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Should You Invest In Foreclosures?

Not all foreclosed properties are available at discount.

Do your research and do your home work when looking at forclosures. Know the are you are buying in, find out what is a reasonable price for a similar home. Look at the property and bring some one else with you to be an objective observer. Write out lists of possible repairs, if you see anything suspicious have a specilaist do an inspection.

The laws that dictate how foreclosed homes are seized and sold on the market again vary from State to State. Make sure to check your State's laws to get a full understanding of the process before you assume its the right move for you to make.

Because timing is often of the essence in pre-foreclosure sales, you may feel pressured to enter into contract or put cash on the barrel while waiving inspection. Try not to waive inspection on a property which is being foreclosed, no matter how good the deal, or if you do insist on the maintenence of an escrow account funded by the seller to cover any major zoning, environmental or building code infractions that you may uncover upon detailed examination, and a contract indemnifying you and holding you harmless from any liabilities that may arise. Thee types of problems dramatically limit the marketability of the home when you attempt to resell, and depending on your local jurisdiction, may even force you into demolishing the property or engaging in expensive cleanup. In a worst case scenario, in the event of ground water contamination etc, you may be subject to fine or even expensive litigation from municpalities and individuals, and a fresh homeowners policy would not cover it.

The best time to buy foreclosure properties is before they get to foreclosure. If you subscribe to a notification service get involved at the default level. Offer the owners in default an equity sharing deal, you bail them out for a share of equity. This is usually a win-win situation and you can make a lot of money just bailing out people in default, its usually and easier deal to make and you still win regrdless what happens becasue you will be inposition to foreclose yourself if the owner finally can't make the deal work.

Another good way to handle foreclosures is to look for notices of default and see if the owner is interested in an equity sharing arrangement. In equity sharing you bail them out for the equity of the property at a certain point. I like to do a 5 year equity sharing agreement with homeowners where you agree to bail them out in exchange for a portion of their equity and the return of your investment plus interest in 5 years while they continue to reside in the home and make the payments. Sometimes you do 50% of the equity at sale depends on what works for everyone. One of the risks is that during that same period the homeowner will default again and you would have to foreclose and wind up owning the property, of course you may not see that as a risk depending on your situation.

Even though there has been a high amount of foreclosures in the nation, they have been touted as "easy money" by real estate investors trying to sell seminars more than real estate. Regardless of where the hype came from the demand is still perhaps more than the supply. For this reason banks have been able to sell their homes more and more at "market value." For instance, Freddie Mac through HomeSteps will actually renovate the homes themselves in order to make them available for full market value. Their goal is to sell them to "end users," or people who plan on buying them as primary residences. In fact, HUD will only sell their homes to end users first, and then open the auction up to investors. Because of this, HUD auctions are flooded with investors, getting a bid in only after end users get a shot at them.

In most of the country's "hot" real estate markets, competition for foreclosures and stagnation of pricing has made the spreads on foreclosure rehabs and flips significantly lower than before, thereby increasing the risks associated with buying foreclosures. Consider targeting a market which may be slightly off the beaten path where demand is increasing as partof your straegy, to help you diversify the risks of buying foreclosures in hot markets.

Sometimes, you can negotiate a "short sale" with the lender. This is where the lender agrees to take a lower amount to pay off the loan, in lieu of going through the foreclosure process.

Doing your "due dilligence" is key. It's important to have a prelim title report done on the subject property(either by you or a 3rd party) to make sure there are no clouds on title.

The key to investing in forclosures is to start early. Contact you local title company and have lists of NOD's emailed to you. This will give you a starter list of homes that are facing forclosure. If you have issues getting the list then contact a Real Estate professional you trust. They can get one for you.

Typically, competiton for forclosures is very high. Be sure to act quickly if you see a good opportunity.

As mentioned previously its often best to identify future forclosures and work with the homeowners prior to the actual forclosure. If your going to be working in the forclosure market its best to get your financing in place so you can move quickly.

Also check the banks for REO or Real estate owned properties some like to sell their portfolio at a discount towards the end of the year. Especially smaller banks.

Very often, when a property is sold at a foreclosure sale, it is not in the best condition. Make sure you see the house before placing a binding bid on the property.

Also important to note, is that when you are bidding on a foreclosure sale at the county or municipal court, you need to have certified funds or cash, usually in the amount of 5-10% of the final bid price, to be given to the court as an "earnest money deposit" upon acceptance of your bid.
You then sign a contract and have generally 30-60 days to close. This time allows you to arrange for the financing, if any, on the property.
Make sure to check with the court for their specific requirements before showing up and bidding on a foreclosure sale.

There are high risks and hard work involved with buying foreclosure homes. A foreclosure property buyer needs to spend a great deal of time to find homes that are in foreclosure and to go through public records to make sure that the foreclosed properties do not have unexpected liens, such as tax liens, which could drive up the purchase price. Beginners should consider buying bank owned properties, which are often free from the usual risks associated with foreclosure homes.

When looking at foreclosure properties, failure to do the proper research can easily lead to as great a chance of dissapointment as of the excitement that comes with a great find. A. If you don't want your purchase to be an unpleasant experience there are some due diligence checks that you should make before you bid or make an offer on a foreclosed property.

While foreclosure listings may sound like increasable deals at first, one must be sure to do plenty of research before snapping up a foreclosed property. All too often, individuals purchase foreclosed property with one idea in mind only to find out that the property really isn't what they thought it would be. That cute one bedroom condo in a trendy area coudl actually turn out to be a basement studio in a not so close to re-development zone. To avoid this kind of mistaken identity, be sure to take the necessary steps to properly research foreclosure properties.

Without a doubt to be successful in investing in foreclosures the investor must get to the homeowner early. Many serious foreclosure investors drive through otherwise well kept neighborhoods looking for homes in an unkept condition. This can often (but of course not always) be a clue that the property is close to going into foreclosure.

You can use a simple formula to make sure that you have some cash flow or make money if buying a rehab project. You can take your after repaired value times 70% less repairs. (ARV x .70)-R = maximum offer. Obviously you can sway a bit from this depending on the area but this rule of thumb is used by professional real estate investors across the nation. You may want to contact remodelers in your area to gain an understanding of what repairs costs. This formula takes into consideration your holding cost until you find a renter or buyer.

For more information regarding this topic, please call Mike Williams at 516-921-9000 or email mwilliams@northshorefunding.com.