Foreclosure real estate has a certain infamy associated with it. Let’s face it, from late night television get rich quick schemes to the 3rd cousin of your twice removed brother-in-law who got a house for pennies, foreclosures are the stuff of great urban legend. In recent months, foreclosure real estate has become all too real as city after city struggle with defaulting citizens forced to let the bank usurp control of their once thriving homesteads.
The question remains whether foreclosure real estate is still the opportunity of a lifetime or just another much hyped method by those who really have no clue. Being a real estate investor, and a person who likes to think that he has a clue 
– I have attempted to walk through some basic facts and analysis to help you reach your own conclusions as to whether foreclosure real estate is for you.
- Understand the Process – Any good buyer or investor must do his or her homework. The same is true in real estate, stock investments and the like. With foreclosure real estate it is important to understand the steps involved and how a property actually comes to be known as a foreclosed property. Without getting into the nitty gritty here – the process is actually quite simple. A lender loans $X amount of dollars to a borrower. That borrower then purchases a property and takes ownership. The property has a lien interest which is the lender’s security in case the borrower decides to stop paying. When the borrower does decide to stop paying the lender starts providing notices to the borrower in hopes that the borrower will catch up on what is due. If the borrower ignores the situation the lender proceeds to file required legal documents that let the borrower know of a looming foreclosure. If the situation is not corrected the lender auctions the property at the court house steps. If an offer high enough to satisfy the banks interest, the bidding party has won the auction on that house and proceeds to close on the acquisition of their new foreclosure asset.
- Lenders Not Satisfied at Auction – if no bids are made on a property or they are not high enough to satisfy the lender’s interest, then the lender will effecitvely “buy back” the property at auction. This means that the lender walks away from the auction as the owner of that property. When this occurs the property becomes a “lender owned property”, also called a “real estate owned – REO property”. This means that the lender has decided to take the property back and seek to market and sell on their own.
- REOs and the Long Process - After banks get these properties back at auction they have entire teams dedicated to working with local real estate agents and property teams to get the properties ready to sell. When these REOs go on the market the lender is often trusting the expertise of the real estate agent to price the property appropriately given the characteristics of the asset and the other relevant factors.
Now that I’ve discussed some of the basics – question still remains whether foreclosures are the opportunity that everyone thinks they are. In short, I think the answer is no. Surprised? If your shocked let me explain. Foreclosures in an environment where credit was easy, appraisals were juiced and downpayments were for wimps, are not the same as foreclosures in other past time periods.
Let me show you by example: John and Suzie Q. buy a fantastic new home from a builder in a thriving subdivision in Las Vegas that sells for $400,000. Other homes of similar size and characteristics sold for only $250,000 one year ago but the market has been booming. The appraiser signs off on $400,000 and John and Suzie Q. take out a special 100% financing loan from Bank of Stupid. One year later, everyone wises up and guess what… the house of cards fall. John and Suzie Q. see their neighbors homes in the same neighborhood reduced to $275,000 and they are scared. A few months go by and their loan adjusts. They can’t afford the payment and the bank now forecloses. At the auction no one bids on the house because the bank wants $400,000. The bank then markets through an REO at the low, low cost of $350,000. Now is this a deal? Of course not. My point in walking through this example is that most of the foreclosures hitting the auction circuit these days are houses which are being born out of this credit debacle.
I want to be clear. I’m not saying that all foreclosures are bad. What I’m saying is that the modern hype over the great deals in foreclosures needs to be weighted against common sense economic, real estate and investing factors. The fact remains that many of the best foreclosure deals are swooped up by experienced investors that are banked by large amounts of cash.
For investors and persons looking to get involved in foreclosures I would recommend reaching out to companies that are investment specialists and actually start dealing with home owners prior to a foreclosure event. These deals are called pre-foreclosures. Pre-foreclosures are excellent for many reasons. A couple great reasons are that (1.) if you find a pre-foreclosure and contract it, you have eliminated any competition and (2.) most banks are willing to work on a short-sale in the pre-foreclosure stage. A short-sale means that the bank will sell the home for less than the debt they are carrying to get the asset off of their books.
If you are an agent, aspiring real estate investor or just a enthusiastic home owner looking for a great deal, I would recommend reaching out to a reputable real estate investment company that may be able to help you get started finding a great pre-foreclosure deal.
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