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SHOW NOTES FOR EPISODE 506: INTRODUCTION TO INVESTING IN FORECLOSURES
With numerous predictions of a major market correction on the horizon, savvy real estate investors are standing ready with cash-in-hand to purchase foreclosures. In this episode, Bill provides an introduction to the basics of foreclosure investing, along with the pros and cons.
Tip of the Week: Terminology – Holdover Clause
- Holdover Clause – This is a section of your Real Property Lease which describes what will happen when the term of the Lease expires, and it covers the possibility that the tenant remains in the property.
- Holdover maybe strictly prohibited, and the clause will provide that the Landlord may evict the Tenant, or that the Landlord may move the Tenant’s possessions, out of the property, and change the locks provided this does not violate State or Federal Law.
- Most Leases will provide for the Tenant to continue to occupy the premises under certain circumstances, and conditioned on certain payments.
- The Tenant will be in a month-to-month tenancy, and each advance payment will only ensure the following month’s occupancy.
- The Holdover Clause will describe the terms that will prevail if the Landlord does permit the Tenant to continue occupancy, month-to-month, but the Tenant will rarely have any rights at all compared to the rights enjoyed under a 12 month lease.
- This week’s Tip of the Week terminology comes from: The Language of the Deal – Real Estate Investing Vocabulary of Terms by Michael Lantrip
Introduction to Investing in Foreclosures
I have been talking a lot about predictions of a crash or recession in the 4th quarter of 2021. I’m not saying this will happen at that time but, as a prudent real estate investor, I want to be prepared. If this happens, the number of foreclosures will grow significantly and for those who are prepared, there may be great investment opportunities.
Investing in foreclosed homes is one of the real estate investing niches that has tremendous potential, sometimes more profitable than other forms of real estate investing. How else can you buy a home faster than the traditional means, for a discounted rate, and build equity faster than nearby properties?
But with that potential comes great risks.
To be a successful investor in foreclosure properties, real estate investors have to know:
- how to find and acquire a foreclosed property
- how to finance a foreclosed property
- how to ensure there are not unknown liens or other back taxes
- how to renovate them without going over budget
- an exit strategy where the investor leaves with a profit
- and more
These are all items we will discuss in this article to help you decide if it’s the right real estate investing niche for you.
What is Foreclosure Investing?
Foreclosed homes are properties whose owners have been unable to maintain mortgage payments.
The mortgage contract specifies what bank has a lien on the property.
When a home goes into foreclosure, that bank takes ownership of the home and then puts it up for sale.
Foreclosure investing is when a company or individual buys these foreclosed homes for renovation and resale.
Most foreclosed homes are sold at auctions.
Advantages and Disadvantages of Foreclosure Investing
Buying a house in foreclosure is not a transaction to take lightly. There can be unique rewards from buying a foreclosure, but there are also many risks. So how do foreclosed homes work to your benefit, and what should you look out for?
Advantages
- Motivated Sellers – Once a bank foreclosed on a property, lenders are highly motivated and looking to recoup any money they can from the property.
- Quick Close – That means they sell foreclosed homes as soon as possible, allowing a much quicker close than a traditional property.
- Discounted Price – In most cases, foreclosed homes are sold far below market value, sometimes 20% to 50% lower than other properties in the same neighborhood. That’s an advantage rarely seen in other forms of real estate investing.
- Clean Titles – Another advantage is that when buying a foreclosure, the bank typically satisfies all liens, and the new owner usually gets a clean title from the bank. That means they’re not responsible for any back taxes or debts that the homeowner might have had — but keep in mind this is something to verify, because each property can be different.
- Quick Equity Play – Also, because homes can be bought far cheaper, investors can build equity in foreclosed homes more quickly than other homeowners in the neighborhood, making it possible to charge more for rent or sell the property at a higher price.
Disadvantages
- Property Condition Risks – Because foreclosed homes are sold “as-is,” their condition isn’t guaranteed.
- Rehab Costs – They may need significant repairs and improvements to not only be a sound structure, but also to be appealing to renters or new owners.
- Deferred Maintenance – It’s safe to assume the previous homeowner of a foreclosed home couldn’t afford to fix issues if they couldn’t even keep up with mortgage payments.
- Requires Additional Capital – Because of this, a foreclosure investor may need access to a lot of capital — whether it’s through a bank or private money lenders — to get homes back into good condition to make a profit.
Finding Foreclosure Properties To Invest In
The first part of learning how to buy a foreclosure — and most forms of real estate investing — is finding a property. In some ways, it’s not too different from looking for traditional home sales, with some additional steps.
Where to Find Foreclosed Homes for Sale
There are several ways to find foreclosed homes.
- County Records – Since foreclosure is highly regulated, foreclosed homes must be documented in public. You can find records of foreclosing homes at your local County Recorder’s Office.
- Public Postings – Notices of Sale for foreclosed homes must be published in local newspapers and their websites.
- Banks and Government Agencies – You can also search websites for banks and government agencies.
- Auctions – Auction houses that hold foreclosure sales can also tell you when the next one’s happening.
- Realtor Foreclosure Specialists – Or, you can utilize relationships with local real estate agents specialize in foreclosures.
- Online Sites – Online realty sites like Zillow or Redfin also identify homes in the foreclosure process in area searches, but keep in mind that some foreclosures may be so new that they haven’t made it to online sites yet.
Financing Foreclosed Homes
There are many ways to finance the buying of a foreclosed home, and it comes down to your experience, network, and overall business strategy.
- Renovation Loans – Some lenders offer renovation loans that cover the purchase price and expected repair costs of foreclosed homes.
- Conventional Loans – You may even be able to obtain a conventional loan for a foreclosed home if it is in good and sound condition.
- Hard Money and Private Money Loans – Another option is loans outside the traditional banking system — these include hard-money and private money loans.
Additional Foreclosure Investing Tips
- Roll Up Your Sleeves
- You’ll likely have to make major improvements on a foreclosed home to make it sale-worthy.
- Be ready to work hard and have ample cash reserves for repairs and upgrades.
- Ensure Liens are Paid Off
- While most foreclosure transactions relieve the buyer of any existing debts tied to the homes, don’t take that for granted. Double-check to make sure your title will be lien-free before you buy a property — or else you can face a significant amount of debt just to keep the property.
- Get the Property Inspected
- Never buy a foreclosed home until you’ve had it inspected by a professional. They’ll be able to find issues with the property that aren’t visible to the untrained eye, and by spotting something, they can save you money down the road.
- Know State Foreclosure Laws
- Every state has different regulations on how to buy a foreclosure home.
- To avoid complications, learn what your state’s laws are. Your state’s Attorney General website is a great place to start.
Foreclosure Investing
Buying a house in foreclosure can be an extremely profitable dependable income generator for real estate investors. But it’s not without its share of risks.
Before investing, ensure that you have the right training — and even after that, make learning about foreclosure investing and other types of real estate investing a lifelong habit.
Reference: https://wealthfit.com/articles/foreclosure-investing/
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