We recently looked at the process of foreclosure from the perspective of the homeowner and the lender. Neither are thrilled to be going through this process. The homeowner is losing a place to live and probably will take a huge hit on his credit. The lender will likely take a loss on the property after it sells at auction, if it sells at all.
But is a foreclosure a good idea as an investment opportunity? Not in every case. The house might be trashed but, if it’s not, you might want to take a closer look.
The first step is pre-foreclosure. During this period you can offer to buy the property outright from the homeowner. You have time to research the title and condition of the property and could acquire it at a price 20% to 40% below market value. If there is no interest during the pre-foreclosure period, the property goes to public auction.
At the auction, the opening bid is set by the lender holding the mortgage and is usually equal to the outstanding balance on the loan plus any additional fees associated with the sale. If there are no higher bids, the attorney for the lender buys the property and it is considered bank owned. While public auctions can offer incredible bargains, you will be expected to pay cash at the time of sale (or within 24 hours) and will have little opportunity to research the title of condition of your prospective purchase.
Obviously, this is not an investment technique for beginners but, at some time in your career, you may be interested in taking a closer look at investing in real estate through foreclosures.
The Young Wealth Team