It ain’t that easy…
Foreclosures are not the easiest form of investment property to break into the business with, and thus really should not be your first foray into property investing. They can be quite confounding, and buying foreclosures typically do not follow the normal rules of supply and 
demand, as well as negotiating. Therefore, it’s a highly specialized niche, usually reserved for the experienced investor.
demand, as well as negotiating. Therefore, it’s a highly specialized niche, usually reserved for the experienced investor.I have previously written here that a “foreclosure occurs when an owner has defaulted on their mortgage loan, usually from not making timely payments to their lender, and their lender then goes through the legal process of taking title to the property. So foreclosures always involve the sale of bank-owned property (unlike short sales, where the bank does not have legal possession of the owner’s property).” Nonetheless, if you’re considering buying a home after foreclosure in order to invest in it, there are a few tips to keep in mind – so you don’t lose yours along the way.
Buying foreclosures dos and don’ts
I have noted before that “when deciding if you should potentially bid on a foreclosure, keep in mind several key factors. Like short sales, you’ll be dealing with the bureaucratic red tape of any bank’s large portfolio of foreclosed properties. Thus, the time from making an offer to getting it accepted and then ultimately closing on the property can be 4 to 6 months on average. Sometimes longer. So you’ll need to be patient, and not worried about exactly when you’ll be able to gain
possession (unlike most home buyers). You’ll also be competing with the pros, other real estate investors who have the knowledge and patience to deal in foreclosures.
possession (unlike most home buyers). You’ll also be competing with the pros, other real estate investors who have the knowledge and patience to deal in foreclosures.In addition, like short sales, it will be most helpful if you’re paying all cash, or can at least remove any mortgage contingency. However, banks are always looking for pure cash buyers first, to help reduce their risk of any potential deal falling through. They will accept offers with mortgages, but the offer will have to be substantially greater than any all-cash offer they have on their property to offset the increase in risk for the lender, in case you don’t ultimately qualify for a loan (especially in the current tight credit atmosphere).
More considerations…
Also like short sales, don’t count on making a steal on any property. Banks have foreclosure property managers that set the asking price on 
sometimes hundreds of properties in their portfolio at any given time. And if their initial pricing is off on a property, and the house hasn‘t received any offers, these managers tend to stick to a set schedule of price reductions, based on time and percentages. So, for example, if a house has been sitting for 30 days without an acceptable offer, the bank will, on their prescribed time schedule, automatically reduce the asking price – and usually no more than 10% at a time. As time passes and the house still doesn’t get a proper offer, the bank will wait until their next time interval for a price drop to occur. This is quite different from an average property owner, who can drop the price at any time, for any amount they choose, on their own house.”
sometimes hundreds of properties in their portfolio at any given time. And if their initial pricing is off on a property, and the house hasn‘t received any offers, these managers tend to stick to a set schedule of price reductions, based on time and percentages. So, for example, if a house has been sitting for 30 days without an acceptable offer, the bank will, on their prescribed time schedule, automatically reduce the asking price – and usually no more than 10% at a time. As time passes and the house still doesn’t get a proper offer, the bank will wait until their next time interval for a price drop to occur. This is quite different from an average property owner, who can drop the price at any time, for any amount they choose, on their own house.”Make nice with the listing agent
Usually large chunks of foreclosed property inventories held by a lender, whether it be a local or regional bank or Fannie Mae, will get
apportioned out to local, trusted real estate agents who have a track record working with that particular lender in their area. These agents will become the listing agents for each property the bank needs to place on the market. And it is these agents that act as the de facto gatekeepers for each foreclosure. Unlike any other type of real estate that’s placed on the market, where a listing agent deals with a particular seller of the property one on one, the listing agent for a foreclosure deals with a mass of bureaucracy. Instead of an individual, they deal with different contact people for the lender – each one with a specific responsibility.
apportioned out to local, trusted real estate agents who have a track record working with that particular lender in their area. These agents will become the listing agents for each property the bank needs to place on the market. And it is these agents that act as the de facto gatekeepers for each foreclosure. Unlike any other type of real estate that’s placed on the market, where a listing agent deals with a particular seller of the property one on one, the listing agent for a foreclosure deals with a mass of bureaucracy. Instead of an individual, they deal with different contact people for the lender – each one with a specific responsibility.Thus, unlike normal real estate transactions, where the listing agent is trying to get the best price and terms for their seller, a listing agent for a foreclosure does not necessarily have to obtain the best price for a property. But they operate, instead, under a completely different set of rigid rules they must follow. And if there’s one term that best describes 
dabbling in foreclosures, it’s “rigid rules.” In fact these rules are so complex and rigid, listing agents in foreclosures tend to be quite specialized, dealing only in representing lenders in foreclosures.
dabbling in foreclosures, it’s “rigid rules.” In fact these rules are so complex and rigid, listing agents in foreclosures tend to be quite specialized, dealing only in representing lenders in foreclosures.It is strictly because of this reason, when buying a foreclosure, you need to make nice with any foreclosure listing agent you’re considering making an offer to for one of their listings. Just to show you the interplay of rigid rules, as well as the lack of normal market conditions having little to do with the foreclosure process, let me offer an illustration of a recent foreclosure deal I had to endure, but in this case, I was representing the buyer.
A foreclosure example from Hell
In this real-world example of how to buy a foreclosure house, my buyer was not an investor. If he was, he probably would not have
acquired the property. The lender in this instance was Fannie Mae, the Federal Home Loan Mortgage Co., responsible for buying up tremendous property inventory throughout the U.S. in packages of loans that get bundled together by banks. Fannie Mae issues specific guidelines to banks about the type of mortgage that can be considered available as a Fannie Mae product, including, for example, the upper limits on the amount of the mortgage.
acquired the property. The lender in this instance was Fannie Mae, the Federal Home Loan Mortgage Co., responsible for buying up tremendous property inventory throughout the U.S. in packages of loans that get bundled together by banks. Fannie Mae issues specific guidelines to banks about the type of mortgage that can be considered available as a Fannie Mae product, including, for example, the upper limits on the amount of the mortgage.In this example, any investor who made an offer on the foreclosure took a backseat -and had to wait a couple of weeks , per the rigid guidelines, before any other owner-occupied offer was either accepted or rejected. In this case, investors lost out due to the Fannie Mae rules: my buyer got in before them, made an offer, negotiated it, and got an accepted offer before any other investor offer could be presented. I was told three others had come in in the interim. One of the key issues to be concerned with, is that because my buyer was the first in with an offer, he received preferential treatment.
A couple of other non-investor offers also came in after ours (as I was 
told by the listing agent), but the lender only negotiated with us. This runs counter to how any good listing agent will operate with a “normal” seller. The listing agent wants to create a bidding war to help jack up the price he can fetch for his seller. Multiple offers are usually a boon, and treated as an integral part of the process when a listing agent runs the show on a bidding war. In essence, the listing agent controls all the negotiations in order to get the best price for his seller. But not so with foreclosures. Please understand this.
told by the listing agent), but the lender only negotiated with us. This runs counter to how any good listing agent will operate with a “normal” seller. The listing agent wants to create a bidding war to help jack up the price he can fetch for his seller. Multiple offers are usually a boon, and treated as an integral part of the process when a listing agent runs the show on a bidding war. In essence, the listing agent controls all the negotiations in order to get the best price for his seller. But not so with foreclosures. Please understand this.Pitfalls abound…
As a property investor looking to learn how to buy a house in foreclosure, this example case is very enlightening. In this example, if you made an offer, you just wasted your time. This is one of the many
pitfalls of buying foreclosures. Another great pitfall is that you must make your offers based on buying the property in strictly “as is” condition. And if you’re buying in the middle of winter, and the water has been turned off, you won’t be able to test the plumbing system for leaks, water pressure, etc. In addition, most of the time the electricity is off, so you won’t be able to test the electrical system or appliances either. So, you’ll need to bracket a large amount for anticipated, unseen but probable repairs. And you’d best know how to estimate properly, otherwise, you could be stuck acquiring a money pit that could seem endless, and ruin you financially in the process. This is yet another reason to gain some experience in acquiring properties first before you even consider attempting to invest in a foreclosure.
pitfalls of buying foreclosures. Another great pitfall is that you must make your offers based on buying the property in strictly “as is” condition. And if you’re buying in the middle of winter, and the water has been turned off, you won’t be able to test the plumbing system for leaks, water pressure, etc. In addition, most of the time the electricity is off, so you won’t be able to test the electrical system or appliances either. So, you’ll need to bracket a large amount for anticipated, unseen but probable repairs. And you’d best know how to estimate properly, otherwise, you could be stuck acquiring a money pit that could seem endless, and ruin you financially in the process. This is yet another reason to gain some experience in acquiring properties first before you even consider attempting to invest in a foreclosure.Returning to my example, even after we had a “deal, we never received the fully executed contract back from the seller. Since the seller is Fannie Mae, there are even more rules and regulations that are required to actually place the “offer” that was accepted by the listing agent! The paperwork goes through a series of departments and personnel, each creating a “pass go” scenario that, like dominos, allows the deal to go through, step by step. The listing agent for a foreclosure 
sometimes calls these steps “triggers” or trigger events. In essence, it is a time consuming process, and the entire time, you never really know for sure if you have a done deal.
sometimes calls these steps “triggers” or trigger events. In essence, it is a time consuming process, and the entire time, you never really know for sure if you have a done deal.Only when the attorney for the bank sets up a closing with the buyer’s attorney do you truly know you’ve got a deal that will actually make it to closing. As before, any property investor getting involved in foreclosures needs the right temperament to deal with the incredible frustration such a process can exact on a human being. Do you think you’d have the right temperament to handle a deal blowing up after putting so much personal time and energy into finding the property, evaluating it to make a proper offer, then following through and negotiating – only to say you’ve got a deal, now wait. And keeping your fingers crossed the deal goes through?… I didn’t think so either…
Do you have the right temperament?
That’s why dabbling in foreclosures is best left to the experienced property investor who has the guts and patience to handle the
inevitable frustrations of such a lengthy, potentially mind-bending experience. Each time out for that matter. In my experience, I have never purchased a foreclosure for all these reasons. I just felt, with an honest evaluation of my own temperament and personality, I would not handle defeat well…especially if it’s because of some silly rule that’s out of my control. Just be wary if you decide to get involved with investing in foreclosures. Ultimately, if you ask how do you buy a foreclosure, I’d say very, very carefully.
inevitable frustrations of such a lengthy, potentially mind-bending experience. Each time out for that matter. In my experience, I have never purchased a foreclosure for all these reasons. I just felt, with an honest evaluation of my own temperament and personality, I would not handle defeat well…especially if it’s because of some silly rule that’s out of my control. Just be wary if you decide to get involved with investing in foreclosures. Ultimately, if you ask how do you buy a foreclosure, I’d say very, very carefully.photos courtesy of wannanetwork.com, freefoto.com, answers.yourdictionary.com, quickenloans.com, uncoverage.net, bestlongislandhomeinspectors.com, homesinspectors.com, realtybiz.net, ohiorealtors.org
Follow
of living with a balloon mortgage. If you’re going to invest in commercial real estate, a balloon payment mortgage will be a given. And in most residential real estate deals where the owner is offering a mortgage, you can also expect a mortgage balloon payment as well. So, what is a balloon mortgage you might ask? The simple answer is that, at the end of the mortgage term, you will still owe a large chunk of the principal on the property you purchased. The balloon mortgage definition is that the balance will need to be paid, on time, at the end of the term in the form of a large, “balloon” payment for this balance due.
are not like most residential bank mortgages that are self-amortizing, where you pay some amount of principal and interest for either a 15 or 30 year term, every month, like clockwork. Instead, to keep monthly payments reasonable, a 15 or 30 year amortization schedule may be used, as in residential mortgages, however the actual term of the mortgage is much shorter, say between one and ten years. The most common ones I’ve seen usually are in the three to five year range. So obviously, if you’ve been making monthly payments using a 30 year amortization schedule for a 5 year balloon mortgage, quite a lot of principal will be have to be paid off at the end of the term. And this remaining balance is known as the balloon payment.
would go out and refinance the property with a commercial bank for this remaining amount, your balloon payment. This is extremely common, and a very accepted practice. Most banks are amenable to offering refinance mortgages because by the time your first mortgage is due, you’ve increased your equity in the property substantially – a fact that only helps you qualify even more for a commercial bank’s underwriting standards. Over a five year period, you may be able to build up an extra ten to twenty percent in equity valuation on your investment property. And banks traditionally want to ensure that you have at least twenty-five to thirty percent of your own funds already invested when they go to offer you any mortgage on an investment property.
noted how “any money you don’t have to put up yourself when you buy investment property offers you the opportunity to increase your leverage on the purchase. And if you don’t have to borrow from a bank (or worse, a hard money lender) then you will be saving your credit line possibilities for further down the road. And if an owner is willing to take back mortgage paper for at least some part of the purchase price, you will be ahead of the game. Even if that amount is small, or not a first mortgage, it will benefit you. Every little bit of leverage goes a long way. Of course, if you can obtain a first mortgage from the seller, even better still.”
simply holding out to obtain seller financing. But if you do manage to come across a willing seller offering some amount of owner financing, by all means, don’t pass it up.
turned down – due to any number of factors: poor credit, too much outstanding credit, not having enough income to pay for the monthly debt service on the loan – whatever the reason, it ain’t going to work with your regular lender. Let’s also assume you’ve asked the owner of a property you’re interested in acquiring for seller financing…that is, let them finance the first mortgage on the property. While this is a great way to increase your leverage on any investment property, it’s also quite rare to find sellers desperate enough to offer owner financing. In addition, the seller needs to own the building free and clear, with no outstanding mortgage on it for them to offer seller financing.
hard money lender. As I’ve suggested in prior articles here before, “when you’ve exhausted all other avenues of property investment loans, crunch the numbers to see if hard money lenders will make a deal workable. Usually used if you have poor credit, or poor cash reserves, as their name implies, you’ll pay for the privilege of doing business with hard money lenders. Their investment mortgage rates are usually at least double conventional mortgage loan rates. And their points charged (pre-paid interest) can be triple or quadruple conventional points charged.”
excellent income producing property. And you want to jump on it by making a quick offer. I have seen some hard money lenders who don’t simply offer high interest rate, short term loans. I have discovered, and run into, some who would like to become your “partner.” One could say that the sheer hard money definition is like that of a loan shark. Be very careful if you find any hard money lender offering financing, but requiring a “back-end” amount when it comes time to sell your property. I had the occasion to inquire of a hard money lender once, and they were quoting me terms that were gangster-like in nature. These included: only financing fifty percent of the purchase price, a ridiculously high interest rate, with a two year balloon mortgage. Oh – and they wanted fifty percent of the gross profit upon the sale of the property when it came time for you to sell. Obviously, any novice investor should stay away from this kind of predatory hard money lender.
here how “the average hard money investment property loan is supplied with capital put up by private investors – usually as a pool of money that is used to drive much greater profits for its investors. This private capital is traditionally unregulated…many consider hard money lenders as sharks feeding off the misery of those in bad financial straits. As a property investor, you will certainly need to approach any hard money investment property loan with a great deal of caution and foresight prior to signing on the dotted line.
how “while paying all cash for a property is the “safe” way of investing, it provides no way to leverage your financial strength. Assuming you could not obtain conventional financing, hard money lenders offer the next best alternative to all cash deals. While your cash flow will be severely impacted because of the relatively exorbitant interest payments on hard money loans, even a small positive cash flow will yield great leverage over several years of making timely payments on the loan. Remember, besides the cash you put up on the property as your down payment, you will be paying off the principal on your hard money loan each month – thereby helping to increase your return on investment (ROI). Over several years, a small positive cash flow will yield much greater ROI’s than an all cash purchase would.
usually come due within 1 to 3 years. In all but rare instances, hard money lenders require being in the first mortgage position, so they can get their money out first if you default.
the consequences in case of default. The hard money lender takes on the increased risk of borrowers with less-than-stellar credit. For this, they are able to charge exorbitant interest rates, with onerous terms, and even more Draconian conditions if the borrower defaults.
of the most common, and most expensive problems results from termite damage. But are you an expert at finding the signs of termite damage? (I didn’t think so…)
from termites – or other potential hazards not easily seen by the untrained eye. I have noted in prior articles here that “the property investor must be aware of these most basic of environmental hazards that lurk within any potential property deal…especially with abandoned houses. And you’ll need to plan for the potential costs of remediation if needed. Just know that these costs can be extremely expensive to take on when you’re making that seemingly wonderful “steal” of a deal on any abandoned property. And that could mean a major financial disaster for you if you don’t plan accordingly for the worst.”
make sure you get a very experienced house inspection company to go over the property in tremendous detail…you’ll have to build in a slush fund for the probability that one or more of these hazards (such as termites) are present. Crunch your offer numbers accordingly…
that termites can damage laminate flooring and even skirting boards. Affected flooring may blister and sag in certain areas and checking underneath the flooring may help to uncover termite activity. You can also check if floors feel more spongy than usual. In addition, look for unexplained cracks on internal walls. As termites consume cellulose found in timber within walls, the visible cracks could be a sign of termite activity inside. Don’t forget to search out wooden ceilings, beams and rafters in attics – they’re just as much at risk of termite damage as wooden structures located nearer ground level. Look for cracks on ceilings and cornices too.
blocks and from there gain access to floor joists, which are still made out of wood. Homes with crawl spaces appear to be at greater risk of damage as their foundations are still traditionally made out of wood.
