If you are investing in real estate, you have likely investigated the foreclosure process. The foreclosure market is packed with incredible deals, and knowing the right scenario to buy will help you get the most out of your investment. Depending on your local economy, each stage will offer a different kind of potential for your investment portfolio.
The pre-foreclosure stage
Pre-foreclosures are known as short sales in the real estate world. This is probably the most advantageous stage of the investor’s foreclosure process because lenders are willing to come up with better deals. Pre-foreclosures occur after the borrower has missed mortgage payments, but before the home goes up for auction. There are actually two stages to a short sale. The first is when the homeowner defaults on his mortgage, or is more than 30 days late in payment. The second part is when the homeowner receives a legal letter known as a Notice of Default.
As a real estate investor, you want to find sellers who have received a Notice of Default on their Mortgage because they are more than 3 months behind on their payments and will likely work with you on a purchase. Before receiving this notice, sellers have ample opportunity to catch up on their payments and cure their loans.
The foreclosure stage
The foreclosure stage begins after the homeowner receives a notice of default and the lender takes legal action against them. They will be evicted from the home and the lender will seize the property. When this happens, the lender must put the home up for foreclosure auction. In some states, this is known as a trust sale.
Fiduciary sales are great because they give you a lot of bargaining power. Foreclosure notices are placed in the newspaper, allowing you plenty of time to research the properties before deciding to bid on a home. Once you find a property you want to bid on, you can go to the auction and place your bid.
The foreclosure auction has many pitfalls, but if you do your research and understand the market, you can get really great homes in good neighborhoods. Many real estate investors use bidding services that will bid on the homes. If you choose this route, all you need to provide is your requirements for a home and the tendering service will do the research for you.
The post-foreclosure stage
After a home goes through the short sale auction and foreclosure stage, it ends up as a post-foreclosure property. This is known as bank ownership or real estate REOs. These houses end up back on the books of the original lenders as a non-performing asset. This basically means that the bank owns the house again, but is not making money from it.
At this point, the lender has spent a great deal of money on a foreclosure and may actually be trying to recoup the fees and money lost during the foreclosure by taking them to the sale price. At this stage, the home is selling for the highest price in the entire process.
An advantage of buying REOs is that banks are highly motivated to take ownership of your books. They are likely to be more willing to negotiate at this stage, as the property is costing them money.