By Michael Perl, from the Bottom Line Newsletter
Rising interest rates and the proliferation of high-risk variable-rate mortgages have pushed foreclosures to record levels.
Opportunity: Agile investors can buy foreclosed homes for as little as 80% or even 70% of fair market value (the price the home might normally sell for) from home owners seeking to avoid a public auction... from lenders wanting to get foreclosed properties off their books fast... or at a public auction.
A careful study of the foreclosure process can lead to great bargains, whether you are seeking a home to live in... to rent out... or to sell quickly for a profit.
Danger: Foreclosed homes are not always a good deal. A buyer who moves too fast can end up with a money pit.
Among the questions to consider...
*How much will it cost to fix up and maintain the home, including insurance and taxes?
*How long will it take to find a new buyer if you view the home as a short-term investment?
If you still want to buy a foreclosure property once you have considered the challenges, here's how to get the best deal...
UNDERSTAND THE FORECLOSURE PROCESS
It is important to know the steps leading to foreclosure...
The home owner “defaults” on mortgage payments, typically after falling 90 days behind.
The lender serves the home owner with a summons, and the property enters “pre-foreclosure.” Attorneys for the lender detail the debt owed in court.
A “final judgment” hearing is held, and an auction date is set.
The owner can sell the property at any point before it is sold at auction. Or the lender could take ownership, either through an agreement with the owner during pre-foreclosure or by winning the auction. The property is then known as an REO property (real estate owned by the lender).
Consult with your bank or a mortgage broker to determine how much of a loan you could comfortably handle, and look for properties in that price range. If the home is an investment that you intend to sell, the most profitable neighborhoods often are up-and-coming areas, where about 80% of residents are renters.
Check foreclosure filings. Ask for the most recent foreclosure filings at the county courthouse. In many counties, there will be dozens or even hundreds of listings every week or two. You also could use a foreclosure tracking service, such as First American CoreLogic (800-345-7334. Typical cost: $100 to $150 per month per county.
After spotting a potential bargain, check recent sale prices of homes in the same neighborhood, making sure that the houses are comparable based on such factors as size and condition. The free Website is a useful resource.
BEST TIME IS BEFORE AUCTION
Some of the best foreclosure bargains are found before the auction removes the sales decision from the home owner. Contact home owners of prospective properties as soon as a notice of foreclosure appears. You might send a letter to introduce yourself and express interest, but don't expect the average home owner in foreclosure to respond to your letter until about a month before a public auction would take place. By then, the owner may welcome an offer to buy the property quickly for a price that allows him/her to pay off the mortgage and perhaps end up with a little extra cash. That might mean 75% of the property’s fair market value.
If the home owner doesn't agree to sell until less than a month remains before the auction, you might not have time to arrange a mortgage. In that case, both you and the home owner should file a motion with the court for an emergency hearing (possible court fee: about $50) and a delay of the auction so you can secure financing.
Even if you can't work out a deal with the home owner, approaching him prior to the auction might give you an opportunity to inspect the house -- which may no longer be possible once a lender takes possession.
If you decide to take this route...Be ultrasensitive to the home owner's situation. Don’t use the word “foreclosure.” Say you're interested in buying if the owner “decides” to sell.
Ask if the owner has looked into “forbearance” from the mortgage lender. Home owners sometimes can bring their loans up-to-date by making a relatively small forbearance payment to the lender. You will lose out on the house if the home owner does get forbearance, but your helpful suggestion should build some goodwill and raise your chances of a purchase if forbearance is not granted, as is usually the case.
Many home owners in foreclosure these days owe lenders more money on properties than the properties would be worth if sold. To get a great deal, you could arrange something called a “short sale” -- the bank agrees to take less for the property than is owed. In the current real estate market, banks often are willing to accept as little as 60% to 75% of the amount owed, particularly in states such as Florida, where home values have fallen substantially.
AUCTIONS ARE TRICKY
It is not easy for a buyer to get a great deal at a foreclosure auction. There are experienced real estate investors at most auctions, ready to snap up any bargains. At most auctions, the lender will bid the amount owed on the property to keep the sale price from going too low. If no one bids more, the lender -- which does not yet own the property -- will end up buying it at auction.
Auction winners generally must pay with cash or by certified check before the close of the business day -- leaving no time to arrange financing. There may not be much time before an auction to research the title and arrange a professional inspection, and auctioned homes are sold “as is,” so once you buy the property, you get it in whatever condition it is in. It's a good idea to attend a few auctions, just as an observer. I would not recommend auction bidding for the novice foreclosure buyer.
BUYING FROM THE BANK
If the bank ends up owning the home, it will try to sell it as quickly as possible, especially in today's depressed real estate market. A bank won’t give you a great deal, but it might give you a very good deal, perhaps as little as 80% to 85% of fair market value. The bank typically will make sure the title is clear of liens (which use the property as collateral) and other barriers to transfer and do some basic repairs to make the property more appealing to prospective buyers.
To find REO properties in your area, call real estate agencies and ask if any of their agents specialize in REO homes. The bank will pay the agent's commission if you eventually buy a property through him. Or call area banks and say you're interested in seeing their lists of foreclosed properties.
Liens. The buyer of a foreclosed home may not know that it carries one or more liens. Some liens, such as those filed by tradespeople, are wiped away by the foreclosure process, but when it's a government agency, such as the IRS, or a home owner’s association that is owed money, the debt typically passes to the new owner. A title search performed after the foreclosure or an attorney with experience in this field can tell you what liens remain.
Cost: A title company might charge $100 to $150 to search a title for liens... a real estate attorney costs a bit more.
Condition. The property you buy might be in worse shape than you realized. Example: The previous occupants trashed the inside of the home to get back at the bank for the eviction. Try to inspect before you buy.
Bottom Line/Personal interviewed Michael Perl, owner of Equity Res-Q, West Palm Beach, Florida. The company has bought and sold more than 400 foreclosures and pre-foreclosures over a six-year period.