When is the right time to buy a foreclosure?
Because foreclosure sales are usually structured to give no one person an advantage over anyone else and whether they are open auctions or sealed bid auctions, it seems that timing, other than placing your highest bid at the right time, is immaterial. Of course this is only true if you accept the conventional process for buying foreclosures. There are other techniques where timing is everything.
The foreclosure process is actually quite a long one if you consider that it starts when a home-owner begins to default on mortgage or loan payments. The reasons vary but divorce, illness, unemployment and death in the family can all trigger problems. To begin with, lenders will provide some leeway but after three or four months they will lose patience and begin making legal noises about foreclosure. It is at this point that information becomes available about “distressed” properties. Large metropolitan areas will have legal newsletters and newspapers that will list foreclosure cases that are being prosecuted. In smaller communities, the county recorder’s office holds the list of information that you need so badly.
Borrowers who are in default are rarely in a position to talk about selling up until the wolf is at the door. This could be several months into the legal process, so your database has got to work really well for you.
This is where your timing has to be well measured. It is important that you strike up a relationship with the owner of the distressed property. If you approach him or her too early, they may reject you out of hand, believing that a miracle will save them. If you approach too late, you may run out of time to assess the property and complete your transaction.
This method of buying property is neither illegal nor is it immoral. Quite the reverse; you are actually achieving gains for all three parties. The borrower can release themselves from a potentially damaging situation that will sit on his or her credit record for some time. The lender really does not need the pain of going through the foreclosure process and would much rather have the loan made current. You will potentially pick up a real discount bargain that you can turn around and sell for a healthy profit.
This type of buying has been called pre-foreclosure purchasing but, in reality, there is nothing to stop the owner from selling the property at any time, so long as they own the title. The only downside for you is that, if there are any junior or subordinate liens on the title; second mortgages, loans secured using the property or back taxes, you will become liable for these, so before you part with any money to buy the owner’s equity share, make sure you understand what they call encumbrances on the title. This is not as daunting as it sounds because it actually gives you a bargaining chip and you may be able to take over the title for a very small payment on the understanding that you will deal with the liens.
This approach will not always be successful because many homeowners become ostrich-like and believe that their situation is hopeless. They will refuse to deal with you and will lose their home and their credit-rating anyway. However you are free to bid at the foreclosure auction and win the property and title free of junior liens or, if the property is unsold, you can always approach the lender directly and make an offer close to the equity value.
As with most things in life, timing is everything in the purchase of foreclosed properties.