleable. This can be difficult at times, depending on the situation with the owner, but you should be able to see the property before bidding.
A general rule of thumb for many investors is to pay a maximum of 70% of the market value. There are many factors that contribute to the value of a home, however, and this decision is up to you. Each investor also has different ideas about how much work they're prepared to do. I would suggest going into the auction with a maximum bid in mind and sticking to it.
3. Real estate or lender owned (often called REOs)
These are properties that went to sale and the bank's minimum bid was the highest. This is the way lenders take ownership of defaulted properties. The lender no longer has a bad loan to collect on; they now have a non-performing asset that they must sell. This is good news because they're probably more motivated than the original owner. Banks dislike non-performing assets and will attempt to sell these properties quickly.
Typically, bank owned properties are listed with Realtors and can be found in the average property search. If they can't be found this way you can always call the lender directly. Ask for the head of the REO Department or request the name of the actual REO asset manager responsible for this property. You should be able to get all the information you need from them.
As you can see, there are several opportunities to purchase properties as a result of the foreclosure process. Every situation is different, so it pays to be flexible and think creatively when looking into this type of investment. As with any investment, a solid understanding of the process can help you achieve the best results. If you're new to this process, working with a Realtor can be a great way to learn.
Contact us today to learn more about how to begin investing in foreclosures!
*Please bear in mind that the information supplied in our articles is not engaged in rendering legal, financial, or any other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
Have any questions about Denver Real Estate? Contact Denver Realty Experts via email, phone 720.263.0373.