Real estate investors, both first-timers and pros, are always on the lookout for unbelievably great deals with the potential to translate into heavy profits. Invariably, the first thing that comes to mind is foreclosures. Investors often imagine coming across that perfect home while driving through the streets of a cozy neighborhood with a “FORECLOSURE” sign in the front yard. However, there is more to the picture than just a beautiful home with investment potential.
If you’re a first time investor and would like to explore the foreclosure market, 2014 is a great time to get going with that investment. But, before you take any step further, you need a basic understanding of how foreclosures work and what the deal entails.
First things first!
A foreclosure is a legal process in which the collateral asset (property) is being forcefully sold by the lender to recover the balance of a loan which the borrower failed to pay.
Why Homeowners go into Foreclosure?
There could be a host of reasons why homeowners stop making payments towards their loan. While some choose to do so voluntarily, the other inevitable reasons include:
- Sudden unemployment
- Physical inability to continue working (medical reasons)
- Excessive debt
- Increasing bill payments
- Divorce
- Disagreements with the co-owner
- Job transfers
The Process
Foreclosure proceedings differ from state to state; however, in most cases, the borrower receives a notice of default regarding the nonpayment of his balance loan amount. He / she is given a certain period of time to clear off the loan. If he / she fails to do so within the stipulated time frame, the lender is forced to sell the property by holding an auction. The highest bidder acquires the property and the lender recovers his loan.
The Best Time to Act
As an investor, the most obvious option is placing a bid at the foreclosure auction and hoping yours is the highest. However, setting the right bid amount requires a little research about the property. While you might not be allowed to inspect the property in question, you may get in touch with local real estate agents who have a fair knowledge about the property and can help you determine its market value based on the condition of the home.
This is an essential step in the process so as to prevent bidding an amount higher than the value of the property. You do not want to incur loss!
Not many investors know that they can approach the homeowner before the wheels are set in motion for a foreclosure. At this stage, you can strike a deal with the homeowner so that he can clear off his pending loan amount without an auction and you can purchase the property for a price lower than market value before the other vultures come into play.
Funding Sources
If you’re entering into a foreclosure deal, the one thing you need to have ready is your source of funds. You have to be willing to pay cash upfront; therefore, you should consider this option only if you are willing to abide by the payment terms.
