Understanding foreclosures is a must. You must know the process that is behind
them, and what the capital requirements are for each stage of
foreclosure. If you do not, then you will waste a lot of time that you
do not need to waste.
Let us take you through the steps of foreclosure so that you
have a proper understanding of foreclosures and it will help you to
purchase foreclosure houses.
Pre-foreclosure is the first stage in the process to understanding
foreclosures. This is what happens when homeowners start to fall behind
on payments and the lender will begin to initiate the foreclosure
This can be a very good time to get involved as a
real estate investor. You are still dealing with the owner of the home.
This is a good thing as it means that you can be a little more creative
with them than what the banks would allow you to do. It will
be much easier to use techniques like a lease option or seller
financing when you are dealing the seller. The bank will not allow you
to do seller financing or lease options if they own it.
It really depends on the type of deal you are doing. If you are doing a
short sale, then you will need financing and the down payment will be
required by the lender. With that kind of deal, you would need credit
to get financing, and cash for down payment and closing costs.
If you are doing a seller financing or lease option type deal, then
your upfront cash requirements will be much less and it will not
require credit. It all depends on how you structure the deal as to what
your cash/credit requirements will be.
The next step to understanding foreclosures is the auction. If
the homeowner cannot save their home, then the bank will foreclose and
the auction is the result.
In some states, the auction is called a trustee’s sale. In
other states, it is called a sheriff’s sale, or a county auction.
Regardless of what it is called in your area, the same thing is going
Basically, the bank is going to set a minimum bid on the
property. This is usually what was owed on the property plus the fees
they incurred for foreclosing. If people bid higher than the minimum,
then the bank will get their money and everything works out. This is
how the foreclosure auction works.
The cash requirements are the main problem at the auction. This is the
main reason people stay away from the auctions, especially
new investors. Many of the auctions require a deposit just to be
bidding (typically $5000 or more). If you are the highest bidder, they
want you to pay the remainder of the money in a short period of time.
In many places, it is 24 hours or less to pay the rest of the money.
That is the major problem with the auction is having the cash
requirements. If you have them, this can be a great place to get a
deal. If you do not, then you might want to look for another method of
finding deals. This is why understanding foreclosures is so important.
It will help you so that you are not wasting your time on something
that you cannot finance.
Bank Owned Real Estate
If no one bids higher than the bank at the auction, then the bank will
own the home and put it on the market with a real estate agent. This is
called a bank owned REO (real estate owned) house.
The bank will try to get top dollar for these properties like any other
property on the market. If you think that they are going to list the
property for what the owner owed on it, you are kidding yourself. They
are going to try and get the best price that the market will bear.
With these properties, it is really just a matter of making offers and
negotiating with the bank to see if they would be willing to work with
you. Be prepared to make a lot of offers before you find one where the
bank will negotiate with you.
Since you are buying these from the bank, the bank will normally not be
very creative. That means you are going to be purchasing the properties
straight up with a down payment and financing as required by the
lender. This is important to know when it comes to understanding foreclosures.
As you can see, most investors would be best suited to pursue
pre-foreclosures. There are more options on being able to get in and
out of deals. For investors who do not have a lot of money or credit to
use, this is a good place to get started.
Why? You are dealing with a motivated seller, a property that needs to
be sold, and you have creative financing options at your disposal. You
should see these creative financing options if you
are not familiar with them.
Understanding foreclosures let you know what to expect, how to
approach them, and what is required to buy properties in each stage.