How to Buy Foreclosure Properties
For as long as banks have been foreclosing on real estate properties, so have investors been taking light of this opportunity to buy real estate for up to 50% off its real value. Imagine that a home owner has lived in a house for 10 years, has built up a substantial amount of equity and takes an unfortunate turn towards foreclosure. If the original loan that was given by the bank was lets say $200,000 ten years prior, and the homeowner has paid down 10 years of the loan or lets say $75,000 of the principle, than the remaining amount due to the bank would $125,000 over the course of the reaming 20 years given it is a 30 year loan. Now the value of the property has increased yearly over the course of 10 years so actual value of the home that was bought for $200,000 ten years prior is worth $300,000 in today’s market. Continuing with this scenario lets say the homeowner stops making their mortgage payments and a foreclosure action begins, as the bank is looking to recoup their money or take over the property.
Now within this scenario there are many ways that one can purchase this property for a percentage of what today’s value is. The first way is called a Short Sale. Short Sale buying happens before a pre-foreclosure takes place. It begins when the borrower decides that they can no longer make their mortgage payments and informs the bank that they will be defaulting some time in the future but want to sell the property before it gets to that stage so that the bank wont begin a foreclosure action on the property and the homeowner wont have to go through the ordeal of having a foreclosure brought against them. Furthermore, the bank allows the sale of the property for less than is owed on the loan. So in the above example if the remainder of the loan is $125,000 and the bank approves a short sale the purchaser could end up with a home bought for $100,000 that is worth $300,000.
After the initial foreclosure filing is done, properties can still be bought in pre-foreclosure status. That is when the buyer goes directly to the borrower that is in default and offers to pay him the entire amount of the loan and sometimes a little extra. There is not a lot of time with buying pre-foreclosures since once the legal action is brought against the default mortgager than the time table starts ticking before the foreclosure property auction. Buying a pre-foreclosure will benefit the bank since they won’t have to pay all of the legal fees to continue with the foreclosure, benefit the borrower seller, since they usually won’t have the negative mark of a foreclosure on their credit record, and will benefit the buyer since they will pick up a property at a discount.
If the borrower in default has not paid the delinquent mortgage payments or sold the property either as a short sale or in pre-foreclosure status than a foreclosure is evident and an auction will take place. At the foreclosure auction which can take place at either the town or county courthouse or at the foreclosed properties themselves, bidders arrive early in many cases to inspect the condition of the property. The highest bidder will win the auction and take ownership of the property being foreclosed on. If in the event that the there is nobody that will bid up to the amount owed on the loan than the bank will take ownership of the property. This is called REO or “Real Estate Owned.”
Buying REO properties is another way that investors and home owners can get a huge discount on foreclosure properties. The banks are not in the property management business so they would rather not have the headache of up keeping the property, paying the taxes, insurance utility bills etc. Therefore they usually look to get rid of the REO properties quickly and inexpensively.