HOW TO FIND & BUY FORECLOSURES TO CREATE INSTANT EQUITY
Buying a foreclosed property can be a great investment. It can also be a terrible one too. Not all foreclosures are created equal. Check out this video and read the article for a more in depth look at building wealth by investing in foreclosures.
WHAT IS A FORECLOSURE?
For all my newbies out there trying to get your feet wet, let me break down what a foreclosure is. In a nut shell, a foreclosure is when the owner has stopped making payments to the lender for various reasons and the lender has taken over ownership of the property. The state of Texas is a non-judicial state meaning the lender does not have to go through the court systems to take possession of the subject property. Essentially, it’s a relatively fast process compared to other states in the country.
There are other forms of foreclosures like a tax foreclosure and even HOA foreclosures. But we won’t go into detail about those. That’s for another day. For now, we are only talking about bank foreclosures.
HOW TO FIND THEM & WHERE TO LOOK
There are several places you can find foreclosures online and you can also attend the county auctions every month. But we will get to that in a moment.
When searching online, we think the best place to look is on the market where the banks have listed the property for sale with an asset management company.
Other places you can find some good deals are different auction sites like Auction.com for example.
If you want additional avenues to explore, you can check out HUD for their recent listings of foreclosures. But we’ve had better luck and much success can be attributed to finding them on the market listed in our MLS.
DETERMINE THE GOOD & BAD DEALS
All foreclosures are NOT created equal. Some are really bad deals you should run away from. Others you may have to create something out of nothing to make it work. And every so often we come across a golden goose. It’s not uncommon for asset management companies or brokers to list foreclosures near full market value, no matter the condition. When searching for a good deal, make sure you know what to look for and how high the property can comp at.
You should also have a good exit strategy. Are you trying to pick up a flip? Or maybe pick up a buy and hold rental with decent equity to start with? Having a solid plan will help you determine which deals are bad and which deals are worth pursuing.
REO VS. AUCTIONS
An REO is basically what we have been talking about so far. REO stands for Real Estate Owned.
It’s a real estate owned asset the lender or bank has acquired through foreclosure. You can make offers, go see the property in person, and even get your ballpark figures of how much it will cost to fix the place up. You can also finance the property rather than paying cash on the spot. Like I mentioned earlier, we’ve had good success going this route.
An auction on the other hand, you aren’t allowed inside the property to take a look, but you can drive by the property and look at the exterior. But you can’t do inspections and you can’t make offers directly to the bank or brokers.
An auction is usually held at the beginning of every month in the county the property is located in. And it’s not just one property they are auctioning off, there are dozens sometimes hundreds depending on economical conditions.
If you attend an auction one day, you better get ready! It’s fierce competition. There are full blown teams and firms out there with very good strategies to purchase a property they are interested in. My advice, go to the Harris County auction one day just to observe and get a feel for things.
What happens if you are the winning bid?
Well let me back up for a second…first to even be eligible to bid you have to give an earnest money deposit of 5k-10k up front. And if you somehow manage to win a bid you absolutely must pay cash right then and there. You can not finance a property from an auction. And if you try, well you lose your earnest money deposit.
Going back to the winning bid for a second, don’t get too excited if you won. Most banks have reserves they need to meet before they will let the property go. Let’s say for example the reserve is $200,000. Your winning bid was $150,000. Well since the reserve wasn’t met, the property will not be sold. It’s up to the lender what they want to do next; either try again next month or list it on the market.
WHAT ABOUT INSPECTIONS & REPAIRS?
As I said a moment ago about auctions, you aren’t allowed inside the property for you to view or inspect. And they definitely aren’t making any repairs for you.
However, a foreclosure you see online is a different story. You can view the property just like any normal listing when house shopping. But don’t expect the lenders to make any repairs, the property is sold as-is where-is.
CAN ANYONE BUY A FORECLOSURE?
Most of the time the answer to this question is yes for an investor. But there are certain circumstances with HUD cases where investors aren’t allowed to make an offer until the house has been on the market for ‘X’ amount of days. If you are looking to purchase a foreclosure as your primary residence then you shouldn’t have to worry about anything. Either way, be sure to do your own due diligence or check with your real estate agent to see if there is anything you need to know about.
SHORT SALE VS. FORECLOSURE – WHAT’S THE DIFFERENCE?
A short sale is different than a foreclosure. It’s the last attempt by the homeowner before the bank decides to proceed with taking ownership. A short sale is where the owner has written permission from the bank or lender to sell the property for less than what they currently owe. But understand this, you can’t negotiate price. The price is what it is. And depending on the price and comps in the neighborhood, this can be a good value pick up. One of our clients purchased a short sale in the Manvel / Pearland area a year ago for $57,000 under market value. And all that needed to be replaced was the flooring. Talk about instant equity!
CAN YOU NEGOTIATE PRICE?
Yes and no. For normal foreclosures you can submit whatever offer price you want. We lowball banks all the time and some of our biggest deals came from doing that. The worst they can say is no. And even better if they come back with a counter. Sometimes they play hardball and come back with full price counters 3 or 4 times before they reduce the price. But just know it’s most certainly possible to negotiate a normal foreclosure.
However, when it comes to short sales you don’t have the luxury of negotiating the price. The lender is already taking a loss without exploring other avenues like foreclosing and going to auction or listing at a later date. The homeowner is selling for less than owed, and has written permission from the lender. The lender may decide to drop the price on their own one day, but don’t bank on it being much.
But going off what I said earlier about my client picking up a great deal, the price could be good enough as it is depending on your exit strategy.
PRE-FORECLOSURES – GOLD MINE OR BUST?
I want to get one thing straight, if you are not an investor stay far away from pre-foreclosures. It can get messy especially if you have no idea what you are doing.
There are many creative ways to purchase a house from someone that’s facing foreclosure. You can buy the house at a steep discount, paying them a certain percentage of their equity, or you can subject-to the deal where you take over their loan. I mean the creativity is endless here. Keep this in mind though, you will have to pay a lot of money to bring the loan current and in good standing with the lender for them to stop the foreclosure proceedings. There are several resources online you can subscribe to and get a list of addresses for you to prospect. But you better be prepared to face some extremely angry people.
I can go on and on about foreclosures and the investing world. But I just wanted to keep it simple for the sake of this article and shed some light on what might be possible for you. Whether you are buying as your primary residence or an investment, foreclosures can be very rewarding. Just make sure you know what you’re doing!
If you have questions or want to talk more in depth about investing in a foreclosure, feel free to reach out to us and we can schedule a time to talk!