Proceeds from foreclosures are more than buying a property at a foreclosure auction for pennies and then reselling that property for a windfall the next day. There are other possibilities. In this article, we will consider three ways you can benefit from foreclosures.
- Offer on Foreclosure Sale
- Buy an REO from the lender
- Negotiating a sale with distressed homeowners
However, before we delve deeper, let’s consider foreclosure.
The foreclosure process
Foreclosure is the result of default. When borrowers miss scheduled mortgage payments, for example, or when homeowners fail to pay property taxes or related obligations, such as homeowners’ association dues or special assessments, they transfer a mortgaged property without approval from the lender or make renovations that decrease the value of the property, because a contract is evaded, a foreclosure can occur.
Typically, a “Notice of Default” or “Complaint for Foreclosure” (depending on the state) is filed to start a foreclosure. This formally announces to the owners of the property, to other parties who may have legal claims against the owners or their property, and to the general public that legal action is being taken to force the sale of the property. This notice is given to the borrower at least one month before the foreclosure sale (usually 60 to 180 days) and is then published online or in newspapers as a public notice.
In response, the borrower can do a number of things to prevent or delay foreclosure.
- Settle the loan with the lender and perhaps reinstate or even refinance your mortgage defaults
- Present a legal defense against the lender and, in turn, drag the process to court and delay it for a year or more.
- File bankruptcy and automatically stay the foreclosure action. In some situations, a bankruptcy court can even vacate a foreclosure sale that has already occurred.
Fine, but without renegotiation of the loan, and when legal defenses or delay tactics are ignored or exhausted, the foreclosure date arrives and the property is auctioned off to the highest cash bidder. So that brings us to the first way you could benefit from foreclosures.
The Foreclosure Sale
Although foreclosure sales often lose money to lenders, lien holders, and homeowners because foreclosed property is sold for less than market value, foreclosure auctions are not as easy because they are not a transaction typical market value.
No information is given about the property other than its legal description. You must pay in cash. There is no “contingency” provision for financing. Property is being sold “as is” with no warranties or warranties as to title, condition, environmental hazards, or even that the property will deed free of occupants (you may inherit from owner, tenants, or squatters).
It’s true that smart bidders can make big profits on foreclosure sales, but there’s a caveat. Never blindly bid on a foreclosure sale – you need to do your homework.
CONVICT
Lenders who win the bid at a foreclosure auction classify and sell the property as REO (“real estate ownership”). So that brings us to the second way you can benefit from foreclosures: buy an REO directly from a mortgage lender.
Since lenders often want to get REOs off their books as quickly as possible, they may give buyers favorable terms such as low or no closing costs, below-market interest rates, and low down payments. Also, when the property needs work up, lenders are likely to accept offers at a discount price. Lenders don’t give away REOs, but you can get good deals.
You can find REOs by attending and following up after foreclosure sales, or by contacting a real estate agent who markets REO listings.
distressed owners
Lastly, you can benefit from foreclosures by buying properties from distressed homeowners.
Divorce, job loss, accidents, illness, business bankruptcy, and other setbacks cause people to miss mortgage payments and end up in foreclosure. You may be able to help them save your credit history and some equity, while at the same time securing a bargain for yourself.
But “get rich on foreclosure” gurus vastly exaggerate the chances of profiting for homeowners facing foreclosure. The reality is that when you talk to homeowners in foreclosure, you’re much more likely to discover a minefield of problems that require skill and creativity than a simple deal.
Homeowners in foreclosure, for example, often owe more than their property is worth, which means you have to convince the lender of a “short sale.” The lender must voluntarily reduce the balance owed on your loan so that you receive a fair return for agreeing to make up the missed payments and take over the loan. This is not easy.
Additionally, many of those facing foreclosure face claims from multiple creditors. You must be sure that none of those creditors have filed a lis pendens, or the IRS a tax lien. If so, you’ll need to clean it to get a clean title.
Also, before finalizing a pre-foreclosure purchase with a property owner, thoroughly inspect the property and accurately estimate the costs of repairs and renovations. You surely cannot profit from foreclosures as long as you bypass inspections and make only a visual estimate of expected costs.
Finally, keep in mind that someone facing foreclosure will not be an easy person to deal with. So don’t act like a foreclosure shark. Instead of a “Here’s my offer, take it or leave it” approach, develop a sensitive, empathetic, problem-solving approach. You are more likely to come to a win-win deal.
Here is your success.