The mortgage foreclosure process creates three sets of real estate investment opportunities: the default/pre-foreclosure phase, the action/sale phase, and the REO phase. This post covers the risks and rewards of each.
Buying pre-foreclosure homes involves working directly with the homeowner and sometimes the mortgage lender. Your goal is to create a win-win scenario. One win is for the homeowners (they make the sale) and the other win is yours (you buy the foreclosure home at a substantial discount).
To accomplish a successful foreclosure home purchase, most experts recommend the following:
1. Locate loans in default.
2. Evaluate and narrow foreclosure homes to pursue.
3. Inspect the foreclosure property.
4. Evaluate the property owner’s needs.
5. Determine the market value of the foreclosure home, fix up costs, potential sales price and profits.
6. Arrange default work out by negotiating with the owner and the mortgage lender.
7. Close on the foreclosure home, repair and resell or rent it quickly.
Pros of buying pre-foreclosure homes: Pre-foreclosure homes are a great investing opportunity if done correctly. Discounts off market value can range from 20 to 35 percent on average. A low cash down payment is possible if structured properly. Also, you have ample time to research homes and unique and flexible sales agreements are possible.
Cons of buying pre-foreclosure homes: Sometimes it is difficult to contact the property owner. Also, you will usually have a lot of competition for pre-foreclosure homes. The courthouse research involved with pre-foreclosure homes can be cumbersome and you may need to negotiate with lien holders.
Buying a foreclosure home at auction
Buying a foreclosure home on the courthouse steps at the auction can be the most rewarding way to buy properties as well as the most dangerous. The foreclosure home is publicly auctioned off to the highest bidder, and the process moves very quickly. When bidding, you compete against the lender and other investors.
Auction buyers research foreclosure homes prior to the sale date, pursue realistic opportunities, calculate values and potential profits, determine bid price and follow the home to the auction and participate.
Pros of buying a foreclosure home at auction: Very good to excellent discounts. Investors can achieve 35 to 45 percent savings off market values and earn an excellent return on investment. This is the only investment method where you can really hit the jackpot.
Cons of buying a foreclosure home at auction: Auctions are frequently postponed which can result in you wasting your time and effort. Inspections of the foreclosure home may not be possible. To be safe, you should conduct a title search, which is costly. Unusually large cash outlays deter most investors (this can also be seen as a benefit).Certified checks for 10 percent of the purchase amount may be required with the balance due in weeks, days or even hours. Inadequate research can yield devastating results.
Buying REOs
Perhaps the easiest way to buy foreclosure property is to buy REOs (Real Estate Owned). An REO occurs when the mortgage lender takes back the home to gain possession and cut its losses. The lender, however, does not want the home because it is not in the real estate business and is therefore usually motivated to move the property quickly.
Pros of buying an REO: The lender is almost always the senior lien holder, thereby wiping out all other liens at the auction. This means an REO will always have clear title, which saves a lot of time, expense and worry when buying a foreclosure home. Most likely the mortgage lender will also have paid any property taxes in arrears. The lender may either repair the property to acceptable standards or allow a discount to the buyer to make repairs.
Cons of buying an REO: Rewards follow risk. This is a low risk investing method and, accordingly, the rewards can be on the low side. Average savings may range from only 5 to 15 percent below market value, although discounts of 25 percent or more are possible if you know how.
Investing in foreclosure homes can provide extraordinary profits. Each of the three foreclosure opportunities above offer both rewards and certain risks. As always, be sure to do your homework before you buy.
For the latest foreclosure news and information, visit America's only free foreclosure resource, www.USHUD.com.
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