Foreclosures investing is an exciting and lucrative way to make money in real estate investing. Foreclosure properties are available everywhere! Not a day goes by will you not hear news about people losing their homes, job layoffs, economy going down, etc. In fact, there were over 2.1 million foreclosure properties listed last year alone. Consumer debt is at an all time high. Personal bankruptcies have been on the increase each year. The 700 billion dollar bail-out plan passed by Congress recently did nothing to help the homeowners. Thousands of homes are neglected due to financial problems resulting in default because of not only the recent financial & economic crisis, but everyday life such as divorce, health problems, aging, and death. Homeowners may try to qualify for repayment programs, work with the lender to modify the loan, or find some alternative method to get them out of their situation. Sometimes, it is just too late to do anything.
So what is foreclosure and how does one invest and make a profit?
A foreclosure is when someone borrows money from a lender to purchase a home and then stops paying the mortgage they owe to that lender. As a result the lender, through a legal process, takes ownership of the home. The borrower in default loses the equity in the mortgaged property. This legal process is known as foreclosure. After the lender has full ownership of the property, they liquidate the property through several ways which usually involves a forced sale of the property at public auction, listing the property with a local real estate company, or utilizing a foreclosure listing membership web site.
Starting from the homeowner default on their mortgage to the home is foreclosed and sold by the lender, the entire process may take from several months to 2 years depending on which state the home is resided in. As an investor you have opportunities at various stages during the foreclosure process to purchase the property at below the market value, and then turn around and resell or “flip” the property for full market value — keeping the equity difference between these two transactions. However, as explained below, not all stages are the right moments for foreclosures investing.
Foreclosure Timeline and Buying Foreclosed Houses
1. The homeowner stops making payments. The lender starts to send letters to the homeowner demanding them to bring the mortgage current. After the homeowner is 2 months behind on their payment, as an investor you could step in and negotiate a “short sale” with the lender on the behalf of the homeowner. A “short sale” means the lender agrees to take less than what’s owed on the mortgage as payment in full. For example, let’s say the house is worth $300,000 and the loan balance is $350,000 (a very common situation in today’s market). You could negotiate with lender and have them agree to take $250,000 as payment in full. You can purchase the property for $250,000 then flip to a retail buyer for $270,000 for a quick $20,000 profit. It may seem absurd the lender would take a $100,000 loss like that but it’s been done every day in this market as it will cost the lender far more money to go through the foreclosure process. More about short sales later.
Typically after 3 months of non-payment the lender will file a Notice of Default (NOD) or Lis Pendens to begin the foreclosure process. This is known as “pre foreclosure.” Pre foreclosure investing is one of the best times because at this stage you have less competitors and you are dealing directly with the homeowner.
2. Foreclosure auction. At this stage the home is put up at an auction at the court house (In some states the auction may be held at the property.). Anyone can bid at the auction. However, this is in general not a good time to buy foreclosed homes. This is because you will need to have cash in hand to make the purchase and good deals will have fierce competitions.
3. Many states has “redemption period” during which the borrower can redeem the house by paying the amount the house was sold at the auction, plus interest. The redemption period may be 1 to 12 months depending on the state. During this time the homeowner can remain in the house. Most homeowners of course have no money to redeem the house so basically they would just stay in the house for the length of redemption period for free. This is usually not a good time for investors to purchase the foreclosed house as the homeowner has no incentive to sell the house for a discount. A short sale deal may be done at this stage but the lender also has not much motivation since the foreclosure has already occurred.
4. After the redemption ends, the lender takes possession of the house. Most lenders (typically banks) turn the property over to asset management firms – these are companies that handle the clean-up and maintenance of the property, and place it on the market for sale. The property is known as a “REO” (Real Estate Owned) listing. This is the final stage an investor can buy bank foreclosed homes. Although there is more competition, this is also a good time for the investor as any title issues would have been cleared by the lender. And many lenders now even do the repairs before they list the house for sale. Most REO properties are priced very aggressively as the lender must liquidate them quickly. And they will drop the price every 3 to 4 weeks until it is sold.
There you have it – a quick overview of foreclosures investing. Of course there is a lot more to it than this short article. Be sure to browse through this site for more information on where to find foreclosed homes listings, how to buy foreclosed homes, how to do short sales, and more importantly, how to sell them for a profit or keep them for long term cash flow.
If you are serious about making 6 or even 7-figure a year with foreclosures investing, there are many investing courses available. Being investing foreclosures for over 15 years myself and bought virtually every course out there, I can tell you there is no need to spend hundreds or even thousands. Here is one inexpensive course that has all the information you ever need to know about profiting from foreclosures. Click here to read the course.
Useful Resources
Domzee » How to Make Money by Investing in Foreclosed Homes
Foreclosure investing is an excellent way to see a huge return on your money. In times when the economy is slow, or the housing market has lapsed, great deals abound, making the environment perfect for foreclosure…
Foreclosure and Its Effects | Realestatebloom.com – Real Estate
December 9, 2008 — Do’s and Don’ts of Foreclosure Investment (1); November 29, 2008 — Foreclosure or Short Sale: Which Problem is Bigger? (0); November 28, 2008 — Foreclosure Prevention through Mortgage Default …
Investing In Foreclosures: A Shortcut To Real Estate Riches …
If you were a real estate investor watching the real estate boom of early 2000s closely, you could have predicted the foreclosure investing opportunities that would become available today in virtually every real estate market…
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