Profiting from Foreclosures

In an arm's-length transaction, the buyer pays a fair price for a property, assuming that both buyer and seller have ample time to respond to market conditions, have readily available credit, and where neither the buyer nor the seller are pressured to close the deal. Foreclosures do not satisfy these criteria; hence, foreclosed properties sell for less than market value. The most common reasons for foreclosure are job loss, divorce, accident, illness, or business failure. Because purchasing foreclosures is generally not at arm's length, many a guru has pronounced that the best profits can be made from foreclosures, but the reality is far more competitive, since many buyers compete for those properties. Moreover, foreclosed properties have many pitfalls that must be avoided; otherwise, the buyer can incur significant losses. Real estate gurus assure their clients that profiting from foreclosures requires little effort, time, cash, credit, or even risk, but if it were that easy, then why wouldn't the gurus be making their fortunes buying and selling foreclosed properties rather than creating a lot of competitors for those properties?

Bank Foreclosed Condominium Units

Successfully profiting from foreclosures requires that you understand the foreclosure legal process for your state, and that you are able to research real estate markets diligently, and are able to accurately value properties and any costs required to renovate the property. And being able to negotiate the best prices is paramount.

Although the main reason for a foreclosure is that the borrower defaulted on a loan secured by the property, other causes of foreclosure include:

• failure to pay related homeowners association fees or special assessments

• transferring a mortgaged property without the lender's approval

• damaging the property or allowing it to diminish in value.

To initiate a foreclosure, the lender files a legal notice of default with a trustee or a lawsuit to foreclose, depending on whether the state is a trust state or a judicial state. The legal filing is published in newspapers or on the Internet and recorded in the deed to formally notify property owners, other holders of legal claims against the property, and the public. Although uncontested foreclosures can be completed within 120 days, if the borrower contests the foreclosure, such as for due process violations, or for violations of consumer rights, then the litigation can extend foreclosure by several years. Sometimes, property owners file for bankruptcy to delay the foreclosure process by a month or 2, in which case, the lender must petition the bankruptcy court to lift the automatic stay, so that the foreclosure can proceed. When the property value is less than the remaining loan amount, many property owners simply walk away from the property and leave it for the lender.

Usually, foreclosed properties are sold at auction, but many times a lender takes possession by submitting a bid $1 greater than the value of the loan and associated costs, such as accrued interest, attorney fees, and other foreclosure costs. In this case, the foreclosed property becomes a real estate owned property of the bank, otherwise known as a REO property, often shortened to just REOs. During this holding period, the lender incurs insurance costs and taxes, and possibly other liabilities, such as environmental liabilities. Hence, lenders want to sell their REOs as quickly as possible. The lender will either list the property with a real state agency or sell it through an auction, especially if there are many properties to sell. Because most lenders do not have the wherewithal to rent the properties to await better selling prices, they strive to sell the properties as quickly as possible. The FHA, VA, Fannie Mae, Freddie Mac own many properties that are sold through real estate agencies.

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