It’s a sad part of the current economic downturn: More and more people are undergoing the heartache and headache of having their house repossessed. Still, despite how sad this is for the person undergoing foreclosure, someone’s going to get that property. And if you play your cards right, you can become a success in the foreclosure market–buying the property at a low cost and selling it in the future for substantially more.
If you’d like to try you’re hand at investing in foreclosed properties, and you’re serious about it, you need to make sure you know what you are doing. Follow these 10 steps below, and you will be well on your way to avoiding the pitfalls that can quickly turn a foreclosure opportunity into a cash-hemorrhaging nightmare.
Step 1: Understand what a foreclosure really is
The important thing to understand about foreclosure is that it is a process – and it can end several different ways. The process is triggered when a borrower defaults on a loan payment, and the bank files a public default notice (these notices are public record, and they can be the key to getting an early jump on a property).
But just because a default notice is filed does not mean you can step in and buy a property. The foreclosure process can play out four different ways.
The borrower can pay the bank during the early grace period known as “pre-foreclosure” and become current on the loan again.
The borrower could sell the property to another party during the pre-foreclosure.
The bank can take control of the property, usually for the purpose of selling it.
The property could be sold at auction.
Step 2: Learn where to find foreclosures
You don’t need to look too far to find foreclosures these days. They are printed in local newspapers, and most papers are recently reporting plenty of them.
You also have the option of working with a real estate agent (make sure he or she has experience in the foreclosure market) or subscribing to a listing service like RealtyTrac. Of course, you can not beat going right to the source – give some local banks a call and ask if they have any foreclosures in your market.
Step 3: Decide what type of foreclosure best suits you
In Step 1, you saw that there are several ways that a foreclosure can end. You have an opportunity to buy the property in just about every scenario, except the one where the borrower becomes current on the loan again. But you need to decide what you are comfortable with. Some investors are comfortable reaching out to distressed homeowners during pre-foreclosure, while others would rather wait for the property to be sold by a bank or at an auction.
Step 4: Beware of liens and other debts
It is fairly common for a foreclosed property to have liens on it. Those liens could come from back taxes, loans taken out against the property, or even from unpaid repair bills. Even where a lien is not present, the previous owner may owe money to a utility or sanitation company, and these debts can be rolled into property taxes that must be paid by you.
Liens and debts can drive up the purchase price of a property – the creditors, after all, need to be paid – and can make a purchase opportunity suddenly unattractive.
Step 5: Get to know your state’s foreclosure laws
Foreclosure laws differ widely from one state to the next. For example, some states like New York and Florida require a bank to actually sue a property owner/borrower before a foreclosed property can go on the market. Other states, like California and Texas, do not require it.
But it gets more complicated than that. There are states that will actually require you to evict the current property owners. Other states may let the current owners reclaim possession of their property, even after you have purchased it at auction.
It makes sense to work with an attorney experienced with foreclosures, at least until you feel comfortable with all the different laws of your state.
Step 6: Understand the real costs of any property
Buying a $200,000 house for $50,000 may seem like a great deal – but it can become a terrible deal very quickly. Many foreclosed homes need extensive renovations and repairs – some of these properties have been downright neglected. You will not want to buy a foreclosed property without having a sense of how much repairs will cost, and how long they will take. Keep in mind, while those repairs are being made, you are still going to be making loan and tax payments on the property. Your margins can vanish fast.
The good news is that no-one expects you to buy a property sight-unseen. Inspect the property before you buy, and bring as many professionals as you need. Make sure an experienced and licensed home inspector performs as thorough of an inspection as possible. If he believes the property will need significant repairs, get estimates for how long they will take and how much they will cost.
Step 7: Get your financial ducks in a row
You might be serious about buying a foreclosed property – but if you don’t have your financing approved, you could easily lose the deal to another party. Whether you are buying the property with cash, a home equity loan, or just a straight mortgage, be prepared to show that you have the money in place.
Some states will even require you to forfeit your deposit if you can not come up with the full amount for a foreclosed property within a week or a month after you have agreed to buy it.
Step 8: Research the neighborhood carefully
A neighborhood with a foreclosed home may look great when you drive through it at noon. But you might not learn anything about the loud train that rumbles through every morning at 6 a.m. – or about a crime problem that could deter buyers. Talk to neighbors, research local crime statistics and look for anything that might scare off a buyer, like a nearby landfill. A little research can keep you from making a bad deal.
Step 9: Don’t let zoning trip you up
A foreclosed property may come with certain zoning limitations or restrictions, and you need to know about them in advance. Zoning restrictions may keep you from performing some of the renovations – like building an addition or adding a septic system – that you think the property needs to become saleable and or livable. Understand how the property is zoned, and chat with a local city building inspector about any ideas you might have for the property.
Step 10: Read anything you sign very carefully
Always remember what a foreclosure really is – it is an attempt by a bank to recover money. Contracts for foreclosed properties are written by the banks, to their advantage. If the deal falls through, you can be sure it will not be the bank that suffers. Make sure you fully understand anything you sign, and retain a good attorney for some extra help.
These 10 steps should not intimidate you from investing in the foreclosure market. There are plenty of great deals to be had, and there is some serious money to be made. Rather, the goal here is to ensure you enter any foreclosure transaction with plenty of caution.
When a foreclosure deal goes bad, usually it is because of incomplete research. In other words, most mistakes are completely avoidable. But follow these 10 steps and you will have a good roadmap for making smart – and ultimately, profitable – investment decisions.
Latest Videos of The 10 Steps to Breaking in the Foreclosure Market:
home-inspection
