WHICH ONE IS RIGHT FOR YOU?
by Rick Sharga, RealtyTrac
uying a foreclosure property often delivers greater returns
than buying a traditional property. But not all foreclosure properties are alike. Which one makes the most sense for your investment strategy? Pre-foreclosure properties— homes in the earliest phase of the foreclosure process—are the least risky but have the lowest discounts. Investors negotiate directly with the homeowner, and while cash pur- chases are fine, these homes can often be purchased with traditional mortgage financing. These homes are purchased for less than sim- ilar homes on the MLS, since the owner needs to close a deal quickly in order to avoid losing everything to a foreclosure auction. Usually, the investor and homeowner settle on a price that covers what’s owed to the lender, is below full market value, and still leaves the homeowner with some cash as they exit the property. Investors need to find out how much is actually owed to the lender before agreeing to a sale—a prelim- inary title search will usually turn up other encumbrances on the proper- ty, like a second mortgage, tax liens and mechanics liens. Also remem- ber that financially-distressed homeowners often let maintenance slide, so having an inspection done is critical. Auction properties represent the highest potential returns—but come with the highest degree of risk. Lenders sometimes offer these homes for the amount owed on the defaulted loan, plus fees and fines, in
order to avoid having to take posses- sion. An auction property is rarely sold at full market value, since most bidders are investors who need to buy at below-market prices in order to make a profit. Auctions are very efficient as well—one day events where an investor bids, wins, pays (usually cash or a cashier’s check), and sometimes takes ownership the same day. Property condition is probably the biggest risk with auction properties. There are no internal inspections available on these properties, since they’re occupied. Investors can get an idea about the home’s condition by taking a look at the exterior, but there are often hidden issues to account for when estimating repair costs. Bank-owned homes are less risky than auction properties and may offer slightly better returns than pre-foreclosure homes. Lenders
sometimes sell these properties as/ is or do a minimum amount of repair work. These homes are priced to sell but do carry some extra risk. Some can be financed, others require cash, depending on the lender. Investors should ask whether the property will be conveyed with a Grant Deed, which offers certain implied warranties, or a Quitclaim Deed, which does not. Investors can find all types of foreclosure properties at www.realtytrac.com, which publish- es the largest, most comprehensive database of foreclosure properties in the country. •
Rick is the Executive Vice President of RealtyTrac, a leading foreclosure search and discovery website used by real estate agents and investors.
One of the country’s most frequently-quoted sources on real estate, mortgage, and foreclosure trends, Rick has appeared on CNBC, CBS News, NBC News, CNN, ABC News, FOX, Bloomberg and NPR.
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