What are foreclosures?
Foreclosures are also called repossessions. Foreclosures happen when homeowners stop making monthly payments for the loan or mortgage on their property through their bank.
If you own a piece of real estate and, for some reason, you cannot continue making the monthly repayments as agreed on your mortgage contract, the bank can take back or foreclose/repossess your property.
Foreclosures or repossessions often happen during an economic recession when more people become unemployed, or the cost of living rises to such an extent that homeowners struggle to meet their monthly commitments.
Why invest in foreclosures?
Investing in foreclosures has become quite popular nowadays, especially with the huge volume of repossessions that has been turning out since the crash of the housing market in 2008.
Many of these properties are being offered for less than full market value because the banks are eager to get their money back.
You can pick up repossessed properties for as low as 50% of their open market value, giving you plenty of opportunities to generate a capital gain even in a down market.
How to buy foreclosures
There are three ways to buy properties in foreclosure: at pre-foreclosure stage, during the foreclosure auction, and from the bank after the auction.
If you buy a property that is about to be foreclosed directly from the homeowner, that is a pre-foreclosure.
If the homeowner is unable to sell the property before it gets foreclosed, then it goes into a public auction.
If nobody bids for the property during the auction, then the lending bank or financial institution ends up with the property.
Repossessed properties are also called corporate owned, lender owned, repos, or real estate owned (REO).
In terms of risk and profit, REOs are the best foreclosures to buy. Although lenders are not required to offer a disclosure, you might be able to sue them if problems arise after you buy the property.
A pre-foreclosure seller might be desperate and lie to you about the condition of the property. There could be liens on the real estate that the seller failed to disclose such as unpaid utility bills and property taxes or a co-owner who did not sign the deed. The seller could just easily disappear after the sale, leaving you with a run-down property with so many neglected obligations.
Buying at the auction is the riskiest foreclosure you can buy. At the auction you have no real estate agent to guide you, no escrow, no title report, no title insurance and no warranty of any kind.
You do not have any inspections by contractors, roofers, plumbers, electricians and pest control, and you get no disclosure from the seller as to the condition of the property or the neighborhood.
To get more tips on how to find and buy foreclosure investments, check out the Rock Bottom Blueprint from real estate expert Dean Graziosi today.
{ 9 comments… read them below or add one }
I’ve just started to look into purchasing a foreclosed property and the terms can be hard to navigate. It sounds like REO is the way to go for me; no worries about auction troubles or preforeclosure lies.Thanks!
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this is an EXCELENT article ! It is deffinately right on the money, i know because my aunt and uncle do it for a living. i am going to look into it myself and use this page as a guide to my success.
I have been looking for a reliable information on investing on foreclosures. fortunately, i got this article. this has been a great help in clearing my general doubts. thank a lot.
This is a very helpful article. Now i can help my friend on how to look for a better one for herself.
I ‘d really like to invest in foreclosures, thanks a lot for information. You clarified all my doubts about how to invest in foreclosures. this article has really helped me in my research. Deans rock bottom blueprint program looks interesting but kinda expensive i’m sure.
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I have recently been looking to purchase my first home. As a first time home buyer this atricle really helped me understand about buying a foreclosed property. I haven’t looked at any foreclosed homes, however this article just changed my mind. Thanks again for the advice.