How To Locate And Profit From Real Estate Foreclosures

By Author: James Kobzeff
Total Articles: 44
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Profit from real estate foreclosures is more than buying a property at a foreclosure auction for pennies and then reselling that property for a windfall gain the next day. There are other possibilities. In this article, we will consider three ways you can profit from foreclosures.

1. Bid at the foreclosure sale
2. Buy an REO from the lender
3. Negotiate a sale with the distressed property owners

Before we get started, though, let's consider the process of real estate foreclosure.

The Foreclosure Process

Foreclosure is the result of default that generally occurs because a contract is shirked. When borrowers fail to make their scheduled mortgage payments, for instance, or when owners fail to pay their property taxes or some related obligation such as homeowners' association fees or special assessments, transfer a mortgaged property without lender approval, or undertake renovations that diminish the value of the property, because a contract is violated, foreclosure can occur.

A legal "notice of default" or a "lawsuit to foreclose" (depending on the state) is typically filed to initiate ...
... a foreclosure. This formally announces to the property owners, other parties who may have legal claims against the owners or their property, and the public in general that legal action is moving forward to force a sale of the property. This notice is delivered to the borrower at least one month before a foreclosure sale (typically between 60 to 180 days) and subsequently posted on the Internet or in newspapers as public notice.

In response, the borrower can do several things to prevent or delay the foreclosure.

1. Workout the loan with the lender and perhaps reinstate or even refinance their mortgage defaults
2. File a legal defense against the lender and in turn drag the process into court and delay it for a year or longer
3. File for bankruptcy and automatically stay the foreclosure action. In some situations, a bankruptcy court can even annul a foreclosure sale that has already occurred.

If the borrower is unable to workout the loan, or other legal defenses or delaying tactics are ignored or run out, the foreclosure sale date arrives and the property is auctioned to the highest cash bidder. Thus bringing us to the first way you might profit from foreclosures.

The Foreclosure Sale

Though foreclosure sales typically lose money for lenders, lien holders, and property owners because foreclosed property sells at a price lower than market value, foreclosure auctions are not that easy because they are not a typical market value transaction.

No information about the property is given other than its legal description. You must pay cash. There is no "contingency" allowance for financing. The property is sold "as is" with no guarantees or assurances about the title, condition, environmental hazards, or even that the property will be conveyed free of occupants (you may inherit the owner, tenants, or squatters).

Yes, it's true that you can turn big profits at foreclosure sales, but do your homework. Otherwise, if you bid blind, without thoroughly researching the property, you can also get burned.

REOs

When lenders are unable to sell the real estate at a foreclosure auction, they retain the property and in turn sell it as an REO ("real estate owned"). Thus bringing us to the second way you can profit from foreclosures--purchase an REO direct from a mortgage lender.

Since lenders often want to remove REOs from their books as quickly as possible, they may grant buyers favorable terms such as low or no closing costs, below-market interest rates, and low down payments. Moreover, when the property needs fix-up work, lenders are prone to accept offers at a discount price. Lenders don't give REOs away, but you can get good deals.

You can find REOs by attending and following up after foreclosure sales, or by contacting a real estate agent who markets REO listings.

Distressed Owners

Lastly, you can profit from foreclosures by buying property from distressed owners.

Divorce, job loss, accident, illness, business failure, and other setbacks do cause people to miss mortgage payments and get into foreclosure. You may be able to help them salvage their credit record and some equity, while at the same time secure a bargain for yourself.

But the get-rich-in-foreclosures gurus greatly exaggerate the possibilities of profiting from property owners who face foreclosure. The reality is that when you talk with property owners in foreclosure, you're far more likely to uncover a minefield of problems requiring skill and creativity then a simple deal.

Owners in foreclosure, for example, often owe more than their properties are worth, meaning you must talk the lender into a short sale. The lender must voluntarily reduce the balance due on its loan so that you receive a fair profit for agreeing to make up past-due payments and take over the loan. This is not easy.

Furthermore, many who face foreclosure contend with the claims of multiple creditors. You must be sure that none of those creditors has filed a lis pendens, or the IRS a tax lien. If so, you will have to clean it up to gain clear title.

Moreover, before you finalize a pre-foreclosure purchase with a property owner, thoroughly inspect the property and accurately estimate the costs of repairs and renovations. You surely cannot profit from foreclosures whenever you gloss over inspections and make only an eyeball guesstimate of expected costs.

Finally, bear in mind that someone facing foreclosure will not be an easy person to deal with. So don't act like a foreclosure shark. Rather than a "Here's my offer-take it or leave it" approach, develop a sensitive, empathetic, problem-solving approach. You're more likely to come up with a win-win agreement.

About the Author
James Kobzeff is the developer of ProAPOD - leading real estate analysis software since 2000. Create rental property cash flow, rates of return, profitability analysis in minutes! Go to => www.proapod.com