You should always be on the hunt for great deals as a real estate investor. Unfortunately, there are fewer opportunities out there than there used to be. One of my best clients even asked me to help him find more deals – and he’s still closing at least one or two deals a month.
While these are solid numbers, they’re far from what he used to be doing. Because we are in a changing market, deals are difficult to be had. Good real estate investors have different tools up their sleeves to find the best deals, and one of those tools can be looking for foreclosures.
Why Foreclosures Happen
A foreclosure is a legal process in which the lender reclaims the collateral used to secure the loan. This usually happens when someone defaults on their mortgage or fails to meet other requirements. The lender will then take the property back and try to sell it to recoup their losses.
One of the reasons I encourage investors to consider foreclosures is that lenders will want to sell foreclosed properties as quickly as possible. Not only do they want to avoid dealing with the hassle of managing a property, but they also want to get their money back as soon as possible.
As a result, they tend to be willing to sell the property for below its value, allowing you to get a great deal.
Types Of Foreclosure Sales
When a lender forecloses on a property, they will eventually sell it (as long as the initial owner doesn’t pay what is owed or come to an agreement with the lender). However, there are several ways in which a lender will sell a foreclosed property, which means that there are several ways that you can try to buy a foreclosure.
The following are the different types of foreclosure sales:
Pre-Foreclosures
Pre-foreclosures are properties in the process of being foreclosed upon, but where the owner has not yet lost their property. In a pre-foreclosure sale, the homeowner will try to sell the property to avoid a full foreclosure. If you can find a pre-foreclosure and make a deal with the homeowner, you can purchase the property before it goes to foreclosure.
I highly recommend trying to find pre-foreclosure deals because it allows you to avoid competing with other buyers since the property hasn’t been officially foreclosed on, which means it’s not public knowledge.
Short Sales
A short sale happens when a homeowner sells their property for less than what they owe on the mortgage. Homeowners willing to do this tend to be in financial distress and know that if they don’t sell quickly, they’ll lose their homes to foreclosure.
However, the lender will still need to approve a short sale since they’ll be taking a loss on the loan. I know what you’re thinking – why would a lender agree to accept a loss? A lender might approve a short sale because they would rather take a loss than go through the lengthy process of foreclosing on a property.
In addition to the cost of the foreclosure process, the lender also risks the property not selling for as much in an auction – or not selling at all. So, in the long run, a short sale might be less risky financially for the lender to agree to.
Sheriff’s Sale Auctions
If the homeowner does not pay the mortgage or find a way to work with the lender to develop an alternative payment plan, their property will go up for auction. This is known as a sheriff’s sale auction and is open to the public.
At this auction, lenders will try to get the best price for their property. As an investor, these auctions can be a great way to find deals because you could get the property for much less than its market value. However, you will also compete with other investors at the auction since it will be publicly advertised and held.
Bank-Owned Properties
If the property does not sell at a sheriff’s sale auction, it will become bank-owned (or “REO” – real estate owned). This means that the lender has taken ownership of the property and will try to sell it directly. The advantage of these types of properties is that you can typically get a better deal since the lender will be even more motivated to sell quickly and recoup their losses.
In addition, they’ll see that demand for the property is low since it didn’t sell at auction. The longer the property goes unsold, the more it will cost them, which puts you in a great position to get a great deal.
Government-Owned Properties
Finally, there are government-owned properties. These homes were purchased using a government-backed loan, such as an FHA loan, and then went into foreclosure. The government, specifically, the Department of Housing and Urban Development (HUD), will take ownership of the property and then try to sell it as quickly as possible.
Benefits Of Buying Foreclosed Homes
Generally speaking, there are many ways you can invest in real estate. But I highly recommend that investors seriously consider looking into foreclosures for the following reasons:
Lower Acquisition Costs
Acquisition costs refer to the costs associated with purchasing a property. For example, agent fees, closing costs, and more. With foreclosures, these costs are usually much lower than for other types of properties because you’re not dealing with a traditional seller.
Finding foreclosures on your own can eliminate the fees charged by professionals helping you locate deals. Additionally, depending on how you buy the foreclosure, you can eliminate the closing costs altogether.
Whether you buy a foreclosure before the foreclosure auction, at an auction, or afterward, you can significantly reduce your acquisition costs by representing yourself.
Fewer Issues With The Title
Issues with the title refer to any problems with the property’s legal ownership. When buying a house the traditional way, you’ll typically purchase title insurance, which will protect you against any liens or title issues. However, they can still be a hassle if they do come up.
When buying a foreclosure, however, the title is typically clear from any potential issues because the lender has already gone through the process of removing all liens and mortgages on the property before putting it up for auction.
As a result, you probably won’t have any issues with the title if you buy a foreclosure. However, even if you plan to buy a foreclosure, I still recommend getting title insurance just to be safe.
Can Use Regular Mortgage Financing
Financing is a critical component of any real estate investor’s strategy. As such, you’ll want to know whether you can finance a foreclosure in the same way that you can fund more traditional real estate investments.
The answer, for the most part, is yes, you can.
If you buy a foreclosure before the auction (such as a pre-foreclosure or a short sale), you can use any kind of financing you want. The same applies if you’re buying an REO or a government-owned foreclosure that didn’t sell at auction.
However, financing may be tricky when buying a foreclosure at an auction. This is because most counties require winning bidders to pay for the foreclosure in cash.
Potential To Profit From Improvements Made
You can expect a higher return on investment (ROI) when buying foreclosures. This is because not only are you paying below the market value for these properties, but there’s a good chance that they are already in some degree of disrepair.
Homeowners who can’t afford to make their mortgage payments generally can’t afford basic maintenance and repairs either. This means that you can add even more value to your investment by making repairs and improvements.
Drawbacks Of Buying Foreclosures
As I’ve previously discussed, there is a lot of potential upside to investing in foreclosures. However, when discussing real estate investment, I also like to caution people about the potential downsides.
That way, you can make a more informed decision about whether a foreclosure investment is right for you. With that said, the following are some of the potential risks associated with buying foreclosures:
Higher Risk Involved
Although the price of a foreclosed property in poor condition will reflect that, you’re still taking on a risk. This is because properties in disrepair often have additional problems that weren’t apparent. When buying foreclosures at auction, you won’t have the chance to thoroughly inspect the property.
You’re essentially buying it in “as-is” condition. As a result, you could end up the owner of a property requiring much more repair and renovation work than you initially thought, which can hurt your ROI.
High Demand And Competition
Foreclosure investing isn’t some secret real estate strategy only I know about. There are a lot of investors that look for opportunities in the foreclosure market. Additionally, foreclosures are public records.
As a result, expect some competition – especially if you show up to an auction to try and buy a property. There could be many bidders present who may drive the price up to the point where it may not be worth the investment.
The problem is it can be easy to become emotionally invested at an auction, causing you to get sucked into a bidding war and overpaying for the foreclosure in question.
Hidden Costs
There are a few hidden costs you should be aware of when buying foreclosures. For example, sometimes, the highest bidder at an auction will also be responsible for paying taxes and liens on the property. Not to mention, you may get stuck with the cost of repairs or renovations that you didn’t account for (as previously mentioned).
Finally, if you invest in significant repairs and improvements but don’t sell the property immediately, you could get stuck with a higher property tax bill. So, it’s important to consider all of these potential costs when investing in foreclosures.
Slower Closing Timeline
Finally, one last drawback is that it can take a longer time to close on a foreclosure than a traditional sale. This is because there’s usually a lot of paperwork and legal hoops to jump through.
Additionally, depending on the type of foreclosure you’re investing in, there can be a redemption period. This is where the original homeowner has some time to try and come up with the money owed on their mortgage and reclaim the property.
As a result, you might have to wait for this period to expire before closing on the foreclosure. So, be sure to factor in these potential delays when budgeting for your investment.
How To Find Foreclosures
Finding foreclosures is not as hard as it might seem. There are several reliable resources that can help you locate foreclosed properties. The following are some of the ways in which you can start your search:
1. Explore The Internet
I’d argue that the easiest way to look for foreclosure investment opportunities is to search for them online. Although you could do a basic Google search in the area you’re looking, the following are a few more specific ways to find information about foreclosures online:
Foreclosure Listings By Banks
Some banks list their foreclosure inventory right on their website. In some cases, it’s easy to find. At other times, it might be more difficult. You could also find a list of banks in your area and call them up. If you do so, ask to speak to the REO department. From there, you can ask if they have any inventory and if they list them for sale on a specific website.
While on the phone, tell them what you are looking for and ask them to call you if they find something. Many banks will offer deals to people they know long before they list their foreclosures for sale on their website.
Keeping this in mind, the following are a few pros and cons of using online bank listings to find foreclosure properties:
Pros
- Homes will consistently be priced lower than regular real estate: Most banks price their foreclosure properties below market value in an attempt to sell quickly.
- Low closing costs: Banks may also offer lower closing costs on their foreclosure properties than traditional home sales to attract buyers.
- Houses listed on their site will be vacant: This means you won’t have to worry about removing tenants.
Cons
- There may be potential liens and liabilities: Properties listed on bank sites may have potential liens and liabilities (such as unpaid taxes) attached to the property that you’ll be responsible for.
Fannie Mae Online Listings
Fannie Mae is the largest buyer of mortgages in the country. Supported by the government, their primary goal is to create liquidity in the market by being a buyer that banks can rely on. For this reason, they are also the owners of many foreclosed homes.
Although they prefer to sell their homes to owner-occupants, they will also sell to investors. They even claim to auction houses off if they are not getting buyers in the open market. You can get more information about their current homes for sale and how it works here.
Pros
- No appraisal is needed: This makes buying Fannie Mae homes easier since there’s no need to get an appraisal.
- Flexible mortgage types: Since Fannie Mae can both sell you a foreclosed property and help with the financing, they are likely to be more flexible in what mortgage type you can use.
Cons
- Not all mortgage lenders provide it: You’ll need to find a mortgage lender that works with Fannie Mae to get financing.
- A homeownership class is necessary for this: To buy a home from Fannie Mae, you need to take an approved homeownership class.
Freddie Mac Online Listings
Freddie Mac is very similar to Fannie Mae and is a large buyer of mortgages. They also have housing inventory they sell in the open market and occasionally auction homes off. Get more information about them here.
Pros
- Exempt from state and local taxes: Freddie Mac offers homes exempt from state and local taxes. This is because they are owned by a government-sponsored enterprise (GSE).
- Risk-free because of agency bond: Since Freddie Mac is backed by an agency bond (which is a guarantee that the government will cover any losses), there is less risk in buying a property from them than from a private individual.
Cons
- Loans are generally only available on standard multi-family properties: Freddie Mac does not offer loans to investors for single-family homes, making it difficult to finance those types of foreclosures.
Free Online Listings
Finally, there are a handful of websites where you can find free listings of foreclosure properties. The following are a few of these sites:
- Equator.com: This website has an extensive foreclosure listings database from banks and private sellers.
- Homepath.com: This is the website of Fannie Mae, and they list all their available properties here.
- Realtor.com: This website has a section for foreclosure listings, although it may not always be up to date.
- CitiMortgage: CitiMortgage has an online search tool that allows you to search for foreclosure properties.
2. Search Government-Owned Listings
The government also gets involved in foreclosure sales. This means that there are government-owned listings of foreclosed homes, and they can help you find a property.
In addition, because HUD offers federal-backed mortgages, such as FHA loans, they also have foreclosures available on their listings. Other government agencies, such as the VA and USDA, may also have listings of foreclosed homes available for purchase.
Department Of Housing And Urban Development
Like Fannie and Freddie, HUD prefers to sell to owner-occupants but will sell to investors after owner-occupied buyers have made offers. They list HUD homes with agents, so the best way to find the best HUD homes is to network with HUD listing agents. Any agent can help you find an offer on HUD homes; however, they need to be registered with HUD to present offers.
Pros
- HUD homes are affordable: HUD homes are generally more affordable than other types of foreclosed properties.
- Always provide the property condition report: Unlike other foreclosures, HUD homes have an extensive property condition report available to buyers, which means you can avoid any unforeseen issues that could potentially hurt your ROI.
Cons
- Must have a deep inspection: HUD homes must have a deep inspection before closing, making the process take longer.
- Property location could be an issue: Many HUD properties are located in areas of lower demand (such as rural areas), which could make them undesirable for some buyers.
3. Visit County Offices Or City Courthouses
When a foreclosure is put up for auction, it is generally done so at the county courthouse. As such, any property scheduled for auction will be listed at the courthouse. You can also contact your local county or city office to find out about any upcoming foreclosure auctions.
You can also go to Auction.com to see upcoming foreclosure auctions and what is potentially going to be auctioned off. Auction.com is an excellent way to locate potential deals, but you will still need to work directly with the county to make the purchase.
4. Local Newspapers Or Title Companies
By law, foreclosure auctions must be advertised. It might sound crazy in this day and age, I know, but they still publish foreclosures in local papers.
These papers come out once per week. Checking local papers is a great way to locate homes just entering the foreclosure process so you can reach out to the owner directly, or you can track them and bid on them once they’re up for sale at the auction.
You can also contact title companies to get a foreclosure list, which will include all properties that have entered the foreclosure process. This makes it easy to put together mailing campaigns for owners or to reach out to them directly, allowing you to make an offer on a pre-foreclosure or a short sale.
Many title companies send out these lists to their clients for free, so ask the title or escrow company that helped you with your last real estate closing if this is a service they can provide. A reputable real estate agent should know how to get these lists if you are a brand-new investor.
5. Pay For The Information
Like me, I’m sure you’d prefer to get your information for free. However, you can also pay to obtain a list of properties that have been foreclosed on, whether it’s through specific real estate websites, the multiple listing service (MLS), or independent real estate brokers.
Real Estate Websites
Many real estate websites have search features where you can input keywords like “foreclosure.” Some real estate websites that focus on foreclosures charge subscription fees.
However, these fees can be worth it as they will provide the most current and accurate information on foreclosures in your area that is available. Keep in mind that title companies pay for these lists, so getting them directly from the listing provider could give you a decent head start on contact with owners. A great example of a site like this in Colorado is www.renav.com.
Multiple Listing Service (MLS)
Virtually all foreclosures that go back to the lender end up on the MLS. Of course, if something ends up on the MLS, that means that countless investors will see it, resulting in stiffer competition.
Although the point of searching for foreclosure properties is to deal with less competition so that you can find better investment opportunities, it’s still worth keeping your eye out on such properties on the MLS as there are still a fair amount of good deals listed there.
You can stay on top of these by working with real estate brokers who understand real estate investing and can set up filters, so you’re notified of new listings and price changes. You can also set up your own filters with websites such as Zillow and Redfin, which get all their data from the local MLS.
Independent Real Estate Brokers
Agents are still an excellent way to locate foreclosure properties. They get involved in foreclosures both before and after the auction. It is best to network and find the agents getting the REO listings, but all agents can search for foreclosures and make offers for you.
Agents do a lot more than search the MLS, though. Often, the good ones will market to homeowners for listings and reach out to their investor clients when they contact homeowners who want to sell. They also network with each other and get word of listings before they hit the market.
However, I recommend not signing an exclusive agreement with any of these agents. Agents know I’m a legitimate buyer and will bring me deals without that agreement. If they have a deal I like, I sign a buyer agreement with the agent for that one property.
If an agent is insistent on an exclusive agreement, they don’t understand this business well enough to know that you need multiple agents on your team, just like they need to work with various buyers and sellers.
If an agent brings you a good deal, then close on it. I also suggest giving them the listing if you plan to resell it. That shows loyalty and incentivizes them to bring you more deals. Not to mention, it’s just the right thing to do.
Pre-Foreclosure Properties Vs. Foreclosure Properties
I can’t stress enough how different pre-foreclosure and foreclosure properties are. Pre-foreclosures, which are properties in the early stages of default, can offer more opportunities for negotiation and a higher chance of successfully acquiring the property. This is because the owner still has a chance to come up with the funds and reinstate the loan.
As such, if they cannot do this, they’ll be more likely to sell the property and avoid foreclosure, allowing you to step in and make an offer.
On the other hand, foreclosure properties seized by lenders often come with complicated processes and regulations. Additionally, the competition for these properties will be much higher because they will be scheduled for auction, which means their sale will be public knowledge.
Although you can find good deals for both pre-foreclosures and foreclosures, I recommend looking for pre-foreclosures whenever possible. You’re more likely to strike a better deal with less competition when buying a pre-foreclosure.
Are Foreclosed Homes The Way to Go?
There are a lot of opportunities when it comes to investing in foreclosures. However, you must understand how the foreclosure process works, how to invest in each stage, and where to find foreclosure investment opportunities. Although there are more risks when waiting to buy at auction, you can still find good deals at any stage.
Whatever you decide to do, successful foreclosure investing depends on your ability to pick a strategy and build a team of qualified people around you. Let us know what we can do to support your foreclosure investing business.
Want to learn more strategies around how to deal with foreclosures? Check out our resources here!