Forclosed Homes

Forclosed Homes For Investments

Back in the 1990’s investing in forclosed homes became very popular amongst real estate investors and to this day it is one of the most powerful strategies for building wealth in real estate. Property investment can be a rocky road and many novice investors have lost everything simply because they don’t have the know-how and the experience. Investing in forclosed homes is by no means an easy way to make money, but what it does offer the investor is a “bargain” unlike anything else.

One of the basic principles of making money as an investor is to buy something for a price below its value and then to sell it again for a price above its value. Its as simple as that. When you buy a property and its value goes down you will be forced to hold on to that property until the market improves and the value goes up. This is why so many investors fail because their capital gets tied up in real estate that they can’t sell.

Foreclosures has become a bit of an over-hyped investment simply because people see how cheap a property is and then their eyes light up – thinking that they can make a fortune from this one! What you need to keep in mind though is that usually homes are foreclosed in bad markets which means that you probably won’t be able to sell the home quickly. This means that your capital is likely to be tied up for a couple of months (or maybe even years) and that you will have to rent out the property – often in a bad market.

There are two main strategies for making money from forclosed homes. The first is to look for foreclosures in good markets and buy them. If the market is good, you can quickly sell the property again and make a handsome profit without holding on to it for too long.

The second strategy is a long term strategy. It works really well in crashed markets where a lot of properties flood into the market place and where there’s a lot of foreclosed homes. In these markets you can buy at rock bottom prices and in some cases buy real estate at 10% of its original value. The downside is that you might have to hold on to these for a long time since these markets can take as much as 10 years to fully recover. However, when it recovers you can make a killing.

The 3 Types Of Foreclosed Homes

Whenever a home is foreclosed its effectively an asset that gets temporary ownership by someone who has no intension or ability to profit from it. This is why investors usually jump unto these opportunities since banks or government agencies that control the foreclosures aren’t as interested in making money as they are in getting the property off their books. Think about it. If a bank repossesses a home it becomes a liability to them. Its an expense and bad debt that wears them down financially. The sooner they can sell it, the sooner they can get their (lost) money back.

There are essentially 3 different types of foreclosures and as a real estate investor you have to keep your eyes open for all of them.

1. Government Forclosed Homes
When the government forecloses a property its usually when its been insured by the government and the borrower defaults on his loan. The HUD (US State Housing and Urban Development) and the VA (Veterans Affairs) programs basically backs a mortgage and pay off the loan once a borrower is unable to make consecutive payments. Buying government foreclosures is quite complicated and there are several agents that specialize in this.

You basically have to work through an agent and make an offer (and pay a deposit). When your offer is accepted you have to settle the difference and the property is yours. You can find some real bargains, but the process can be slow and cumbersome.

2. Bank Repossessed Properties
When someone fails to make their mortgage payments, the Bank will proceed with a foreclosure and take ownership of the property. As I already mentioned this is a heavy load on banks and the recent spurge of foreclosures with the financial meltdown has actually sent many banks into bankruptcy. Right now there are more forclosed homes than at any time in history and if you have the capital you can pick up real estate for 30% of its true value.

Bank foreclosed homes are much easier to purchase and they usually try and sell it on open auctions. These are usually hassle free transactions and the banks even erase all the outstanding judgments and obligations before they hand it over to you.

3. Dilapidated Properties
These come in different shapes and sizes and aren’t repossessed per say but still fall into the category of forclosed homes. Often private properties fall into dilapidation where local governments and agencies are forced to step in. Sometimes due to structural instability or even just because of severe decay. Although these properties will require a lot of work, its usually great bargains and if you are willing to put in the work, its worth shopping around for.

Buying Forclosed Homes

Forclosed homes are cheap and make for great investments or even great buys for people who want more for their money. Some people live in million dollar homes that did not cost a million dollars. Many home buys overextend themselves when they buy a home – their dreams run away with them and when it comes to making the astronomical mortgage payments they cannot do it. The results is that the financer has to take the house back and sell it on to cover their losses.

In the recent financial downturn the property markets across the world collapsed. Millions of homes were foreclosed and as a result many investors stepped in to buy real estate at 30% of its original value. For them it’s a perfect deal because this was a rental market and when the real estate markets return to its original value 2 or 3 years down the line then they can sell and make a fortune.

Whether you want to buy a foreclosed home to live in or as an investment, the major benefit is that financing is easy. In most cases 100% financing is possible but you need to do your homework because it is still a significant investment and just because its cheaper does not mean its cheap. Here are a couple of things you need to look out for.

- Condition of the house: You will be responsible for repairs and to fix up the property once you buy it, so make sure there aren’t any structural or major expenses on the house.

- Inspections and permits: Make sure that you get a proper survey done of the property and make sure that all the permits and inspections are in place. This is very important for houses where the builder abandoned it before it was completed.

- Local market: its worth checking out the local market before you dive in to buy the bargain of a lifetime. Often when an area comes crashing down there might be several foreclosures up for offer. Don’t just buy the first best one.

The best place to buy forclosed homes is at court auctions since the risk is significantly lower – especially if it was repossessed by a bank or under the HUD (the government’s Housing and Urban Development Plan). Local and county courts will be able to provide you with details of homes that are facing forclosure but its also worth checking with good real estate agents and even on the web you can find websites that specialize in listing forclosures.

Tax Foreclosure Properties

Every day thousands of properties across the USA are being traded on the foreclosures market. Many real estate investors invest solely in foreclosures and any expert will quickly tell you that flipping homes in the current market is not easy. With real estate investments you need to take a linger view as being shortsighted may come at a heavy price. Its true that foreclosures gives you extra leverage as you can often get 100% financing and buy way below market value, but you really need to do your homework.

Properties get foreclosed for various reasons. The vast majority of forclosed homes is the result of a bank or a lender repossessing a property that the owners could not make the mortgage payments on. These properties are usually sold at auction and with a little bit of shopping around you can find great deals. One problem with these types of listings is that banks will not let the properties go for a steal and its not always as cheap as many people make it out to be. Banks are commercial organizations that is in it for the money.

Governments on the other hand can’t make profits on forclosed properties and finding government forclosures is by far the best deals. There are various government agencies like the HUD that you can check with to help you get started, but Tax forclosures are often rock bottom prices. When the owner of a property cannot pay the property taxes for instance the government will step in and take ownership – sell the property and cover the lost taxes. They don’t care about making “a profit” and they just need to cover the lost taxes.

The IRS issue notices for these properties as Government Tax Lien and you can find the listings at a local tax office. You will probably have to spread your wings if you want to do a broader search and there are a few websites that list foreclosures specific to taxes.

One thing you have to be careful of is the fact that often owners will forsake properties for good reason. Many times dilapidated buildings can have taxes that are too heavy to justify ownership. They can just let it go and leave it up to the government to auction it off. It saves them time and money and transfers the tax responsibility unto a new owner. You need to do your homework carefully before buying foreclosures of this kind – especially on old buildings.