Foreclosures Part One

Ever since I started working in Real Estate people have been asking me about foreclosed property. Most people understand that their are some good deals in buying foresclosed properties. The biggest problem with foreclosures is that most people know little or nothing about them. In this series of articles I will touch on the foreclosure process, how people can make money buying them, and how to avoid being foreclosed upon.

The foreclosure process:

A foreclosure unfortunately begins for a variety of reasons. Loss of income, health reasons, interest rate adjustments and divorce are the tops reasons for foreclosures. Each state has different laws pertaining to the process of foreclosure. Here is a general process. After a period of non-payment, usually three months the lender will begin to send letters stating their intent of foreclosing on the property. Depending on the laws of the state one of four things will happen. The homeowner makes due with their payments and keeps the home, the owner sells the property, the property goes to a “Sheriff's Sale” where it is auctioned off to the highest bidder (I will go further into depth on this later), or finally the bank/lender will repossess the home. There is a huge opportunity for investors to make money in this process. Potential home onwners can find great buys as well.

Understanding that their is opportunity in all four of these stages of the foreclosure process is important. I hear people saying “you can only make money if you get the foreclosure before….”. They usually say once the bank has the property back the opportunity to make money or get a great deal is gone. This is true in some circumstances, but this is not always the case. In the current Real Estate market that most of the United States is currently experiencing the banks and lenders are feeling pressure to “dump” property. The banks and lenders are repossessing a record number of properties. At the same time they are required to keep the dollar amount of these holdings at a low-level. If they hold too much property their credit ratings will fall and the cost of the money they borrow will increase making them even less profitable. Up until a year ago I didn’t see banks selling off the properties that they owned at a discount. Now I have seen some of the very best deals being made on bank owned property (REO properties-this is another term you’ll hear for bank owned property). I recently say a property sell for 25% less than any other comparable property had in a specific neighborhood for the entire year. I had been in the home, and I was amazed at how low of a price the bank took on the property. The property sold for $129,000 and after $20-30k in renovations it would be worth around $225k. This type of deal would seldom be a possibility if you were trying to negotiate with a homeowner prior to the bank taking the property back. Homeowners generally negotiate the price to the point where they are going to break-even or make enough money to move out and have a little left over. If the owners had tens of thousands in equity they usually could find help and avoid the foreclosure.

Purchasing a property directly from the owner before it has been taken-back from the bank can also be highly profitable. With foreclosures at an all-time high there are an incredible amount opportunities. If you chose this route to obtain property you need to be extremely patient, and at the same time you need to be able to be quick like a cat. The property owners are often highly-emotional, and will often change their mind minute by minute. Psychologically speaking the home is one highest requirements in life. When a person has the security of homeownership threatened their behavior can become unpredictable and irrational. I have seen people so dismayed by the situation that when they are offered a remedy to the situation that will save their credit and even help them find a new place to live they do the opposite of what is logical and let the foreclosure happen anyway. Make sure if you are making a deal with these folks that you have everything in place when you start negotiating with them and you get an agreement signed. Do not allow them to think things over…

The Sheriffs sale is a subject that I will cover in a later article.

Many investors in these scenarios will run into a road-block. How do you locate the properties? Most people think that logically the best place to go would be the banks, right? All you’ll do with this is run into red-tape. If you want to by property from banks and lenders contact a Realtor or a brokerage that specializes in REO properties. You will find that a brokerage or individual Realtor will have dozens of bank-owned properties. If you are looking for properties that are pre-foreclosures advertise in the newspaper, make up business cards, and even use signs stating that you want to buy property quickly (you’ve seen the signs and they work!)

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