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FORECLOSURES INVESTING
The mortgage foreclosure process creates three sets of real estate investing opportunities: the
"Default/Pre-Foreclosure" phase, the "Auction/Sale" phase and the "REO" phase. This article discusses the
risks and the rewards of each opportunity.
Buying Pre-Foreclosures
Buying pre-foreclosures involves working directly with the homeowner and sometimes the lender.
Your goal is to create a Win-Win scenario. One win is for the homeowners (they make a sale) and one win is for
yourself (you buy the property at a substantial discount).
To accomplish a successful purchase, most experts recommend the following: (1) locate loans in default, (2)
evaluate and narrow selections to pursue, (3) inspect the property, (4) evaluate the property owner's needs, (5)
determine the market value of the property, fix-up costs, potential sales price and profits, (7) arrange default
work out by negotiating with the owner and the lender, (8) close on the property, repair and resell it quickly.
Pros: This is a great investing opportunity if done correctly. Discounts off market value can
range from 20% to 35% on average. A low cash down payment is possible if structured properly. You have ample time
to research properties. Unique and flexible sales agreements are possible.
Cons: It is sometimes difficult to contact the property owner. You will usually have a lot of
competition. The court house research can be cumbersome. You may need to negotiate with the lien holders.
Buying At The Auction
Buying on the court house steps at the auction can be the most rewarding way to buy properties
and the most dangerous at the same time. The property is publicly auctioned off to the highest bidder, and the
process moves very quickly. When bidding at the auction, you compete against the lender and other investors.
Auction buyers (1) research properties prior to the sale date, (2) pursue realistic opportunities, (3) calculate
values and potential profits, (4) determine bid price and (6) follow the property to the auction and
participate.
Pros: Very good to excellent discounts. Investors can achieve 35% to 45% savings off market values
and earn an excellent return on investment. This is the only investing method where you can really hit the
jackpot.
Cons: Auctions are frequently postponed, wasting your time and effort. It is rarely possible to
inspect the property. To be safe, you should have a title search performed, which can be costly. Unusually large
cash outlays deter most investors (note that this can also be seen as a benefit). Certified checks for 10% of the
purchase amount may be required with the balance due in weeks, days or even hours. Improper research can lead to
devastating results.
Buying REOs
Perhaps the easiest way to buy foreclosed property is buying REOs ("real estate owned"). An REO
occurs when the lender takes back the property to gain possession and cut its losses. The lender, however, does not
want the property because it is not in the real estate business and is therefore usually motivated to move the
property quickly.
Pros: The lender is almost always the senior lien holder, thereby wiping out all other liens at
the auction. This means an REO will always have clear title, which saves a lot of time, expense and worries when
buying foreclosures. Most likely, the lender will also have paid any property taxes in arrears. The lender may
either repair the property to acceptable standards or allow a discount to the buyer to accomplish the repairs.
Cons: Rewards follow risk. This is a low risk investing method and the rewards can be on the low
side as well. Average savings may range from only 5% to 15% off market value, although discounts of 25% or more are
possible if you know how.
Investing in foreclosures can provide excellent profits. Each of the three foreclosure opportunities presents both
rewards and certain risks. Be sure to do your homework before you BUY.
Many new investors want to buy properties directly from the bank. You never
hear anyone say, "I want to buy a property from a mortgage company, credit union or savings and loan."
The attraction to bank owned properties is understandable, as it is the bank you borrow money from to buy a home.
It is natural to assume that the bank owns the property. Whether a Deed of Trust or Mortgage, the title to your
property is either held by a third party or pledged as security for the loan, so in fact the bank does not own the
property.
You borrow money from and give a mortgage to the bank. The mortgage is the security instrument utilized to protect
the bank from loss should you default on the loan. Unless you bought a bank foreclosure directly from the bank, the
bank has never owned the property at all.
The Lenders Profits
The goal of the foreclosing lender is to gain possession of the property. The financial goal is the recovery of the
principle loan balance, accrued interest, late fees, penalties, taxes paid on behalf of the property owner, court
costs and attorneys' fees. In most states, the laws are written so that the lender can only attempt to recover
these widely accepted standard losses.
The lender will add in every legitimate expense when foreclosing. This is what is sued for: the total the lender
claims is owed by the property owner. In most states, this is the maximum amount the lender can collect. The laws
are written this way to protect home owners from unfair practices.
The commonly held notion that a bank (or any other lender) must sell a repossessed property for the same amount it
cost to gain possession and therefore cannot make a profit is false. If the foreclosing lender is the successful
bidder at the auction, it will take possession of the property for the very first time. When this happens, all the
rules change. The lender, now the legal property owner, can do anything it wants with the property, Rent it, keep
it, whatever. It can also sell the property for any amount it so desires.
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