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Foreclosure Investing for Beginners
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Profit from foreclosures is more than buying a property at a foreclosure auction for pennies and
then reselling that property for a windfall gain the next day. There are other possibilities. In this
article, we will consider three ways you can profit from foreclosures.
Bid at the foreclosure sale
Buy an REO from the lender
Negotiate a sale with the distressed property owners
Before we dig in, though, let's consider foreclosure.
The Foreclosure Process
Foreclosure is the result of default. When borrowers fail to make their scheduled mortgage
payments, for example, or when owners fail to pay their property taxes or some related obligation
such as homeowners' association fees or special assessments, transfer a mortgaged property
without lender approval, or undertake renovations that diminish the value of the property, because
a contract is shirked, foreclosure can occur.
A legal "notice of default" or a "lawsuit to foreclose" (depending on the state) is typically filed to
initiate a foreclosure. This formally announces to the property owners, other parties who may have
legal claims against the owners or their property, and the public in general that legal action is
moving forward to force a sale of the property. This notice is delivered to the borrower at least one
month before a foreclosure sale (typically between 60 to 180 days) and subsequently posted on
the Internet or in newspapers as public notice.
In response, the borrower can do several things to prevent or delay the foreclosure.
Workout the loan with the lender and perhaps reinstate or even refinance their mortgage defaults
File a legal defense against the lender and in turn drag the process into court and delay it for a
year or longer
File for bankruptcy and automatically stay the foreclosure action. In some situations, a bankruptcy
court can even annul a foreclosure sale that has already occurred.
Okay, but with no loan workout, and when legal defenses or delaying tactics are ignored or run
out, the foreclosure sale date arrives and the property is auctioned to the highest cash bidder.
2. Thus bringing us to the first way you might profit from foreclosures.
The Foreclosure Sale
Though foreclosure sales typically lose money for lenders, lien holders, and property owners
because foreclosed property sells at a price lower than market value, foreclosure auctions are not
that easy because they are not a typical market value transaction.
No information about the property is given other than its legal description. You must pay cash.
There is no "contingency" allowance for financing. The property is sold "as is" with no guarantees
or assurances about the title, condition, environmental hazards, or even that the property will be
conveyed free of occupants (you may inherit the owner, tenants, or squatters).
It's true that savvy bidders can turn big profits at foreclosure sales, but there is a caveat. Never bid
blind at a foreclosure sale--you have to do your homework.
REOs
Lenders that win the bid at a foreclosure auction classify and sell the property as an REO ("real
estate owned"). Thus bringing us to the second way you can profit from foreclosures--purchase an
REO direct from a mortgage lender.
Since lenders often want to remove REOs from their books as quickly as possible, they may grant
buyers favorable terms such as low or no closing costs, below-market interest rates, and low down
payments. Moreover, when the property needs fix-up work, lenders are prone to accept offers at a
discount price. Lenders don't give REOs away, but you can get good deals.
You can find REOs by attending and following up after foreclosure sales, or by contacting a real
estate agent who markets REO listings.
Distressed Owners
Lastly, you can profit from foreclosures by buying property from distressed owners.
Divorce, job loss, accident, illness, business failure, and other setbacks do cause people to miss
mortgage payments and get into foreclosure. You may be able to help them salvage their credit
record and some equity, while at the same time secure a bargain for yourself.
But the "get rich in foreclosures" gurus greatly exaggerate the possibilities of profiting from
property owners who face foreclosure. The reality is that when you talk with property owners in
foreclosure, you're far more likely to uncover a minefield of problems requiring skill and creativity
then a simple deal.
Owners in foreclosure, for example, often owe more than their properties are worth, meaning you
must talk the lender into a "short sale". The lender must voluntarily reduce the balance due on its
loan so that you receive a fair profit for agreeing to make up past-due payments and take over the
loan. This is not easy.
3. Furthermore, many who face foreclosure contend with the claims of multiple creditors. You must
be sure that none of those creditors has filed a lis pendens, or the IRS a tax lien. If so, you will
have to clean it up to gain clear title.
Moreover, before you finalize a pre-foreclosure purchase with a property owner, thoroughly
inspect the property and accurately estimate the costs of repairs and renovations. You surely
cannot profit from foreclosures whenever you gloss over inspections and make only an eyeball
guesstimate of expected costs.
Finally, bear in mind that someone facing foreclosure will not be an easy person to deal with. So
don't act like a foreclosure shark. Rather than a "Here's my offer-take it or leave it" approach,
develop a sensitive, empathetic, problem-solving approach. You're more likely to come up with a
win-win agreement.
Here's to your success.
About the Author
James Kobzeff is the developer of ProAPOD - leading real estate investment software solutions
since 2000. Start working with rental property today. Discover how to create cash flow, rate of
return, and profitability analysis presentations in minutes! Go to => www.proapod.com
Article Source:
http://EzineArticles.com/?expert=James_Kobzeff
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For more information on making money with foreclosures, visit
http://www.skyvaultpublishing.com/LDDNet/formula.html
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