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Foreclosures
Foreclosures being sold on the courthouse steps are numbering in the thousands. Latest numbers released have the figure of ten thousand foreclosures a day and counting. That is a lot of real estate hitting the market. When these properties are sold at the courthouse through auction you can be assured that, someone from the lending institution will be there to bid up to the amount they are owed on the property. Never doubt that the bank will get at least the principle left owed on a property. The myth is that you can buy homes for pennies on the dollar, which is simply not true.
There are primarily three ways you can purchase a foreclosure; at the auction like detailed above, from the homeowner before the auction or from the lending institution after the foreclosure sale.
Buying From Homeowner
This is by far the preferred avenue for buying distressed property; however, it is likely the hardest. Owners who are bitter and upset probably will not be happy to talk with you about their home. This takes great interpersonal skills and a good amount of empathy. If you can win the confidence of the homeowner and assure them, you are not there to rip them off but to save their credit from further harm you will have an inside track on a potential investment. In addition, you will get the chance to inspect a property when otherwise you might not. Put together a win/win offer, your goal is to get the property with as much instant equity as possible but temper that with a willingness to be fair. There is a middle ground to be had in this situation, one that provides you with a good profit margin and leaves the homeowner with some dignity.
Auction
As stated above many homes are ending up on the courthouse steps for sale by auction. This avenue may render you a property well below appraised or market value. When you go be prepared, have your financing firmly in place, have a predetermined bid cap, and do your homework on the property. There can be hidden costs to a foreclosure and we will discuss these further on. This can be an opportunity but remember other investors are aware of the some opportunity so at this point competition could be stiff.
After the Auction
Lending institutions have to protect their interest in a property. That is why they will attend the auctions and place bids up to their investment amount. Sometimes they end up owning the property. Move quickly and you can still get the property at a fair price.
Buyer Beware
Foreclosed property is an opportunity but for the inexperienced, they can lead to financial problems. It cannot be stressed enough that you must do homework on a property before you buy it. Here are some common pitfalls to purchasing foreclosures:
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Check for hidden liens on the property, owners probably will not tell you about them and if it is a first loan, the bank does not have to disclose prior liens and they will survive the sale. This will mean you are responsible for paying them off, usually immediately. A full-blown title search can cost big money, however some companies will give you a quick search that yields raw data you must comb through.
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You may also have to pay past utility bills or IRS liens on the property.
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A few states allow a grace period for homeowners to buy back their property. This means they must pay the auction price plus a percentage to redeem the property. Be aware of anything like that in your area and the time frame it encompasses before you do extensive remodeling.
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You may not receive access to the home for inspection before purchasing. This will have to be a judgment call on your part. I would reserve these types of purchases for well-established neighborhoods and keep the price well below comparable property. Know that you could still get burned on this deal, roof or foundation problems not to mention termites will eat away exponentially at your profit.
Financing
If you have excellent credit this may be the time to cash in on it. You could turn a fantastic profit by flipping these homes or by holding them as rentals. Be sure you are prepared for the cost of holding the property in either situation, as it will take time to see cash flow from either alternative.
The best funding source you can use is other people’s money. Get all your facts together and pitch your idea to other investors. You may be turned down at first but when you find a good deal someone will recognize it.
Conclusion
Many a fortune has been made in the foreclosure market. If you are savvy and motivated you too could come away with a nice portfolio of real estate or a nice balance in your bank account. Both way this is a buyer’s market, be smart and you can walk away a winner.
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