Wednesday, July 23, 2014
There are many reasons why homes end up in foreclosure and a number of opportunities to purchase foreclosure properties at various stages of the process no matter what economic conditions exist at the time.
During the nation's most recent economic downturn foreclosure activity came in two waves: the first caused by the crash of both the stock market and the U.S. economy resulting in millions of homes losing equity and going "underwater," and the second wave caused by high levels of unemployment.
It would be a misconception to assume, however, that foreclosures only occur during bad economic times. The fact is that foreclosures never totally disappear in any real estate cycle. But buying them requires patience and tenacity.
Available Options to Purchase Foreclosure Properties
The foreclosure process consists of three basic stages, each of which presents homebuyers and real estate investors opportunities to purchase a home potentially below current market value. Those stages — laid out by the state foreclosure laws — include the pre-foreclosure stage, the auction stage and the bank-owned stage.
The Pre-Foreclosure Stage
Once the decision to foreclose has been made, the lender must record the borrower's default in the county where the property is located. In a non-judicial foreclosure state the paperwork filed is called a Notice of Default (NOD), while in judicial foreclosure states it is a Lis Pendens (LIS) — meaning "litigation pending."
To locate these homeowners in default, buyers can go to the county recorder's office and check out the default notices themselves; find a real estate professional who is familiar with the foreclosure process and has resources to garner that information; or subscribe to a service like RealtyTrac, which provides a listing of default notices for a monthly fee.
There are downsides to working in the pre-foreclosure stage. First, homeowners in default have the opportunity to bring the loan current. Secondly, if they can't afford to "cure the loan," you are potentially working with people who can be in a highly emotional state of financial distress and can therefore be unrealistic in their expectations.
For buyers who are willing to deal with highly charged emotional situations, working with distressed homeowners to find a viable solution to their financial problems by getting them out from under their mortgage may result in a successful purchase at a reasonable discount.
The Auction Stage
Once the pre-foreclosure period allowed by the state's law has passed, the foreclosing lender can set a date for public sale of the property at auction to the highest bidder.
This is the most difficult stage of the foreclosure process for inexperienced buyers to pursue foreclosure properties. These are all-cash purchases, and the competition is fierce as professional investors come prepared with cashier's checks to buy as many properties as they are interested in on any particular day.
For the uninitiated, it is a good idea to attend an auction to familiarize yourself with the process before trying to participate. With today's lower inventories, properties that do make it to auction typically end up selling for far less of a discount than they used to during the market crash.
Still, the auction process is a viable way to buy foreclosure properties. For those who want to pursue buying at this stage of the process, there are online sources such as Auction.com that provide lists of upcoming auctions — including date, location, time and amount of the opening bid. Remember to bring lots of cashier's checks with you!
The Bank-Owned Stage
Many times during the foreclosure auction no bidders are interested in buying a particular property for a number of reasons. Sometimes it is as simple as the opening bid is so close to the amount owned on the loan being foreclosed that is not enough of a profit margin to make sound financial sense.
Properties that do not sell to interested third parties at auction go back to the foreclosing lender as an REO (real estate owned) property. These bank-owned properties are then sold, in most cases, by real estate agents who have been pre-approved by the lender to represent them in the sale of the property. These properties are then listed on a Multiple Listing Service (MLS), making their availability known to a largest potential buyer pool possible.
Today's inventory of REOs is much lower than normal. With fewer properties available comes more competition and multiple offers – many times coming in at a price well above the list price.
Also, don't forget about U.S. government agencies. They are also in the business of selling off the REOs in their portfolios. For properties owned by Fannie Mae check out HomePath; for properties being sold by Freddie Mac check out the inventory at HomeSteps; and the U.S. Department of Housing and Urban Development (HUD) has homes in inventory as well. Check out the HUD website for REO properties for sale.
Whether you are a homebuyer or a real estate investor, so long as you have the patience and tenacity to work the system, you can be successful in buying foreclosure properties in any market.
When it comes to buying foreclosures, however, the most successful buyers tend to be those who select one of the three purchase strategies — working either the pre-foreclosure, auction or bank-owned stages of the process – and then stick with it.
This information is provided by Auction.com, LLC, the nation's leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.