How to Break Into the Foreclosure Market
Seven steps to get you started
By RealtyTrac | Published: 2/03/2008
With mortgage interest rates at historic lows and a record number of homes falling into foreclosure, many real estate investors and homebuyers are pouring their money into the foreclosure market.
But it's not an easy market to navigate, so do your homework, be patient, learn the foreclosure process and, most importantly, be persistent. Here are the steps to get you started:
1. Know what foreclosure is. Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. It begins when a borrower/owner defaults on loan payments and the lender files a public default notice or a lis pendens (Latin for "lawsuit pending"), depending on the state. The default notice is a public record, and for buyers it's the first step in locating a property in foreclosure.Ultimately, the foreclosure process can end one of four ways:
- The borrower/owner pays off the default amount to reinstate the loan during a grace period known as pre-foreclosure.
- The borrower/owner sells the property to a third party during pre-foreclosure, allowing the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
- A third party buys the property at a public auction at the end of the pre-foreclosure period.
- The lender takes ownership of the property, usually with the intent to re-sell. The lender can take ownership through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction.
2. Find available foreclosure properties. Here are some tips:
- Look for public notices of foreclosures and auctions in local newspapers.
- Subscribe to online listing services like RealtyTrac.
- Work with a real estate agent who specializes in foreclosures.
- To find bank-owned houses that aren't listed with an agent, contact the lender for information.
3. Choose a foreclosure type you're comfortable with. There are different stages in the foreclosure process, and each stage offers unique advantages and disadvantages for the buyer. For instance, some buyers prefer buying bank-owned properties because they're uncomfortable dealing with distressed homeowners. Read more about the three bargain-buying opportunities:
- How to Buy a Pre-Foreclosure House
- How to Buy a House at Public Auction
- How to Buy a Bank-Owned Property (REO)
4. Check the property liens. Foreclosure buyers need to be aware of other liens on the property, which can drive up the purchase price. Liens typically placed on a home can be for outstanding property taxes or unpaid repairs or remodeling done by a contractor. For tips on how to check liens, read this.
5. Research the local state foreclosure laws. California and Texas, for example, follow non-judicial foreclosure process, which means that lenders are not required to go to court or file a lawsuit to repossess a home. Other states like New York and Florida require the lender to sue the borrower and get a court order to sell the property.
6. Get good at math. Calculate how much you'll need to sink into the property, outside of mortgage and tax payments. Necessary renovations, upgrades and other expenses can pile up and eat into your profit margin.
7. Secure financing. Whether you use cash, a home equity line of credit, resources from other investors or mortgage products, secure the money for your purchase in advance. Sellers only want to work with serious buyers. You could miss an opportunity if you don't have your financing in place.
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