A property is in foreclosure—when a notice of default has been filed in the public records. Lenders can foreclose for other reasons, but the most common is when payments are in arrears. This means the owner has stopped making mortgage payments and the lender has given notice that unless the payments are brought up to date, it will sell the property to the highest bidder. Usually, the borrower will be at least two payments behind before the notice is given.
Not all homes that fall into foreclosure go to public sale because owners have the right to make up the back payments owed. If the homeowner does not make the loan current, over a certain period of time which varies from state to state, the lender will take possession of the property. The final step the lender takes after the certain period has passed is to auction the property at a public sale.
Real estate investors and home buyers see profit in buying foreclosures because they can often buy the property for the amount owed, picking up the home owner's equity earned for free.
Sellers stop making payments for many reasons. Very few choose to go into foreclosure voluntarily. It's often an unpredictable result from one of the following:
Investors who specialize in buying foreclosures often prefer to purchase these homes before the foreclosure proceedings are final. You can obtain records at your local courthouse of owners that have been served with a foreclosure notice from their bank.
Finalization of foreclosure proceedings vary from state to state. In states where mortgages are used, homeowners can end up staying in the property for almost a year; whereas in states where trust deeds are used, trustee sales give a seller about four months before vacating.
Almost every state provides for some period of redemption. This means the seller has an irrevocable right during a certain length of time to correct the default, including paying all foreclosure costs, back interest and missed principal payments, to regain control of the property.
If the property is occupied, the successful bidder is typically the person responsible for removing the occupants, who may or may not be the previous owners. The occupants could be relatives or friends of the owners, renters or squatters. A solution might be to pay or offer incentives to the occupants to leave. For example, you can offer $1000.00 if they move out in a week, $750.00 for 2 weeks, $500.00 for 3 weeks, etc... If they do not go away nicely, you will have to evict them. In some states, a person can be legally evicted in 21 days, in other states, such as Minnesota or California, it could take more than three months. There is also extra time allowed for appeals and then waiting for a court date. You may not be able to take possession of the home you paid cash for at an auction as much as 6 months or longer.
If you are unfamiliar with the process of evictions, you should hire a lawyer to take care of this for you. Be aware that tenants who are sued for eviction sometimes retaliate by stealing fixtures or destroying the home in some manner.
The obvious reason to buy a foreclosure is that you can get the home for cheap. Sometimes as low as 30% to 40% below market value, but many foreclosures sell for only 5-10% below market.
But the savings may be twofold if the property is purchased from the lender who holds the mortgage that's in default. The lender may be willing to waive some closing costs, and maybe even offer a break on the interest rate or the down payment. This could potentially save you thousands!
Bank-owned properties offer the safest deal for inexperienced foreclosure buyers. There's no risk, no taxes, no liens, no tenants to evict. A lender who's eager to sell might be willing to offer attractive terms just to unload the home.
The lender might offer to finance the property at a below-market rate or with a lower-than-usual down payment. Because the bank already has done an appraisal, the buyer might not have to pay an appraisal fee. And lender deals typically include title insurance, which removes much of the risk that accompanies buying homes earlier in the foreclosure process.
Not all foreclosures are previously owned homes. Some foreclosed homes are new. These homes are not as easy to identify and rarely appear on national lists. In some areas, the slow economy has left many builders of new midscale and upscale homes at the end of their construction-loan periods without finding buyers for their homes.
In these cases, the banks that issued the construction loans take possession of the homes and attempt to sell them.
These, too, are foreclosures. They are "hidden" foreclosures because no one associated with the sale of these properties will refer to them as foreclosed homes.
Experienced investors purchase properties just before heading into foreclosure. The investor finds a homeowner about to go into default who doesn't want to lose all of the equity in the property, so accepts a portion of the difference between the equity and the home's market value.
Pre-foreclosure buys offer bargains but demand persistence. It is because creditors are often hounding the owners at this stage and the owner is trying to sort the good guys from the bad guys. Trying to get through to the homeowner is almost impossible.
If the homeowner is contacted, the buyer could be in for a surprise. Homeowners in default might not have phones or electricity, and they might have a variety of personal and legal problems. What's more, they probably need somewhere to live before they can move out of the property the buyer wants. This is a high-risk, high-reward proposition, and is not for the first-time foreclosure Investor.