When a buyer stops making payments on a property, the lender has the right to reclaim the property and resell or auction it to reclaim their investment. While this is rarely a happy time for sellers, foreclosures can provide an excellent opportunity for buyers who are willing to do their homework and research available properties. When housing inventories are high, lenders are under pressure to sell foreclosed houses quickly, creating significant values, particularly if buyers are able to invest some time upgrading a property.
The real estate market and economy are beginning to recover, and with prices rising, investors are heading to foreclosures, looking for a bargain. There are plenty to be found, but there’s plenty of danger, too. Before you dive into the foreclosure market, do a bit of homework. Here are some good places to start.
Not all foreclosures are the same. In fact, some of them aren’t even true foreclosures. Foreclosure is a multi-stage process that can take up to a year, and discounted homes are available in each stage.
Stage 1: Pre-foreclosure
Pre-foreclosure is essentially a warning phase, in which the lender gives a property owner a grace period before calling in their loan. Sometimes, an owner can make good on back payments and resume their original mortgage. If not, to avoid defaulting, an owner will sell their house (and the mortgage) to a third party, usually at a substantial discount from market value. One person’s misfortune can be another’s gain, but pre-foreclosure sales can be risky, and often require permission from the lender. Unless you are a financial expert with substantial real estate experience, enlist an experienced real estate agent to help guide you through the process. An agent can help you determine which properties are true bargains, and can ensure that your pre-foreclosure sale meets all legal and regulatory requirements.
Stage 2: Public auction
When the pre-foreclosure phase ends, lenders will often auction the property to the public. There are still bargains to be had, but competition can be fierce, and it may drive up prices beyond a property’s actual value. If you plan to buy an auctioned property, perform as much research as you can before bidding. Research comparable properties in the same neighborhood, enlist an expert to inspect the construction and amenities, and visit as many auctions as possible to get a “feel” for the process. Above all, don’t get caught up in emotion. Today’s ”deal of a lifetime” will probably come again next week.
Stage 3: Bank-Owned (REO)
Lenders will often sell bank-owned properties (often called “Real Estate Owned,” or REO) at a discount to recoup their lost investments. You can still get a substantial discount on REO properties, but be prepared to do more pre-sale research and some post-sale repairs. During the foreclosure process, owners have neither the money nor the inclination to keep up their homes, and some deliberately damage the property. SInce most REO properties are sold “as-is,” be sure to hire a qualified home inspector so you know exactly what’s on your plate.
There are great deals to be had on foreclosed and pre-foreclosure properties if you keep your eyes open. Do your homework and you might just land a bargain.
by Cormac Foster
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