The Must Read Property Guide to Buy Foreclosed Homes and Make Money…Serious Money

This is the 2nd installment from my buddy Eric Moorman, who I consider to be a real estate investing genius. Be sure to check out his first post “How I make $250,000 a year investing in real estate“, in case you missed it.Also, if you want to learn more about real estate investing, be sure to subscribe to our free newsletter below.
How to Buy a Foreclosed Home

Buying a Foreclosure

I t is no surprise; there are a LOT of Foreclosures in the Real Estate market right now.

It is also no surprise these houses can be bought at steep discounts.

In fact, Foreclosures, in my opinion, are the hottest thing going in Real Estate investing.

The market is full of them, and the banks are holding thousands back, so as not to flood the market even more. As most of you know, banks are not in the business of Real Estate. They are in the business of loaning money. When a bank gets a Foreclosure, it is a toxic asset on the banks books. Now, more than any other time in history, banks are dumping these toxic assets for pennies on the dollar.

Before you quit your day job and decide you are going to get rich buying and selling Foreclosures, know this:

The word Foreclosure means several different things and has several different stages. Depending on what stage of Foreclosure a house is in will depend on the amount of risk you will take on. Let’s look at the different stages of Foreclosure and the positives and negatives to buying in each stage. Before you read further, understand that each state handles Foreclosures differently. The timelines and examples I give below will not necessarily be the standard for where you live.

The Pre-Foreclosure

The first stage of the Foreclosure process is known as Pre-Foreclosure. This means the individual who owns the mortgage is behind on their payments. Depending on the bank, the payments could be between 3-12 months behind. Yes, some banks do not start the Pre-Foreclosure period for 12 months!

At this stage, the owner is still living in the house. Interest and penalties are accruing on their loan, but the only thing that is really happening is their credit score is going down (rapidly) and they are getting a lot of letters in the mail from the bank. The bank has not decided to go full blown foreclosure yet, as they are attempting to work something out with the home owner and save themselves the very high cost of the foreclosure process.

The positive to buying at this stage of the foreclosure process is you obviously have a motivated seller. Depending on their situation, they may be willing to sell their house very cheap, in order to avoid foreclosure and save what they can of their credit.

The negative is they may not have a lot of equity in the house, and therefore their motivation may not be a factor. It does not do an investor any good to buy a house when it is worth what the seller owes on it (or as is the case with many properties in this market, the house is not worth what the seller owes). You look for motivation but you make purchases on equity.

Without getting too deep into investment strategy, know that in some cases it may be worthwhile to make up delinquent payments and purchase the house with creative financing. We will not discuss that in this post, but know it is a viable option and one we will discuss in future posts.

The Short Sale

The next stage in the Foreclosure process is when you can buy the house on a Short Sale. A Short Sale is when the bank is willing to take less for the house than what is currently owed on the property. There is no set time period for when a house goes from Pre-Foreclosure status to the bank being willing to do a short sale on it.

When the bank has decided it will take a Short Sale, it has basically come to the conclusion the current home owner is not going to be able to make up their back payments and continue with the mortgage. The only reason a bank will accept a short sale is to forego the long process and high cost to Foreclose on the delinquent mortgage.

There are a few positives and a LOT of negatives to buying in this stage of Foreclosure. Some investors love to buy at this stage, but as you will see it is a lot of work, takes an extremely large amount of time and rarely produces a deal.

The positives to buying a house as a short sale is this, you can get a very steep discount…. That is about it! The negatives are the following: The current homeowner has to apply for a Short Sale, sending in a lot of financial information basically convincing the bank they are no longer in a position to pay their mortgage. This takes forever!

Once the house has been approved for a Short Sale, the current owner must agree to your price and then send it to the bank for approval. This process also takes forever (several months). A short sale can easily take 6-9 months to go through, and I have seen cases in which it took over one year.

Here is the scary reality of short sales, it may be to the very end and you think the deal you have been working on for months is about to go through and BOOM, the bank rejects it. There is money to be made in Short Sales, but it is definitely not a method to base your investment business around.

Going to the Auction

The third stage of the Foreclosure process is when the property is being auctioned at the courthouse steps. This is the most dangerous time to buy, and only seasoned investors should attempt to buy at the courthouse auction! At this stage, the bank has gone through the legalities of the Foreclosure process and the house is going up for auction. The bank will send a representative to bid at least what is owed on the property, and anyone who is willing to pay above that can buy the house.

The positives of this are, if there is a ton of equity in the house, you may have a shot at getting a good deal. Here are the negatives. The individual often times may still be in the house at this stage! Even if you buy it, they may trash it as they are leaving. Hence, you have no way to calculate what your repairs will be on the house.

Also, at this stage, the bank does NOT necessarily remove all liens from the property. You may buy the house and discover there is a mechanics lien, a lien from the city or various other liens that YOU have now inherited.

Also, every state has a period of redemption for the previous home owner to catch up the mortgage and all of the fees, after the auction sale. Granted, this is VERY unlikely, but it is something to consider. Also, at the courthouse steps, the buyer is required to put a large sum of money down as a deposit, with a very small window to come up with the remaining balance.

If you are not a cash buyer, you will have a very hard time buying these properties. Once again, there is money to be made by purchasing homes at the courthouse auction but it is very dangerous, and there are several things you may discover once you purchase the property that completely change the financial outlook of the deal.

If the phrase “Buyer beware” was ever appropriate, it is when buying at the courthouse steps!

REO…Speedwagon? Not quite

The final stage of the Foreclosure process is my favorite. This is the point where the house becomes an “REO.” Once an auction on the courthouse steps takes place and no one bids more than the banks bid, the property goes back to the bank and becomes an REO or “Real Estate Owned” property.

At this point, the bank has been dealing with this toxic asset for quite a while, with no money coming in and only money going out! You must understand the banks costs, to understand why they are extremely motivated to sell these properties.

As previously stated, the bank has had this non-performing asset on their books for a long time. They have spent money on attorney’s fees, property preservation, insurance etc. Most big banks have thousands of these non-performing assets and they need them off the books badly.

The positives to buying at this stage are many. First, once the property is an REO, when the bank sells the property, they are required to deliver a clean title and remove all liens. Hence, you will not have any surprises once you have bought the house.

Also, no one will be living in the house at this point. The bank has seen that the previous owners have vacated the property, with no chance of redeeming their loan. The negatives to buying at this stage are, the previous owners often leave the house in poor condition. Depending on how you look at it, this may not be a negative at all. The worse condition a property is in, the better the discount. When you become good at estimating repairs, this is simply a factor that will go into your offer.

This may surprise you, but as investors, the house matters very little when it comes to getting a check.

I am not saying the condition of the property plays no role when deciding to pursue an investment, but the condition of the house is not the main factor. My point is, do not stray away from houses that smell like cat pee or are in bad shape, there is money there! Many of the current houses on the market will not be financeable through a bank, due to their condition. This only serves as a bonus for you, the investor!

As of this writing, Fannie Mae, Freddie Mad and FHA (Federal Housing Administration) alone hold nearly 250,000 REO homes. As an investor, the foreclosure market is definitely something you should be paying attention too.

While there are various stages of foreclosure and each stage carries a different amount of risk, each stage also allows the opportunity to create a huge amount of wealth. While there are several avenues to focus on when trying to make money in Real Estate, in this market, few come close to the power of harnessing equity out of bank distressed REO’s.

Focus on your education and learn the foreclosure process, and then go make some money!

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Comments | 2 Responses

  1. says

    This is a very interesting article to my wife and I as we are thinking about buying our first house and foreclosures are abound. In fact, we found the neighborhood we like, but it appears that 3 houses are for sale (and out of our range) and 3 houses are in some stage of foreclosure. We’re hoping one of these foreclosure houses might be in the right price range. So how do we find these REO’s?

  2. alyssonroberts says

    Hi Kyle! You can find REO’s on house listings. This articles was so far great. It tackles almost all essentials of foreclosure issues. Thanks fr sharing, it interests me a lot.

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