Is there such a thing as a safe deal in foreclosures?
Risks abound in the foreclosure market. Not only are the buildings themselves sometimes a bit shaky, the processes that have been set up to sell them can also produce some shaky results. Some options are safer than others, however but the discounts may not be what they were.
Foreclosure properties are basically properties that have been seized from borrowers when they have defaulted on their loan. It sounds like a brutal act but in this economic climate, lenders don’t really need any more foreclosures and they will give defaulters copious rope before they act. The resulting effect on the borrower and his or her family is that they generally lose faith in their ability to make the loan current and lose interest in maintaining or repairing the property as, they tell themselves, it is no longer theirs. This leads to what is called a “distressed” property which would probably be unsellable on the open market however there is a burgeoning market specifically for foreclosure properties; a little bit like the Klondike Gold Rush.
Apocryphal stories of houses being bought for a dollar and sold for $100,000 have attracted the attention of hordes of amateur real-estate investors. In the real world there may be the odd house sold for 30% to 40% below the market valuation but most sell just 5% below market, such is the buying frenzy at auction.
Finding a safe deal in the unusual foreclosure landscape is only possible through good old fashioned hard work and persistence. In theory you can buy the property at any time and from anyone in the chain from the original owner through the lender, the Marshall’s Office, real-estate agents, or one of the many Government Agencies like HUD whose job it is to mop up foreclosures and regularize their distribution to the needy.
Buying from the original owner before the foreclosure process is completed can produce some genuine benefits for everyone concerned. The original owner gets to keep his credit record and maybe gets a proportion of the equity in his pocket, the lender gets the loan current and has one less foreclosure to deal with and you get the house for around the price of the owner’s equity. It sounds amicable but there can be real problems with the condition of the title to the property, especially if the original owner was mortgaged twice over and delinquent on property taxes too.
If you opt to buy at auction you may end up paying over the odds for a not-very-good property and let’s face it the competition is getting stiff and the risks of losing to a crazy high bid are quite real.
No, the safest option is to build a relationship with the lender. Get to know the people who are handling the foreclosure process and make your offer to them. Use your influence to convince them that selling to you is their best option and they may actually end up helping you out with preferential financing terms just to get the property off their books.