Determining if a Foreclosure is Right for You

No matter where you live, the topic of purchasing a foreclosed home is bound to come up in social settings. That’s because there are so many right now, and there are so many people promoting the foreclosure investment opportunities. But are foreclosures really a good deal?

Roger Price Owens, a Realtor with Prudential Americana Group, Realtors in Las Vegas, NV, says buying foreclosures is not for everyone. ‘First of all, it isn’t a 30-day process. Buyers that are either relocating or need to move their families, things of that sort, and are on a timetable are definitely barking up the wrong tree in looking at this as a prospective home to live in.’ To determine if buying foreclosures is for you, you have to understand the process as well as the pros and cons of this type of sale. So let’s begin.

Foreclosing on a Property
When a homeowner is delinquent on a mortgage for more than a month and the lender has not heard from the borrower, the lender will often begin the foreclosure process. The process varies from state to state. The first step is a public recording of a notice of default or a filing of a judicial lawsuit against the homeowner. The homeowner, during a specified period of time, can still reinstate the mortgage and retain the home if all past payments are brought current, as well as fees. If the homeowner can’t afford the home, the home will likely be sold in a pre-foreclosure phase by the homeowner, at an auction, directly from the lender or by some other government agency. This is when an investor can decide to purchase the distressed property.

‘I think a lot of people think that foreclosure purchases are like these huge $60,000-under-market purchases, and that is not necessarily the case,’ Owens says.

Despite the words of caution, Owens admits that if you have enough patience and understanding about the foreclosure process, investing in these types of properties could be advantageous.

What are the Benefits?
‘You are buying from the bank and properties are definitely reduced in price, let’s say generally below value,’ says Owens. But, as he pointed out earlier, today’s comparables are frequently being compared to other properties that are in foreclosure so the foreclosed properties are actually setting the market value.

Even so, buying foreclosures intrigues many. Richard Geller, CEO of MortgageReliefFormula.com says there’s little risk and can be great rewards if you purchase the property in a short sale.

‘What you do as an investor is you purchase a property, basically at a certain price, and the property is a short sale. So, the seller doesn’t care what you the investor pay for the property. [The seller] isn’t getting any of the money anyway. The homeowner is not getting a dime; it’s all going to the lender in a short sale,’ explains Geller.

A short sale is when a home is sold in the pre-foreclosure phase. The lender agrees to the sale and ends up taking less than the amount owed to the lender. Basically, the lender is letting the homeowner out of the mortgage in order to have the home be sold to a third-party buyer.

There are several other benefits to buying foreclosures, whether it’s a short sale or in any other phase of the foreclosure process. Lower purchase price equals a lower required down payment. Of course, foreclosures typically have motivated sellers who are eager to climb out from beneath the debt, and with that there can be motivated lenders who are hoping to not end up owning a property and then trying to sell it.

The Disadvantages
It’s not always sunny on Foreclosure Lane. Here’s what you should consider before you leap with both feet and your pocketbook into this marketplace.

Some foreclosures have what is called a ‘cloud on title’. In other words, there are liens or judgments against them. Some buyers get what they think is a ‘steal’ at an auction, only to find out later that the property has significant liens attached to it and now must be paid by the buyer which can result in taking a loss on the property.

Keep in mind, especially with properties sold at auctions, you will be taking the property sometimes ‘sight unseen’ and ‘as is’. Both of these should make you think before you slap down the money to buy a foreclosure. There can be a considerable amount of work to rehabilitate the property.

‘You definitely have sour-grapes issues by those who have moved out of [foreclosed] properties, and sometimes the banks do not repair the homes,’ says Owens.

Foreclosed-on homeowners may sell fixtures out of the home before they are evicted. ‘So you may find a foreclosure home without air conditioners, dishwashers -- [former homeowners] take the light fixtures -- anything they can sell to a pawn shop or to builders,’ says Owens.

He says buyers should be prepared to do out-of-pocket work on the home to get it to the condition they want.

Your best bet is to go into the foreclosure market knowing that while the properties may not be perfect, the end result can be the best for all -- a discounted property for you, the investor, and help to a distressed seller.