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Bank-Owned Real Estate May Be Plentiful,
But Learn the Ropes Before You Invest
Last month, RealtyTrac, a leading online market for
foreclosure properties, reported that over 3.16 million
foreclosure filings were made in 2008, up 81 percent from 2007
and up 225 percent from 2006. There was one more stunning fact
that one in 54 U.S. housing units received at least one of the
following a default notice, auction sale notice and/or
full-scale bank repossession during the last year.
For those with money to invest in real estate, this is an
exciting but extremely risky time. 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.
You'll hear many advertisements telling you how easy it is to
invest in foreclosures and make a fast profit. But those who
deal regularly in foreclosures know that making a profit can be
tough, and that's true even for individuals with lots of cash,
close ties to lenders and public officials and plenty 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
that they could not 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 intermediaries 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 a
local government building 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. That's
where the risk comes in it's not uncommon for owners losing
their property to neglect it or damage it on purpose on the way
out. Repairs can be costly.
Cash or loan? Borrow to buy a foreclosure property?
With today's credit environment, don't count on any lender to
stake you no matter how attractive your credit rating is. This
is risky stuff. There's also a second reason. While the typical
purchase of a home or business property 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, a lender marketing foreclosed property likes 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.
Where to learn more? 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.
February 2009 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.
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