Is Investing in Foreclosures a Good Idea?

The post Is Investing in Foreclosures a Good Idea? by Vandita Jadeja appeared first on Benzinga. Visit Benzinga to get more great content like this.

If you’re looking to profit from real estate, investing in foreclosures is one way to land properties below market prices. However, the rewards of successful investing come with unique risks.

The key to taking advantage of opportunities and avoiding inherent challenges is understanding the foreclosure process. This article delves into the pros and cons of investing in foreclosures and offers steps you can take to begin buying foreclosed properties.

What Is Foreclosure Investing?

Foreclosure is the legal process that allows a lender to repossess or take ownership of a property, typically a home, after a borrower fails to make mortgage payments. 

If the homeowner makes it clear they can’t pay back the loan, a bank can take legal steps to take the house. It will then try to sell the foreclosed property quickly, often below market value.

The foreclosure process typically rolls out in six stages:

1. Payment default: A homeowner fails to pay the mortgage as agreed.
2. Notice of default: Often, after 90 days, a lender sends a default letter.
3. Pre-foreclosure period: A borrower can explore options to avoid foreclosure.
4. Notice of sale: A lender can schedule the property for sale at auction.
5. Foreclosure sale: The property is sold to the highest bidder.
6. Real estate owned (REO): Properties that don’t sell revert to the lender.

The new property owner — the lender or a third party — may need to evict the previous homeowner after the sale. 

As with any kind of investment, there are risks and benefits to investing in foreclosures, which should be weighed carefully prior to making decisions.

The Benefits of Investing in Foreclosures

• Lower purchase price: Lenders want to recoup their costs (the previous loan balance, property taxes and liens), leading them to lower prices to sell properties fast.
• Equity potential and higher returns: Buying a property at a lower price allows you to build equity faster and potentially boost returns with upgrades.
• Increased bargaining power: A lender’s eagerness to dispose of a property may give you more negotiating power to get a better deal.
• Investment strategies: Foreclosure properties are prime candidates for certain investment strategies, including fix-and-flip, buy-and-hold, subdivide or develop the property.
• Guaranteed clean title (for REO properties): Generally, the lender that takes ownership of a property clears the title of any liens.

The Risks and Downsides

• Potential for unexpected costs: Homes may have been neglected and are sold “as-is,” so they may have costly problems that require an inspection to detect.
• Lengthy, complex process: Lenders have their timeline for dealing with properties, and legal proceedings may delay negotiations and closings.
• Competition at auction: Investors, flippers and bargain hunters are attracted to buying foreclosures, and a bidding war can drive up a property’s price.

Scams to Watch For

As an investor, you don’t want to get scammed — and you don’t want to find yourself unknowingly caught in the middle of one. The lending and mortgage industry is fraught with predatory lending practices that target homeowners in foreclosure.

One of the most common forms of fraud is equity stripping, also known as equity skimming. This occurs when a lender offers a homeowner who has defaulted on a mortgage a loan to avoid foreclosure. The lender, often known as a rescue artist, convinces the homeowner to transfer the home’s title to avoid foreclosure.

The homeowner may make payments under the guise of loan repayments or rent, but that money never goes toward the original loan and gets pocketed by the lender. Once the title is transferred, the rescue artist pays off the original loan, skims away the homeowner’s equity and owns the home, leaving the homeowner worse off.

If you go into foreclosure investing, consider your transparency and ethical behavior, along with the behavior of agents and others involved in your transactions. Equity skimming can result in five years in prison and a $500,000 fine, and related conspiracy charges to commit bank fraud and make false statements to a financial institution could land you 30 years in prison and a $1 million fine.

Other predatory lending practices to steer clear of include bait-and-switch schemes, loan flipping, packing and balloon payments. Homeowners can seek advice from counselors at the U.S Department of Housing and Urban Development (HUD) to avoid getting into compromising situations.

Who Should (and Shouldn’t) Invest in Foreclosures?

Investing in foreclosures can be high-risk and high-reward. It’s not a real estate investing strategy for the faint of heart. Foreclosures come with several drawbacks and challenges that require careful research, planning and professional guidance to navigate. So who might it be best suited for? 

If you’re an experienced real estate investor or a house flipper who understands market trends and is used to renovating properties, buying foreclosures may be right for you.

The buying process can often be lengthy, so you need to allow time to find the right place and then wait for the process to play out. Doing your own renovations can save you money, so foreclosures might work for do-it-yourself (DIY) enthusiasts as wel. 

The complex transactions and typical work required to renovate a property make foreclosures less ideal for first-time homebuyers without the help of real estate and legal professionals.

It also might not be the best choice for anyone who wants a move-in-ready home, who doesn’t have the money available to cover repair costs and unexpected expenses or who is unfamiliar with the foreclosure process.

If you’re considering investing in foreclosures, you must conduct thorough due diligence, be prepared with time and money for the property’s condition, have cash or financing in place when you go to buy, and be ready for competition for quality properties.

Weighing Risks Against Rewards

Investing in foreclosures can be a good decision for some investors, delivering strong returns. While the ultimate decision about buying a foreclosed property depends on your financial situation, investment goals and risk tolerance, your success hinges on preparation, strategy and awareness of the pitfalls.

Frequently Asked Questions

The post Is Investing in Foreclosures a Good Idea? by Vandita Jadeja appeared first on Benzinga. Visit Benzinga to get more great content like this.