Foreclosure Investment Myths:
Foreclosure—the very word strikes fear in the hearts of most homeowners. Unless, that is, you are looking to take advantage of a foreclosure from a buyer’s perspective. Then it can be music to the ears. However, you’ll want all the facts before you jump in. There are plenty of myths regarding foreclosures, and you need all the information you can get before you make your move.
Contrary to conventional wisdom, which states that “foreclosures are at an all-time high!”, foreclosure rates have stayed fairly constant since the Depression at just less than 1 percent of all loans. However, because of the trend toward risky loans (such as interest-only and adjustable-rate) and “McMansion” movement, some forecasters predict a huge upswing in foreclosures literally any minute.
Not so fast. According to Foreclosures.com, the foreclosure rate isn’t expected to change through the end of 2006. This is because those who’ve owned homes for a few years have typically built up enough equity to refinance, sell or make other arrangements if they’re unable to meet the payments. And unlike what you see in the movies, the foreclosure process is very slow—ranging from one month to as much as a year, depending on state law.
And just how does foreclosure work? According to RealtyTrac.com, the foreclosure process is costly and time consuming, and is a last resort for lenders to recover their investment. When a homeowner defaults on a mortgage agreement, the lender typically must first file a public default notice after which the homeowner is given a grace period known as a pre-foreclosure period. During this time, the homeowner can pay off the debt or choose to sell the property. The minimum timeframe for a pre-foreclosure period varies by state and can range from 27 days (Texas) to 290 days (Wisconsin). Only at the end of the pre-foreclosure period can the lender auction the property off to a third-party buyer or repossess the property and sell it on the regular market.
Another persistent foreclosure myth is that foreclosures sell at far below market value. According to First American Real Estate Solutions, foreclosed properties sell for just 15 percent less than comparable, non-distressed homes. And in states with high real estate values, the difference is just 5 percent. Not exactly a killing any way you look at it.
The most relentless myth is that anyone can make money in foreclosures. A slew of seminars, infomercials and books about the subject have surfaced in recent years, making it seem as if buying and selling real estate—especially foreclosures—is a piece of cake. But there are so many rules, regulations and intricacies, it takes study, persistence, patience and the right information to prosper—more than any book, seminar or infomercial can impart.
There are three ways to buy foreclosures. Directly from a homeowner in trouble per-foreclosure; from a bank that has repossessed the home (real estate owned, also known as REO) or at public auction. All of these avenues presents different problems, and you must be familiar with each. The most common problem involved: overpaying for the property, and since few foreclosures are actually on the market, they’re harder to find and get, since there are ten times more interested parties than there used to be.
Public auction is definitely the riskiest way to go—auctions are notoriously emotional events. The reason they’re put up for auction in the first place is that the seller is counting on the fact that people will get carried away in the bidding process and drive the price up, even above its market value.
Your best bet is to look for pre-foreclosures. For a monthly subscription fee, there are web sites that send you listings based on local court filings. If you don’t mind hassling down-on-their-luck folks, this can be the way to go, contacting them before the foreclosure goes through and trying to get a deal.
The deep, dark secret of these web sites is that often, their information is out of date—and hundreds of people like you are receiving the same leads. If you’re really serious about foreclosure investing, you need to make contacts of several realtors who can give you the most up to date info regarding foreclosures—and you need to be aggressive.