LETTERS From CAMP Rehoboth

CAMP Money

One of the most significant impacts of the current economic downturn is home foreclosure. It is an emotional and often devastating experience for the homeowner, but it is also one of the best places for small real estate investors to capitalize. In 2008 alone, more than one million foreclosed and "distressed" properties will hit the market.

Understanding the basics of how the process works will help you make the most of this investment opportunity. Many foreclosed homes are purchased for as much as 30 to 40% below market value, but the majority sell in the range of 5 to 10% below market. Good buys are definitely available, but they require research, preparation, patience and persistence.

Foreclosure is a legal process through which the homeowner's property rights are terminated, usually due to a failure to make timely mortgage payments. When a lender decides to foreclose on a property, a notice of default or a lis pendens (Latin for "lawsuit pending") is filed, depending on the state of residence. Some states, such as Florida, New York, and Pennsylvania, require a lender to sue the borrower and get a court order for the sale of the property, a process known as a judicial foreclosure.

Like any other type of investment, buying foreclosed properties carries a certain level of risk. If you buy a property that later proves hard to sell, you will be stuck with a mortgage payment longer than you want. Additionally, if you pay too much you will reduce your profit potential on selling the property.

Research and preparation.

It is essential for you to do some homework and research your state's foreclosure laws and procedures. Seminars, websites, and county offices all offer an abundance of information, but always make sure to consider the source of the information. The closer you can get to the source (your state or county government, for example), the greater the likelihood of obtaining accurate information.

As with home purchases, the first rule of real estate, "location, location, location," definitely applies. A seasoned realtor can be crucial in assisting you through the process. Be certain that he or she has experience in this particular area. In addition, knowing what you can afford in terms of the financing aspect is another important consideration. A mortgage pre-approval enables you to act quickly when the 'right' property becomes available and, in large part, communicates to all parties your ability to qualify.

Once the property is identified, search public records. In addition to mortgage(s), look for liens on the property since they can drive the price up. The homeowner facing foreclosure, finds himself in financial distress and often other obligations like property taxes also go unpaid. Back taxes due must be paid off by whoever takes ownership of the property. In some states, a foreclosure negates "junior" level liens, such as second mortgages.

Other states require the new owner to pay off mechanics' liens (placed against a property for unpaid contractor obligations). Information on such debts is often available through your local county clerk or the Recorder of Deeds office. Title companies can also be of assistance in conducting a lien search of a property. Fees for such are typically inexpensive, particularly given the benefit they provide.

Check assessed values and sale prices of neighboring homes. Your realtor should complete a thorough market analysis of what comparable homes have sold for. Be proactive and fair in terms of your price and consider submitting a summary of your research along with your offer.

Patience and persistence.

Because the end result can vary, the amount of time required to purchase a foreclosed property can vary as well. In most cases, several months is normal. Ultimately, the foreclosure process results in one of the following outcomes...

First, the borrower/owner can pay off the default amount themselves in order to reinstate the loan during a grace period known as pre-foreclosure.

Second, the borrower/owner sells to a third party during the pre-foreclosure, allowing the borrower/owner to pay off the debt and avoid having a foreclosure on his or her credit history. This involves approaching the owner directly and offering to buy.

Next, a third party buys the property at a public auction at the end of the pre-foreclosure period, usually about 90 days. This offers some of the best pricing opportunities but usually means a shorter time period to obtain financing and to research the title and condition of the property.

Finally, the lender takes ownership of the property, usually with the intent to re-sell as quickly as possible. The lender can take ownership through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction.

Generally speaking, for the average investor looking to purchase a foreclosed property, buying from the lender is the safest way to purchase. Primarily, this is because once the bank takes ownership, the buyer has the assurance of knowing that any liens are then satisfied. It also can mean lesser closing costs and a greater willingness to close quickly.

But the best strategy for getting the bank to sell is to offer a fair price, verification that you can afford to buy (mortgage pre-approval), and proof of all the research you've done to get to that point.

With the market showing few signs of hitting bottom and inventories of unsold homes continuing to rise, the opportunity is great. Just be sure to walk before you run.

For more information on buying foreclosure properties, "Call Me. I'm Your Neighbor!"

Chris is a Senior Loan Officer at GMAC Mortgage. E-mail christopher.beagle@gmacm.com or call 302-226-2448.

LETTERS From CAMP Rehoboth, Vol. 18, No. 10 July 25, 2008