Foreclosure Investing

What is foreclosure investing? To put it simply, foreclosure investing is actually buying homes that the lenders are going to seize because the homeowners have not met their mortgage obligations. The real estate investor purchases the homes from the lenders, who want to sell quickly and recover as much as they can of what is owed to them, and the investor buys the homes below what is actually owed on the mortgage.
There are several methods of purchasing foreclosed homes. Two of the most common methods of foreclosure investing are:
Short sales – A short sale is when the seller and the lender agree to accept a price less than what is actually owed on the mortgage. Most of the time, the mortgage lender will not ask the homeowner to pay the difference, and the homeowner will not have to go through the embarrassing process of an actual foreclosure. In turn, the lender doesn’t have to be burdened with getting rid of the property, and the investor gets the property at a discounted price. In order for homeowners to qualify for a short sale, they must be many payments behind on their mortgage, and they must have already received a notice of default. A homeowner’s credit will still be damaged when selling through a short sale, though it won’t be damaged as much as it would if they had gone through the complete foreclosure process. Short sale properties are sold “as is,” so the investor needs to be aware of any damages or repairs that have to be made to the properties, and take that into consideration before closing the deal with the lender. The investor also needs to be aware of the current market value of any homes they purchase through a short sale.

REO’s – When the homeowner fail to pay their mortgage payments and get several months behind, their lender with initiate the foreclosure process beginning with the default notice. If the homeowner still does not bring the mortgage payment up to date, the next step for the lender is the pre-foreclosure process and finally the actual foreclosure, at which time the lender becomes the owner of the property. An REO, or real estate owned property, is often sold quickly to an investor at a price which is below the market value of the home. These bank owned properties are expensive for a lender to hold on to because of the maintenance required, as well as the lender having to pay off any liens that the property might have against it. These properties can be an excellent opportunity for an investor, as long as the investor knows the market value of the home, as well as any repairs that might be required.

In spite of everything you hear on TV about being able to buy foreclosed homes quickly and easily, only knowledgeable investors have the real estate investing savvy to know which houses to buy and which to walk away from. Why? Because most of the homes are sold “as is” without any warranties. The houses could have hidden damages, and unless you are a knowledgeable investor and know what to look for, you could end up paying a ton of money in repairs. It is also important to know the market value of the real estate in which you are interested, or you could end up paying much more for the property than it is worth and could actually lose money on the deal.

There are four things an investor should know before buying properties:
• First, an investor should know the market value of any property in which they are interested. Using the MLS or comparable sales will give the investor the first tool he needs to invest in that property.
• Second, an investor should know the laws in his particular state regarding what he can or can’t do with homeowners who are in default on their mortgage loans. Some states have mortgages, and some state use trust deeds. Each has different implications and timeframes.
• Third, money is important, but it shouldn’t keep you from buying properties. If you don’t have the money to buy a property, there are other investors out there who would be happy to invest in properties with you to get a share of the deal.
• Fourth, knowledge is critical. Find out whether there are any unpaid property taxes, federal tax liens, wrong property information, other parties involved, or if the land is leased and not owned before you invest in a foreclosure. Not having knowledge of these things can make your deal go south in a hurry.

Take the time to learn these things. A real estate investor should educate himself on real estate investing and learn the things he should know, especially in foreclosure investing, before purchasing any properties.