What Is Foreclosed Property Investing?
People have been investing in foreclosed property for many many years. There is a benefit to investing in these properties as they are often sold with built in (or quickly recaptured equity) and can often be acquired rather quickly.
So what is a foreclosed property?
A foreclosed property is property that has been secured as collateral by a lending institution for nonpayment of the loan.
There are many steps involved in this process and, as an investor, you want to know some of the terms as they define the current position of the foreclosure process.
Needless to say that when a lender takes back a property that had a past owner who did not make good on his or her repayment plan, there are legal issues involved in the process.
The more you understand how this process works, the easier it will be for you to understand the lender's position and how you can best navigate your way through the process..
How the foreclosure becomes a property for sale to the public:
Simply stated, a homeowner defaults on their mortgage. After notices and attempts to entice the property owner to bring their loan current, the final recourse for the lender is the take action to take the property back and sell the property to someone and recoup their mortgage balance due to them.
The lender's primary interest is to get their unpaid balance back. Often there is equity in the property and the lender's primary interest is to recoup the amount due to them in the loan agreement.
So if a property today is worth $300k and the loan balance is $200K, the lenders first interest is the $200K. The $100K difference is what an investor is trying to capture.
The lender does not have entitlement to profit from this sale. Any profit they get, they may have to give back to the homeowner, but that is not a priority for them. Their concern is the money due to them and any and all fees associated with the foreclosure.
So the equity in this example is often available to be negotiated. This is where knowing your cost to renovate and bring the property up to current condition will benefit your negotiations.
The flip side to this example is when the property has a value of $300K and the loan balance is for $400K. In this case the lender who is selling is very motivated to get out every possible dime they can as they are clearly going to be losing money.
While the lender in this case will lose money, the odds of an investor getting a really great deal on this property are pretty slim. These two examples hopefully illustrate the importance of knowing your numbers and the market values.
Judicial and Non Judicial Foreclosures
Here is where knowing the laws and what type of foreclosures your area has comes into play. Some areas do judicial foreclosures (foreclosures that are performed through the court system), while other areas do non-judicial foreclosures. These foreclosures are done without judicial oversight as typically these loans had a power of sale clause as part of their loan agreement. This gives them the right to perform a sale when a loan is in default to collect on their debt. These tend to be more common and needless to say without court interaction tend to go quicker.
Right of redemption
A right of redemption is a right given to a homeowner which entitles them to regain control of the property as long as they bring their current mortgage and all arrears and penalties current.
While each area has a different time frame to their right of redemption period, it typically ranges from 1 to 12 months.
Knowing this in advance of buying is paramount as you do not want to invest in major renovations until this time frame expires. If you were to buy a property and then invest 50K in renovations and the past owner comes in and redeems their interest in the property, you essentially may have just give them a nice 50K renovation
Understanding these redemption laws is priority number one. Past owners redeeming property is not all that common, but putting capital improvements in the property during the redemption period definitely gives them reason to do so.
Foreclosure investing may Not be suitable for the beginner
Investing in foreclosed property may best be suited for those who own or have owned a number of properties and understand the nuances of evaluating the property.
Establish exit strategies and go through entire acquisition and profitability phases of investing before embarking deeper into foreclosures.
These can be great investments and mastering the basics of investing before investing in these advanced stages is highly recommended. As you have them mastered then learning the ins and outs of investing in foreclosures may be your next lucrative venture.