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1: Default
Your first opportunity comes in the "pre-foreclosure"
stage, when owners have already defaulted on their mortgage payments
but actual foreclosure hasn't happened yet. To find out about houses
in default, visit the local courthouse where defaults are registered.
You can then make offers directly to the defaulting homeowner.
However, few pre-foreclosure bargains exist among
the most desirable homes. Many of those will sell for near their
appraised values.
Properties that sell at a 20 percent to 40 percent
discount usually need repair or are in unstable communities.
At this stage you have about 90 days to act after
the default notice is posted and another 21 to 25 days after auction
sale date is published.
Stage two: Auction
If a property doesn't sell in pre-foreclosure,
and the home owner actually defaults on his mortgage, the home goes
to public auction. During this stage you can find the best bargains,
but it is fraught with difficulties.
Here's some of what you're up against:
- Many auctions are canceled at the last moment
as the property has been sold or payments reworked.
- Court-appointed trustees only accept cash
or cashiers' checks.
- There's little time to arrange inspections,
so bidders may have no clear idea of what they're buying.
- Properties are sold "as is," without warranties.
Sellers needn't disclose problems. Buyers may find themselves
with unexpected -- and expensive -- repairs.
Not all auctions are created equal. If the loan
was guaranteed by the U.S. Department of Housing and Urban Development
(HUD), then the department takes ownership of the home and either
sells it through a real estate agent or auctions it on the Internet.
These properties are not the bargains some potential
investors think they are. For one thing, there's a lot of competition.
As for auctions of homes owned by banks or other
private lenders, investors should not show up without preparation.
All investors should know the state's laws and the particulars of
the property they wish to bid on.
They should also be ready to put down a cash
deposit of 10 to 20 percent of the sale price on the spot should
they win the bidding. The balance will most likely be due in less
than 30 days - in many cases in as little as 24 hours.
Financing is not the only obstacle for buyers
at a foreclosure auction. The homes may still be occupied by the
delinquent owners, and it is up to the high bidder to deal with
the messy question of eviction. In some states, the former owners
have up to a year after the sale to buy back their home for the
amount they owe plus foreclosure costs.
Also, don't expect a clean title search or title
insurance to accompany an auctioned property. It is not uncommon
for a winning bidder to be unpleasantly surprised by an unpaid $6,000
bill from a roofer or a claim by a third cousin who has an interest
in the property.
And while some auctions take place in a house's
front yard, allowing you to actually look the place over, just as
many are sold online or "on the steps," meaning at the county courthouse.
Good luck locating someone with a key to let you in for an inspection
beforehand.
Simply put, these auctions
are too risky for most buyers. A property could have multiple loans,
liens, back taxes, be in need of major repairs. Individuals can
look at homes at
HUD's Web site
and
Homesales.gov.
Stage three: REOs
Here's the investor's last chance. If the foreclosure
didn't sell at auction, it has nowhere else to go but back to the
lender, where it takes on a new name: real estate owned.
Lenders hate REOs. An empty house is a nonperforming
asset on their books. The longer a house sits unoccupied, the more
its value depreciates. Meanwhile, the lender is spending money for
its upkeep -- or not, in which case it faces the possibility of
a thorough trashing and an "as is" sale price.
Most large lending institutions won't deal with
investors directly, preferring to hand over properties to real estate
agents. But smaller banks, eager to save on the commission, may
want to talk.
This may be the best chance for "mom and pop"
to buy a foreclosure. Experts suggest that when a lender buys a
house you want, quickly send an overnight letter to the bank president
offering to pay their bid price for the property. The bank may want
a quick turnover.
Banks do want to maximize profits, though. So
buying from a lender may not result in big savings.
Some of the best foreclosure deals may be had
through governmental or quasi-governmental agencies such as Fannie
Mae, Freddie Mac, HUD, and the VA. Listings are numerous and available
on their Web sites, but the properties they feature are often less
upscale. Web auctioneer eBay lists thousands of foreclosed homes,
too.
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in the area and are excited that you are considering moving to our
town. We have provided you with a searchable data base of available
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every day, you need a professional that understands the industry
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