Why Invest in Foreclosures?
Foreclosure investing is the best way to buy cheap real estate that offers true value, both on purchase and over the long term. Foreclosures are sold every day all over the U.S. at auctions, by banks, and by government agencies for anywhere from 30% up to even 60% less than what they are actually worth. When you buy real estate for these kinds of savings, you're getting instant equity in your purchase, because you can turn around and sell the property right away for far more than you paid. There are no developer risks to worry about, only the chance to gain value over time. Whether you're buying a new home for your family, looking to earn extra income with a rental property, or looking to flip homes and resell your purchase for a profit, no other kind of real estate makes it easier than foreclosure properties.
How Foreclosures Come to the Marketplace
Foreclosures begin with mortgages. When a homeowner enters into a mortgage agreement or deed of trust, they're agreeing to pay off the value of their loan over a certain amount of time. This means making monthly mortgage payments toward paying off that debt. When a homeowner doesn't make those payments, the lender loses money. If mortgage payments continue to go unpaid, the lender will have no choice but to seek to take back the loan provided by selling the property under mortgage. This is a common practice that occurs every day, and unfortunately it's the only way lender can get back the money lost on unpaid loans so that they can keep lending to other homebuyers. However, these foreclosure sales offer tremendous opportunity for new buyers. Since the lender only needs to make back the unpaid portion of the mortgage loan, and not its full amount, they can undersell a property and still make good. This means properties selling for 30%, 50%, and 60% are actually common on the foreclosure marketplace, and that's why smart investors seek them out.
Different Types of Foreclosures
Generally, there are two types of foreclosures out there, judicial foreclosures and non judicial foreclosures. Judicial foreclosures are foreclosures that happen through the court system. Once a homeowner defaults, the lender will file a suit in court called a Lis Pendens. This will outline the details of the mortgage default and ask the court to grant them a foreclosure sale in order to get back the money they've lost. If the court approves the foreclosure, they will schedule a sale date for the property, and a court representative or the local Sheriff's office will conduct the sale, collect payment for the foreclosure home, and award that money to the lender.
Non-judicial foreclosures are foreclosures that happen without the need for court permission or oversight. Non-judicial foreclosures involve mortgages that contain a Power of Sale clause. This clause gives the lender permission to pursue a foreclosure sale on their own in the event of a default. These types of foreclosures are also known as executory foreclosures. Non-judicial foreclosures tend to be more common than judicial foreclosures.
State Laws and the Foreclosure Process
Ultimately, local state laws and customs play a big part in the foreclosure process. Some states may require that all foreclosures be judicial, while other states will require very little oversight of foreclosures. It's extremely important for any buyer or investor to become familiar with the specific foreclosure laws for their region before they even start looking at foreclosure property listings. You have to become familiar with the entire foreclosure process, including the exact time the law allows for different stages of the foreclosure process, in order to be a truly effective buyer. Time is an important factor when buying a foreclosure, because you'll often have a limited period to determine whether a foreclosure truly offers a good value, and knowing the laws and process is key in managing that time well.
You'll want to determine what the laws are concerning strict foreclosures, and whether or not the homeowner is entitled to a period of redemption after the sale, during which they may be allowed up to a year to pay off their debt and retain ownership of their home. You'll also want to look into whether strict foreclosures are the rule in your area, which allow for repossession of a homeowner's property before a sale occurs. Knowing the details will make you a better buyer.
The Foreclosure Process and Foreclosure Stages
While the foreclosure process can differ from state to state, below is a general overview of how a foreclosure proceeds that buyers can use as a general guide.
The Pre-foreclosure period is the stage before a foreclosure sale has been scheduled for a property, but after a homeowner has defaulted on monthly payments of their mortgage loan. After a homeowner defaults, the lender or will issue a Notice of Default. The Notice of Default will describe how the homeowner is in violation of the terms of the mortgage, detail how much they owe in default (plus any associated interest or penalties), and provide a date by which the default debt must be paid off. This is where local laws can have a big impact on the foreclosure process. Different states require, by law that the homeowner is provided a certain amount of time to pay off the default debt. This period can vary from as little as 3 weeks to up to a full year. This range of time is commonly called the pre-foreclosure period. During this pre-foreclosure period, a homeowner can end the foreclosure by paying off the full amount owed, as described in the Notice of Default. As a result, many homeowners seek to sell their property before the pre-foreclosure period expires. This allows them to earn money on their home, pay off their debt, and avoid having a foreclosure on their credit record, which can be devastating. If the pre-foreclosure period expires without payment, then the lender or court in charge of the sale will set a date for a foreclosure auction of the property.
The Foreclosure Auction
Foreclosure auctions are very straightforward ways to sell a property. They are open to the public, and on the scheduled day of the sale, anyone can come and bid. If your bid is accepted as the winning bid, you'll be awarded a Bill of Sale, and you'll usually be required to put down at least a down payment on your purchase. However, some states may require that you pay the full amount of your bid directly following the sale. This demonstrates, once again, not only the importance of knowing the local laws and customs regarding foreclosure sales, but also the importance of securing financing before you buy. Looking into financing and getting pre-approved for a loan should be the investor's first step before buying a foreclosure, because in most cases, you'll need access to that money very soon after a sale ends. If your financing is held up and you can't pay within a few days of the sale, you may lose rights to the property, and it could be rescheduled for sale.
The Redemption Period
It's extremely important for investors to be aware of the laws concerning the Period of Redemption following a foreclosure sale. Depending on the local law, the original homeowner may be allowed a Period of Redemption after a sale ends, during which they can provide the full amount of the unpaid loan and regain control and ownership of the property. While it is uncommon, some homeowners are able to secure a second mortgage or outside financing to take advantage of the Period of Redemption. In some states, this period may only be 4 weeks, but in others, in can be up to a year. This can have a big effect on the foreclosure buyer or investor. If you're interested in flipping houses for profit right away, you'll want to avoid states with long periods of redemption. During the Period of Redemption, you'll be responsible for making mortgage payments, paying property taxes, and any other costs associated with the ownership of the home. This can add up quickly, and can have a big effect on your bottom line. Too many costs can eat away at the savings you earned by buying a foreclosure in the first place, and that means it also eats away at your future profits on resale. Be sure to plan for whatever the Period of Redemption will require of you before you buy so that you aren't caught off guard.
The REO or Post-Foreclosure Sale
If a property does not sell for a minimum amount to satisfy the lender or court during a foreclosure auction, the property will be awarded directly to the lender following a sale. The lender then usually seeks to sell the property themselves in order to collect the amount lost. When this happens, the property becomes what is known as an REO home, or 'real estate owned' home. The lender sells REO properties through a silent bidding process. Interest buyers or foreclosure investors approach the bank and place an offer on the home. The bank will entertain offers until it finds one it is willing to accept. The winning bidder will then be awarded the property. This process can be less hectic than the foreclosure auction, and this appeal to many buyers. REOs offer the same deals as other foreclosure homes, so they can be just as good an opportunity to make money. REOS can also be fantastic deals, because lenders are so often willing to sell them for low prices. In most cases, they just want to get foreclosure properties off their hands, because they aren't generally in the business of selling real estate. You can often find really marketable and great homes for very low prices, simply because the lender doesn't have the time or resources committed to selling these properties for top dollar.
The Pros of Investing in Foreclosures
When it comes to real estate investing, there simply isn't any other opportunity out there as profitable as foreclosed homes investing. The savings you stand to gain on purchase translate directly to profits in the future, whether you rent your purchase now and allow it to grow in value or you turn around and flip it immediately. Buying for below market value means instant equity, and very few other properties can offer that advantage. Another great aspect of foreclosure investment is that whether you buy a home once or you start investing in foreclosed homes as a living, it allows you to earn money on real estate on your own terms. You get to become an expert on a corner of the market that offers huge value, and you do it all without having to hire a real estate agent or middle man. Specialist knowledge like this pays off again and again.
Tips to Keep in Mind
While foreclosures offer the best deals on the market, it's important to realize that finding and getting the best deals isn't always a walk in the park. Foreclosures will require careful research, a lot of time spent learning the foreclosure process, and a lot of time gauging the values of many different properties in order to find the best ones. Foreclosures require 'sweat equity'! You're going to have to put in some extra time and effort, but in the end the payoff is more than worth it, especially if you continue to invest. You'll only get better and more comfortable the more properties you look at and the more sales you attend. And be sure to keep deadlines and schedules in mind. Foreclosure can happen fast, and you need to be on top of the process! As long as you know the laws, the rules, and as much as you can about the properties you're looking to buy, you'll be in great shape.
Finding the Right Properties for Foreclosure Investment
For information on buying foreclosures, finding properties, and getting the best deals possible, explore more of what BankForeclosuresSale.com has to offer! We're here to help you become an expert investor so that you can save and earn money, not just to help you find listings! Explore our service and database today, and contact us to find out how to learn more.