Understanding Foreclosures Will Help Focus Your Efforts As An Investor

Understanding foreclosures is a must. You must know the process that is behind them, and what the capital requirements are for each stage of foreclosure. If you do not, then you will waste a lot of time that you do not need to waste.

Let us take you through the steps of foreclosure so that you have a proper understanding of foreclosures and it will help you to purchase foreclosure houses. 

Pre-foreclosure

Pre-foreclosure is the first stage in the process to understanding foreclosures. This is what happens when homeowners start to fall behind on payments and the lender will begin to initiate the foreclosure process.

This can be a very good time to get involved as a real estate investor. You are still dealing with the owner of the home. This is a good thing as it means that you can be a little more creative with them than what the banks would allow you to do.  It will be much easier to use techniques like a lease option or seller financing when you are dealing the seller. The bank will not allow you to do seller financing or lease options if they own it. 

Cash Requirements

It really depends on the type of deal you are doing. If you are doing a short sale, then you will need financing and the down payment will be required by the lender. With that kind of deal, you would need credit to get financing, and cash for down payment and closing costs.

If you are doing a seller financing or lease option type deal, then your upfront cash requirements will be much less and it will not require credit. It all depends on how you structure the deal as to what your cash/credit requirements will be.

Auctions

The next step to understanding foreclosures is the auction. If the homeowner cannot save their home, then the bank will foreclose and the auction is the result.

In some states, the auction is called a trustee's sale. In other states, it is called a sheriff's sale, or a county auction. Regardless of what it is called in your area, the same thing is going to happen. 

Basically, the bank is going to set a minimum bid on the property. This is usually what was owed on the property plus the fees they incurred for foreclosing. If people bid higher than the minimum, then the bank will get their money and everything works out. This is how the foreclosure auction works. 

Cash Requirements

The cash requirements are the main problem at the auction. This is the  main reason people stay away from the auctions, especially new investors. Many of the auctions require a deposit just to be bidding (typically $5000 or more). If you are the highest bidder, they want you to pay the remainder of the money in a short period of time. In many places, it is 24 hours or less to pay the rest of the money.

That is the major problem with the auction is having the cash requirements. If you have them, this can be a great place to get a deal. If you do not, then you might want to look for another method of finding deals. This is why understanding foreclosures is so important. It will help you so that you are not wasting your time on something that you cannot finance.

Bank Owned Real Estate

If no one bids higher than the bank at the auction, then the bank will own the home and put it on the market with a real estate agent. This is called a bank owned REO (real estate owned) house.

The bank will try to get top dollar for these properties like any other property on the market. If you think that they are going to list the property for what the owner owed on it, you are kidding yourself. They are going to try and get the best price that the market will bear.

With these properties, it is really just a matter of making offers and negotiating with the bank to see if they would be willing to work with you. Be prepared to make a lot of offers before you find one where the bank will negotiate with you.

Cash Requirements

Since you are buying these from the bank, the bank will normally not be very creative. That means you are going to be purchasing the properties straight up with a down payment and financing as required by the lender. This is important to know when it comes to understanding foreclosures.

As you can see, most investors would be best suited to pursue pre-foreclosures. There are more options on being able to get in and out of deals. For investors who do not have a lot of money or credit to use, this is a good place to get started.

Why? You are dealing with a motivated seller, a property that needs to be sold, and you have creative financing options at your disposal. You should see these creative financing options if you are not familiar with them.

Understanding foreclosures let you know what to expect, how to approach them, and what is required to buy properties in each stage. Review our detailed information on each stage of foreclosure on the foreclosures page accessible by the link below.