If you’re investing in real estate, chances are you’ve researched the foreclosure process. The foreclosure market is full of amazing deals, and knowing the right stage to buy will help you get the most out of your investment. Depending on your local economy, each stage will offer a different type of potential for your investment portfolio.
The Pre-Foreclosure Stage
Previous foreclosures are known as short sales in the real estate world. This is probably the most advantageous stage of the foreclosure process for investors because lenders are willing to make better deals. Pre-foreclosures occur after the borrower has missed mortgage payments, but before the house goes to auction. There are actually two stages to a short sale. The first is when the homeowner does not pay his mortgage, or is more than 30 days late on the payment. The second part is when the homeowner receives a legal letter known as a Notice of Default.
As a real estate investor, you want to find sellers who have actually received a Notice of Default on their mortgage because they are more than 3 months behind on payments and will likely work with you on a purchase. Before receiving this notice, sellers have ample opportunity to catch up on their payments and cure their loans.
The Foreclosure Stage
The foreclosure stage begins after the homeowner receives a notice of default and the lender takes legal action against them. They will be evicted from the house and the lender will repossess the property. When this happens, the lender must place the home at the foreclosure auction. In some states, this is known as a fiduciary sale.
Trustee sales are great because they give you a lot of bargaining power. Foreclosure notices are published in the newspaper, allowing you plenty of time to research properties before deciding to bid on a home. Once you find a property you want to bid on, you can go to the auction and place your bid.
The foreclosure auction has many pitfalls, but if you do your research and understand the market, you can get some really great houses in great neighborhoods. Many real estate investors use bidding services that will bid on homes for them. If you choose this route, all you need to provide is your requirements for a house and the bidding service will do the research for you.
The Post-Foreclosure Stage
After a home goes through the short sale and foreclosure auction stage, it ends up as a post-foreclosure property. This is known as bank-owned or REO-owned real estate. These homes end up back on the original lenders’ books as a non-earning asset. Basically, this means that the bank owns the house again, but is not making any money on it.
At this point, the lender has spent a lot of money on the foreclosure and may actually be trying to recoup the fees and money lost during the foreclosure by bringing them back to the sales price. At this stage, the house is sold for the highest price of the entire process.
One advantage of buying REOs is that banks are highly motivated to take the property off their books. They are likely to be more willing to negotiate at this stage, as the property is costing them money.