Foreclosures: For novices, it's a crapshoot
|By Mike Giusti Bankrate.com
The allure of foreclosed properties to a would-be
real estate investor is nearly irresistible: Buy valuable properties
for pennies on the dollar with little or no risk of your own money,
work when you feel like it, and grow rich.
Countless seminars and how-to books
promise to turn even the most novice buyer into a high-powered real
estate investor through the magic of foreclosed homes. The trouble
is the dream of instant, safe, trouble-free wealth often turns out
to be like most things that sound too good to be true -- a scam.
If easy money was to be made, everyone would be getting rich off
True, some people do, just like
some people get rich in the stock and commodities markets, oil wells
and foreign currencies. But, just like these other forms of investing,
profitably buying and selling real estate takes research, knowledge,
experience, money and time. And nearly every deal with a huge profit
potential also comes with an appropriately sized risk.
Beyond get-rich-quick seminars
and informational classes offered by nonprofit agencies and local
sheriff's offices, few, if any professionals are available or willing
to teach novice investors the ins and outs of foreclosure sales.
Why should they show you how to buy a great property at a deep discount
instead of doing the deal themselves?
Still, if you are willing to go
it alone and invest the time and cash required to deal in foreclosures,
your first step should be to understand the process as thoroughly
Foreclosure is the legal method by which lenders or governmental
agencies take properties from owners who fail to make payments,
and then resell those homes to recoup money owed them.
Nonpayment of a mortgage or home equity loan is the
most common reason a home gets foreclosed, but it is far from the
only reason. But people could also be facing a foreclosure because
of a balloon payment, not paying property taxes, not carrying enough
insurance, or even failing to keep the property in good working
condition, says Rande Johnsen, a trustee for Trustee Corps in Irvine,
There are three distinct phases of foreclosures, each with its own
advantages and each fraught with peril.
||The 3 phases of foreclosure:
The time between when the homeowner has stopped making payments
and when the land is actually put up for sale at auction. Investors
take this opportunity to deal directly with the homeowner.
||Auction: When the
courts seize the property from the homeowner and sell it to the
highest bidder. The county sheriff or a trustee handles this process,
depending on the state.
If the property fails to sell at auction, or if the lender
ends up as the highest bidder, the home becomes "real
estate owned" (REO) by the bank. Banks then try to
sell these REO properties on the open market, often through
a real estate agent or third-party marketing company.
Often these homes are sold to buyers who don't even
know they are buying a foreclosure and go through the entire process
as they would with any other home.
Going once ...
The typical foreclosure is literally bought on the county courthouse
steps during a sheriff's auction or a trustee's sale. These auctions
are typically held on a weekday morning, and bidders must come to
the sale armed with information and flush with cash or its equivalent.
Plastic, personal checks and IOUs are almost universally shunned
at auction and, depending on where you live, investors usually must
make a sizable deposit or pay the entire sum on the spot, says John
T. Reed, editor of Real Estate Investor's Monthly newsletter and
author of the book "How
to Buy Real Estate For At Least 20% Below Market Value."
Details vary widely by state, but as a rule, prospective
buyers are not allowed inside the house before bidding begins. This
is a frightening concept for many buyers, who must lay down thousands
of dollars in cash upfront without knowing anything about the home
beyond what is available through basic public records searches and
a curbside appraisal.
The house could be infested with termites, gutted
to the rafters by previous residents or filled with lead paint or
asbestos, and a buyer wouldn't know until after the sale is final.
This as-is aspect
of auctions is only part of what can make foreclosures so perilous for beginning
buyers. Another is that these homes can never be guaranteed to come with a clear