Foreclosure profits 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’ll consider three ways you can benefit from foreclosures.
- Offer in Foreclosure Sale
- Buy an REO from the lender
- Negotiate a sale with distressed homeowners
However, before we go any 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 some related obligation, such as homeowners association dues or special assessments, they transfer a mortgaged property without lender approval or make renovations that decrease the value of the property, due to circumventing a contract, foreclosure can occur.
Typically, a “Notice of Default” or “Foreclosure Lawsuit” (depending on the state) is filed to initiate 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 60-180 days) and is subsequently posted on the Internet 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 for bankruptcy and automatically stay the foreclosure action. In some situations, a bankruptcy court can even set aside a foreclosure sale that has already occurred.
That’s fine, but without loan renegotiation, and when legal defenses or delaying 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 for lenders, lien holders, and homeowners because the 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. The property is being sold “as is” with no warranties or guarantees as to title, condition, environmental hazards, or even that the property will pass on free of occupants (may inherit from owner, tenants, or squatters).
It’s true that smart bidders can make big profits on foreclosure sales, but there is a caveat. Never bid blindly on a foreclosure sale – you have to do your homework.
CONVICT
Lenders who win the bid at a foreclosure auction classify and sell the property as REO (“real estate owned”). 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 fixing 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 struggling homeowners.
Divorce, job loss, accidents, illnesses, business failures, and other mishaps cause people to miss mortgage payments and end up in foreclosure. You may be able to help them save their credit history and some equity, while at the same time securing a bargain for yourself.
But “get rich from foreclosure” gurus greatly exaggerate the chances of profiting from homeowners facing foreclosure. The reality is that when you talk to homeowners in foreclosure, you’re much more likely to uncover a minefield of problems that require skill and creativity than a simple deal.
Homeowners in foreclosure, for example, often owe more than their properties are worth, which means you must convince the lender of a “short sale.” The lender must voluntarily reduce the balance due on your loan in order for you to receive a fair return for agreeing to make up the missed payments and take over the loan. This is not easy.
In addition, many of those facing foreclosure are dealing with 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 benefit from foreclosures as long as you skip inspections and make only a visual estimate of expected costs.
Finally, keep in mind that someone facing foreclosure is not going to 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, empathic, problem-solving approach. You are more likely to come to a win-win deal.
Here is your success.
