Investing in Real Estate: Understanding Foreclosures

Investing in real estate can be a great opportunity, but what options are right for you? In Investing in Real Estate: Understand Pre-foreclosures, we talked about the opportunities in pre-foreclosures and what they meant for you, the investor. Now it’s time to learn about the second opportunity for real estate investor: foreclosures. Foreclosures are a great way to find a property priced below fair market value. In this article we will cover the pros and cons of investing in foreclosures, and also where to find all the information you need to see if investing in foreclosures is right for you.

Foreclosures are homes where the homeowner stopped making payments to the bank. In order to recoup the money they have invested, the bank needs to make money on this property. Although the bank wants to recover some of its investment, it does not actually want to take ownership of the property. So what does the bank do? They offer the home through an auction that is known as a “sheriff’s sale.” In essence, your local county sheriff’s department acts as the auctioneer for the bank. This is great news because it can be a great opportunity for a savvy and well informed investor.

To find homes that are up for foreclosure auction, type your county name plus “sheriff’s office” in a search engine like Yahoo or Google. This should bring you to your sheriff’s web page. By clicking on the column that says “sheriff sale” you will have a ton of information at your fingertips, including the dates of sales, addresses of properties up for auction, and a list of appraisal prices (and possible opening bids or deposit amounts). .

First notice the date of the sale. Most counties have weekly or monthly auctions on specific days at specific times. Visit a few auctions to see how many people attend and how stiff the competition is. Are there a lot of bids? In my area, there is very small interest in these types of investments. While there are many people in attendance, few actually bid. Often the property sells for opening bid (it hardly ever crosses the appraisal price).

The address is also listed so that you can drive by and inspect the property. This is where things can get a little tricky. When investing in pre-foreclosures, you have the opportunity to meet the homeowner or real estate agent and walk around and inspect the property. With foreclosures, this is a little more delicate. The homeowners are losing their home and can be bitter, upset, or frustrated. In some cases they have already moved out and the property is empty. Drive by the property to see which is the case. Generally you can tell by a quick peak. Is the lawn overgrown? Does the home look abandoned or in disrepair? Again, be careful here. Just because the home looks decayed or has not had normal upkeep, it does not necessarily mean it’s empty. People who don’t have money for their house payment may not have money to take care of the lawn or fix leaky gutters.

The next information you will need is the price of the home, or what the sheriff’s office has assessed as this particular property’s value. To determine a starting bid the sheriff’s department does its own appraisal. This is just a drive by of the property. Appraisers do not have keys (since the home owner left in a hurry or is still in the home) and do not enter the property. Therefore, these appraisals are significantly lower than the actually value of the property. Since this is what value the auction goes by, this is great news for the investor.

In most areas, the starting bid is a percentage of the appraisal price. In Ohio, the opening bid can not be less than 2/3 of the appraisal price. (Every state and every county have different rules so make sure and research your specific area). What does this mean in a practical sense? Let’s say you find a home in an area that you believe is worth $100,000 dollars. The sheriff has the property listed at $75,000. This means that the opening bid will be $50,000. You potentially have the opportunity to get a $100,000 dollar home for $50,000! If this is so easy, why doesn’t everyone do it?

For starters, most auctions require a down payment. This is a serious business and is not for those who may have problems getting financed. In fact, most investors only invest in foreclosures when they know they have cash. Most auctions require at least 10% of your winning bid. In larger cities, the requirement may be as high as 50% or more. Winning a bid is considered very serious business. Not following through is very expensive and can have legal ramifications. This is not something you want to take lightly!

The last thing to consider is the condition of the property. While the home may be worth $100,000 in top condition, you don’t always know what type of condition the property is actually in. This is why due diligence is so important. Visit the property and take the time to walk around the perimeter. Peek in windows if the property is empty. Talk to neighbors. (Especially in affluent areas, neighbors are anxious to see the property occupied. An unkempt property can lower neighborhood property values so neighbors will often talk to potential buyers). Be forewarned that even after any amount of work you could still be in for some surprises. Remember the homeowners didn’t have money for proper care so the home may be in bad shape. Has the septic tank been emptied? Does the roof or basement leak? A roof repair is expensive enough, but with leaks left unchecked the inside damage may be just as costly. Also, items that come standard in regular transactions (like appliances) may be missing (occupants will take everything they can to recoup their own losses, from appliances to light bulbs, ceiling fans, and light fixtures).

There are a lot of variables in foreclosures, so investing in this area is not for the faint of heart. Since you can never fully inspect the property, you can’t know the condition of the property or the amount of money you will need to invest in the property. However, foreclosures attract many investors because, since the price is so cheap, the potential for profit can be huge. Even if you have to invest a large chunk of money into the property, if you can get the property cheap enough there is still room for a nice profit. If you are lucky enough to find a property that doesn’t need work, then you are on your way to an awesome investment!