Home foreclosures attract bargain hunters looking for cheap real estate deals. Low acquisition costs for foreclosures relate to mortgage loan terms, where homes serve as collateral. Beyond costs, buyers of foreclosures are better able to benefit from networking opportunities that help compound additional wealth. Learn the three stages of foreclosure, in order to best take advantage of opportunities that match your objectives.
Identify Motivated Sellers in Foreclosure
Foreclosures are costly for both lenders and borrowers. Lenders spend money on litigation and eviction proceedings to remove people from foreclosed premises. More importantly, lenders forego future interest income that may total up to hundreds of thousands of dollars. Alternatively, distressed borrowers risk eviction and severe damage to their credit reports. According to Experian, a foreclosure may stay on a person’s credit report for seven years, which would make it extremely difficult to be approved for mortgage financing during that time. The prospects of foreclosure create situations where both homeowners and banks are motivated sellers.
Buy Cheap Foreclosures
Most people buy foreclosures for their low prices. According to CNN Money, foreclosed real estate may sell for discounts of between 20 and 40 percent off market value. A prospective homeowner can exploit these savings as an opportunity to trade up into a larger property. Investors, however, take advantage of foreclosure sales to improve their chances for turning a profit.
The Foreclosure Process
Foreclosed properties move through pre-foreclosure, auction and real estate owned (REO) stages. Distinct benefits for buying foreclosed homes change, as a particular property transitions through each stage. In pre-foreclosure, a homeowner has defaulted on the mortgage, but has yet to be foreclosed upon and evicted. The distressed homeowner should be more agreeable to make small price concessions and repairs on the property. At closing, you will have earned goodwill and personal satisfaction, as you save a person from foreclosure and eviction.
After the pre-foreclosure stage, a home is auctioned off to the highest bidder. People that buy auctioned homes benefit from deep discounts, because these homes may require extensive repairs. Lastly, you may investigate real estate owned opportunities (REOs), which are bank-owned properties that carry important benefits over other foreclosures. REOs are clear of any title and lien disputes that often cause complications for pre-foreclosures and auctioned properties. For example, a property you buy at auction may be attached to a $50,000 tax lien. Municipal treasury officials could seize your new home, if property taxes are not paid off in a timely fashion.
Restore Foreclosed Property
Foreclosed properties allow for a greater degree of customization. Do-it-yourselfers view a foreclosed home in disrepair as a challenge to restore toward basic living conditions. Other buyers may look forward to hiring contractors that install hardwood floors, track lighting, and crown moldings to transform the distressed property into a dream home.
Foreclosures and Networking
Searching for, and buying, foreclosed property puts you into contact with numerous homeowners, bankers and other investors. These personal references can provide advice and leads to access financing, uncover investment opportunities, and identify tenants for your rental property.
The Advantages of Buying Real Estate Foreclosures, Sources:
CNN Money: The 3 Stages of Foreclosures
Investopedia: The 6 Phases of Foreclosure