In the real estate investment industry a few percent can mean tens of thousands of dollars or more. It’s no surprise then that foreclosures are among the most desired methods that real estate investors use to obtain prize real estate at significant discounts to market. From the homeowners perspective, it’s really very sad but from the lenders perspective they would argue that they are simply following the protocol that must be obeyed when a homeowner fails to meet their borrowing obligations.
If you thought that using foreclosures as a means of real estate investment was beyond your ability then you may wish to rethink – particularly as it’s possible to obtain real estate for discounts of as much as 20% or more (to market). With the foreclosure rate due to rise in the near future, this is a strategy every serious property investor must be prepared to implement for increased profits.
This article looks at the foreclosure process, how to purchase real estate with foreclosures and some issues to consider before getting your toes wet.
The Foreclosure Process – How And Why Properties Are Available Through Foreclosure & How To Bid For Them
When a home-owner fails to pay their mortgage (after a number of warnings) their home is sometimes foreclosed by a bank. There are two major timeframes during which you can get involved – either you can choose to offer the existing owner (before the foreclosure is finalised) or you can wait until after the foreclosure and purchase the real estate directly from the bank. The bank may choose to put the property up for sale via an auction or sell it directly on the market.
There are many reasons why home-owners want to avoid having their property foreclosed at all costs – they do not want the foreclosure taboo to show against their credit history. This means that you can step in and purchase the property from the seller before the foreclosure becomes final – if your negotiation skills are good it can mean you picking up real estate at significantly below the market price.
If the real estate is offered for sale at auction then it may be an opportunity to pick up a bargain. However, you’re likely to face competition on any real estate that is considered to be prime. Take into account the following before attending the auction with the intention of securing the property:
(1) Create a plan – what is the maximum amount you’re willing to pay for the property. Decide this before hand and stick with it during the auction. Your plan should also include a blueprint of action should you obtain the real estate. Will you flip it on the market or rent out? Convert into something different? These things must be planned far in advance of you buying the real estate or you could end up with something that doesn’t fit in to your plans.
(2) Investigate the property thoroughly – do you need to spend anything on it by ways of repairs/modernisation? How much will this cost?
(3) Are you funding the purchase with loans? How will you repay the loans? If the real estate does not bring an income do you have sufficient cashflow to service any loans?
(4) Are you confident that the real estate does not have any existing fines related to it? It’s possible to purchase a property at auction only to discover it comes with existing fines which you must now pay ( the real estate instantly becomes a liability - not quite the cash cow you had hoped for).
So why would the government or banks sell these repossessed real estate units at far below their market value? For a start, lenders do not like to have more than a certain number of foreclosures on their books at any given time – they could be accused of periodically lending to those who are unsuitable candidates while the government can make better use of liquid funds rather than assets tied up in real estate.
Either way, the real estate investor wins.
Some “Real World” Issues That You Will Need To Consider Before Getting Into The Foreclosures Market
First, many individuals may well struggle to cope with the idea of being the “nasty person” who profits from someone else’s misery. In the past investors who have purchased real estate through foreclosures have had problems with evicting the existing owners. If this type of situation arises it can be difficult to sort out (and include costly & lengthy legal proceedings to get the tenants evicted). In some places, the previous owner may also have the legal right to buy back the real estate from you.
Despite some potential pitfalls (which can be avoided and planned for) foreclosures remain a good way of investing in bargain real estate.
About the Author:James Franklin