Buying Foreclosed Properties
There are excellent profits to be made by investing in foreclosed properties, but before you start, there are a few myths to clear up. First of all, while it's true a bank or mortgage lender is motivated to get foreclosed properties off its books, it's usually not possible to buy them for "pennies on the dollar." You can, however, almost always purchase them at below-market prices. Second, it's not true that a lender will be willing to sell the property for just the balance due. The lender will set the price based on the prevailing market rate, and many other factors. And third, your credit will still be a factor.
Another common myth is that foreclosed properties are all in bad neighborhoods.
This just isn't true, particularly as the rate of foreclosures continues to go up. When the economy stumbles, or the interest rates rise, many upscale homes are lost as its owners struggle to meet the increased monthly payments on less income. You will find plenty of foreclosed properties in distressed neighborhoods that represent good value, but you will also find foreclosures in some of the finest communities in America. But regardless of location, it is common for foreclosed properties in any area to need at least some repair. In most cases, you will be buying the house "as is," so factor in an estimated cost of repair when making your bid.
There are three types of foreclosures; you may purchase a home in pre-foreclosure, at a foreclosure auction, or lastly, you may purchase an REO (real estate owned) property that has already been taken back by the bank and has received no bids at an earlier auction. In a short sale, you, the investor, offer the lender a discounted price for a property before the auction takes place. Depending on the property, this can be an excellent strategy for investment. Buying at auction, too, is a good source of deals. But sometimes after the auction, a bank may not receive any bids on a property, or may receive bids that are under its minimum requirement. These properties are then called "REO" properties, and most lenders will be able to provide you with a list of their REO's. This list, too, can be an excellent resource for finding good real estate deals.
When you bid on a foreclosed property at auction, it will usually not be possible for you to inspect the property in great detail beforehand, and you will be expected to have solid financing--or cash--on the day of sale.
In addition to
buying foreclosures from
lenders, HUD also is a source of
foreclosed homes. These too, are
sold on an "as is" basis, and at
market value. HUD will establish
a priority period during which
foreclosed HUD homes will be
sold to owner-occupants only;
after that period has elapsed
and if no owner-occupants have
made bids, the bidding opens up
to investors.
In addition to buying the property at a discount, it's not unusual for a lender to offer an investor other incentives, such as attractive interest rates or lower closing costs and points. If the lender doesn't offer these sorts of incentives, it never hurts to ask for them.
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