Foreclosed Homes for Sale Investing Benefits and Risks
Investing in foreclosed homes for sale is an exciting part of the real estate business for many investors. It involves investing in a foreclosed home that have been put up for public sale or auction after the bank forecloses on that property’s loan. Foreclosure in the context of real estate happens when a homeowner fails to pay their mortgage. The bank will foreclose on the loan through court proceedings, and the homeowner loses their right to occupy the house.
The property is then put up for sale to repay the loan provider. This sale could be handled via the statutory foreclosure process and administered by an appointed trustee. In case of a judicial foreclosure, the court regulates the sale.
Any person can bid on a property put up for a foreclosure sale. For practical reasons, the lender acquires foreclosed properties for the amount owed on the mortgage. The sale proceeds are used mainly to clear the mortgage claims, while any excess goes back to the homeowner.
Why Real Estate Pros Buy Foreclosed Homes for Sale
Investing in foreclosed properties can prove to be extremely lucrative. Afterall, foreclosed homes make up more than 30% of all home sales in the US. Most of these sales were to people investing in foreclosed homes. For individuals who are open to putting in some amount of sweat while investing in property, rentals are a great way to build wealth. It may take extra work, but the return on investment is often worthwhile.
“Investing in foreclosed homes for sale is an exciting part of the real estate business for many investors. It involves investing in a foreclosed home that have been put up for public sale or auction after the bank forecloses on that property’s loan.”
The Risks of Buying Foreclosed Properties
Some risks associated with investing in foreclosed homes sold via public auction include:
- Publicly auctioned homes are purchased “as is.”
- Buyers rarely get the opportunity to inspect the property.
- Most of these properties are fixer-uppers.
- Sometimes homeowners have lost their property, and because they are angry or frustrated, they damage the home, remove appliances, or other expensive items.
- Certain liens and unpaid taxes can become a problem if left unpaid. The person that buys the property is usually required to pay back taxes.
REIT’s for Passive Investing in Homes in Foreclosure
REITs are another method that real estate investors frequently use. In these, you invest your money in traders or companies that are owners of these properties. REIT investment is a passive investment strategy. You put in no effort, and returns are lower than more aggressive investing. However, many investors have found success in REIT investing.
Investing in REITs carries a smaller risk than a direct investment in the real estate market, which can be incredibly volatile, even in the best of times. If you are looking to invest in real estate without the associated stress and pressure, REITs may prove to be a good option. As with any investment strategy, you should always do your research.
Pre-Foreclosures for Investing in Foreclosures
There are excellent upsides and downsides to finding a pre-foreclosed property. One advantage is that you may end up helping a homeowner out who is about to lose their property, while they are at their lowest point. If you contact them before their problems result in foreclosure (“notice of default” listings show up in many papers), you benefit while working out a deal that also will help the homeowner, even if they lose some money on the sale.
They need to sell as quickly as possible, and that means you stand to gain from their urgency. When you buy a house from a person in this position, you become instrumental in them avoiding the angst associated with a foreclosure.
Short Sale – Get It While It Is Hot!
A short sale is another pre-foreclosed investment option. The price of these homes is much lower than what owners have to pay on their mortgages. They need to get approval from the bank for this type of sale. It often takes place when the value of the house is lower than the mortgage on it. Real estate agents generally put up these homes for sale.
It means you can do your due diligence as well as make your offer. The seller isn’t in the picture at all. However, once the property is on the market, you’d have to compete with others looking for an excellent deal. It’s essential to know that, if your offer gets accepted, it could be weeks, even months before the bank responds. You need to understand and analyze the market and comparable homes as it will help you win the deal by submitting details and stats along with the offer.
REO (Real-Estate-Owned) Bank-Owned Sales Foreclosure
An REO (Real-Estate-Owned), also called a bank-owned property, is the last stage in any foreclosure process. This investment carries a lower risk because the bank owns that house. They pay all the taxes, may carry out repairs, and will handle the eviction too. However, as mentioned earlier, the difference between the market value and the sale price of these properties isn’t substantial.
By the time the bank forecloses and evicts the homeowner, several potential investors will have, for some reason or the other, passed up their chance to purchase the property. When the bank fails to sell the property in a way that will get the amount owed, they hire a third-party real estate agent to handle the process. The agent will then list that house for sale at a price much lower than the market value.
Interested buyers can walk through the property, conduct due diligence, and make an informed decision. These are the properties that ultimately languish on the market, gathering dust and cobwebs until someone is finally willing to pay the amount that matches the target price set by the bank.
Sometimes banks have to change their approach to the sale when there is a lull in the real estate market, and the number of unsold homes continues to rise. At times such as these, the bank may decide to sell the property via a post-foreclosure auction. Many times, they offer distinct advantages over foreclosure auctions administered by the government.
Where Can You Find REOs (bank-owned properties)?
There are different ways in which you can locate bank-owned properties, such as:
- Bank websites – Certain banks have a dedicated department that handles REO sales
- MLS – A vast majority of lenders list their bank-owned properties on an MLS (Multiple Listing Service)
- Online Specialists – Most other online services like Zillow, that list foreclosure properties charge a fee
Why are Properties Foreclosed?
Divorce or dissolution of a marriage is the most frequent reason for foreclosure. Besides divorce, illness, loss of employment, or a rise in adjustable interest rate mortgages can also cause a homeowner to fall behind financially. With adjustable-rate mortgages (ARM), the higher payments caused by the elevated rate may cause a homeowner to become over-extended. No matter the reason, this means investing in foreclosed homes allows professional investors to obtain properties at lower-than-market prices.
The Process Followed in Public Auctions of Foreclosed Properties
Generally, the property owner receives a “notice of default.” They can try to clear their dues in 90 days after receiving the notice. But if they are unable to “cure” the loan, the financial institution (bank) will sue the owner and repossess the property. Either the trustee or court will sell the property to the person that makes the highest bid during the public auction.
There could be a variation in the disposition process depending on the state and county the sale takes place. Usually, the bank sells the home to the highest bidder. The bank tried to sell for more than the amount owed to the bank, but many times, the bank will take a loss. In that case, in most cases, a bid that exceeds the outstanding mortgage is far above the real value of the house.
Once an offer is accepted, the bank will also often require a non-refundable deposit of 10-15% of that amount with the balance due within 30 days.
These are the stages of foreclosure:
- The general foreclosure process starts when a financially distressed homeowner falters on making their loan payment, and their creditors serve them with a summons.
- After this, the creditors file papers with the country clerk’s office, and it becomes public.
- In some regions, the place where mortgages and deeds are registered may be called ‘office of the land registrar’ or something similar. The notice is known as Lis Pendens or “pending legal action” (in Latin.)
- Once the matter reaches this stage, the homeowner will get a negative response if they attempt to borrow any money from public credit sources.
- Once the publication process is complete, it opens up the path for the foreclosure action to proceed. The owners will now have a definite timeframe to make a deal with their creditors, sell the property, or pay up.
- If they take neither of these actions, the foreclosure sale will follow.
- In case no bidder puts forth the owed amount, the property will go back to the lender. It then becomes part of the real estate inventory that the lender holds.
- Experienced foreclosure investors can work in any of these stages. However, once the property becomes bank-owned (REO), they will no longer be able to make a transaction with the owner.
Take the Right Approach to Foreclosure Real Estate Investing
This information should help prospective investors of foreclosed properties know what their options are. There are many benefits to purchasing a foreclosed property, but it’s essential to conduct due diligence and market research.
This approach will help you identify which properties may be worth bidding. If you keep an eye open for “notice of default” listings in newspapers, it will give you a better chance to get a good deal on a property slated for foreclosure. Making a bid at the right time can prove to be a lucrative real estate investment.