Often in real estate the #1 place to invest is in foreclosures.

Many market circumstances make it the perfect time for small and medium-sized real estate investors to purchase one or more foreclosed homes for their personal residence, resale, or rental. During downturns in the economy, more high-end properties go into foreclosure, so the feeling that foreclosed properties can only be obtained in high-crime regions is incorrect. Beachfront homes and homes in affluent areas are always part of the mix of available foreclosed properties. You can buy foreclosures for as little as 50% below market, but many foreclosures sell for as little as 10% below market. However, the savings can be doubled if the property is purchased from the mortgage lender that carries the delinquent mortgage loan. Certain mortgage lenders may be prepared to waive some closing costs, perhaps even provide an interest rate reduction or down payment.

information is king

The beginning investor must learn to navigate the foreclosure process. If you put in the time and effort, it will translate into savings. If you spend five hours a week doing research, it’s worth it.

For many consumers, the foreclosure process can be very daunting. Good properties can be obtained, but finding those properties requires research, preparation, tenacity and patience. The foreclosure process begins when a property falls behind on a mortgage loan. Many homeowners who fall into foreclosure have been struggling financially for a year or more before giving up, which usually means the home has gone without general maintenance for a while.

This could include everything from missing doors to torn off kitchen sinks. Remember that even in foreclosure-rich areas you will find front yards, broken appliances and windows, and dirty floors, carpets and walls. This could be a positive or negative for a homebuyer. Homes in poor condition can fetch bargain prices, but if you make the repairs and then resell the property, you could earn a small fortune. The first unwritten rule of real estate is location and it applies to these situations. If you walk into the house and there is trash everywhere, but the foreclosure is in an affluent area with high resale values, just hold your nose, walk through the entire house, and consider making an offer well below the asking.

Invest in foreclosures

When a mortgage lender determines to foreclose on a property, a notice of default is usually filed. Notices of default are public record and for investors the first step in finding a home in foreclosure. An investor looking for foreclosures can also buy magazines or, better yet, subscribe to a website that does all the work for you and lists all the defaults in your area.

Once a house has been located, search the public records. You will need to search for outstanding liens on the property, as these will often increase the purchase price. Bonds are typically placed on a home for outstanding property taxes. Be sure to also get comps (area sales) to help assess true value and likely gain. Explore local state foreclosure laws. Some states, such as Pennsylvania and Ohio, require the mortgage lender to sue the owner and obtain a court order to sell the home, a process known as judicial foreclosure. There are other states, including Texas and California, that follow the non-judicial foreclosure process, which does not require a lawsuit to sell. Virtually all foreclosures are returned to the bank or investor during auctions. While homes in great locations and in respectable condition generally don’t sell for much below market, run-down homes can, however, be purchased well below market.

The safest way to buy foreclosures

Lender-owned homes provide the safest deal for buyers who are new to foreclosures. There is no risk of taxes, liens, or tenants to evict, just what condition the property is actually in. A mortgage lender who is eager to sell may be willing to offer very attractive terms. If the mortgage lender has already ordered an appraisal and their deal includes title insurance, which is normal, then much of the risk associated with buying foreclosures can be avoided early in the process.

Finding Hidden Foreclosures

Foreclosures do not have to be previously owned homes, some foreclosed properties are new. These homes are not as easy to identify and rarely appear on national listings. In many areas, when the economy slows, it leaves many builders of new upper-middle-range properties overstretched with few buyers or prospects. When this happens, the banks that provided the construction loans take possession of the properties and then try to sell them. These are the famous hidden foreclosures because no one associated with the sale of these homes will refer to them as foreclosed properties.

Innovative investors often find homeowners who are on the verge of defaulting and are trying to keep some of the property’s value. If found early enough, the homeowner is usually willing to receive a small percentage of the difference between the home’s equity and market value. Pre-foreclosure shopping offers rare bargains, but most of all it requires persistence. Creditors often harass homeowners at this stage, so it can be very difficult to contact the owner. If the owner is contacted, the buyer could be in for a big surprise. Homeowners in default may not have phones or electricity, and they may have a variety of personal and legal problems. Also, they will most likely need a place to live before they can move out of the house the buyer wants.

This can be a high risk, high reward proposition, and it is not for first time foreclosure buyers.

the auctioneer

Many auctions are held on the steps of the county courthouse and have two distinct disadvantages: Buyers may not be able to inspect the home and will have to pay the full purchase price the same day. HUD holds auctions to help you get rid of properties you’ve acquired through defaults on federally backed mortgages. Great deals are hard to find if you go this route, but the cost of getting started with good credit can be very low as many mortgage lenders will lend the full price of the foreclosure or more.

If the property is to be used as a rental, many banks may require as little as a 10% down payment. Foreclosed properties purchased in good areas below market values ​​that appreciate annually can be a sound investment strategy for many buyers. Properties used as rental properties provide many investors with valuable tax deductions while the home increases in value and builds equity.