Buying pre-foreclosed or foreclosed properties can be an inexpensive way to acquire rental properties and maximize monthly profit.
We’ve all heard about buying properties for “pennies on the dollar”. Sometimes it’s true, but usually not.
Many times, you can find and buy a property at a 40%-70% discount by searching through pre-foreclosures or foreclosures.
What is a Foreclosure?
A foreclosure is a property, which has already been assumed by the bank, and will be sold on the fair market or through public auction.
A foreclosed property has to go through a very detailed legal process in which lenders reclaim properties from borrowers who can no longer pay their mortgage.
What is a PRE-Foreclosure?
A pre-foreclosure is a property in the early stages of being repossessed due to the property owner’s inability to pay an outstanding mortgage or tax obligation.
The homeowner is still rightfully in possession of the property, but may not be for very much longer.
State Laws Vary
Like most housing issues in the US, the foreclosure laws vary from state-to-state, and homeowners often have redemption periods in which they can reclaim the property.
To further complicate things, the amount of time it takes to foreclose on a property is different in each state as well.
Pre-Foreclosures Offer High Potential ROI
Property investors can use these complex legislative rules and lengthy processing timelines to their advantage by finding homes that are in the beginning stages of foreclosure (i.e. a pre-foreclosure), and then offering to buy the house quickly and directly from the homeowner.
It can be a win-win for both parties.
The homeowner wins by:
- preventing a foreclosure,
- avoiding subsequent ruined credit,
- preventing a deficiency judgment. Yes, in some cases a lender can pursue the previous owner for the remaining debt after the sale of the foreclosed property.
The investor wins by:
- buying a property before other investors get the opportunity,
- avoiding a lengthy process of dealing with the government or lender to buy a bank-owned property,
- being able to help someone in a dire situation.
If the investor offers to buy the property with cash, the process might only take days instead of months, like a foreclosure does. Not to mention, the distressed homeowner may accept an offer that is significantly less than the property’s value simply because they need money quickly and cannot wait 54 days (national average in Oct 2013) for the property to sell through an agent.
In many cases, the homeowner has a significant amount of equity in the property, but has simply lost his/her job or income – thereby preventing them from paying their debts. This is your ideal seller.
When you locate this type of property, contact the homeowner and try to make a deal with them to purchase the home.
You want to try an avoid houses that are over 100% Loan-to-Value – for example, a 200k house with a 300k mortgage has a LTV of 150%.
Remember, just because something is discounted, doesn’t mean you should buy it.
If the house is underwater so deep that it’s hanging out with the Titanic, then it’s probably not a wise purchase.
If you do your research, you can save a lot of money on a property that you would have bought anyway.
Below is table that outlines the state foreclosure laws throughout the United States.
The nice folks at Foreclosure.com put this information together. Foreclosure.com is the tool that I use to find pre-foreclosures and discounted properties.