Late night infomercials draw on the nearly irresistible allure of making fortunes on foreclosed properties. After all, who wouldn't be excited about buying up real estate for pennies on the dollar with none of their own money, working on your own schedule and becoming rich beyond your wildest dreams? We see it all the time; informercials, seminars, and how-to books promising to turn novice buyers into wealthy real estate investors through the magic of foreclosure.
Successful investors however will tell you that making money is this game requires a great deal of patience, a lot of research, and the knowledge, experience, and money that only time brings. That's because for every deal with a potentially huge upside, there's another with an identically sized downside. And in this game, there's no lack of competition... much of which has been doing it for a long time and no longer need financing to secure their deals.
If however, you're willing to put in the time to learn, and be patient enough to make smart deals, your first step should be to understand the process as much as possible.
Foreclosure is the process through which banks, lenders, and governmental agencies seize real property from property owners as a result of failing to make payments. Failure to make mortgage payments, or payments on a loan secured by real property is far and away the leading cause for foreclosure, but failure to pay taxes, HOA dues, or even carry proper insurance can also be cause. Here's how foreclosures work:
Typically, foreclosures are quite literally purchased on the steps of the county courthouse at auction. Auctions are usually held on a weekday morning, and bidders must come to the auction fully informed about the properties they want to buy. They also must come with cash or its equivalent as credit cards, checks, and financing are not accepted. In most cases, they'll need to be prepared to make a sizable deposit or pay the entire sum right on the spot.
Each state has their own laws regarding real property auctions, but as a general rule, property buyers are unable to perform interior inspections prior to auction. This is particularly problematic for first time investors who are now expected to purchase properties knowing nothing more about them than what is available through public records and a drive-by inspection. The home could be overrun with termites, have serious mold problems, or even be gutted to the frame and it's new owner wouldn't know until it was too late.
Also of concern is that auction homes can never be guaranteed to come with a clear title. Even with advanced notice of the auction, buyers have some time to research public records and the history of available homes, but many homeowners settle their lender disputes at the last minute, thereby halting the sale. So any time, effort or expense a buyer may have invested for research is lost. Under these circumstances, obtaining title insurance is not an option. But choosing to forgo title insurance could wind up being far more costly.
In addition to bank and lender foreclosures, government agencies such as the Department of Housing and Urban Development or the Veterans Administration place their properties up for auction. These types of government auctions are typically performed online, and investors are allowed to bid only after the initial bid period for owner occupants has expired without an acceptable offer. Buyers are allowed to tour homes in advance, perform inspections, and even get title insurance.
The availability of these types of homes will vary wildly by market, and is usually quite limited in comparison to courthouse auctions. More often than not, and especially in a hot sellers market, buyers can expect to pay near market value for these homes, with little, if any discounted pricing. HUD and VA foreclosure bidding but require the assistance of a licensed real estate agent.
Because of the large number of homebuyers and the relative shortage available homes for purchase, investors are finding new ways to make deals. One such way is by finding property owners who are delinquent on their payments and contacting them directly to try to negotiate a deal. Essentially, investors will buy troubled homeowners out of their debt by agreeing to purchase their home quickly, without broker involvement, usually at a price well below market value, thereby protecting the homeowner from foreclosure. These types of deals are far more difficult to make in a sellers market where the homeowner could simply sell their home through normal channels.
"Buying Equity" is not without its problems either. All of the title problems inherent with auction properties apply here as well, except that without formal foreclosure proceedings, all subordinate liens like home equity loans and workmans liens remain in place.
If a foreclosure property goes to auction and fails to sell, ownership reverts to the lien holder, in most cases the lender. At this point, most lenders contract with asset management companies to liquidate these properties through partnerships with local real estate agents. Those properties most commonly appear in local MLS's with a foreclosure flag, and naturally they attract the most competition from an investors standpoint.
During a buyers market, investors typically can snatch up REO properties with relative ease, and usually at significant pricing discounts. During a sellers market however, there is a lot more competition, and owner occupants often drive prices high enough to make them unsuitable as investment properties. When this happens, many investors turn to "aged" properties; homes that have been on the market much longer than average, usually because of condition.
Send us a message with the contact box at right, and we'll get you set up!
In a nutshell, wholesaling is the contracting of a property with the condition that it can be assigned to another buyer. Investors who wholesale properties scour the MLS for aged listings, and make extreme lowball offers. It's a numbers game for them; they might make 75-100 offers in a month, expecting to only win with 5 - 10 of them. They get the properties under contract, put up the earnest money deposit, then market the home to their list of investors who will then pay a fee to have the contract assigned to them, which then closes as usual.
Wholesaling is very time consuming, but can be lucrative in the right market, assuming you have a cash reserve to make cash offers. As with REO's, wholesaling during a sellers market is much more difficult.