Foreclosure homes, what are the risks? do they offer a good opportunity for potential investors? In this article, we clarify the process for you.
Foreclosure homes can be a gold mine for real estate investors, but there are risks. Fortunately, most investors understand those risks. What about a new home buyer who is looking for a bargain? If this is you, then you may take some time to investigate the process of buying a home in foreclosure. Buying a foreclosure home can be a risky endeavor. Let us examine the foreclosure process.
What is Foreclosure?
Foreclosure is a process by which a mortgage lender recuperates an outstanding debt associated with a real estate property when a homeowner falls behind in mortgage payments. Once the borrower fails to pay, the loan is considered in default. After three to six months of default, the mortgage lender usually files a public notice of default to begin the pre-foreclosure process.
Buying Foreclosure homes
Once you are planning to buy foreclosure homes, you owe it to yourself to try to understand how the foreclosure process works. When it comes to foreclosures, there are three possible outcomes, which constitute the phases of the foreclosure process.
· During the first stage of the foreclosure process, the homeowner has a grace period to possibly pay off the default amount to reinstate the loan. The grace period is not a favor from the lender; it is determined by state laws. This is known as the pre-foreclosure phase. if the homeowner pays the default amount, the foreclosure process ends at the pre-foreclosure phase.
· During the pre-foreclosure, the borrower may manage to sell the property to a homebuyer. In this case, the homeowner is able to pay off the mortgage and prevent a foreclosure record on his/her credit history.
· If the homeowner has difficulty finding a homebuyer to pay off the default amount, The homeowner may and the lender may settle for a short sale, which is a public auction that may result in selling price that is lower than the total amount f the loan. Importantly, the homeowner still stops the foreclosure at the pre-foreclosure phase.
· If the homeowner is unable to stop the process, the property, the lender may recover the property from the homeowner through a public auction called a sheriff sale. If during that auction, there are no bidders other than the lender itself, then the lender is the only bidder and repossesses the property by foreclosure. This is how properties become bank-owned properties, which are in need of new homebuyers.
Understanding the risk of buying during the Pre-Foreclosure phase
When a property is in pre-foreclosure, an investor may contact the homeowner in an attempt to purchase the property. An investor may typically make the largest profit during this phase by negotiating a deal that could be acceptable to all parties (the buyer, homeowner, and lender). It is like a shot sale, except that the property is not sold through a public auction. Big investors who have access to pre-foreclosure listing can make big profits, particularly on upscale real estates. Because the homeowner is still in possession of the property and wants to sell, the property is typically not trashed during pre-foreclosure.
Before you decide to purchase, it is important to achieve the necessary conditions to succeed in the pre-foreclosure process:
1. You should make sure you have the necessary resources. to purchase a property in pre-foreclosure. The most important step is to ensure you have the financing ability to purchase the real estate. If you want to take a loan and have the down payment, be sure to acquire the pre-approval for a loan. If you do not feel comfortable contacting the owner, you may want to enlist the professional help of a real estate agent. In this case, you will be the one incurring the real estate agent’s fee if a deal is achieved. Another important thing is to make sure you have the liquid asset required to upgrade the property as needed, particularly if you want to flip it for an enormous profit.
2. Lien, lien, lien; do your homework.
If you are buying a real estate property through regular channels, there is a closing agent that typically researches the property and ensures all liens are addressed before closing. In the case of a preforeclosure, it is your job to find out all the liens on the property. It could be anything from a second mortgage to taxes utility bills. All these liens will become your responsibility, should you decide to make a deal. Therefore, you should do your title search, which can be offered as a service to you by an agency.
3. Close the deal. If the homeowner wants to sell during pre-foreclosure protect his/her credit, you’ll need to negotiate the terms of the purchase. If you are not familiar with the process, enlisting an agent will be highly beneficial to guide you through entering escrow and closing the deal to stop pre-foreclosure.
After Pre-Foreclosure, the foreclosure homes
If you did not make a deal before the end of the pre-foreclosure period, you can bid on the property at a public auction (typically a sheriff sale). Buyers are usually required to pay in cash at the auction, and you may not have much time to research the title and condition of the property beforehand. This is when you can really get into trouble and incur liens you only become aware of after you purchase the property. Do not let your emotion drive your decision. Get all the facts first. In addition, understand that after you win a bid, you will only have a short period to come up with the difference between the bid amount (purchase price) and your cash deposit (typically 10%).
Foreclosure homes are Bank-owned real estates
If during the Sheriff sale/public auction the lender takes ownership of the property, it will become a bank-owned real estate. The foreclosure process ends, and the bank typically wants to re-sell the property for a profit. While the profit may be less, the risk is also reduced, as the lender will make sure the property is sold with a clear title.
There you have it, You can now go ahead and explore the foreclosure option as a sound investment.
Originally posted 2018-08-18 10:32:02.