Is there a future in foreclosure investment?
The foreclosure market was once seen as a small niche market where purchasers willing to take a risk could pick up a bargain property in need of major refurbishment. New buyers with plenty of energy could get much more house for their money and investors had a source of cash generating real-estate. In 2005, over 800,000 properties entered foreclosure and the figures have been rising steadily for a number of years.
It’s the economy, stupid
The economic climate in the states with a contracting manufacturing industry and two decades’ worth of home-ownership initiatives has placed so many people in a vulnerable position. There only seems to be potential for even more foreclosures in the coming years. This is bad news for homeowners close to the edge but good news for the armies of purchasers and investors who are now using the internet to track down their bargains.
The Internet
Googling the words “foreclosure listings” brings up a mere 12,400,000 web pages which indicates that there is a phenomenal amount of information out there. Details of foreclosures are no longer a matter of local interest; they are open to the world.
Auctions
Legends telling of $100 purchases turned into $50,000 sales in a matter of days have fuelled a Klondike style gold rush however the reality is starkly different. Foreclosure properties are generally sold at auction and inexperienced bidders can become too emotionally involved in the property. They find themselves bidding close to the market value so frequently that foreclosure properties are sold, on average, at 5% discount rather than the much mooted 50%.
Pre-foreclosure buying
Of course there are still real bargains to be found but, as with most things, they come at the expense of thorough and mind-numbing research coated with a thick layer of persistence. These qualities are generally not present in the get-rich quick brigade and so, professional property investors will still reap the rewards. Because of the frenzy of the auction floor, many serious foreclosure investors are avoiding this arena. They are choosing instead to pursue a version called pre-foreclosure purchasing. This involves tracking down properties that are just entering the foreclosure process, assessing the risks associated with the legalistic liens and encumbrances on the title and approaching the owner with a view to relieving them of their financial handcuffs. This approach requires a great deal more knowledge, skill and subtlety than bidding at an auction, so it will continue to be the province of the rich, the clever and the bold.
Buying direct from the lender
Knowledge of the entire process also allows the quick-footed to deal directly with the lender who has brought the foreclosure prosecution. They know that holding a chunk of timber, bricks and mortar is not what banks and loan companies really want to do. They would much rather have cash moving through the veins of the company. Negotiations like these need careful timing to ensure that the lender is amenable to the approach and is willing to break through the processes he has carefully put in place.
The future
There is no doubt that the foreclosure market will continue to grow. The reserve of properties destined for sale in this way is still depressingly large. The rumors that foreclosures can be a source of easy money are spreading far and wide thanks to the internet and greed is a commodity that is never in short supply.