Foreclosure Investing For Dummies. Ralph R. Roberts
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Admittedly, the process sounds pretty easy, but it can be very challenging for any or all of the following reasons:
Banks don’t like to sell properties at bargain-basement prices just to unload them.
REO managers often pass the best deals on to their closest contacts and to investors with proven track records, so you may need to invest some time in building fruitful relationships.
REO managers may require you to buy two or more properties as a package deal. You must agree to take one not-so-promising property along with another that has more potential.
Properties are sold as is, so you can get stuck with a lemon, especially if you don’t do your homework.
Chapter 12 brings you up to speed with the REO process, reveals ways to contact and work with REO managers, and suggests timing your offer to coincide with the REO department’s fiscal calendar.
Finding and buying government properties
The U.S. government sponsors several programs to encourage home ownership, including Department of Housing and Urban Development (HUD) and Department of Veterans Affairs (VA) financing. Often, borrowers default on these loans, and the government ends up with a property that it doesn’t need or want. In addition, state and local governments may seize properties for infrastructure improvements or as a result of unpaid taxes or criminal activities.
As a citizen, you have the right to purchase these government properties, and you can often pick them up at deep discounts. Following is a list of common resources for government-owned properties:
HUD and VA repos: When homeowners default on a HUD or VA home loan, like any lender, the government can choose to foreclose on the property. These deals aren’t always best for investors because HUD and VA homes are commonly listed at or just below market value, but by being persistent, you can often find some pretty good deals.
State department of transportation: The department of transportation commonly buys up property for road improvements and disposes of the property after completing the project.
State or county drug enforcement agency: If a homeowner is paying for a property with illicit funds, or if the house is home to criminal activity, the government may step in, take possession of the property, evict the homeowners, and sell the house.
County sheriff’s office: When your county sheriff’s office seizes a property, perhaps because it was purchased with proceeds from criminal activity, it may offer the property for sale through a broker or at auction.
Buying properties from other investors
Some foreclosure investors are more interested in discovering and acquiring foreclosure properties than they are in fixing them up and reselling them. These investors consider themselves to be foreclosure wholesalers who find and buy properties and then sell them to other investors.
Just as I advise against buying properties from foreclosure wholesalers, I strongly discourage you from becoming a foreclosure wholesaler yourself. You can make more money by working the foreclosure from start to finish: buy, renovate, and sell. For details about renovating and selling a house for more than you paid for it, check out Flipping Houses For Dummies, 4th Edition (John Wiley & Sons, Inc.).
Waiting Out the Redemption Period — If Necessary
Many areas of the country give foreclosed-upon homeowners one last chance to get their homes back — through redemption. If the homeowners can come up with enough money to pay off the balance of their loans and all penalties and back taxes, they get to keep the property. In some cases, homeowners have up to a year to redeem their property before the high bidder at the auction takes possession.
The redemption period can affect you in any of several ways:
If you purchased the property at auction, you must wait to do anything to the property until the redemption period expires. Otherwise, you may invest heavily in renovations only to see the homeowners or another investor redeem the mortgage that you bought and cut you out of the deal. You may need to secure the home (particularly if it’s vacant) and perform repairs to make the property safe and prevent deterioration, such as from a leaky roof, but invest as little as possible during this period.
The homeowners may still be able to file for bankruptcy during the redemption period to buy themselves some additional time, which can throw your plans for renovating and selling the property for a loop.
If another investor purchased a property and is waiting for the redemption period to expire, you still have an opportunity to purchase the property. You can work with the homeowners to bump the other investor out of the deal, redeem the property, and buy it directly from the homeowners.
Surviving the redemption period can be tricky, especially if other investors take interest in the property. Chapter 16 shows you what you should be doing during this time to protect your interest. Flip to the appendix at the back of this book to find out whether your state has a redemption period and, if it does, how long the redemption period is.
Part 2
Laying the Groundwork for Maximized Profit and Minimized Risk
IN THIS PART …
Build a successful foreclosure investing team, complete with an attorney, a mortgage broker, a title company, a tax specialist, building contractors, and a top-notch real estate agent.
Estimate the amount of money you’ll need to buy, fix, and sell an investment property and the profit you can expect.
Figure out how to get the money you need to finance your foreclosure investments and increase your leverage while reducing the risk to your own assets.
Evaluate financing options, including hard-money loans (from private lenders), conventional bank loans, self-directed Individual Retirement Accounts, and partnerships.
Develop a strong reputation and the kinds of relationships that lead to the best foreclosure investment opportunities so that opportunities come looking for you.
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