How to Buy Foreclosure Homes
By Steve Gillman - 2005
Yes, you can buy foreclosure homes as an investment strategy.
It is not as easy as many make it out to be, though, and you
may have some qualms about investing in this way. As for the
latter, all I can say is be honest and accept that the owners
are losing the home in any case, so your offer might be the best
opportunity they have at the moment.
Foreclosure Homes at Auction
Of course you can buy at auction and avoid meeting the family
that is losing their home. The problem is that the homes just
don't go cheap at most auctions. There are too many investors
getting into this area, so the chance of a great deal is pretty
It can be a bit complicated as well. You will often have to
arrange financing before the auction - despite the fact that
you may not be the high bidder. A pre-qualification letter from
your lender won't cut it most of the time. Find out exactly what
you'll need to bring to the auction before you attend, or better
yet, start looking at these homes before they are foreclosed
Buy Pre-Foreclosure Homes
If you know that a home owner is facing foreclosure, you may
have an opportunity to help him and yourself. Many owners who
are seriously in default are simple going to lose the home, and
wreck their credit. They may even lose all the equity they have
in their homes - unless you help them out. Let's look at an example.
Suppose your ad in the paper reads, "Losing your home?
Maybe I can help." A man calls, and explains that he is
several months behind on his payments, and has received a foreclosure
letter from the bank. First, you need to know if about the situation.
If it is a temporary situation, and the man may be able to catch
things up soon, you can either make some money with a second-mortgage
loan to him (if there is sufficient equity) or refer him to someone
who does these.
For the sake of this example, we'll assume he is definitely
going to lose the home. You discover that the home is worth about
$160,000 and he owes a total of $120,000 including back payments
and penalties. He wants to protect his credit rating from further
harm and he is ready to move on, but time is limited. He has
just weeks to get the place sold, and he is afraid he will lose
all of his equity.
You agree that this is a real concern with time so short.
In fact, to sell the home quickly, he would probably have to
accept $150,000 or less, and pay a real estate commission of
$9,000 (6%), plus he will have other costs of around $2,000 or
so. You do the math for him, and point out that IF he gets it
sold, he will likely walk away with just $19,000 ($150,000 minus
$9,000 commission and $2,000 in costs equals $139,000, minus
the $120,000 he owes).
However, if he doesn't get it sold real fast, he may get nothing
after a foreclosure sale where investors try to bid low and the
bank adds all legal fees to what is owed. You offer to get him
out with $15,000 cash, and he doesn't have to take the chance.
You buy the home for $137,000, which means he nets about $15,000
after some costs. This solves his problem and you get a home
for $23,000 less than market value.
Now what do you do with it once you buy foreclosure home this
way? You have a number of options. You could resell it, although
the profit might be minimal after paying a real estate sales
commission and other expenses, including holding costs. You could
rent it out - buying for $23,000 less than market might make
it more likely to have cash flow. Then there is another option.
If the seller really wants to stay in the home, you might
sell it back to him on a lease-option arrangement. He can rent
for two years until he is back on his feet (be sure this is likely),
and then buy the home for the likely market price of $176,000
(assuming appreciation of 10% in two years). You avoid the need
to pay a real estate agent to sell the home in this way, and
the family gets to stay where they are.
Of course if you just bought a home in foreclosure from a
family in this way, and then sell it back for a hefty profit,
they may be resentful. Explain that they are likely to pay just
as much or more when they are ready to buy again, but if it doesn't
feel right, don't do it. You don't want resentful tenants, and
they just might be happier moving on.
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