The 3 Stages of Investing in Foreclosures - Do you know what you should pay for foreclosure property?

Foreclosure is the proceeding in which a Bank or other Secured Creditor sells or repossesses a real property after the Homeowner has failed to comply with their agreement with the lender.  This agreement is called a mortgage or a deed of trust.  This is most common when a homeowner has defaulted on their payments or obligations to the bank or creditor. Depending on the terms of the agreement, the lender now has the right to call the loan due or sell the property to satisfy the debt owed.

The 3 Stages of Investing in Foreclosures:

There are three basic stages of foreclosure, each with specific investing strategies:

1. Pre-Foreclosure

2. Auction

3. REO

Most Real Estate investors would like to acquire Real Estate at 70¢ on the dollar or less, including repair/rehab costs. While successful property acquisition is possible in all three stages of foreclosure, there is greater success in properties that are in the Pre-Foreclosure stage.

If you are truly looking to purchase properties at 40-70¢ on the dollar, this is the stage in which you should concentrate. While purchasing properties at this stage may be a little bit more difficult, the discounts can be much larger.  Why are Pre-Foreclosures more Profitable? Simple! As the property advances through the stages of foreclosure, there are more costs associated with processing the property. Those penalties, interest, legal fees, filings, etc., all add to the cost of acquiring the property.

So, let’s take a look at the three basic types of foreclosure properties as they progress through the process.

Pre-Foreclosure:

A Pre-Foreclosure is created when the homeowner falls behind on the primary mortgage, secondary mortgage or home equity loan payments. The Foreclosure process usually begins once the homeowner has missed three consecutive monthly payments.  Once the lender starts the foreclosure process, the homeowner has only a set amount of time to bring their mortgage current before the formal foreclosure process begins. During the preforeclosure period (ranging anywhere from 21-455 days), you can be a tremendous asset to the homeowner, by providing alternative solutions to foreclosure and helping them to avoid acquiring additional penalties and fees that can be tacked on to their arrears. You will find that the Pre-Foreclosure period is the ideal time to locate properties.  During this stage you can do everything from an equity buyout, to taking the property subject-to, to doing a double closing or simultaneous closing, to a lease-back, and, in most cases, a shortsale.  At this stage you are purchasing the home directly from the homeowner before they lose their home at a Foreclosure Sale.

Auction/Sheriffs Sales:

Of all the different types of deals you can pursue, purchasing real estate at the courthouse requires the most experience and the most resources. If you are going to bid at auction, you will be competing with the lender as well as other all-cash, seasoned investors.  Though auction deals can be lucrative, they are not for the amateur investor. To acquire these deals you will need to use your own funding, putting 10% to 100% of your bid price down immediately in the form of a certified check. Any balance would also be due immediately within 30 days or less after you accept the bid. The time frames for full payment depend on your county. Property purchased at auction can be resold by the winning bidder, but not usually assigned. Be careful, because poor research procedures can cause your deal to be a loss, as it is almost impossible to pre-inspect the property. Therefore, you are risking overpaying for a property that needs a lot of repair/rehab. You may also be responsible for evicting the current homeowners, which will add more costs and risks to your deal.  Carefully check your state’s regulations regarding homeowner redemption timeframes. If you are in a state that allows redemption, the homeowner has the ability to purchase the house back, typically within 6-12 months for the same price it sold at auction, plus interest.  As the auction winner, you will not be able to resell the house during this time period, and any money you put into the house can be lost if the previous owner redeems.  After spending a lot of time and effort on research, the auction may be canceled or postponed. In many cases, the foreclosing lender will bid up to what is owed on the property to protect their interest in the property. Therefore, they end up being the winning bidder or raise the bids to almost market value. However, if you have done your homework correctly and you have the resources to personally invest in the property, the payouts in some circumstances can be very large.

REO’s – Real Estate Owned or Bank Owned:

REO is an acronym for ‘Real Estate Owned’ by the bank or lender. An REO is created after a foreclosure auction occurs and the lender is the winning bidder or the minimum bid has not been met and the property reverts back to the lender.

Often, what is owed to the bank is more than what the property is worth at fair market value. Therefore, many auctions never result in a sale. If the lender is the only bidder, the lender will gain possession and take back the title on the property.  When purchasing an REO, you can usually do a traditional closing with traditional financing. You will be able to inspect the property the bank has already obtained clear title. In most cases, you will purchase the property as-is. You can not usually assign an REO contract to another person or investor. The bank usually requires an earnest money deposit and if you fail to close on the deal you can lose the deposit.

Feel free to contact me for more information or to sign up to receive a free list of Pre-Foreclosure and Bank Owned Properties.