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These are properties that have been acquired by mortgage lenders because the owners have defaulted on the loan payments. The lender or "mortgagee" takes the property that was pledged as collateral for the loan when the payments are behind (that is, when the payments are "in arrears" or "delinquent" and the owners are said to be "in default"). Lenders must follow the state laws where the property is located. Owners default on loan payments for a variety of reasons including divorce, illness, death of a spouse, and loss of employment. Lenders try to work out some kind of resolution with the owners to make up the payments in a process called "loss mitigation." This period is referred to as "preforeclosure." If efforts to work out a correction for the problem do not succeed, the lender will generally initiate foreclosure procedures after three months of non-payment.
Another party may offer to solve the problem by buying the property from the owner during preforeclosure, or from the lender at time of the public foreclosure sale, or afterwards. This presents an opportunity for savvy investors and prospective home owners looking for bargains. Foreclosure properties represent an exciting way to buy real estate because they can be purchased at discount prices, typically between 10% to 50% (or more) below market value. These discount prices are possible because the sellers, which can be the borrowers, the mortgage lender, or one of several government agencies, are motivated to sell as quickly as possible to avoid further losses. As an owner-occupant buyer, you can purchase a foreclosure as your home and enjoy instant equity. As an investor, you can buy foreclosures for rental or resale with built-in profit margins.
There are basically three stages to the foreclosure process. At each stage, the real estate is thought of as a distinct type of property that a new purchaser can acquire:
To summarize, a preforeclosure occurs when the lender initiates foreclosure proceedings as the result of a default. If the borrower cannot cure the default by paying the arrears, and does not sell the property, it is sold at a public foreclosure auction. If no one buys the property at the auction, it becomes REO and the lender is now the seller.
There is also a fourth stage for some properties. In the case of loans "insured" by a federal agency such as HUD or Fannie Mae, or "guaranteed" by the Department of Veterans Affairs (VA), the properties are eventually acquired by the government. When such properties are foreclosed by the mortgagees, the agencies reimburse the lenders for the loan amount and certain costs of foreclosure. The government then takes ownership of the real estate and makes arrangements to sell the properties to the public through contractors and Realtors.
You can see how at each stage, the owner is a highly motivated seller. Watching the progression of properties through one type to the next will allow you to understand when is the optimum time for you to seize the opportunity to benefit by helping others to solve the problems that have arisen from the borrowers' difficult circumstances.
Lenders foreclose according to the laws in the state where the property is located. There is either a "judicial" or "non-judicial" foreclosure procedure that must be followed. States that use mortgages to document property ownership follow the judicial procedure, which requires lenders to file a court case to prove default before they can foreclose. States that use deeds of trust follow the non-judicial procedure, which does not require a court case. Non-judicial foreclosures can take as little as 30 days to complete. Judicial foreclosures can take much more time because of the need to have the court approve the foreclosure action.
Absolutely! Most of the great family fortunes in our country have been created through real estate ownership and investments in real properties. People just like you are attracted to the opportunities presented by dealing with foreclosures because frequently they can buy the properties at prices substantially below market value. Buying properties at discount prices is the surest and quickest way to make money in real estate. Individuals who are looking for a home can get a significant amount of equity up front with foreclosures. Of course, there are no guarantees with any investment, but all across the country, people earn almost immediate income by "flipping" foreclosure properties for big profits. And many landlords are able to buy and rent foreclosures, producing positive cash flow and long term wealth accumulation.
You have already taken the most important first steps! You are reading to learn more about the process, and you have come to the right place. www.foreclosure.com serves as a "Knowledge Center" with information, analysis of trends, and actual property listings for each of the types of foreclosures. Our site offers the best available nationwide database of foreclosed properties, making it easier for you to begin your search. Property information is up-to-date and comprehensive, with the most extensive use of sources for preforeclosures, auction properties and other foreclosures. We provide details about the real estate directly from the lenders, government agencies, tax rolls, and other sources. REO listings come from foreclosing mortgagees, HUD, VA, Fannie Mae, and about 95% of the corporate sellers in the market. People just like you all around the country subscribe to our enormous, user-friendly property database to find the best deals in real estate.
Buying real estate is a tricky process, whether it's a foreclosure, preforeclosure, auction, REO or traditional transaction, which requires a good amount of knowledge and experience to ensure that it is done right. So the short answer to this question is "No:" You are not required to enlist the services of an agent or broker to buy foreclosure properties. However, we don't recommend that you go at it alone ... especially in the beginning of your real estate investing career. It's a lot of work, which can become overwhelming and confusing if you do not have time or experience at your disposal. A savvy Realtor® can become a very important member of your team, finding, negotiating and closing the best deals possible with your best interests in mind. Therefore, we encourage you to find a local agent or broker near you who can make your life easier, as well as save you valuable time, energy and money by finding you the very best deals in your area. It will more than likely turn out to be a wise investment that pays for itself and more in the long-term.
You might be surprised to know that there are several sources of investment capital
available for funding foreclosure deals. These sources fall into four main categories:
You can obtain conventional financing from any number of commercial banks and mortgage companies. This type of source can be very cost effective, providing you have good credit. Many buyers of foreclosed properties use conventional financing to fund their purchase. Conventional financing sources would be the same sources you would use if you were buying a non-foreclosure property. Try your local bank or mortgage broker because both of these sources should have competitive rates and terms.
Partners are individuals, including friends, relatives, and other investors, who would be interested in providing some or all of the money in exchange for a percentage of the profits you will make when the property is resold. You can advertise by word of mouth, via the Internet, or in local newspapers. You can use existing lines of credit from home equity loans against your own property or from credit cards to fund your deals when you are first beginning.
You can also use hard money lenders who are in the business of providing loans for real estate deals. These sources require you to make monthly payments on the loan until you sell the property and pay off the balance. Check local sources, including the newspapers, for ads from hard money lenders and investor-partners, or consider advertising your interest in meeting such persons for the purpose of making foreclosure investments.
You should be aware that foreclosure properties are sold in "as is" condition. That means that neither the owner, foreclosure attorney, lender, government agency, nor their agents are required to do any property repairs. You should therefore expect and be prepared to fix up the property, either by yourself or by hiring a contractor. Occasionally, REO properties, especially VA homes, may have had some repairs or cosmetic work done to them, and in that case, you are buying that work too, like it or not, so the "as is" principle still applies.
Another point is to arrange for your financing in advance of your foreclosure purchase. Then you can bargain with the owners from a position of strength. Contact your lenders or partners to negotiate and settle on the terms and conditions of your financing so that you will be prepared to complete the purchase once you negotiate a good deal with the owners.
A preforeclosure is a property whose owner has defaulted on the loan payments and whose lender has initiated the foreclosure procedure, usually starting with an official "Notice of Default" to the owner. A preforeclosure property exists during the first stage of the legal procedure, and therefore still belongs to the owner. The length of the preforeclosure period depends on type of foreclosure process mandated by state law and the applicable legal documents the borrower signed with the lender when the property was originally purchased. As mentioned earlier, either judicial or non-judicial procedures are required by law in different states.
Once again, you are at the right place. There are several ways to find out about preforeclosures, including buying paper lists or online database subscriptions, constantly checking the local newspapers for Notices of Default, and contacting foreclosure attorneys directly. Does this sound difficult and/or expensive? It is. That's why www.foreclosure.com has been developed to offer you the high-quality, updated, user-friendly information you need to succeed. www.foreclosure.com was established and is maintained by experienced real estate investors, and we know the value of providing our subscribers with easy access to all types of properties in each stage of the foreclosure process.
You must submit a written contract directly to the owners in order to buy a preforeclosure, since the property still belongs to them during this stage. You can initiate contact with the owners by mail, by phone, or by visiting them, depending on your personal preference. When you make contact, find out all you can about the physical and financial details of the property in addition to the information you have from our database. For example, find out the condition of the property and its major systems (e.g., roof, plumbing, heating/air conditioning, appliances, and foundation). You are there as a problem-solver, and you MUST learn the full extent of the problems. Also find out the number of liens, type of liens, loan balances, and total amount of arrears. Ask to see any correspondence from the lender(s) that will fill in the details the owners may not be fully aware of or may not full understand. The sooner you can establish yourself as a true professional who needs the complete and honest cooperation of the owners, the sooner you can make a reasonable offer that will help them, and enable you to achieve a profit.
You will need all this physical and financial information to do your research and to determine whether the property represents a good deal, given what you (and your partners, if any) want to do with it. Once you have made the determination, you can then prepare a written contract and submit it to the owners. When you have successfully negotiated the purchase, you must then inform the foreclosure attorney to stop the foreclosure process during the time necessary to proceed to closing and settlement of the purchase transaction.
At first, you generally don't need much of an earnest money deposit when negotiating with property owners. Deposits can be $1,000 or less. Later, of course, you will need to obtain the funding to pay off the current debt on the property
There are two primary points to consider. The first is that all of the debt that encumbers the preforeclosure property remains against the property until it is sold at the foreclosure auction. This means that any "junior" or subordinate debt stays in place, including trusts, second and perhaps even third mortgages, tax liens, assessments, and judgments. Any of these debts incurred by the owner and secured by the real estate, which may exist against the property, must be paid off. Most of the time, there is only one trust deed or mortgage on a property; however, it is of vital importance that you find out about any other possible indebtedness before you spend too much time and money pursuing a purchase of the property.
The second issue is that only the individuals who are named on the title can sell the property. This seems obvious, but it can go overlooked and valuable time can be wasted. All of the owners of the property must agree to sell it to you before a legal sales transaction can be completed. Make sure that you know who ALL the owners are and that they are all interested in selling before you start negotiating a deal. Most homes are owned by individuals or couples, so finding them and negotiating with them should be straightforward. Owners who have co-signors or non-resident partners, and owners who have abandoned the property and may have moved out of the area will obviously take additional time and effort to locate, negotiate with, and get documents signed. Just remember that even one deal that nets you thousands of dollars will make your time well spent.
An REO is "real estate owned" by the mortgagee, usually a property that was not sold at the foreclosure auction to a bidder and was therefore acquired or "taken back" by the lender. Since lenders are not in the business of managing real estate, they are willing to sell REOs quickly to interested homebuyers or investors. REOs are sometimes called "special" or "non-performing" assets to distinguish them from properties that are owned and actually used by the lenders, such as corporate facilities or branch offices.
Many people find REOs by following the properties through the stages of the foreclosure process (i.e., preforeclosure to auction property to REO) or by contacting the lenders REO or Special Assets departments. Some lenders establish relationships with local Realtors® who manage and market the REOs for sale to the public. You may be directed by the lenders to contact these real estate brokers or agents to find out about available properties.
Of course, we know there is a better way to find REOs! As a subscriber to www.foreclosure.com, you benefit from the work of a nationally-connected company that "makes searching easier." For less than the cost of a tank of gasoline for most cars these days, you can see all the information you need 24/7 for a whole month. And it comes to you in the comfort of your own computer station at your home or office, along with helpful instruction and tips. You know the facts are up to date as part of the largest database of "opportunity-laden" bargain properties in the country. Today, more than ever, working smarter is much better than working harder.
You can buy an REO by submitting a written contract directly to the lender or through the lender's Realtor®. As in the case with preforeclosures, find out all you can about the REO and determine whether it is a good deal before you submit the offer.
Lenders will generally request an earnest money deposit to be submitted with the offer. The deposit may be up to $5,000 or more, depending on the lender and the value of the property. Once you have successfully negotiated with the lender and have agreed to the terms and conditions of the deal, you then need to obtain your funding in order to close or "settle" the purchase of the property. Whether or not the lender will carry financing is an important consideration. Other key terms to negotiate include whether contingencies are allowed based upon professional inspections, the amount of time you have to close, and so on.
Some lenders will be interested in offering you a loan to buy their REO; others will not. Some will provide financing to investors; others will only provide financing to owner-occupants. You must communicate with each REO owner to determine its loan policies, along with its financing terms and conditions.
The U.S. Department of Housing and Urban Development (HUD) is a federal agency that insures mortgages to homeowners through its Federal Housing Administration (FHA). HUD acquires properties from lenders that foreclose on FHA-insured mortgages and HUD then offers them for sale to the public. These properties are properly referred to as "HUD owned." Technically, they are not "HUD foreclosures" or "HUD repossessions" because HUD is only the receiver of the property AFTER the mortgage lender has completed the foreclosure. Although HUD becomes the owner and sells the property, it did not foreclose, because only the mortgagee had that legal responsibility.
www.foreclosure.com is your single best resource for HUD homes nationally. HUD also advertises to the general public through over a dozen asset management and marketing (M&M) companies that are contracted by HUD to maintain and sell its properties. You may check the HUD Web site for the names of M&M Contractors who list the properties by posting them on their respective Web sites.
You can also find HUD properties by contacting Realtors® who are subcontracted by the M&M Contractors to list and sell them. These brokers list the HUD properties assigned to them in the Multiple Listing Service (MLS), where they are accessible to other MLS members. Ads in your local newspapers or contacts with local real estate brokerages may enable you to learn the names of brokers who have registered with HUD to show and sell HUD properties in your selected areas.
Bids to buy HUD properties must be submitted during the bid period through a registered real estate broker. Your agent will generally submit your bid using HUD's Web-based, electronic bidding process. A computer system stores the bids until the end of the offer period, which is the bid opening date, and automatically performs the calculations to determine which bid offers the highest net proceeds.
If you are the winning bidder, the M&M Contractor, acting on behalf of HUD, will notify your agent who will then notify you. The agent must then submit your signed sales contract (on the HUD-9548 form) within 48 hours, reflecting the offer that was made electronically and that became the winning bid. The agent should have all the paperwork you need. Once your contract is submitted and approved, HUD will ratify the contract and schedule your settlement date to occur within 30-60 days.
HUD requires an earnest money deposit as low as $500 (for properties that sell for $50,000 or less) that must have been supplied to your real estate agent at the time of electronic bidding. This deposit will be submitted to the HUD Closing Agent immediately after your bid is acknowledged as the winning offer. You will have time to finalize your financing, but you must submit a pre-qualification letter from a lender at the time your contract package is sent to the M&M Contractor.
No. Only registered state and local governments can buy HUD properties for $1. HUD offers some of its properties to government agencies to support community programs. These properties are not generally available to the public. As an individual, you can only buy HUD properties using the process described above.
Even though HUD property listings are available to the general public, there is an initial period during which only owner-occupants can submit bids. At the end of the period, if the properties have not sold, the bidding is opened up to both owner-occupants and investors. Properties available to investors are noted in the database.
Also, make sure that your contract package is complete and that it exactly matches your bid. The package, with a copy of the pre-qualification letter and cashier's check for the earnest money amount, must be received within 48 hours after the bidding closed. Otherwise, HUD requires the M&M Contractor to cancel your bid and return the property to the market or offer it to the next highest bidder.
The U.S. Department of Veterans Affairs (VA) is a federal agency that guarantees mortgages to homeowners who have served in the military. VA acquires properties from lenders that foreclose on VA-guaranteed mortgages and offers them for sale to the public.
As you might know, www.foreclosure.com makes finding VA homes as easy as can be simply search by area within our Web site and use the contact information provided to schedule to see the property. The VA has a contract with one company to manage and advertise its properties to the general public. Contact information for this company can be found at the VA Web site. You will need to contact real estate agents who are registered by VA to market and sell them in order to submit an offer. Check the Web site of the property management company for the names of agents who can help you find VA properties in your area. Also check the ads in your local newspapers or contact local real estate brokerages.
Offers to buy VA properties must be submitted on VA forms via a registered real estate agent. The forms can be found on the VA Web site, and your agent can work with you to complete them. If you are the winning bidder, your agent will be notified.
VA requires an earnest money deposit from $100 to 5% of the purchase price to be submitted with the forms. You must arrange your own financing and comply with other procedures set by VA. The settlement is conducted by the title company identified in the property listing.
You can use conventional or other financing to buy VA properties. However, you can only obtain a VA loan if you are qualified based on military service and you intend to live in the property as an owner-occupant.
Fannie Mae is the popular name used to identify the Federal National Mortgage Association (FNMA). Fannie Mae was established by the government to purchase FHA and other mortgages in order to bundle them for sale on the secondary market as "mortgage-backed securities." Fannie Mae acquires properties from lenders that foreclose on such loans and offers them for sale to the public.
www.foreclosure.com gives you access to information about these properties just like all other sources of REO. Fannie Mae advertises its properties to the general public via its Web site. The properties are also listed in the local Multiple Listing System (MLS), which is accessible by Realtors®. You can contact local real estate brokerages to find agents who market and sell Fannie Mae properties.
Fannie Mae sells its properties via real estate agents. You must present your offer to the agent who in turn presents it to Fannie Mae for consideration. Fannie Mae will review each offer and notify the agent of its decision. Fannie Mae will accept your offer, reject your offer, or make a counter offer. The counter offer demonstrates Fannie Mae's willingness to negotiate for a price that is mutually agreeable to both parties.
As with other properties, an earnest money deposit is required with your contract. Fannie Mae offers a variety of loan programs including some with low down payments. These down payments are typically between 3-5% of the purchase price.
Although Fannie Mae may sometimes make a few repairs to properties to increase their value, the properties are sold in "as is" condition. This means that Fannie Mae does not guarantee any work that may have been done on the property. You will have to check the repairs to validate the quality of the work.
An auction property is one that is sold or about to be sold at a public auction, usually at the county courthouse. This means that the property owners could not payoff the arrears or sell the property before the date of the auction. The auction is open to all bidders, including investors and homebuyers, and it is sold to the highest bidder. An auction property is under the control of the foreclosure attorney who conducts the sale on behalf of the lender.
Our www.foreclosure.com database enables you to know about the properties in your selected areas well in advance of the auction. Many foreclosure investors and bargain home buyers work with the original owners during preforeclosure, then if that process does not produce an acceptable deal, proceed to buy at the auction. It is important for you to be patient and diligent in using our database and maintaining your efforts to acquire the properties you find that offer opportunities. Nothing succeeds like persistence in this business!
Buying properties at the foreclosure auction or "at the courthouse" is an experience unlike any other in purchasing real estate. You will look for the attorney who represents the interests of the mortgagee and assure him or her that you are qualified to buy the property at or above the price set by the court in a judicial state, or by the trustee in a non-judicial state. That minimum bid price includes the full amount of the unpaid indebtedness owed to the foreclosing lender, plus legal costs. Other bidders will be investors like you and possibly junior lien holders whose interests are otherwise extinguished by the foreclosure action.
The attorney will qualify bidders by asking to see their earnest money deposits. We suggest you contact him or her in advance. You will need a cashier's or certified check that is usually non-refundable if you win the bid. This secures your purchase of the property and is not contingent on financing or inspections. Observe closely when the attorney examines the deposits to identify the real bidders and thereby establish the extent of the competition. The winning bidder will have to be fully prepared to close within as little as 30 days after tendering the deposit to the attorney and signing the contract.
The attorney starts the bidding at the specified minimum amount and continues to solicit bids from you and other interested parties until the winning bidder is determined. Don't picture the image of a fast-talking auctioneer with a gavel. Although, the bidding process can occur very quickly, often in as little as three minutes, it is more like a conversation among a few people, with the attorney in the center. Be vigilant in tracking the bids and watching your competition. You should always decide on your bidding strategy and your upper limit before you start bidding.
It depends on the seller. Contact the foreclosing attorney in advance and don't be too surprised if the requirement is for an amount equal to 10% of the minimum bid price. In some jurisdictions, the required earnest money deposit amount is specified in the sale notice either as a percentage or a fixed amount. If you are the winning bidder, you must pay the deposit in the form of "good funds" such as a cashier's check immediately after the auction. This amount will be forfeited if you fail to close.
There are three points to consider. The first point is that auctions start on time and are conducted very quickly, so make sure you arrive early and introduce yourself to the attorney to demonstrate that you brought the correct amount of earnest money deposit in the required form. Brief last minute questions may be asked and answered then. Secondly, you should expect to have some competition, even if it is minimal, so make sure you have your bidding strategy and the top price you will pay fixed in your mind in advance. The third point, as mentioned before, is that you must have cash or a cashier's check, and must be prepared to sign the seller's contract and settle the transaction shortly thereafter.
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