Investing In Foreclosures - A Primer

There is far too much to investing in foreclosures to include it in a simple post, but the basics can be outlined.

First - a foreclosure may not be what it seems. In many cases, the owner has either let maintenance slide (due to inability to afford repairs), or he may have even purposely sabotaged the home out of anger. In any case, before investing in a foreclosure, do your due diligence and check it out thoroughly. Estimate repair cost - then add 25% to cover the unforeseen problems.

Second - upon buying a foreclosure the very first thing you should do is secure the property. Never leave it untended, even for a day. Vandals - or even the previous owner - may damage it further. Board it up and keep it boarded up until the renovations are completed. There are malicious people everywhere. Trust me.

There are three phases to any foreclosure proceeding, and as an investor you can purchase the property in any of those phases. Please note that many people - even the so-called "infomercial experts" get these phases mixed up. So here they are, in plain English:

When a property owner defaults, usually three or more payments, the lender will send the owner a notice of intent to take legal action if the arrears are not paid immediately. This phase is PREFORECLOSURE. The property is not yet in foreclosure.

The second phase is when the lender has obtained the legal right to proceed and property actually goes up for auction. This is FORECLOSURE. At the auction, the lender will start the bidding with a bid equal to the amount owed plus late fees and legal costs. Whoever is the highest bidder gets the property.

The final phase occurs only if the lender is the only bidder (or the highest bidder) and the lender takes ownership of the property. At this point it is no longer a foreclosure - it is an REO - Real Estate Owned. The bank and its Realtor may still call it a foreclosure, but technically it is no longer such.

In Phase 1 the investor can approach the owner with a plan to salvage the seller's credit and provide him with some walking money, so he can rent another place. But before making any offer, do your homework - there may be tax liens, IRS liens, mechanics liens. Check for liens, and do a title search. Bear in mind - if you purchase in this phase, you will be required to pay the arrears, late fees and legal costs of the lender, so do not offer to pay too much for the property or you could end up with an "alligator".

In Phase 2 you may purchase by being the highest bidder at the auction. The same rule holds - do your homework on liens etc., and know what repairs will be needed.

In Phase 3, the lender is trying to dump the property and may entertain offers that provide opportunity for an investor. Banks are limited as to how much property they can legally hold. When they approach their limit, they MUST sell. Bear in mind, too, that lenders are not in the business of maintaining properties. They know if it does not sell quickly, it will either cost them money to maintain, or it will begin to fall apart and be subject to vandalism. So the lender may very well welcome yout offer, even if it is "creative" (but not too creative)!

Again, these are just a few of the basics. For more complete information, and strategies for investing in foreclosures (including "no cash" methods) and 23 other methods of investing in real estate refer to "The Simple Man's Guide to Real Estate".

New Real Estate Blog

There are a few new real estate investing blogs I would like to make you aware of. They are as follows:

Become A Real Estate Investor

Real Estate Investing 101

Real Estate Investing for Beginners

These blogs promise to make it easier for newbies to get started in real estate, while watching out for the pitfalls
.