How to buy foreclosures is a hot topic now and it always will be. The reason for this is pretty simple, there is a lot of money to be made in foreclosures. There are two ways to buy foreclosures. One involves a battle with everyone else who shows up at the courthouse, the other involves little to no competition. I like the second one better but I will discuss both of them for you.
The first method of buying foreclosures is the traditional way, where you go down to the county courthouse and bid against everyone else. There are two different types of foreclosure sales that will happen in this manner. The first is usually referred to as an upset sale. This is when the property is being sold for a minimum bid, that bid is going to be the amount that is owed to the foreclosing institution plus whatever costs and penalties have been tacked on to get the property to the auction. It is important to note that this type of sale is rarely a free and clear sale. This means that there might be other liens against the property and the new buyer will inherit these liens when they buy. I can’t think of a better reason to do a title search than when you are buying a foreclosure at a public auction. I have seen people buy properties only to find out that it was a 3rd mortgage foreclosing and that the 1st and 2nd mortgage were still in place. I have seen people bid up a property to well over what it would have sold on the MLS. People make all sorts of mistakes at auctions, don’t be one of my bad stories. Do you homework BEFORE you bid at a foreclosure auction. The title search isn’t your only problem. What about the condition of the property? You can’t inspect a property before a foreclosure auction. At best, you might get a look at the property from the outside. I can tell you from experience that a lot of damage can happen to the inside of a house without anything showing on the outside. I tell my students, that you don’t dare buy a house you haven’t researched. If you ignore me on this, and you screw up and buy a house, then magically discover that the other liens on the house are worth more than the property you just purchased; then you will want to talk to a bankruptcy attorney about doing what is called a cram down. It might be your only hope.
The way that I like to buy foreclosure property is before the foreclosure happens. There is a magical gap between when the borrower first goes into default and when their house is auctioned off. It is between these two points that I want to get involved. This gap can be as short at 30 days or as long as 2 years depending on the state where the property is located. In that gap, I can acquire the property a few ways. I can buy the mortgage as a defaulted note. Presumably, I can buy controlling interest in a property for a discount on the principal balance. So, if I am dealing with a $100,000 property, I might only be paying $70,000 or less for the note. The note gives me the right to foreclose, but then I actually have to hire the lawyer and get the foreclosure moving. Once that happens, I can talk to the borrower and see if I can negotiate a deal where they just give me a deed in liu of foreclosure. That saves me time and money, it also saves the borrower from having a foreclosure on their credit.
I can also buy controlling interest in a property via a tax lien sale, in states that sell tax liens. This is also done by public bid at the county courthouse. In general, most of these liens are going to be paid, so there is no real assurance that I get any sort of property out of this auction. I can get a good return on my money, but in this case I want a property.
My favorite way of buying foreclosure property is to buy it directly from the current owner, before the auction. I negotiate directly with the borrower who is in default. I offer to take over their debt. I offer to make up their back payments and any penalties. In exchange I get to take a property with equity, sometimes a lot of equity, and I have financing in place. I don’t need to apply for this financing. I just start making the payments. In this situation, I get to do a full title search and inspections before I put a penny into this house. So I know exactly what I am getting into. I am also helping the current owner. I am stepping in to save their credit. They are still going to lose a house but the collateral damage is minimized. A few years down the road, when their financial situation improves, they can buy another house, because there is no foreclosure on their credit report. They don’t have to deal with the humiliation of having all of their neighbors know they lost a house to foreclosure. I generally give them a few thousand dollars to move and rent an apartment. I also give them time to clean their stuff out of the house. The sheriff’s office usually gives former home owners an hour to gather all of their belongings and get out. Selling a house to me or to one of my students is a much better deal for them.