Are you ready to start making money? Foreclosures are being declared as real estate's newest profit opportunity. There are stacks of how-to books hitting the bookshelves daily and real estate experts holding seminars around the country offering investment advice on how to get rich quickly from homeowners and lenders desperate to unload properties. Just like other forms of investing, profitably buying and selling real estate takes research, knowledge, experience and time. Often, safe, trouble-free wealth-building opportunities turn out to be like most things that sound too good to be true. If it were so easy to make money, everybody would be getting rich off of foreclosures. And remember, every deal that comes with a huge profit potential has high risk associated with it.
Realty Trac (realtytrac.com), the leading online marketplace for foreclosure properties, released its June '08 U.S. Foreclosure Market Report. It showed foreclosure filings, including default notices, auction sale notices and bank repossessions, were reported on 252,363 U.S. properties during the month - a 3 percent decrease from the previous month, but still a 53 percent increase from June 2007. The report also showed one in every 501 U.S. households received a foreclosure filing during the month. In comparison, Kentucky ranked 39th in the nation, had a total of 731 foreclosure filings for the month, rated one in every 2,583 households receiving a foreclosure filing, and decreased to 2 percent from 9 percent in June 2007. Arizona, California, Nevada and Florida still dominate the market with the highest state foreclosure rates, according to the report.
If you are a novice and choosing to invest in the foreclosure market, there are some basic terms and guidelines you need to understand about the process that may save you money, time, stress and an undesirable property.
A foreclosure begins when an owner has stopped making payments and the lender has given the borrower a written Notice of Default that the payment must be brought up to date or the property will be sold off. This notice is a public document (many Web sites offer foreclosure lists). It usually averages two missed payments for a lender to issue the notice, but not always. If the owner does not respond or make the payments, the lender can apply to the court to bid to take back the title at a sheriff's sale. The lender will typically only bid to the extent of its security. Time periods vary from state to state.
Prior to the property going up for sale at auction, many investors take the opportunity to deal directly with the homeowner. This is known as a short sale. Frustrated homeowners are sometimes willing to give deep discounts to avoid a foreclosure on their record.
Short sales are attractive to investors because lenders often agree to take less than what is owed on the property; the idea is that you are saving the lender time and money by stopping the legal foreclosure process and taking it out of the lender's hands. Consequently, if the lender has many foreclosures on the books, they may allow the homeowner to sell the property for less than what is owed, but the investor must satisfy all the lenders. Multiple mortgages on the property may leave little if any profit margin.
More important is title research. A previous owner may come from out of the woodwork, present its valid claim before the court in the proceedings, and you lose everything you have put into the deal. Foreclosures can be particularly problematic because there are so many procedures and regulations that must be followed, many unfamiliar to the first-time investor.
At public auction, the court has seized the property from the homeowner and will sell it to the highest bidder. A trustee, or commissioner, typically handles this transaction; many are done weekly "on the courthouse steps." The investor can't assume just because the home is in foreclosure that it's a good deal. Preparation is essential. Researching the home through basic public records and a curbside appraisal is not sufficient information in order to make a well thought out decision before bidding and laying down thousands in non-refundable cash and taking legal ownership of the property.
Do a title search, find out who are all the lien holders, and if possible, try to find out the current homeowner's situation and inspect the property. Overlooking a lien that wasn't paid out by the foreclosure action could easily wipe out any potential profit you had hoped to earn. Also, foundation, roof and termite problems are costly items to repair. You may pay too much if you fail to factor in the costs associated with fixing up the property. Investors should be aware that they are buying the property in an "as is" condition, and the deal is final even if the home has problems.
If no one bids high enough to meet the lender's price at auction, the foreclosure completes and title transfers to the lender. REO (Real Estate Owned) means the property is owned by the lender. Banks then try to sell the REO properties on the open market, usually through a real estate agent or third party marketing company. The lender can always become another bidder, too. If they are the top bidder, they win. Some investors see REO homes as the best way to purchase property. Most lenders want to get the property off their books quickly, and investors can often get a much reduced price. However, sometimes there can be hidden fees, like unpaid taxes or penalties, to contend with that the lenders may not want to negotiate. This is especially true in areas where home values have depreciated.
So, if you walk into the investor market wanting to participate in real estate foreclosures without understanding the entire process, you could wind up in trouble. In today's market, be prepared to keep and maintain the property for a longer period of time. Real estate is all local, but the days of quickly flipping a foreclosure home have stalled. Don't let the bargain mentality take over. Do your homework, and invest wisely.
Jennifer Mossotti, CCIM, is a Realtor with Prudential de Movellan Real Estate and a former LFUCG councilmember.