How to Profit from Foreclosures
November 12th, 2008Profit from foreclosures is more than buying a property at a foreclosure auction and then reselling that property for a windfall gain the next day. In this article, we will consider three ways you can profit from foreclosures.
- The Foreclosure Sale
- REOs
- Distressed Owners
Before we dig in, though, let’s consider the process of foreclosure.
The Foreclosure Process
Foreclosure is the result of default. When borrowers fail to make their scheduled mortgage payments, for example, because a contract is shirked, foreclosure can occur.
A legal “notice of default” or a “lawsuit to foreclose” (depending on the state) is typically filed to initiate a foreclosure. This notice is delivered to the borrower at least one month before a foreclosure sale (typically between 60 to 180 days) and subsequently posted on the Internet or in newspapers as public notice.
In response, the borrower can do several things to prevent or delay the foreclosure.
- Workout the loan with the lender and perhaps reinstate or even refinance their mortgage defaults
- File a legal defense against the lender and in turn drag the process into court and delay it for a year or longer
- File for bankruptcy and automatically stay the foreclosure action. In some situations, a bankruptcy court can even annul a foreclosure sale that has already occurred.
Okay, but with no loan workout, and when legal defenses or delaying tactics are ignored or run out, the foreclosure sale date arrives and the property is auctioned to the highest cash bidder. Thus bringing us to the first way you might profit from foreclosures.
The Foreclosure Sale
Though foreclosed property sells at a price lower than market value, foreclosure auctions are not that easy because they are not a typical market value transaction.
No information about the property is given other than its legal description. You must pay cash. There is no “contingency” allowance for financing. The property is sold “as is” with no guarantees or assurances about the title, condition, environmental hazards, or even that the property will be conveyed free of occupants (you may inherit the owner, tenants, or squatters).
Savvy bidders can turn big profits at foreclosure sales, true, but there is a caveat. Never bid blind at a foreclosure sale—you have to do your homework.
REOs
Lenders that win the bid at a foreclosure auction classify and sell the property as an REO (”real estate owned”). Thus bringing us to the second way you can profit from foreclosures—purchase an REO direct from a mortgage lender.
Since lenders often want to remove REOs from their books as quickly as possible, they may grant buyers favorable terms such as low or no closing costs, below-market interest rates, and low down payments. Moreover, when the property needs fix-up work, lenders are prone to accept offers at a discount price. Lenders don’t give REOs away, 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 profit from foreclosures by buying property from distressed owners.
Divorce, job loss, accident, illness, business failure, and other setbacks do cause people to miss mortgage payments and get into foreclosure. You may be able to help them salvage their credit record and some equity, while at the same time secure a bargain for yourself. But its no simple deal.
- Owners in foreclosure, for example, often owe more than their properties are worth, meaning you must talk the lender into a “short sale”. This is not easy.
- Many who face foreclosure contend with the claims of multiple creditors. You must be sure that none of those creditors has filed a lis pendens, or the IRS a tax lien. If so, you will have to clean it up to gain clear title.
- Before you finalize a pre-foreclosure purchase with a property owner, you must thoroughly inspect the property and accurately estimate the costs of repairs and renovations. You cannot profit from foreclosures whenever you gloss over inspections and make only an eyeball guesstimate of expected costs.
- Someone facing foreclosure will not be an easy to deal with. So don’t act like a foreclosure shark. Rather than a “Here’s my offer-take it or leave it” approach, develop a sensitive, empathetic, problem-solving approach. You’re more likely to come up with a win-win agreement.
Here’s to your success.
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