"In the past few months I have heard great things about what foreclosures can offer, but I've heard nightmares before too. Are foreclosures worth all the trouble? How do I buy a foreclosure?"
- Alice, Sunnyvale
Dear Alice,
Foreclosures have quite the reputation and you have all the right to be a bit wary to delve into them.
Foreclosures are properties reclaimed by lenders and banks after the borrower defaults on his or her loan payments. Before the subprime crash the foreclosure process could take as little as three to four months for a foreclosure to begin and end. Now with the influx of foreclosures, lenders have become more hesitant in reclaiming properties and instead are willing to work with borrowers to negotiate some way to keep the borrowers on track with their monthly payments. Unfortunately this is not always a solution that works out. Foreclosures still occur but now it takes more time -- an estimated six to eight months.
Foreclosures do offer some wonderful opportunities to you, home seekers, and real estate investors alike. What once was a way of buying property for a select few hardcore investors, foreclosures have become more accessible and more public in recent years. There have been numerous books written precisely on the foreclosure topic in order to guide beginners through the process -- if you are seriously considering buying a foreclosure it may not be such a bad idea to read a book or two.
Foreclosure buying basic. There are three ways to buy a foreclosure.
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Directly from a distressed homeowner before the property goes into foreclosure, also known as pre-foreclosure.
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From the bank that has reclaimed the property, also known as real-estate owned properties or REOs.
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At a public auction.
Each method of buying a foreclosure has different rules and different pitfalls to look out for -- but as a warning, the last thing you want to think when entering the land of foreclosures is to think it's an easy task to find a gem and sell it for a huge profit. The fact of the matter is that buying foreclosures is the riskiest method of buying real estate. Oftentimes you will not be able to see the interior of the property, you will not be able to predict any additional liens, and oftentimes you will have to deal with the eviction of the current owner. The eviction, a lengthy and expensive process, could take anywhere from a month to a year, depending on the state. In California, the owner has the right to stay in the property for up to a year before being required to move out -- cutting into your profits, if any.
Negotiating a deal with a distressed borrower during the pre-foreclosure stage and buying REOs are much safer options than looking into buy foreclosed properties, especially as public auctions. All in all foreclosures are definitely a viable option for buying real estate but is not a safe enough option for me to recommend. I wish you the best of luck in your endeavor Alice and I leave you with some tips about foreclosures and the process of buying them :
- Foreclosed houses often do not sell for far less than fair market value.
Obviously foreclosures offer buyers a chance to purchase distressed properties that, if lacking interest, will ultimately sell for less than market value. However, in reality there is enough interest to push the eventual selling price to close to the norm. Most foreclosed homes in the nation are being sold for 15-20% below fair market value but in markets where real estate prices appreciated through the roof, foreclosures are still only selling for an average of 5% under current values. Especially now that there has been a great increase in interest to buy foreclosures, the margin of bargain prices has become smaller and smaller throughout the years.
- Not everyone can make money in foreclosures.
Five, ten, even fifteen years ago when there was little interest in foreclosures, hardcore foreclosure buyers would be able to find some real gems, some real bargains. Then again at those times there were only three or five other people eyeing the same property at the same time. Now because foreclosures have become so popular with the general public, each property now has the interest of tens if not hundreds of people, making the act of finding a real bargain extremely difficult.
- General Tips for buying foreclosures, especially at auction:
Make sure to do your homework before you buy a foreclosure.
Research state law about foreclosure regulations, eviction policies, etc.
Bring the necessary funds to procure a foreclosure at auction (generally 10-20% of winning bid).
Work with a real estate professional and/or team that has had experience in foreclosures.
If possible, inspect the home before bidding on the property.
If possible, request and read through all inspection reports of the property.
In case you want to find some websites that offer foreclosure listings or resources, these companies are quite helpful:
