|When homeowners fall behind on mortgage payments, a foreclosure may occur. A foreclosure is a process in which a financial institution repossesses or sells a piece of property because of a loan default. Mortgage lenders usually consider a mortgage to be in default when payments haven’t been made in three months. When a mortgage loan is in default, the mortgage lender can start the foreclosure proceedings of the property.
There are three ways to get a great deal on buying foreclosures:
Pre-Foreclosure: Information is everything! Up to date accurate information is essential for investing in foreclosures. You will need a source for knowing what properties are going to sale, for how much and when. Buying homes in pre-foreclosure is about timing and reaching the homeowners early on to help them. Many of these homeowners don't know who to turn to, they are mostly scared and/or worried. Wouldn't anyone be fretful in the same situation? When a homeowner is unable to pay one or two mortgage payments, it is almost prescient that a foreclosure ahead. As investors we have to think about the reality these people are facing and present them options in a hopeful manner, to help them move forward in their lives.
Auction: When a borrower defaults on his/her mortgage payments, the original lender takes back the property and sells it at auction, often at a seriously discounted price. The main advantage of buying at a foreclosure auction is that the moment a property reaches the actual sale date, all trust deeds (loans, debts.) junior to the foreclosing loan are wiped off the property. This can create instant equity. The winning bidder at this auction will pay off the loan with his/her winning bid amount and will then take title.
Bank Owned: These properties have gone back to the market and are marketed on the MLS. Banks typically list properties lower than comparable homes in the neighborhood. Better yet banks today will often times negotiate with potential buyers below the already low list price. 10-20% of all properties progressing to the trustee’s sales have no bidders show up. The instant that no bids are made at the sale, the foreclosing beneficiary (lender) becomes the owner. He/she now must keep current any loans senior to his/her loan if there are any. The property is now a REPO or R.E.O. (real estate owned). Learn about our Bank Tour Bus here. Some of the best deals on the market are found on this tour.
Lenders are now getting these properties back regularly. It is very expensive for the lenders to be stuck with these properties! These costs to the lender would be enormous in the event that they chose to list the property with a broker and many months elapse during the clean up, the marketing, and the escrow period. The whole key to buying at this stage is to act quickly by approaching the beneficiary (lender), the same day of the sale, before he turns the property over to a real estate agent for resale. Quick action at this point can save you tens of thousands of dollars.
When a property has a lot of equity, the general rule is to approach the owner, during default (stage 1), with an offer. It is in his interest to accept an offer of a few thousand dollars to get out before losing everything at the foreclosure sale.
When a property has little or no equity, simply step back, be patient and wait for (stage 2) the trustee’s sale. The trustee’s sale will wipe off all junior liens, creating equity. Ten to 20% of the time no outside bidder will show, and the property will revert to the foreclosing beneficiary. Now is the perfect time to low ball the lender with an offer substantially below the minimum bid at the trustee’s sale before he incurs any costs, such as commissions, clean up, repairs and holding costs.
There are three key elements to buying cheap real estate. First you must know which properties are in trouble and know exactly at what stage of the foreclosure process the property is in. Second, it is critical to know how much time the owner has left. Third, you should always know all the trust deeds (loans) that are against the property so that you can establish the lowest possible price to offer. These three elements are researched as completely as possible on every property giving you the most important information that any buyer can have.