Home Foreclosures
Over one million home foreclosures are expected to happen this year. This means the home is repossessed by the lender because the homeowner has failed to pay the mortgage payments. It may be they can't afford it or they could be part of a growing segment of homeowners that simply walk away from their mortgage. You can usually buy a foreclosure for about 25% less then the market value.
Many home foreclosures are caused when people see a big jump in monthly mortgage payments. This might be because they bought the house as a speculator and financed with an interest only loan; they are now faced with a balloon payment they can’t afford. A lot of these homes have little or no equity so they may not be good deals. The lender will try to get market value or no more than 10% below market value. If the mortgage is already upside down, this is a foreclosure to avoid!
Buying home foreclosures have some pitfalls you must watch out for, too. It's never a good idea to buy a house without first doing a title search; the mortgage you pay off by buying a foreclosure might only be $25,000 but if there is a second mortgage your profit might be eaten up. Look to see if there are any liens on the property because you will be responsible for all of them.
Watch out for homes listed “as is”. This means that an exterior inspection is the most you can hope for. You will usually not be allowed to walk through the property or have it inspected for structural problems. This can end up costing you more than you can sell the house for!
Foreclosed properties also may not be maintained. If they can't afford the payments, they can't afford maintenance. You might have a house with leaky roof, plumbing problems or some expensive electrical work needed. Some homeowners even trash their house before they leave it for the final time.
There are three ways to buy home foreclosures:
- Pre-foreclosures are homes you buy from the homeowner to prevent home foreclosures. They are the least expensive and you can see and evaluate the house. You'll often pay just the amount of the mortgage owed and you’ll be able to do a title search. You will have to make up any back payments but you can usually make a 10-20% profit.
- Auctions are risky but can be very rewarding as you can make as much as 40% profit. The drawbacks are that you can't inspect the house, you must pay in cash or with a cashier's check and you’ll be competing against other investors. You may also find that you have trouble evicting the current resident!
- Real estate owned, or REO, is property owned by the realtor. You get to see the property and ask for and get a clear title. These properties are generally in better shape than other foreclosures. You won’t get a deal as good as at an auction or when you buy directly from the owners but you know exactly what you are getting.
Home foreclosures can be a very good real estate investment if you take some precautions and make sure you know what you are buying.