The foreclosures are very much in news these days. The occurrence of a large number of foreclosures is an indication of the nation’s economy going through bad times. This also throws up a good opportunity for real estate property buyers to strike attractive bargain deals at real estate auctions. Jeff Adams, a popular online columnist on real estate investment, calls foreclosures a priceless opportunity to buy cheap properties at auctions.
Foreclosure is a legal process initiated by the lender to acquire a mortgaged property against which the loan stands defaulted. This enables the lender to recover a portion of the outstanding loan by selling the property in real estate auctions.
A lending institution cannot keep on accumulating foreclosed properties. That would block the capital flow, which is the main resource for the business turnover of a lending institution. The lending institution also does not have the adequate set up to hold and to transact the real estate properties. They hand over such properties to professional auctioneers for quick disposal.
The Interest Rates & the Types of Mortgages
An ordinary buyer of a piece of real estate property either for self use or for the purpose of investment cannot raise the huge funds required for the deal at a time. Therefore, the buyer has no alternative but to turn to a lending institution to borrow he balance funds after making a down payment of 10% to 20% of the value of the property. The property in question is mortgaged to the lender as collateral to secure the loan.
The mortgages are of following types depending on the rates of interest to be charged on the loans:
- Fixed Rate Mortgage Loans, where the interest rate remains fixed throughout the period of loan repayment.
- Floating Rate Mortgage Loans, where the interest rate changes according to that which is prevalent. In the money market.
- Hybrid Mortgage Loans: This combines the features of both the above types of loans.
The interest rates, thus, determine the overall cost of borrowing the funds and have a significant bearing on an individual’s decision to invest into real estate.
- Foreclosure: The foreclosure event is triggered when a buyer fails to make periodic fixed payments to the lender towards eventual full ownership of the mortgaged property. The event of foreclosure, in effect, means taking possession of the mortgaged property by the lender because of loan default.
- Pre-Foreclosure: Prior to foreclosure, a notice is issued by the lending bank to the buyer of mortgaged property against which the payment is defaulted. The notice stipulates the time period to settle the amount in default. This stage is known as pre-foreclosure.
The foreclosure follows if the mortgagee fails to comply with the terms of the aforesaid notice. The mortgagee, however, has the right to sell the property on his own during the notice in order to raise the funds required to pay the outstanding balance.
- REO: In case no bidder turns up to buy the property put up on auction, the lending institution repossesses that property. This is known as REO or the Real Estate Owned.
Furthermore, there are following two types of foreclosures:
- Judiciary, where the legal property transfer records entitle the mortgagee to reclaim the property upon paying the balance amount of outstanding loan within the specified period of time.
- Non-Judiciary, where the entire process of auction is handled by an independent third party. Such cases do not have redemption periods unless specifically agreed upon by the owner and/or the buyer.
Auctions of Foreclosed Properties
The advances in Information Technology has made it possible for a modern property buyer to identify and bid for suitable real estate properties at online auctions from the comfort and convenience of one’s own home or office.
The real estate auction houses are increasingly conducting online auctions of foreclosed properties. Auction.com and RealtyBid.com are very popular among these websites. These auctions are usually very transparent, fair and cost-effective to all concerned. However, a note of caution: It is imperative to ensure that the properties on auction are without any encumbrances and are not abandoned in decrepit condition by the financially broke sellers.
It is also necessary to be wary about hedge funds, who with their far superior financial muscle leave no room for small players in the game.
The small investors, however, can still pick up good properties by exercising patience and good discretion and hold on to such properties a little longer till the market conditions improve.
Conclusion:
It is good time for bargain hunters to buy foreclosed property at auctions. In the current scenario of large scale foreclosures many a good property deal can be picked up at highly discounted prices.
The interest rates prevailing in the money market have remained quite low for the past some time and unlikely to go further down. Fixed rate mortgage loan is, therefore, the most prudent option for a property buyer in the current scenario.
