How to Buy Foreclosures

Often in real estate the #1 place to invest is in foreclosures or real estate in general.

Many Market circumstances make it a great time for small to medium real estate investors to purchase 1 or more foreclosure properties that didn't make it through the making home affordable mortgage program, for their own residence, resale or rental. During downturns in the economy, more upscale homes go into foreclosure, so the belief that foreclosure homes, which may have been saved with the making home affordable mortgage program, are exclusively obtainable in high crime regions is incorrect. Beachfront and properties in affluent areas are always part of the mixture of foreclosed properties available whether caused by the inadequacies of these new mortgage programs or not.

You can buy foreclosures for as cheap as 50% below market especially in areas where the making home affordable mortgage plan has been used extensively, but a large percentage of foreclosures sell for just 10% under market. Nonetheless the savings may be larger if the home is purchased from the mortgage lender who declined to use the making home affordable mortgage program and foreclosed on the previous borrower. Certain mortgage lenders may be inclined to waive many of the closing costs, maybe even provide a break on the interest rate or the down payment.

Information is King

The beginning investor must learn to navigate the foreclosure process. If you put the time and effort in, it will translate in to 1000's in savings. If you spend 5 hours a week researching, it is well worth it.

For many borrowers the foreclosure process can be very discouraging. Good homes are obtainable, but finding those properties requires research, preparation, tenaciousness and patience. Looking for homeowners who did not qualify for the making home affordable mortgage program is a great start.

Many owners of property that fall into foreclosure have been struggling financially for a year or more, which usually means that the property has not been getting general maintenance for a quite sometime.

This can include everything from missing doors to ripped out kitchen sinks. Remember front yards, broken appliances, windows, dirty floors, carpet and walls are found in even the affluent areas of foreclosures. This could be a positive or a negative for a home buyer looking to find a mortgage on a foreclosure. Homes in awful condition will get bargain prices, but if you make the repairs and then resell the property you might just make a small fortune. The first unwritten rule of real estate is location and it most definitely does apply to these situations. If you walk into the home and trash is everywhere, but the foreclosure is in a wealthy area with high resale values, just hold your nose, walk through the entire house and look at making an offer well below asking.

Investing in Foreclosures

When a mortgage lender decides to foreclose on a home, a default notice is usually filed. Default notices are public record and for buyers the first step in locating a house in foreclosure. A buyer searching for foreclosures can also buy magazines or better yet subscribe to a website that does all the work for you and list all defaults in your area or look for homeowners who have failed to qualify for the making home affordable mortgage program.

Once a house has been located, search public records. You'll need to look for outstanding liens on the property, since these will often drive up the purchase price. Liens are generally placed on a home for outstanding property taxes. Be sure to also pull comps (sales in the area) to help asses a proper value and the likely profit. 

Explore local state foreclosure laws. Some states such as Pennsylvania and Ohio do call for the mortgage lender to sue the borrower and get a court order to sell the property, a process known as judicial foreclosure. There are other states including Texas and California which follow the non-judicial foreclosure process, which does not demand a lawsuit to sell.

For novice investors, purchasing from a bank is the best way to go. Getting involved with short sales can be a time consuming nightmare. Virtually all foreclosures are returned to the bank or investor during auctions.  While homes in great locations and in respectable shape generally do not sell to far below market, rundown homes, however, can be picked up well below market. Although many homes which are not qualifying for the making home affordable program may be selling for well under market value as homeowners are ready to give up and walk away.

Safest Way to Purchase Foreclosures

Lender owned properties provide the safest deal for buyers who are new to foreclosures. There's no risk on taxes, liens or tenants to evict, only what shape the property is truly in. A mortgage lender who is anxious to sell just might be willing to offer very attractive terms.

The mortgage lender might offer to finance the home at interest rates below the market or even provide a lower than normal down payment. If the mortgage lender has already ordered an appraisal and their deal includes title insurance, which is normal, then much of the risk associated with buying foreclosures early in the process can be avoided.

Finding Hidden Foreclosures

Foreclosures do not have to be previously owned homes, a few foreclosed properties are brand new. These properties are not as easy to find and seldom appear on national lists. In many areas, when the economy slows it leaves numerous builders of new mid to upper end homes over extended with few buyers or prospects.

When this happens, the banks that issued the construction loans take possession of the homes and then attempt to sell them. These are the famous invisible foreclosures because no one affiliated with the sale of these properties will refer to them as foreclosed properties.

Daring investors often find homeowners who are about to go into default and are attempting to keep some of the equity in the property. If found in time the homeowner is normally prepared to accept a small portion of the difference between the equity and the properties market value.

Pre-foreclosure purchases do offer outstanding bargains but they demand persistence most of all. Creditors are often hounding owners at this stage, so it can be very trying to actually get through to the homeowner.

If the owner is contacted, the buyer could be in for a big surprise. Homeowners in default might not have phones or electricity, and they may have a mixture of personal and legal problems. What's more, they more than likely need somewhere to live before they can move out of the home the investor wants.

This can be a high risk, high reward proposition, and is not for first-time foreclosure buyers.

The Auctioneer

Many auctions happen on the county courthouse steps, and they present two distinct disadvantages: Investors may not be able to inspect the property, and they will have to put up the entire purchase price the same day.

HUD runs auctions to help it unload homes it has obtained through defaults on federally backed mortgages. The great deals are hard to find if you go this route, but the cost of getting started with good credit can be very low as many mortgage lenders will loan the full price of the foreclosure or more. If the property is to be used as a rental, many banks may require as little as 10% down.

Foreclosure homes bought in good areas at below market values that appreciate yearly can be a strong investment strategy for many buyers. Homes used as rental properties give many investors worthy tax deductions while the property increases in value and builds equity.