Should You Buy Foreclosures At Auctions? Part 1

Many beginning investors are attracted to foreclosed properties auctions. They heard the stories of picking up foreclosures for dirt cheap—buying houses for pennies on the dollar— and renting them for a nice monthly cash flow or flipping houses and walking away with a tidy profit and live the go “good life.”

While many investors do find homes repo bargains and make money, the process is not as easy and trouble-free as some gurus and books claim. And, if buying and renovating foreclosed homes were that easy, everyone would invest in government foreclosures, bank own homes and VA foreclosures to get rich.

The bottom line: buying, selling and renting foreclosed homes and other real estate require research, knowledge, experience, time, money and lots of patience.

If you want to invest time and money in foreclosed properties at auctions, you need to have a comprehensive understanding of how the system works, which increases your chances of success.

Foreclosure basics

Foreclosure refers to the legal process that allow mortgage lenders or government entities a legal avenue to claim properties from owners who fail to make payments, including mortgages and taxes, to resell and recover the money owed by the property owner.

The most common reasons foreclosures occur has to do with homeowners who fail to make the necessary mortgage or home-equity loan payments. Some other reasons borrowers lose property to foreclosure:

• Nonpayment of property taxes
• Inability to make a balloon payment on a home loan
• Failure to carry insurance

Mortgage lenders will also foreclose on a homeowner who fails to keep the property in good condition.

Understanding the stages of foreclosure

The actual process of foreclosures varies from state to state. By separating the foreclosure into three phases—preforeclosure, auction and REO properties¬— makes it easier to understand how it works and the approach to take for your foreclosure investment strategy.

Preforeclosure: This term refers to the period after the homeowner has defaulted on the home loan– stopped making payments and is 90-days delinquent. The owner probably has received the initial “Notice of Foreclosure” from the lender, but the home has not been put up for sale at foreclosure auction.

Many foreclosed homes investors take advantage of this time to deal directly with the property owner, which eliminates competition from other investors. This approach can be an effective strategy and a good method to master. It’s another way to foreclosures bargains, especially during periods of tight housing inventory.

Foreclosure homes auction: After the court rules a homeowner has defaulted on the loan, the auction involves the actual act of the court confiscating the home from the homeowner and selling it to the highest bidder at a public proceeding. In most jurisdictions, a trustee or county sheriff handle the auction process. (See Part 2 for a more through explanation)

Bank owned homes: At many auctions, foreclosed properties fail to sell or the bank makes the highest bid. In this case, the property is called “real estate owned” (REO) by the lender. Banks are not in the real estate investment business—when it comes to taking title to these homes.

They will usually list REO properties with a local real estate agent or other party to sell bank owned properties on the open market.

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