The media is full of foreclosure news, and with good reason - foreclosures are up almost 35 per cent this year, with twice as many properties in some areas. With this expanded inventory buyers have more properties to choose from.
When a homeowner defaults on their loan, the house will go into foreclosure. Many investors see this as a chance to get a great deal on a property, but don't let your dreams run away with you - the most attractive houses often sell for a price close to their market value. There are deals to be had (you may be able to shave at least 10 to 20 percent off the market value), but you have to follow certain steps in order to secure them. A foreclosure financing specialist can help you through the process.
As an investor or a potential homeowner you can buy a home in any of the three stages of foreclosure, though they all carry different risks and savings potential. The best buys may be found at preforeclosure, after the property has been listed in public record but before it goes to auction. This is a private deal done with the homeowner, who is obviously in a stressful situation, and in some cases isn't even aware that the property has been publicly listed. If you are willing to approach the buyer you may be able to get the home for less than market value (but more than the amount owed on the bank loan). This isn't an easy process and is often more than the average home buyer is comfortable with.
The next stage is the auction, which is probably the riskiest stage and has a major financing obstacle: auctions require you pay your deposit in cash or by cashier's check, and often the balance is due within days, even hours, of the purchase. Add this to the idea of buying a property with no inspection, often sight unseen, without being eligible for title insurance. You could be on the line for unpaid bills, liens, and pricey repairs. Furthermore, if the defaulting owners refuse to move out you'll may have to oversee their eviction. Still there are bargains to be found here. If you can come up with the cash, be sure to do your homework prior to the sale - research the house in advance and know your state laws to minimize surprises.
When an auction is unsuccessful, the property reverts back to the financial institution that holds the mortgage. This is the final stage of foreclosure: the property is now REO, real estate owned. Buying at this stage means you can have an inspection done and qualify for title insurance. The bank has most likely dealt with any evictions and tax liens, and may have even done some repairs. This is a much safer deal, buy you might not get the savings you were hoping for. Small banks may offer better opportunities here - these houses are non-performing assets on the bank's books. Remember, the bank has to pay for the upkeep of the property (or let it go and risk losing more money). So while they not be moved to action while holding just a couple of properties, as inventory piles up they should be more open to selling rather than holding.
Remember, you don't want to become an example of history repeating itself: make sure you can afford your payments. Resist the urge to buy more than you can comfortably afford. Making a back up plan (and a rainy day fund) for unforeseen circumstances (such as an illness, injury, etc) will allow you some breathing room in a crunch. If you do find yourself in financial trouble, talk to a HUD approved housing counselor for free advice before you're in too deep.
