December 28th, 2008 5:52 PM by Uletas Greene Carter
Real estate foreclosures have hit historic high levels in recent years, due in part to the growth of the sub-prime lending market, expiring adjustable rate mortgages and the increase in 100% or greater loan to value mortgages.
There are three types of foreclosures:
NOD (Notice of Default) Buying pre-foreclosure involves locating a homeowner who is in default and sometimes working directly with the lender.
Pros: Good prices on properties, discounts often 20-35%. Low cash out investment possible if structured properly. Sellers are usually flexible and motivated. Sufficient time to research property.
Cons: Can be difficult to locate and talk with the owner. Competition can be fierce. Researching liens and working with the lienholder can be difficult.
Auction (NTS) Notice of Trustee Sale: Buying at the auction can be a financially rewarding way to purchase or financially devastating, depending on the research done prior to the auction.
Pros: Great prices on properties -- discount often 35-45%. However, there is often a lot of competition which can increase the cost of the property.
Cons: the most potentially dangerous way to buy foreclosure property. The process goes quickly and can be difficult for the novice. Certified checks for 10% (or even the entire amount)of the purchase price may be necessary and the balance can be due in weeks or even hours.
Real Estate Owned (REO) These are lender repossessed houses that the bank wants to rid themselves of.
Pros: The easiest way to buy foreclosure properties. REO properties are the best way for beginners to start investing in foreclosures. REO will always have clear title and usually has paid back due property taxes as well.
Cons: Less risk offers lower reward. Discounts range in the 5 - 15% arena but can be as high as 25%.
Added bonus buying REO's: If you can purchase the property from the lender who holds the defaulted mortgage, you may be able to get them to waive closing costs or points or negotiate a lower interest rate or down payment.
Tips for Investing in Foreclosures.
Secure financing early. If you have a pre-approved loan ready for the property when you locate it, you'll have more leverage to bargain a great price.
Inspect the property thoroughly. Hire a professional inspector to ensure there are no structural defects and that you know exactly what you are getting into.
Determine price in advance. Resarch the neighborhood and similar properties. Your real estate professional can provide information on what neighboring properties have sold for in the last six months.
Check the title. You also need to check to see if there are any liens filed against the property. A lien is most often filed when there are unpaid property taxes. Depending on the state in which you live, other unpaid debts can often be tacked onto the property as a lien as well.
Reserach the title thoroughly. The best price in the world is too high if the title isn't clear.
Foreclosure can be a great bargain to fix and flip, buy and hold, or live in yourself. However, it's always wise to check with a real estate professional before diving into the foreclosure investment process.
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