When searching real estate websites, you will likely come across properties listed as foreclosures or bank-owned properties (REO). At times, the prices on these properties seem like a dream come true. The question is, should you consider buying a foreclosed investment property? You may have heard some guru touting his success and rise due to foreclosure investments. Although foreclosures might seem like a smart way to jump into the real estate market for cheap, they could come with some serious pitfalls. Here are some things to know about buying a foreclosed home.
☛What is Foreclosure?
At its most basic, foreclosure is what happens when a loan borrower is unable to make the required payments on their loan. Eventually, the loan goes into default which forfeits the right to their property. When a buyer borrows money to buy a property, they are entering into an agreement for the cost of the house minus any down payment.
Mortgages are “secured loans,” which simply means that the mortgage is recorded against the property itself through a lien. If a borrower fails to make a certain number of payments, the lender who issued the mortgage can try to recover some of the debt owed by seizing and selling the property that is the subject of the lien. This process is the same whether it’s a private residence or an investment property. In most cases, an investment property is easier to negotiate ownership of the loan is in default.
☛The Foreclosure Process
The specific foreclosure process varies under different state laws. In most cases, it follows the same general trackway. The main differences depend on whether your state generally uses a judicial foreclosure process or a non-judicial foreclosure process.
- In a judicial foreclosure, the foreclosure may need an order from a judge to get started. States like New Jersey, Pennsylvania, California, Florida South Carolina & North Carolina are some Judicial Foreclosure states.
- In a non-judicial foreclosure process, which is also known as “power of sale,” the courts may not be involved at all. Regardless of if the foreclosure is judicial or non-judicial, it can follow the same general process.
STEP 1: BORROWER STOPS MAKING PAYMENTS – The first step of foreclosure is when the borrower stops making payments on their mortgage. This is often caused by financial hardships. Things like unemployment, illness, divorce, or other unexpected financial obligations.
STEP 2: LENDER PUBLIC NOTICE NOD – Once a borrower has missed three to six months of payments, depending on state law, the lender will post a public notice. This public notice is sometimes known as a Notice of Default (NOD) or “lis pendens,” which means pending suit.
- In some states, they also post this notice on the door of the property that is at risk of foreclosure. This notice is a public alert to the borrower that the loan is in default.
- After a borrower receives a Notice of Default (NOD), they have 30 to 120 days to avoid foreclosure. This action is dependent on state law. This period is a pre-foreclosure.
- During this time, the borrower may collaborate with their lender on available options. At times, a borrower may apply for a loan modification or a deed in lieu of foreclosure. This is to pay the amount owed. At times even enter into what is known as a “short sale” if the borrower is unable to work things out with the lender.
- A short sale is when the borrower sells the property and the net sale proceeds are “short” of the amount owed on the mortgage. A short sale needs to be approved by the lender.
- In a short sale, the difference between the sale price and the total debt is called the “deficiency.” Because the short sale price doesn’t fully satisfy the debt, the lender in some states might be able to sue. The suit to the delinquent borrower is to recover the “deficiency” after the short sale. It is good to note that there could be tax consequences because of a short sale.
- If the borrower can pay the amount owed or sell the property through a short sale, the pre-foreclosure process ends without elevating to full-scale foreclosure.
☛STEP 3: FORECLOSURE
At this stage, the lender has the option to sell the foreclosed property at auction or direct to market with a realtor. These auctions are sometimes referred to as trustee sales and notice of the auction must be given. The notice goes to the County Recorder and is posted in the newspaper.
- At times, the borrower can come up with the money owed until the property is auctioned off. This is known as the “right of redemption” and can stop the foreclosure process immediately.
- If the borrower can’t exercise the right of redemption, the property is auctioned off to the highest cash bidder. If no one acquires the property at auction, the lender takes ownership of the property.
- In some cases, if the property is more valuable than the debt that is owed, the lender may forgo the auction. The lender may accept the deed to the property back known as a “deed in lieu of foreclosure.” The lender may also buy the property back at the auction itself. If the lender takes ownership, the home becomes a bank or real estate-owned property (REO).
- These properties are then sold in the traditional real estate market. Sometimes they are sold in bulk to investors at liquidation auctions. Auctions of this magnitude are open to vetted investors that can provide proof of funds to attend. In some states, under the judicial foreclosure process, borrowers may still have the right to redeem their property after the sale.
- Whether a redemption period is offered at this stage and how long of a period is given can vary based on several factors including but not limited to state law.
- In some states, the homeowner who was foreclosed on may be able to stay in the property during the redemption period. Other states deem the buyer the new owner at foreclosure has the right to live there. If the defaulting borrower cures the default, they get the property back.
☛Buying A Foreclosed Home
As you can see, the foreclosure process is very complicated, and it is governed by many different state and federal laws. This can make buying a foreclosure a bit more complicated than a traditional purchase. If you’re interested in buying a foreclosure, you can find listings on many different websites that feature bank-owned properties. In most cases, banks work with certain brokers and they represent the banks’ interests. When checking out the foreclosures in your market, take note of the real estate agent’s name.
- Make sure you get your own real estate agent. Avoid having the lender’s realtor manage your interest in the deal. It is always good to have your own representation. It keeps things honest.
- Remember banks are in the business of banking, not real estate. So Keep in mind, that banks usually outsource the job of selling foreclosed homes. This job goes to real estate agents. Another thing to remember when you’re scrolling through listings is that most foreclosed homes are marketed “as-is.” This means that there are no warranties on the condition of the house. That translates to you buy the property, you inherit all its issues.
- This means that you may face challenges when it comes to foreclosures labelled as-is. especially with health or safety issues present. Items like structural damage or mold become your problem once the deal closes. Keep in mind that many foreclosed homes have fallen into disrepair and may need significant updates to be marketable. So take that into consideration when shopping for a foreclosed property.
- Occasionally, you may be allowed time for a home inspection to be completed as part of the sale, but this may depend upon the bank selling the property and the brokerage in which the property is marketed.
- Purchasing a property at auction for instance would not allow for a home inspection or site visit by the bidder. And just because a foreclosed home might have potential issues, don’t expect it to be below market value. The competition for properties in some states makes it difficult to get foreclosures at a reasonable sale price.
- It is important to remember that even low-priced properties might get multiple offers. These offers may be above the asking price of investors eager to snap up a fixer-upper.
☛Keep in Mind
☛Multiple offers can fuel a bidding war and can raise the bidding and in turn the selling price.
Be aware that the foreclosure market moves fast. You need to make sure that you have your financing resolved before making an offer. The entire process once it’s on the market is lightning fast, so deal momentum is paramount. If you are a cash buyer, you might have a firm budget in mind. So, make sure you allow for extra cash to buy the property. Establishing how much higher you will go is important. So, make sure you have some idea of the cost to cure plus the buy price and add $10-$20K on top of that. If you’re planning on taking out a mortgage to buy a foreclosure, you should get a pre-qualification letter before negotiating with the bank. Also, don’t forget to add closing costs to the mix. If you are borrowing, you will also need to add an extra 3% to 6% to the entire deal.
- A mortgage pre-approval letter tells you how much money you are eligible to borrow. it also lays out the terms of final approval on a mortgage in a Pre-Approval letter.
- Pre-approval may also help expedite the buying process. It shows the bank that your credit, income, and assets have been reviewed by a fellow lender. It shows that it is approved for a mortgage up to a specified amount pending certain conditions such as locating an eligible property.
Despite the negatives, foreclosures can be profitable if you know what you are doing. So do your homework and make sure the property you find fits your investment criteria and strategy. Make sure the numbers make sense and jump…the water is great on this side of the fence.
Thinking about buying a foreclosure?
ROGP Capital offers mortgage loans for qualified investors interested in building their portfolios. Better yet, you can get pre-qualified in less than 24 hrs, with absolutely no obligation and no hidden fees.
So, don’t miss out on the next wave of foreclosures. Despite the competitive market across the country, savvy investors will be able to plunge into the market and find great deals. Please book a call for a free strategy call. If you are ready to take your investing to the next level, we can help. Let ROGP Capital help you build your portfolio using our private capital resources.