Guide to Foreclosure Investing, Foreclosure is taking possession of the mortgaged property which has been defaulted upon. Many times home owners are unable to pay off the loans taken against their house’s equity. This results into a default situation where the lenders or the banks foreclose or acquire possession of the owners property as collateral for defaulting on the debt.
Investing in foreclosures occurs when these foreclosed properties are sold buy the lenders to wiling buyers. In certain cases even after the property has been sold to the highest bidder, the original owner (against whom the foreclosure action was taken) has the right to buy back his property within a stipulated time period.
Foreclosures are mainly of 3 types on the basis of the foreclosure timeline
Pre – foreclosure
- When the owner defaults on their mortgages, they receive a notice from the loan issuing bank or lender, notifying the owner of his predicament.
- Failure to repay the obligations during the pre – foreclosure phase results in the property being foreclosed.
- Pre – foreclosure the investor has the advantage of checking the property and clarifying his queries directly with the owner. It is also a low competition deal where there is no outright bidding.
- Pre – foreclosures have to be executed quickly so that the negotiation, documentation and legal proceedings can be done before the deal is foreclosed.
Foreclosure
- Foreclosed properties are generally auctioned and sold to the highest bidder.
- Because for the lenders foreclosed properties are similar to excess baggage and hence are willing to sell them off at cheaper prices.
- The bidding process might intensify and sometimes overshoot the price of the asset.
- Upon declaration of the winning bid, full upfront payment is required to be transferred within a short stipulated time period ranging from 24 hrs to 1 week.
REO’s
Foreclosed assets which were unsuccessful in being sold during the auctioning round and have no interested buyers are repossessed by the lenders/ banks, They are more commonly known as ‘Repos’ or REO’s (Real Estate Owned
- Are usually listed with local REO brokers and agents
- Have very little upside equity potential and hence are unable to attract suitors
- Having been under the possession of lenders for a span of time, these properties are generally worse off than the rest and will always require maintenance and conditioning post investment.
- Lenders consider REO’s to be equivalent to non – performing assets and are eager to offload them from their books, hence these properties can easily be got for heavy discounts.
Foreclosures can also be classified into 2 types based upon local state jurisdictions and the type of contract.
Judicial Foreclosure
- Arise due to default In case of contracted mortgage payments.
- Take a long time as they undergo legal proceedings and hence take time to be available In the market.
- Contain a redemption period clause where the original owner has the right to buy back the foreclosed asset within a time period which may vary between 1 to 6 months.
Non – Judicial Foreclosure
- Default in case of property dealing through deeds of trust
- The foreclosure and auctioning is handled by a third party trustee instead of the lender
- Has no redemption period clause
Foreclosures are a smart investment moves which have been gaining recognition nowadays. Although foreclosure may at first seem a straight forward transaction, even deeply experienced investors have had troubles. Meticulous care, planning and research are a must for any investor who does not wish to see his money sink. With an increase in number of foreclosed properties there are a great many chances of hitting the jackpot with the right foreclosure investment.
To many such successful investments,
