Foreclosed & Foreclosure Homes
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Foreclosed & Foreclosure Homes


To the novice real estate investor, the word foreclosure conjures up images of bargain-basement buys. If you are a novice, or have heard stories of such windfalls from a friend or associate and are looking to capitalize on this bonanza, the best thing you can do for yourself as a real estate investor is block visions of paying ten cents on the dollar for distressed properties out of your mind. In times of strong real estate markets, purchasing a foreclosed property for 50 to 80 percent of its fair market value is not an unrealistic expectation. In this buyer’s market, even better deals can be realized!

There are two basic types of real estate foreclosures — judicial and non-judicial. A judicial real estate foreclosure requires a lawsuit to be filed in court, while a non-judicial foreclosure circumvents this process. Although some states allow both procedures, one type of real estate foreclosure usually predominates in each state.

Buying foreclosed homes can be a highly profitable investment option, but it does require work. People who choose this investment strategy will most often buy a foreclosed home, complete any necessary repairs, and sell it quickly.


THREE WAYS TO PURCHASE HOME FORECLOSURES


BUYING FORECLOSED HOMES
AT REAL ESTATE AUCTION

When you hear of a house selling on the courthouse steps, this is literally what happens. Lenders and buyers will congregate outside the courthouse, bidding on properties. This bidding is very intense and the process moves very quickly. To avoid potentially devastating results, you must conduct as much research as possible prior to a real estate auction.

In order to participate in home foreclosure auction buying, you first need to do the following:
  • Prior to the sale, thoroughly research any properties you are interested in purchasing;
  • Keep your expectations realistic;
  • Evaluate your potential profit versus loss should you win the bid;
  • Decide what your highest bid will be and stick to it.

Pros of Home Foreclosure Auction Purchase

  • Savings against market value can be as high as 45 percent;
  • Outstanding return on investment.

Cons of Home Foreclosure Auction Purchase

  • Real estate auctions can be postponed;
  • Seldom is there an opportunity to inspect a house prior to sale;
  • Title searches can be costly;
  • Large cash layout is required.

PRE-FORECLOSURE

Pre-foreclosure is a deal entered into by the homeowner, buyer and, sometimes, a lender. Pre-foreclosure can be a very successful way for both parties to make a quick transaction. You begin the process by seeking home loans that are in default. Under pre-foreclosure you will be able to inspect the home and determine what the seller’s needs are. Next, you must determine the actual value of the home, what repairs are necessary, how much these repairs will cost, and how much profit you can reasonably expect on resale of the property. Since real estate prices can change rapidly, to stay ahead of the market you will need to make immediate repairs and turn a quick sale after you purchase the home.

Pros of Pre-Foreclosure

  • Discounts from market value can be as high as 40 percent;
  • Very small down payments are required;
  • Time is available to conduct research on specific properties;
  • Sales agreements can be customized and flexible.

Cons of Pre-Foreclosure

  • Homeowners can sometimes be hard to reach;
  • Competition for the purchase is high;
  • You may need to negotiate with other lien holders (second mortgages, government liens, etc.).

REAL ESTATE OWNED   (REO)

Of the three methods of buying foreclosed homes, Real Estate Owned, or REO, is probably the easiest. In this situation, a lender (bank or other mortgage holder) will take back a property in order to regain possession and will then accept a financial loss to rid themselves of the property and clear their books. Since the lender has no desire to hold the property, they are considered to be motivated sellers.

Pros of REO

  • In the majority of cases, the lender is the senior lien holder, which removes all other liens from contention;
  • There is always a clean title;
  • Ordinarily, any property tax in arrears has been paid by the lender.

Cons of REO

  • Savings are generally much lower — on the order of 10 to 20 percent;
  • The lender rarely wants to perform any repair, preferring to sell the property as is.

Real estate investment courses are available that enable you to profit from home foreclosures by combining the methods used by professional real estate investors with key insider information, thereby revealing exactly how to buy real estate foreclosures safely and realize substantial profits from distressed property situations. See our Real Estate Investment Courses page for available courses.


Authored by Kenneth L. Anderson and John Derevjanik.  Original article published 4 August 2003, updated 30 September 2008.


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