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A foreclosure is the process in which the mortgage holder repossess a property which the borrower (mortgagor) failed to pay according to the terms of the promissory note.
“Foreclosures” is a term sometimes used to refer to the property themselves. But really, the term refers to the process. So to “buy a foreclosure” is to buy a property that is in some stage of the foreclosure process.
For real estate investors (or typical homebuyers as well) there are several different points during the foreclosure process when you can buy a property.
This guide will tell you where you can find properties to buy as they move through the foreclosure process, and an overview of each different stage.
Get To Know Your States Laws
The way the foreclosure process works is similar throughout the US, but there are also some key differences that vary from state to state.
These include whether the process is judicial, if deficiency judgements are allowed, if there is a redemption period after sale, if there is a reinstatement mandate and more.
For more information on state by state rules and also the legal definitions of the above, I recommend this article at Nolo. They have a chart of each state’s potential rules. You can also find more specific info on each state.
Obviously, you are trying to buy a foreclosure, not being foreclosed on. But knowing these rules is still important so that you know what to expect and be ready for any bumps in the road.
Finding Foreclosures Online
The first place to start is to find a place to look up homes that are in the foreclosure process.
The best way to find homes that have started this process is a site that mines the public records to see when notices are filed, auctions are scheduled and when the property is actually repossessed by the bank.
Foreclosure.com is a site that has this data, from pre-foreclosure homes, to auctions, to homes that are bank owned (foreclosed).
This can be one of the tools that you use as you find the right property.
Keep in mind, a data mining software like this is important, but you will want to do your own due diligence on each property.
Notice of Default & Pre-Foreclosure
The first step in the foreclosure process is for the lien holder to notify the borrower that they have not been making payments.
Technically, the pre-foreclosure stage is considered the time between when a borrower stops making payments and when the foreclosure process formally starts.
A notice of default is a formal notice that is sent to the borrower saying that they are not making payments. This is a default of the promissory note that was signed at settlement.
In this letter it spells out the default, what needs to be done to bring the loan back to good standing and also what will happen if it is not.
If the default is not cured in a specified time period, the foreclosure process will continue.
This letter may also be called a “breach letter” or something else depending on your state.
Where to find Pre-Foreclosures
In most cases, notices of default or breach letters are filed with the court or recorded in another way. So the best place to find properties behind on their payments is a service such as above.
Other options would include looking up these notices at the courthouse or wherever they are filed.
From there, most real estate investors get in touch with a real estate agent to write a letter or make contact with the owner to see if they are interested in selling.
Some investors may make direct contact. But partnering with a professional can have many benefits if you get one with experience who can add value to your endeavors.
Why Pre-Foreclosures are an Opportunity
If a homeowner is having trouble making payments, and they have equity in their home, they are likely to be highly motivated to sell quickly.
They may need to sell so quickly that they would rather sell it immediately to an investor rather than list it on the open market.
Favorable contract terms (all cash, no contingencies, fast closing, etc.) can be attractive for homeowners not making payments.
Short Sales
The homeowner in the foreclosure process may not always be so fortunate to have equity in their property. For example, if the home is worth $400,000 and the homeowner owes $450,000, the home is underwater.
In this case, the owner will either let the foreclosure process complete and let the bank auction or take the home back, or sell the home at market value. If they sell at market value, the mortgage holder will have to approve the amount.
This is called a short sale. In a declining market where home values are decreasing, short sales are very common.
Where to Find Short Sales
Most short sales are on the open market, so you can find them through a real estate agent’s website or other site that is connected to the Multiple Listing Service.
Banks and other lenders will analyze the price of the contract compared to the market, so they may reject the contract amount if they believe it is too low.
However, many times it is better for the lender to accept a short sale than to have to spend the time to continue the foreclosure process.
For sellers, there are some advantages to doing a short sale vs. allowing a foreclosure as well. This is case by case, but overall most sellers would rather have a short sale than a foreclosure.
Why Short Sales are an Opportunity
In some situations, short sales present a chance to own a property under market value.
Each bank or lender has different needs for cash at a given time, so they may be open to selling the property lower than they could get later by holding onto it.
Short sales are also notoriously slow transactions and require a lot of paperwork. This drawback can actually be a benefit. Many people will not want to wait for a short sale, so often they attract less competition.
Auctions
Foreclosure auctions, sometimes called “sheriff sales” or court house auctions, occurs after the property has been repossessed by the bank or lender.
This sale traditionally takes place outside the sheriff’s office or local courthouse steps, or another pre-announced location. In some jurisdictions, the auctions take place online.
At the end of the auction, the highest bidder is bound to buy the property. In most parts of the country, you must complete the purchase immediately after winning.
Many of the auctions end with the lender outbidding the competition to keep the home. Then it becomes an REO.
Most auction properties are sold “sight unseen”, so aside from driving by the property you will not know the condition of the interior.
For this reason and the speed of the sale, this is a recommended only for experienced investors.
Where to Find Foreclosure Auctions
You can manually look up auctions on government sites, trustee’s sites and in other publications. You can also find them on foreclosure sites.
Once you find the auctions, you will want to verify as the day of the auction approaches. They are often cancelled because the foreclosure process can be stopped.
Why Auctions are Opportunities
Foreclosure auctions present a high risk, high reward option for buying investment grade homes. Many auction homes have unknown interior condition and may have a homeowner that was just foreclosed on living there.
This means you often will have to deal with an eviction on top of getting the property ready for sale or rent.
This can make the properties quite tricky compared to the other sources, where you can see the property first and the homeowner is (usually) cooperative or already moved on in the case of an REO.
But, with this risk there can be substantial upside to these properties. Some of them do sell, both online and in person, for under market value.
REO
REO (real estate owned) is an industry term used for homes that are owned by the bank or lender. This is the last step of the foreclosure process, for the bank to take ownership.
These properties are sometimes known as “bank owned” or just “foreclosures”.
Banks hire REO agents, asset managers, real estate agents and other professionals to look after their real estate, clear out the properties, value them, market them and eventually sell them.
Many times the foreclosure process stops before the bank takes possession, so the number of REO properties will vary depending on your area and the market conditions.
Where to Find Them:
Banks and other lenders are not in the business of losing money. So the majority of REO are exposed to the most number of buyers via a real estate agent on the live market.
You can find these properties on any site with a direct feed to the MLS, local real estate agent’s websites or most portal sites. You can use filters set to ‘REO’ or ‘Bank Owned’ to find them in a given area.
Most of these properties are easy to view by contacting your real estate agent. Banks tend to clear them out, winterize them and then put them on the market vacant.
Why REO are Opportunities:
REO properties are, on average, in worse condition than resale homes. And sometimes, a lender will be motivated to sell a home quickly or for a bit under the market because they need the cash on their balance sheet.
Other times, banks price them just like it is a resale property, so it is a case by case basis.
Another benefit of buying an REO property is that the properties are vacant. You will not have to deal with an occupant where the other options you will. So it is usually a more straightforward process.
More Tips For Buying a Home in the Foreclosure Process
• Do Your Due Diligence
As a real estate investor, you are probably used to performing due diligence. If you are new, you will get used to it.
With distressed properties, it is even more needed. Most distressed properties are sold “as-is”, meaning the owner or bank is not going to be making any repairs on the home.
And in the case of an auction or REO property, the bank will have little to no information about the home and may require extra waivers or addenda.
So in addition to making sure the numbers work as an investment, you will want to make sure to find out as much about the properties physical condition and lien history as possible.
Of course, you cannot eliminate all risk but the more you can find out, the less unforeseen issues will come up.
• Know the Market
The amount of distressed properties and how much of an opportunity they offer vary with market conditions.
For example, in a market where home values are rapidly going up, you will find less short sales, less auctions and less REO properties, because owners can sell instead of walking away. This could be a chance to find pre-foreclosure properties behind on payments.
In a slow market or during an economic recession, you will likely find lots of short sales and REO properties. And you might be able to get a good deal with a bank that desires cash instead of mortgage notes or real estate.
Knowing the market trends, both nationally and locally, can give you clues on where to look for your next deal.
• Keep an Open Mind
The right real estate investment can show up at any time, from many different sources. Distressed properties can be a great source of good investments, but not the only source.
You want to stay within your financial criteria for getting a property, and be open to that kind of property coming from anywhere, not just homes in foreclosure.
• Have Rock Solid Financing
If you are obtaining financing, you want to make sure to have a solid partnership with a lender lined up beforehand.
It is a good idea to have a couple of financing options. For example, a hard money lender and a conventional lender.
Distressed properties, especially auctions, often are not suitable for traditional financing so you will have to have an alternative (cash or hard money).
More Resources
Here are some other articles to look at for real estate investors.
Are foreclosed homes cheaper than other homes?
My story of buying my first 2 investment properties.
Should you follow the 1% rule?
Conclusion
Properties that are in various stages of the foreclosure process present an opportunity for real estate investors to get a good deal on a home.
Each deal should be analyzed and researched as much as possible to see if it fits your criteria for investment and also to find out more about the condition of the property and the title.
There are different resources you can use to find opportunities at different stages of foreclosure. These include MLS, local records and foreclosure data mining sites.
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