Distressed Property Investing

Over the past 4 years there have been a lot of attention-grabbing and doomsday-like lines about the housing market similar to these: “Housing Market Crunch”, “Mortgage Crisis”, Double-Dip Recession.” The headlines describe the downturn that the housing market took over the past four to five years. However with the downturn comes opportunity. One such opportunity is investing in Distressed Properties (Foreclosures, Short Sales, and REO’s)

Before you can invest in distressed properties, it is important to understand what the different types of properties are available. This article is a primer on foreclosures and short sales.

Foreclosure Basics
A foreclosure happens when the owner of a property falls behind on their mortgage payments. The most popular reason for falling behind on a mortgage used to be a health even that they were unprepared for, however unemployment is currently the major reason. A foreclosure is actually the process the bank takes to obtain the payments due from the owner or take back the ownership of the property.

The Foreclosure Process
Here is the summary of the steps that happen during the foreclosure procedure

1. The borrow misses payments and violates the terms of the mortgage. The mortgage goes into default.
2. If payments are not made within 90 days of the mortgage going into default, foreclosure proceeding can begin. The lender goes to the County Office and files a notice of default (this is the pre-foreclosure process).

The homeowner has a period of time to respond to the default notice where they can pay off the default payment and make the loan current.

3. If the homeowner does not respond the county posts a Notice of Sale on the home. This notice goes into the local newspapers for a period of time.
4. Eventually the county sheriff auctions off the property to the highest bidder
5. The highest bidder pays for the auctioned property. The county requires the full payment as soon as 24 hours or as late as 30 days after the auction is complete
6. If the property does not sell at auction, the bank retains ownership of the property, which is a real-estate owned (REO) property.

Short Sales
A short sale is a sale of a property in which the proceeds fall short of what the owner still owns on the mortgage. You can negotiate with the bank that holds the mortgage on the property to buy the home at a price that is less than the market value. Banks would prefer not to go through the foreclosure process, nor do they have interest in owning the property.

Let’s take a look at an example where an owner (John) of a home is about to go into default. John lost his job and can no longer make payments on the house. The house John owns is worth $350,000 however on the mortgage he owes $400,000. He knows that foreclosure can devastate his credit and is looking for a way out.

As an investor you can negotiate to buy the property from the bank. From the banks perspective a short sale is the lesser of two evils (the other being going through the foreclosure route).

A lot of times distressed properties sell well under market value however in an as-is condition even when factoring in possible repairs, closing costs, taxes, and fees. Investing in distressed properties can be a time consuming and risky endeavor. One thing you have to be careful of are liens on the property. Many liens will get cleared when you purchase a foreclosure, however tax liens are one that will not. And if the owner was not paying the mortgage on the property, there is a good chance that he was not also paying the property taxes.

Here is a blog post from Realtor Patrick Southern discussing investing in real-estate owned (REO) properties.