If experts are correct, the number of foreclosures in 2011 will beat out the record breaking number of foreclosures in 2010. With communities all across the country plagued with vacant and foreclosed properties, the opportunity for both investors and homebuyers to purchase a home or property at a generous discount is tremendous. In the past, the foreclosure market was typically the realm of serious investors looking to purchase below market value, fix the property up and then sell at a profit – a practice many refer to as “flipping”. In recent years, however, the foreclosure market has seen an influx of traditional home buyers who are looking to purchase either primary or secondary homes and investment properties. For the right buyer, purchasing a foreclosure can yield significant rewards. However, be aware that there are risks associated with buying a foreclosure, and knowing how the process works, what different types of options you have to purchase a foreclosed property, and how to minimize your risk are essential.THat is of course if you are thinking of purchasing a home this way.
There are three basic stages of the foreclosure process: pre-foreclosure, auction and finally bank owned. A purchase can be made in any of these three stages. The pre-foreclosure and auction stages are where you typically reap the biggest rewards, but they also where you take the largest risks. If a property is foreclosed on and not sold at auction, it becomes bank owned, also known as real estate owned or REO. This is typically the best stage, particularly during the current market conditions, for homebuyers to safely purchase a foreclosure and receive a decent discount off market value. Today there are many REOs listed on the MLS and those are the "foreclsorues" I tend to encourage my buyers to purchase. Let’s look at the three stages a little closer…
The Pre-Foreclosure Market The first stage of foreclosure is termed “pre-foreclosure”, and is the time period between which the homeowner receives a Notice of Default from the bank and the day the property goes up for auction. The Notice of Default is filed with the county and is public record, so pre-foreclosure property records can be obtained by anyone. This is actually called a NOTICE OF DEFAULT or NOD. Purchasing a home in the pre-foreclosure stage typically involves approaching the homeowner directly and trying to get a price that will allow them to pay off their mortgage while still giving the buyer a good discount lower than market value. Many times having good dialogue with these individuals can be tricky as it is most likely a frustrating time for them. But this is where they stand to gain too in terms of getting their loan paid off and preventing a foreclosure so it won't damage their credit. While this stage can possibly yield a great deal to the buyer, it is still often difficult and many times this is the turf of the seasoned investor rather than simply a buyer looking to purchase a home.
The next stage of foreclosure is the auction. While this is the stage where buyers could expect a fairly substantial discount, it is also the riskiest way to purchase a foreclosed property. For starters, buyers are expected to purchase sight unseen, meaning that they really have no idea of the condition of the inside of the home before purchasing. Secondly, you are not able to get title insurance – and if the house has any liens attached to it, you as the buyer are responsible and will not know this until you have already bought the property. I have heard some horror stories regarding this aspect. And lastly, you must pay cash, as financing of auction properties is not allowed.
Bank Owned or REO Properties are when nobody bids on the property, or nobody bids high enough to cover the cost of the loan, the property then becomes a bank-owned property, also known as an REO or real estate owned. Banks then put these houses on the market through real estate brokers. Buying an REO property is the least risky way to purchase a foreclosure, but most often will yield the smallest discount as banks typically attempt to sell the property at or near market-value. But in this today's environment the discount can still be notable. Because of the enormous volume of foreclosures on the market banks are also much more willing to negotiate and give buyers a discount in order to get the property off their hands. So while in the past buying a foreclosed property from a bank might not have netted much, if any, of a discount from market value, the recent foreclosure crisis has given buyers a temporary opportunity to purchase a foreclosed property in the least risky way possible while still achieving a decent discount from market value. If you are working with a good agent or broker, they will most likely have experience and relationships with the banks and will be able to negotiate on your behalf to get the best possible price. Banks simply have too many foreclosures and are eager to lower their liabilities, so now is the time to safely buy a foreclosure and still get a good discount from market value. To sum it all up – if you are looking to safely buy the home of your dreams at a substantial discount, there has never been a better time. There are thousands of qualified brokers and agents all around the country who can help you locate, negotiate and move in to your dream home, all at a price you would have never expected to pay just a few years ago.