|
Foreclosure Investing May be On the
Upswing, But it isn't for the Squeamish
In May, RealtyTrac, a leading online market for foreclosure
properties, reported that foreclosure rates were up 4 percent in
April from March levels, but up a whopping 65 percent from April
2007.
There's that old saying that one person's misfortune is
another person's happiness. But in these troubled times for the
mortgage industry, those who consider investing in foreclosure
properties should not only understand foreclosure and the
importance of cash in the process, but the emotional element
unique to this kind of investment. After all, each foreclosure
represents someone who has lost a home.
With the rise in foreclosures, you'll definitely hear more
about how "easy" it is to invest and make a killing.
But in reality, those who deal regularly in foreclosures know
that making a profit can be tough, and that's true even for
individuals with close ties to lenders and public officials and
lots of experience. Here's a look at the foreclosure process and
how it works.
What is foreclosure? A foreclosure happens when a
buyer defaults on their payments and the lender takes formal
legal action to seize the property. Foreclosures have
accelerated not only due to a downturn in the economy that's
affected home sales, but because many homeowners were tripped up
by adjustable-rate mortgages that moved to higher payment levels
than they could afford. State rules govern this process, but
generally, when a lender decides to foreclose on a property it
files a notice of default or a lis pendens (Latin for
"lawsuit pending"). This document is a public record,
and for buyers including other lenders it's the first step
in locating a property in foreclosure. A buyer looking for
foreclosures can look online for lists of properties in default,
but it's particularly important to double-check these listings.
Do all troubled properties have to be in foreclosure to be
sold? Actually, no. You will hear about
"pre-foreclosure" or "short sale" properties
put up for sale by lenders who have entered into agreements with
troubled homeowners who elect to give up the property to avoid a
foreclosure on their credit report. You will also hear about
such sales being done by intermediary companies who claim to
deal in these transactions. Some are legitimate, some are not.
Check them out.
How do people invest in foreclosure properties? There
are three primary ways this happens. First, you will see buyers
coming in at the "pre-foreclosure" stage. Second, you
will see buyers going after "REO" (real estate owned)
properties literally foreclosed real estate still on the books
of a lender. Third, you'll see foreclosures auctioned off at the
public courthouse or in private auctions, depending on how the
lender wants to market such properties to get them off their
hands. Each process has its own conventions for inspecting the
properties sometimes prospective buyers get time to inspect
what they might buy, other times little or none.
Can I borrow to buy foreclosures? If you have to
borrow money to buy foreclosed or other troubled properties, you
might not want to get involved at all. While the typical
purchase of a home involves mortgage financing that takes weeks
to secure due to credit checks and other factors, the sale of
foreclosure properties is typically a fast-moving process that
requires no-strings financing. Bottom line, lenders like cash.
There's another good reason to enter this process with cash
instead of debt. Even sophisticated foreclosure investors often
discover ugly surprises when buying property with greater
damage than they anticipated, for example and they may not
have the flexibility to borrow to fix those unexpected problems
after they borrowed to buy in the first place.
So, how do I educate myself? Start with some solid
advice about your personal finances and your tax situation. A
CERTIFIED FINANCIAL PLANNER professional can help review your
circumstances and how prepared you might be for this risky form
of investment. Beyond that, it's a process of learning how
various lenders in your community deal with pre-foreclosure and
foreclosure property and how public officials and private
auction houses in your area handle the auction process for such
property. Generally, this is knowledge that will take time to
obtain since all the parties involved in this process are busy
and besieged by many like you who want to learn. Be patient,
take the proper time to study the process and don't spend a dime
until you do.
June 2008 This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
|
