Southern California Real Estate by Phil McCollum

Finding The Best Deals...

Buying Foreclosures: Are They Really Great Deals?

When people want a bargain, they think “foreclosure” and while it’s true you can get great deals that is not always the case.

To really understand foreclosures, you must first realize that the term "foreclosure" is used generically to represent all three types of foreclosure properties, all of which have their own advantages and disadvantages and are purchased differently.

Below I briefly discuss the three types of foreclosures.

Pre-Foreclosure

Once the homeowner has received a Notice of Default (NOD) the foreclosure process has begun but can still be averted. The NOD informs the homeowner that they are delinquent on the repayment of their loan and the lender has initiated the foreclosure process.

This is the best time to buy a foreclosure, if you know how to do it, but it's also the most work. You would have to find the properties that have received a NOD, contact the owner and make a case that they should sell to you. It sounds simple but the sellers are typically not receptive and can be quite hostile as they are already getting harassed by the bank and now people are calling or knocking on their door trying to buy their property. Many are in denial that their home is in foreclosure. A homeowner who has received a NOD can still exit the foreclosure process by bringing their loan payments current. They can also list the home for sale using the normal process using a real estate agent, or they can sell the home themselves. Buying a pre-foreclosure means buying directly from the seller and this is where the biggest profit potential exists for foreclosure properties. However, you must do your homework. With property values down sharply, you can't assume that there is still equity in the property even if you pay off the loans.

If the property is listed by an agent, the profit potential is reduced since the seller must pay a sales commission, but the disclosure process is in effect and the risk of purchase is greatly reduced.

Courthouse Auction

When the home makes it all the way to foreclosure, the home is sold at a courthouse auction. Once the foreclosure period has expired, assuming no last minute efforts are made by the homeowner to bring the loan current, the property is sold at auction, literally on the courthouse steps just outside the entrance to the courthouse. This type of sale requires cash or a no-contingency loan (i.e. you fail to get the loan you don’t get the property and you lose your down payment). You must do your own research on the property and you can’t get any contingencies on the property condition. You need to understand property values and all the liens against the property.

This method of purchasing entails the highest risk. And although great deals are possible, as an individual investor you will be bidding against deep-pocketed investors who make a living out of buying and selling these properties.

REO (Bank Owned)

Most foreclosures receive no bids at the auction and are taken back by the lender. These homes are referred to as REOs, as in Real Estate Owned by the bank. The bank typically hires someone to get the home ready for sale and then has a real estate agent list it on the MLS.

Lenders don't want to hold onto these properties, yet their strategies differ. Sometimes they will offer the property below market value to get rid of it quickly while other times they will try to sell for fair market value. You must evaluate these properties as you would any non-foreclosure properties. Just because it's a foreclosure doesn't mean it's a great deal.

Educate Yourself About Foreclosures

If you think buying a foreclosure may be an opportunity for you, you need to fully understand the process. Fortunately, that's easy to do. Go to Amazon.com or your favorite bookseller and search for books on foreclosure. I'm sure you'll find some useful information. One that has been recommended to me is:

Foreclosure role play

To illustrate my point that buying a foreclosure is not as easy as you first imagine, let's assume you have subscribed to a foreclosure list and are actively reviewing the list. A few days after you subscribe, you see a home in a neighborhood that you find desirable. You're excited that you might be able to get an incredible deal and grab the perfect location. You drive by the property and it looks okay, a little deferred maintenance and the yard is getting out of control, but overall it looks very promising. After thinking about the home and doing some additional research on available properties, you've decided how much you want to pay for the property. The figure you've selected is about 30% below market values, so it's almost too good to be true that you you can buy this home.

You have the owner's name, but no phone number, so you decide to knock on his door. When you knock, nobody answers. There's a car in the driveway, and it looks like somebody is home, so you try again. Still nothing. After waiting a few minutes, you try one more time, but nobody answers. You leave, disappointed, but decide to come back tomorrow.

The next day you visit the home and again you knock a couple times but nobody opens the door. Finally, you try again and get a response. Inside the home an angry voice yells "Go away". Taken back a bit, but still encouraged to have gotten a response, you say, "I'm interested in buying your home." thinking that those will be the magic words to break down the communication barrier and gain access.

Unfortunately, once again you are angrily told to go away. You leave, pondering the next step.

The following day, you resolve to try again. As you approach the door, rehearsing your opening statement in your head, you feel as if someone is watching you. You raise your hand to knock and suddenly the door opens and a man with an unkempt appearance yells for you to get off his property. Fearing bodily injury, you hurry away.

When home owners go into default, they may become unresponsive or they may become angry. In either case, they will be difficult to approach with your proposal.

You must understand that these people are under a lot of pressure. The bank is calling them demanding payments. Other creditors may be calling as well. And their are besieged by lawyers, credit repair offers, real estate agents, and potential home buyers such as yourself. They don't know what to do or who to trust, so they do nothing.

In some cases, you will be able to negotiate a deal, possibly a very good deal. But the reality is that you'll need to have a systematic approach to contact distressed homeowners, and you'll have to prepare yourself for lots of anger and rejection.

What Could Be Better Than FREE Foreclosure Lists?

I'm sure you've seen signs and ads promoting foreclosure lists and you may have an interest in getting such a list. But before you even think about a foreclosure, I want to set you straight.

Here's the reality: the free foreclosure lists real estate agents provide, if indeed they even have such a list, will be almost useless to you. And agents provide these lists with only one thought in mind - to attract you as a client. They have no intention of helping you buy a foreclosure unless it's already been listed for sale in the MLS.

If you've read the discussion of the three types of foreclosures, you'll probably already have an idea what I'm talking about. Your free foreclosure list will include properties that have received a Notice of Default, a Notice of Trustee's Sale, or real estate owned (REO) by the bank.

Buying a foreclosure is not what you may have been lead to believe. It's easy, at least in principle, but more difficult in reality to find super bargains and close the deals.

For pre-foreclosures, it requires a lot of work to personally visit and talk with the people being foreclosed, and do your own research on the property, including the condition and whether there are any liens against the property.

Buying at auction is not possible for most people because they don't have the cash, or are unwilling to take the risk of getting financed in a short time period with no loan contingency.

That leaves REO properties that have been listed for sale on the MLS.

This is Much Better Than a Free Foreclosure List

You can search for foreclosures quickly and easily right here.

My company has put together a website where you can search for all the available foreclosures available for sale through the MLS. This is essentially a free foreclosure list with a built in search feature!

You can gain access to the site by filling out the form:

Would You Like to Learn More About Buying Foreclosure Properties?

If you are one of those people who likes to figure things out for yourself, I've gathered a collection of foreclosure websites for you to visit. Some offer free foreclosure database access, although most only give a 7-day period before they start charging a monthly fee. As stated above, for most people the foreclosure lists will not be particularly helpful.

These sites are provided with the hope that they might be of some benefits to you.

http://en.wikipedia.org/wiki/Foreclosure

http://www.realtytrac.com

http://www.freelistforeclosures.com

http://www.foreclosurenet.net

http://www.freeforeclosuredatabase.com

http://www.foreclosures.com

http://www.countyrecordsresearch.com

http://www.hud.gov/homes/homesforsale.cfm

http://realestate.yahoo.com/Foreclosures

http://www.foreclosuredata.com

If you have questions about foreclosure, feel free to give me a call.