Considerations for Buying Foreclosed Real Estate

Home foreclosures attract value-conscious buyers seeking out cheap real estate deals. Low acquisition costs for foreclosure properties relate to the structure of the mortgage loan product. When plotting real estate strategy, prospective buyers weigh the risks versus rewards of taking on properties as they transition through separate stages associated with foreclosure. Be advised that real estate foreclosure opportunities shift alongside the economic cycle.

Mortgage Structure

Most people take out mortgages to finance real estate purchases. Real estate functions as collateral to secure, or back, the mortgage loan. The mortgage contract specifies that lenders may take steps to foreclose, or seize, properties as compensation for missed payments. Beyond principal and interest payments for mortgages, all homeowners are responsible for paying property taxes to municipal officials. Your local treasurer’s office also maintains the right to foreclose on real estate, in order to make good on past due property taxes.

Foreclosure Sales and Market Value

Real estate foreclosure deals are typically executed at prices beneath market value. Banks and treasury officials do not view real estate sales as part of their principal business operations. Rather, banks and municipal officials are anxious to liquidate real estate holdings for cash quickly, in order to earn some form of compensation for potentially large losses. Homebuyers can exploit these sentiments to purchase low-priced real estate and improve their chances for turning a profit.

Stages of Foreclosure

The real estate foreclosure process includes three separate stages. In pre-foreclosure, homeowners have missed loan payments and are in default, but the bank has yet to seize property. According to CNN Money, you may personally contact distressed homeowners, and negotiate smaller price discounts. After the pre-foreclosure stage, homes that cannot be sold are seized and auctioned off. Real estate auctions often allow for deep discounts, but buyers may be forced to close deals quickly in cash—without actually being able to inspect the property. Lastly, lenders reclaim properties as real estate owned (REO), where you must contact banks directly to express buying interest. Your cost savings may also be reduced, at that point.

The Economic Cycle

Successful real estate investors coordinate their respective strategies according to the economic cycle of growth, recession and recovery. In recession, foreclosure notices and deep discounts increase, as consumers suffer from job losses, while real estate demand is weak. Higher numbers of foreclosures effectively increase the housing supply and pressure property values downward. Value-conscious buyers exploit recessions to acquire cheap foreclosures, and hold real estate until the market recovers. At that point, real estate investments may be sold for large profits. Monitor real estate prices and search for foreclosures through real estate agents, the Department of Housing and Urban Development and your local treasury office.

Financial Risks

Foreclosed homes may require expensive repairs to restore the property back to comfortable living conditions and meet building codes. Potential title disputes and liens may further complicate these deals. For example, you may inadvertently purchase a foreclosed home that is attached to a $100,000 property tax lien.  Treasury officials may seize your new home, if property taxes are not paid off in a timely fashion.