Bottom line: Many investors, caught unaware when the housing bubble burst and the subprime lending market melted down, found themselves holding a bunch of properties they couldn't get rid of -- properties quickly becoming expensive to maintain.
If it still sounds like a good idea for you to buy a foreclosed property, keep reading.
Three types of foreclosuresFirst, consider the three options when it comes to investing, which coincide with the three stages of foreclosure:
1. Preforeclosure: This is when the borrower is in default on the loan, but a formal foreclosure has not yet been filed. To buy a property at this point, you deal directly with the homeowner, possibly while involving the lender, such as in the case of a short sale. If you try to acquire a preforeclosures without notifying the lender -- say, by simply taking over the mortgage -- you risk triggering the "due on sale" clause found in most mortgage agreements. This clause in the homeowner's mortgage means the note becomes due and payable in the event of any title transfer of the property.
2. Auctions and sales: This is where the property is sold at an auction or sheriff's sale. The good side of this is that there are no negotiations with homeowners, and existing liens and encumbrances typically are wiped out. The downside is that you often cannot inspect the property beforehand, you usually need significant and immediate cash and you may need to evict the occupant from the home.
3. Real estate owned properties: At this point, the lender has reclaimed the property, and the homeowners have vacated. The condition of real estate owned, or REO, properties can vary widely. Generally, liens and other clouds on the title have either been satisfied or wiped out. You can tour the property before making an offer. You will usually get the property for less than market value, but not drastically lower. Discounts are more likely if the property is in less-than-perfect condition. However, the lender is eager to unload this home and therefore will probably be willing to offer favorable financing terms or throw in other incentives.
Finding foreclosuresFinding properties in foreclosure isn't hard these days:
- Drive around. In many high-foreclosure areas, you can often spot them simply by driving down the streets and look for the "Foreclosure" banners on top of the "For sale" signs.
- Go online. Use online foreclosure search services. Many of these sites offer a short, free trial period, but keep in mind you will be automatically charged the subscription fee once that period ends. Be sure you know exactly what fees you will incur -- charges can vary widely from one site to another.
- Pick up a newspaper. Auction properties are easy to identify, as these sales are usually advertised in the newspaper (and possibly) online, often a month or two prior to the sale. Also, search for ads placed by owners or agents that contain buzzwords and phrases that signal distress, like "owner anxious," "bring all offers" and "priced for quick sale." Many people actually state right in the ad that the home is in foreclosure or preforeclosure. Or use the newspaper in reverse -- you can get distressed owners to come to you by placing newspaper ads or posting signs. Mostly likely you've seen those "I buy homes" ads that seem to be springing up all over. Many other people are posting the same signs, so it can be tough to make yours stand out.
- Contact a local agent. Real estate salespeople can search their multiple listing service, or MLS, listings for properties that are in distress or have been on the market for long periods of time. To find REO properties, check with local brokers who specialize in these types of homes. Or go the direct route and simply call the lenders in your area (ask for the resource recovery department).