The safest ways to buy foreclosures
Low interest rates and fast appreciation lure hunters to homes facing foreclosure. You may pay less than market value, but not too much less -- and the reasearch can be daunting.
With interest rates at record lows and the stock market looking too
perilous for small investors, many people are putting money in an asset
they understand -- real estate.
One of the best places to invest is in foreclosures and bargain residential real estate.
The
current market conditions make it a perfect time for a small investor
to purchase one or more foreclosure properties for their private
residence, rental or resale. During economic downturns, more upscale
homes go into foreclosure, so the notion that foreclosure homes are
only available in crime-ridden areas is inaccurate. Beachfront and
homes in affluent areas are part of the mix of foreclosed properties
available.
But anyone considering buying a foreclosed home should forget about paying pennies on the dollar.
"You
can buy foreclosures for as cheap as 30% or 40% below market, but most
foreclosures sell for 5% below market," said John T. Reed, editor of
Real Estate Investor's Monthly, a newsletter based in Alamo, Calif.
Yet
the savings may be twofold if the property is purchased from the lender
who holds the mortgage that's in default. That lender may be willing to
waive some closing costs, maybe even offer a break on the interest rate
or the down payment.
Investment of time
A novice must learn to navigate the
foreclosure process. But Todd Beitler, owner of the Real Estate Library
in Boca Raton, Fla., says the time and effort can translate to savings.
"If somebody spends 10 hours a week for five weeks to do research, it's
worth it."
For most consumers, however, the foreclosure process can
prove daunting, Reed says. Good buys are available, but they require
research, preparation, patience and persistence.
The foreclosure
process starts when a property owner falls behind on mortgage payments.
Many owners of homes that go into foreclosure have been struggling
financially for almost a year before they give up, which usually means
that the house has not received needed repairs or general maintenance
for a while.
This may include everything from missing light bulbs
to roof leaks. Tree limbs in front yards, broken appliances and
windows, and dirty carpets, floors and walls are found in even
very-affluent area foreclosures.
This can be a boon -- or
boondoggle -- for a buyer. Houses in poor condition might fetch bargain
prices, but repairs can boost the cost again. The first rule of real
estate, "location, location, location," applies in these situations. If
there is trash in every room of the house, but the foreclosure is in a
good area with high property resale values, hold your nose, walk
through the entire house and consider making a low offer.
Reading assignments
When a lender decides to foreclose on a property, a notice of default or a
lis pendens
(Latin for "lawsuit pending") is filed, depending on the state. This
document is a public record, and for buyers, it's the first step in
locating a property in foreclosure. A buyer looking for foreclosures
also can buy magazines and newsletters that list properties in default.
Once
a home has been located, search public records. Look for liens on the
property, since they can drive up the purchase price. Liens typically
are placed on a house for unpaid property taxes. Also check assessed
values and sale prices of neighboring properties.
Research local
state foreclosure laws, since they differ. Some states -- such as
Florida, New York, Ohio and Pennsylvania -- require the lender to sue
the borrower and get a court order for the sale of the property, a
process known as judicial foreclosure. Other states -- including
California and Texas -- follow the non-judicial foreclosure process,
which doesn't require a lawsuit.
For novice investors, buying
from the lender is the safest way to buy. Most foreclosures are taken
back by the bank during auction, Beitler says. While well-located homes
in good shape generally don't sell for deep discounts, rundown
properties can be sold more cheaply.
Often, the banks hire a real
estate agent and sell foreclosed homes in the traditional manner, Reed
says. But sometimes buyers can succeed by pestering bank loan officers
with low offers.
Buyers might try low-balling the lender's REO
(for "real estate owned") officer shortly before the nonperforming
assets have to be reported to supervisors, Beitler says.
The safest deals
Bank-owned
properties offer the safest deal for inexperienced foreclosure buyers,
Beitler says: "There's no risk. There are no taxes, no liens, no
tenants to evict."
A lender that's eager to sell might be willing to
offer attractive terms, says George Tribble, broker of record at
Jetstream Mortgage in Oakland, Calif., and past president of the
California Association of Mortgage Brokers.
The lender might
offer to finance the property at a below-market rate or with a
lower-than-usual down payment. Because the bank already has done an
appraisal, the buyer might not have to pay an appraisal fee, Tribble
says. And lender deals typically include title insurance, which removes
much of the risk that accompanies buying homes earlier in the
foreclosure process.
Hidden foreclosures
Not all foreclosures are previously owned
homes. Some foreclosed homes are new. These homes are not as easy to
identify and rarely appear on national lists. In some areas, the slow
economy has left many builders of new midscale and upscale homes at the
end of their construction-loan periods without finding buyers for their
homes.
In these cases, the banks that issued the construction loans
take possession of the homes and attempt to sell them, using
real-estate agents to handle the deals.
These, too, are
foreclosures. They are "hidden" foreclosures because no one associated
with the sale of these properties will refer to them as foreclosed
homes.
More daring investors can find other points in the process
to buy homes, like just before foreclosure. The buyer finds a homeowner
about to go into default. The homeowner doesn't want to lose all of the
equity in the property, so accepts a portion of the difference between
the equity and the home's market value.
Pre-foreclosure buys
offer bargains but demand persistence. That's because creditors are
often hounding owners at this stage. "Trying to get through to the
homeowner is virtually impossible," Beitler says.
If the
homeowner is contacted, the buyer could be in for a surprise, Reed
adds. Homeowners in default might not have phones or electricity, and
they might have a variety of personal and legal problems. What's more,
they probably need somewhere to live before they can move out of the
property the buyer wants.
This is a high-risk, high-reward proposition, and it's not for first-time foreclosure buyers, Beitler says.
The auctioneer
Most
auctions take place at the county courthouse steps, and they pose
disadvantages: Buyers might not be able to inspect the property, and
they'll have to put up the entire purchase price the same day.
The
U.S. Department of Housing and Urban Development also runs auctions to
unload homes it has acquired through defaults on federally backed
mortgages. There aren't a lot of steals in this process, according to a
study by Tim Allen, a real estate professor at Florida Atlantic
University.
Allen tracked sales at a HUD auction in Florida in
1998; he found that buyers paid prices very close to assessed value.
Beitler agrees that there's a "frenzy" at HUD auctions that can push
prices to unreasonable levels.
The cost of getting started
With
good credit, many banks will loan the full price of the foreclosure or
more. If the home is to be used as a rental, many banks will require
only a 10% down payment.
Individuals with a large amount of equity in
another home may get a line of credit from their bank to purchase a
foreclosure. When they convert the line of credit to a mortgage, no
down payment may be required.
Foreclosure homes bought in good
areas at below market values that appreciate annually can be a sound
investment strategy for many investors. The appreciation of the homes
is tax-exempt until the home is sold. If the home is a primary
residence, the appreciation may be tax-free.
Homes used as rental
properties give most investors valuable tax deductions while the house
increases in value and builds equity. With many stock portfolios down,
foreclosure real estate investing may be the alternative many people
are seeking.
From CNN Money
Ask Extra Realty, Inc for its portfolio of foreclosed homes for sale. Its a different story! Homes can be bought a a very resonable price compared to market value.