Is Investing In Foreclosures Right For You?

 

Some foreclosure basics

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).

Recent history of foreclosures

With the spate of defaults on mortgage loans nationwide over the last several years, banks have been foreclosing on properties that have been in default in record numbers. This, of course, has created an oversupply of houses on the market, helping to drive the current downtrend in house values quite precipitously.

Foreclosure considerations

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.

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 foreclosed 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.

Another negative to consider, as is the case with short sales, is that you’re uniformly purchasing any foreclosure in “as is” condition. So once you get an accepted offer, make sure your house inspector’s report is quite thorough, and you can anticipate a proper amount for fix-up and/or maintenance issues with the property. Certainly, the seller and their lender will not be making any further improvements. This is also important to remember if you’re not paying all-cash for the property. Your lender may require the property to already be in “habitable” condition. Obviously, since the seller will not be doing any work, you may be unable to finance the property.

How best to find them

Banks tend to work with sets of Realtors who have created a niche as foreclosure (and/or short sale) specialists. If you decide to start searching out foreclosed properties, it’s best to work with one Realtor in your area that does specialize in these type of properties.

You can also look yourself using your local Multiple Listing Service to run your initial searches, then contact your Realtor to have them show you the properties.

Who foreclosures work best for

Like short sales, if you have the temperament to deal with the bureaucracies of lenders, the patience to wait out an accepted offer all the way to closing 6 months or more later, and the deep pockets to make all-cash offers, then foreclosures may be right for you.

Who should avoid foreclosures

On the other hand, if you feel like you can’t stand wasting your time spinning your wheels with bank bureaucracy, don’t have the requisite patience, and are cash-poor, or find it difficult to obtain a new mortgage, then foreclosures are definitely not for you.

 

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