The dream of every homeowner and real estate investor is to find a great home at an even better price, but foreclosures can offer a certain degree of opportunity for us. When homeowners can’t keep up their payments or sell a house on their own, the bank forecloses on the property and resells it to cover its costs. If the home loan was insured by the Federal Housing Administration, or FHA, then the U.S. Department of Housing and Urban Development (HUD) takes over the property and resells it.
Either way, the previous homeowner’s loss could be your gain.
HUD foreclosures are first offered to buyers who intend to live in the home. But after a set period, the homes are offered to investors. You might be able to find local listings of HUD foreclosures. Or, HUD contracts with a number of management companies to compile listings in each state. Go to www.hud.gov/homes/index.cfm and click on your state to see what’s available.
You can look for foreclosures by ZIP code, so you can concentrate on neighborhoods with which you’re familiar. Also, be sure to do your research: Make sure you know what comparable houses in the neighborhood sell for so you can set a realistic purchase price. If you are planning on reselling or “flipping” the property, that same information can help you set a sales price. Be aware that it could be difficult to resell at a profit in a neighborhood with multiple foreclosures.
When buying foreclosures, you’re not always able to have the property inspected before putting in a bid. You could end up needing expensive repairs to shore up the foundation, fix the heating and air-conditioning system or replace the roof. When looking to purchase a property, know your numbers. Hard Money Lenders usually do not lend over 65% ARV (After Repair Value) A quick example for a quick reference: A $100,000 property you want to have all the repairs and holding costs factored in and calculated not to exceed $65,000. So if you’re looking to Wholesale (I will cover Wholesaling in the near future) you would want to be able include your “Finder’s Fee” or “Wholesale Fee” incorporated in the 65% ARV.
The home’s previous owners can present another challenge to buying foreclosures. If the home is still occupied, it could be difficult to evict owners or renters. And, if you are planning on reselling the home, the longer you have to pay the mortgage, the less profit you’ll make at resale.
Some investors buy properties before the foreclosure proceedings are final rather than waiting for an auction. That involves negotiating directly with the owners and dealing with complicated legal issues. Buying from the lender, or at a HUD auction, in generally considered a safer way for inexperienced investors to buy foreclosures.
If you’re planning to flip the foreclosure, make sure you hold reserves in escrow so you are able to make payments on the loan for several months, just in case you can’t sell it right away.
You also might want to purchase a foreclosure as a rental property. As long as the money coming in is greater than what you owe in mortgage costs, taxes and maintenance, rentals can be a good investment. Again, you’ll need to know the neighborhood and comparable rents before taking the plunge.
Buying foreclosures can be lucrative, but smart investors get plenty of advice from tax advisers, real estate attorneys, and mortgage lenders before they make a move. It’s always smart to know your OUT before knowing your IN. Always listen to the numbers. They never lie.
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