Buying A Foreclosure - Pre-Foreclosure, Auction or REO

Buying a Foreclosure

Buying a foreclosure is a great way to purchase a property, pick it up for a reasonable price and flip it for a nice profit. There are basically 3 different ways you can buy a foreclosure. The first way is to buy a pre-foreclosure. This is a property that is delinquent, but hasn't made it to the auction yet.

The next way is to buy a property at the auction. We do NOT recommend this method unless you are an experienced investor because there are several things you need to be aware of before you start bidding.

The final way is REO. This stands for Real Estate Owned and is where the property was auctioned off, there were no buyers so the property ends up back with the lender. The lender then has a listing agent list the property to sell it.

Buying a Pre-Foreclosure

The strategy of buying a pre-foreclosure is to create a situation where everyone wins. This type of strategy mainly involves you and in some cases the lender. Because the homeowner is behind on his or her mortgage payments, they are now in a motivated state of mind and willing to entertain offers made by investors. Keep in mind, you may not be the only person looking at this property. Generally though, you can expect very little competition because it takes a little more work to get these.

When buying a foreclosure this way, you must do some research on these types of properties. The following are some basic guidelines:

  1. locate loans in default,
  2. evaluate each property by comparing and contrasting location, price, and property condition
  3. narrow your selections to a few
  4. inspect the properties
  5. determine the property owner's needs, his motivation and flexibility
  6. determine the market value of the property, fix-up costs, potential sales price and profits if you plan for a quick flip
  7. arrange default work out by negotiating with the owner and the lender if you are buying for less then what is owed. This is called a short sale.
  8. close on the property, fix it up, live in it or flip it quickly or a nice profit

Buying Foreclosures At The Auction

Buying a foreclosure at the auction is a great way to purchase a property under market value. However, you must be extremely cautious and know what you are doing. There is a lot that is involved and we don't recommend anyone going there unless you have experience. Here's how it works. Most properties are auctioned on the courthouse steps. The property is auctioned off to the public and the highest bidder walks away with the property. This can be very rewarding to those who are in a position to buy the property within a short amount of time and can be devastating to those who bid without proper financing in place.

Most auctions require a deposit of the purchase price on the spot and the remaining balance usually within 1-30 days. So make sure you have your deposit ready and your financing is in order before you bid. If you are unable to get financing within the allotted time, you will most likely lose your down payment, and they will auction the property off again. Buying a foreclosure at the auction is also the riskiest place to pick up a foreclosure like I mentioned before. You are buying the property in "As Is" condition so it's very important to do your homework before you just go to an auction and bid on a property.

When buying at the auction, we recommend you:

  1. first visit a local courthouse when more of the auctions take place to get a feel for the bidding procedure, find out how much is required as a down payment and when the rest is due
  2. get proper financing in order
  3. research properties and do your homework prior to the auction date
  4. calculate potential profits
  5. determine the most you will bid for the property
  6. follow the property to the auction and participate

Buying Foreclosures that are Real Estate Owned (REO)

Buying foreclosures that are REO primarily involves the lender and listing agent. REO just means the lender reclaims the property and establishes control over it to minimize its losses. Buying a foreclosure that is REO is by far the easiest way to pick up a distressed property. Lender's are always listing properties that come back from the auction, because they don't like excess inventory. They are in the lending business, therefore it is quite easy to find these types of properties.

Most of the time they will hire a broker or real estate agent to handle the REO's just because there are so many of them. Lender's in this situation are very motivated, especially if they have a large number of them. These properties are considered to be a huge expense which need to be eliminated. This gives the investor numerous ways to creatively negotiate with the lender on a purchase price. One disadvantage when buying a foreclosure that is REO, is that you will pay close to market value for these properties because the lenders will have paid off any outstanding liens, taxes, and other expenses.

We have a great strategy we use for buying "pre-list" REO's and are able to get some killer discounts. You can check it out in our products.

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