If you are going to invest in foreclosures, I think it is important to know a little bit of how they work.

We’re going to discuss the general foreclosure process in the US and the 3 distinct stages of foreclosure you can invest in.

US Homeowner

Title & Lending Process:

•       Homeowner/Borrower holds Legal Title to the property…not the bank

•       Bank places lien on house for amount borrowed

•       Bank holds lien, borrower holds title

•       In the event of default on the loan, bank notifies borrower to make up back payments

•       After 90 days…3 missed payments…bank has the legal right to begin foreclosure process on the property and take the house back

•       Depending on the state, foreclosure can take anywhere from 112 days to 2 years

•       In today’s US economy, foreclosure can take longer…banks don’t want anymore houses back

Homeowner Rights:

•       Bank CANNOT take house back unless…

-It goes to foreclosure auction

-Borrower voluntarily deeds house back to bank (deed in lieu of foreclosure)

Foreclosure Auction:

•       Bank auctions the house at County Courthouse for amount it wishes to receive

•       If no one bids on the house, or if opening bid set by bank is too high for a bidder, bank gets the house back and list the property with a local Realtor (REO listing)

Foreclosures = Opportunity

•       24% of all US homes with mortgages are overleveraged…the house is worth less than what’s owed on the loan(s)

•       4 million foreclosure filings predicted this year

•       Bank will take back over 1 million homes

Foreclosure Stats
Number of Homes in Foreclosure

•       #1 Nevada…             1 in 33 homes

•       #2 Arizona…             1 in 49 homes

•       #3 Florida…              1 in 57 homes

•       #5 California… 1 in 62 homes

***stats from 4/2010

** Important: notice that the worst state in the country is running at a foreclosure rate of 3%, this is high rate compared to normal historic rates which are below 1%. HOWEVER, when I ask the question on stage while speaking to foreign investors of what % of house are in foreclosure in the worst hit states, I get answers of 15, 20, 30+ %!!!!! This is simply not true and the #s are available on many sources like realtytrac.com to prove it. Point is, thing are bad but even in the worst hit state in the US, only 3% is in foreclosure. That mean some people are still paying their mortgage contrary to media hype!!!

Purchase Options

There are 3 ways for you to buy “foreclosures.” Each way has a window of opportunity available at different times in the foreclosure process. All 3 have their pros and cons.

#1 Short Sale = bank agrees to settle for less than what’s owed on the loan

1^st stage of buying oppotunity:

-       Troubled homeowner is usually behind in mortgage payments and puts house on the market with a realtor. The asking price is less than what the mortgage is on the property so the bank will need to approve the offer. The bank has appoints a “loss mitigator” to handle the file. This is the main point of contact from the bank.

Short sale PROs

Full access to property

Potential to get financing instead of paying cash

Discounted price potential!

Clean title on property

Short sale CONs

Banks can take forever to make a decision

(Loss mitigators are buried with files!)

Efforts can be vain as banks can string you along for months and deny your offer and bring the house to auction instead. (sometimes the bank will take the property to auction at a lower price than your short sale offer too!!! Makes no sense from a #s standpoint and it can be very frustrating)

***If you are going to buy a short sale you need to make the realtor involved in the sale rides the loss mitigator very hard!!! Squeaky wheel gets the oil so someone has to stay on the loss mitigator at the bank or the file can get lost in the pile. An experienced realtor who has a track record of getting short sales completed is a plus!

#2 Auction = Home is bought at courthouse steps

2^nd stage of buying opportunity

The bank has had enough.  Any short sale offers are not being accepted and the bank has gone through the proper paperwork to set an auction date for the property at the local county courthouse.  This gives investor the chance to bid on the property and buy it cash. The bank sets the opening bid amount.

Auction Pros

HUGEEE discount potential

You know that day if you get the property

Less competition possible

Auction Cons

Must pay cash (usually at time of auction or within 24 hours)

No clear title (serious title issues possible, additional liens etc)

Limited access to property before the sale

Potential unhappy resident to deal with living in the property

****If you are going to buy at the auction you need cash and you need to do your homework. You must make sure there are no other liens on the property. You must make sure you are bidding on the right mortgage. Once you buy for cash at the auction(or called “buying on the steps”) all sales are final! You inherit any problems with the property. This is a very local game and it is usually full time local investors who invest in this niche because the due diligence can be intense and mistakes can be costly.

#3 REO (bank owned property) = Home has gone through auction process, no bidders, bank buys it back and lists the property with a realtor

The 3^rd stage of the buying opportunity

No one bids on the house at the auction and the bank gets the property back. At this time the property is assigned to an “Asset Manager” at the bank. The asset manager hires a local realtor to list the property for sale. (The same way we would list our own properties) This is now called a Bank REO property “Real Estate Owned” meaning the property is now owned by the bank. Now this is bad debt on the banks balance sheet and they could to get rid of it. Sell! Sell! Sell! These realtors can have great deals and working with them can be very rewarding! Banks prefer cash and they usually want to close quick to get the bad debt off their books. Banks do like to own and manage property and it is not their strength either!

Pros of REOs

Large discount potentials

Full access to property

Vacant/ no people or emotions to deal with

Clear title

Faster/ more predictable process than short sales

Repeat business with high volume REO realtors

Cons of REOS

*Usually have to pay cash and close quickly

*Competition

*** If you are going to work REOs (which is the niche we focus on) You need to be researching/tracking the REO listing constantly and build rapport with the REO agent (I will tell you how in the next tip)

The #1 Rule when buying a foreclosure

Foreclosures are the “hot topic” in the news today and every wealth guru is telling their students that now is the time to buy a foreclosure.

For the most part, I agree, foreclosures can be a fantastic way to find great deals. However, before you run out and buy one, it is imperative to remember the #1 rule.

Just because it’s a “foreclosure,”, does not mean it’s a good deal.

(short sale, auction or REO)

Let me repeat myself in case it didn’t sink in

Just because it’s a “foreclosure”, does not mean it’s a good deal.

Sounds easy enough but it amazing how many new investors I’m meeting who are willing to sacrifice due diligence and solid fundamentals just because the property is called a “foreclosure”

Cut through the media hype on these over played terms. It’s just a house that is owned by a bank and just like other distressed sellers, a bank will sometimes try to list their home for a high sale price hoping that someone will bite (whether as a short sale,  at the auction, or listing as an REO)

So don’t bite!  Do your homework first!  Know your #s and be sure to have a clear strategy that you are confident you can execute to make money with the property. This is crucial.

I promise you that the word “foreclosure” will not save you if you buy the wrong type of property(we will go over the right type in detail) The word  foreclosure will not save you if you buy a major fixer-upper but have no idea how to get it rehabbed! And the word “foreclosure” will not save you if you overpay for a property or have no exit strategy.

And keep in mind, out of every 10 foreclosures I review:

5 houses are total dogs and priced too high

3 houses are “ok” deals but not great

2 houses are really good and worth my time and effort so I will probably make an offer