October 12, 2007
It may be starting to seem like the MyPhoenixMLS.com blog is only about foreclosures. It’s not – I have lots of other interesting real estate topics brewing in the back of my mind, too. It’s simply that foreclosures have been the hot topic lately – and they’re affecting most of us in one way or another. Next week I do plan to move onto other topics – so if you’re interested in reading about other real estate related topics, stay tuned.
Today, though, I want to talk about the flip side of foreclosures: how you can profit by investing in pre-foreclosure and foreclosure sales.
The actual process of foreclosing on a home is very expensive for the mortgage lender – often costing upwards of $25,000 and a lot of time (time that the mortgage lender isn’t getting paid interest and principal on the loan). So it can often be in the lender’s best interest to simply cut its losses and sell.
And, for foreclosure investors, this is a dream market. According to the Yahoo! Real Estate Foreclosure Center, so far in 2007 5,440,048 foreclosed homes have become available. Of those, 327,360 have sold – for an average price of $162,155, which represents a 26% savings (e.g. homes were purchased for 26% less than market value, on average).
Interested in getting your feet wet as a foreclosure investor? Here are 7 tips for successful foreclosure property investing, adapted from a REALTOR® Magazine Online post earlier this year:
1. Know your market. If you don’t already live where you plan to invest, make sure you get to know your investment market well – what neighborhoods you should stay away from, where great hidden deals might be, where the hottest new development is, etc.
2. Develop an investment strategy. Foreclosure investing is like any other type of real estate investing – develop a strategy for what you want to accomplish, the risks you are willing to take, and how long you plan to be investing and then stick to that strategy.
3. Develop your best practices. There are a lot of foreclosure buying techniques out there. Decide which is best for you, given your investment strategy.
4. Be a bit skeptical. Just because a home is in foreclosure doesn’t mean it’s automatically a good deal.
5. Ask for help. Foreclosure investing takes a lot of work. Invest in the help of a trustworthy team.
6. Make friends with mortgage lenders. Often, you’ll get the best deal if you can negotiate a good purchase price with the seller and get the lender to forgive a portion of the debt (the difference between the sales price and the loan balance, for example).
7. Move fast, but not too fast. You’ll need to act quickly once you find a foreclosure property that you want to buy – before other investors beat you to it. At the same time, you don’t want to be too rushed or you may make a decision you’ll regret later.
If you’re interested in taking advantage of the opportunity to profit from homes in the process of foreclosure, you’ll have three opportunities to buy:
1. You can buy a pre-foreclosure, when the lender has begun the foreclosure process but the home has not yet been sold at auction. At this point, you’ll have to buy directly from the homeowner, much as you would any other home. You’ll also have an opportunity here to negotiate with the lender, perhaps for the forgiveness of some of the debt over what you’ll be paying for the house.
2. Once the home has been foreclosed, it will be sold at a public auction. You’ll have an opportunity to buy here, too – but prepare for some competition from other property investors.
3. If a foreclosed home doesn’t sell at auction, the bank may repossess it (or the lender may repossess it earlier in the foreclosure process). At that point, the home is called bank-owned or real estate owned (REO). You may be able to buy the home from the bank – lenders are not in the business of owning real estate, after all.
But foreclosure investing is not for the weekend investor. It takes discipline and commitment. Even with the help of foreclosure listing services such as RealtyTrac and Yahoo! Real Estate Foreclosure Center, you’ll still have to do a lot of legwork to contact the owner, arrange the deal, fix up the house, and re-sell it before you see your investment return.
If you do decide that foreclosure investing is for you, there are a number of resources to help you learn how. Sites like Yahoo! Real Estate Foreclosure Center and RealtyTrac offer a wealth of information, including foreclosure listings and educational information. The University of California at Irvine even has a six-week course in foreclosure investing, according to InmanBlog.
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