Getting Up Close and Personal With Foreclosures

Foreclosure investing refers to the investment of capital in purchasing a mortgaged property, subsequent to the foreclosure of the mortgage associated with that property. This process could turn out to be a tremendously lucrative opportunity and guarantees favorable returns in most cases. Foreclosure investing in the U.S. is on a constant rise and according to a survey conducted, 39% of the residential premises sold last year were foreclosed homes.

The Basics of Foreclosure Investing

  • Real estate experts recommend a reasonable amount of experience in traditional real estate investment before venturing into foreclosure investing.
  • This investment alternative is undoubtedly attractive because of the potential profits it promises.
  • However, an in depth study and analysis of foreclosure investing is a must to avoid possible problems that can play havoc with the investor’s finances and enthusiasm for investment in real estate.

The Approaches to Foreclosure Investing

Foreclosure investing can be ventured into at any one of three stages of a foreclosure:

  • Purchasing Pre-foreclosures

Investing into a property prior to its foreclosure would mean buying it from its defaulting mortgagor. An investor can expect to purchase such a property lower than the current market value, because the seller’s motive usually is to recover the mortgage amount to be paid off and not to profit from the deal.

  • Foreclosure Investing at the foreclosure auction

A buyer needs to compete with several bidders and might have to pay a higher price than the first option, while purchasing at the foreclosure auction.

  • Purchasing from the mortgagee following the foreclosure

In case there are no bidders at the foreclosure auction, the mortgagee ends up owning the property. Buying it from the lender after such an auction is the third option and is referred to as buying REO or Repos (Real Estate Owned or repossessions respectively), or ‘lender owned’ in real estate terminology.

The Risks Associated With Foreclosure Investing

1. The riskiest of all the three options mentioned above is investing into pre-foreclosures, because, in this case, the mortgagor

  • might not reveal the truth about the property’s condition and surroundings due to the desperation to sell it off.
  • might disappear after the deal, exposing you to a huge risk of not being able to acquire the property after the sale.
  • might not mention the real number of lien holders on the property, the list of unpaid utility bills, property taxes or the possibility of another individual’s name on the property title; who being unaware of the sale, did not sign the lease.

2. Buying at an auction is an equally risky proposition because,

  • There is no real estate agent to guide you through the proceedings.
  • No title report or title insurance at your disposal.
  • It is usually an all-cash deal with the threat to lose your deposit in case you do not pay the entire amount in a stipulated time frame.

Foreclosure investing in REOs is the least risky of all the three options, because they are quite similar to a regular property sale. The seller might not be entitled to give a disclosure to the buyer; however, in case of any trouble post sale, the buyer has all the right to sue the mortgagee who sold the property.

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