So many new investors want to buy properties directly from the bank. You never hear anyone say, "I want to buy a property from a mortgage company, a credit union or a savings and loan."
The attraction to bank-owned properties is understandable, as it is the bank you borrow money from to buy a home. It is natural to assume that the bank owns the property. But, whether a deed of trust or mortgage, the title to your property is either held by a third party or pledged as security for the loan, so in fact the bank does not own the property.
You borrow money from and give a mortgage to the bank. The mortgage is the security instrument utilized to protect the bank from loss should you default on the loan. Unless you bought a bank foreclosure directly from the bank, the bank has never owned the property at all.
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The Foreclosing Lenders' Profits
The goal of the foreclosing lender is to gain possession of the property. The financial goal is the recovery of the principle loan balance, accrued interest, late fees, penalties, taxes paid on behalf of the property owner, court costs and attorneys' fees. In most states, the laws are written so that the lender can only attempt to recover these widely accepted standard losses.
The lender will add in every legitimate expense when foreclosing. This is what is sued for: the total the lender claims is owed by the property owner.
In most states, this is the maximum amount the lender can collect. The laws are written this way to protect home owners from unfair practices.
The commonly held notion that a bank (or any other lender) must sell a repossessed property for the same amount it cost to gain possession and therefore cannot make a profit is false.
If the foreclosing lender is the successful bidder at the auction, it will take possession of the property for the very first time. When this happens, all the rules change. The lender, now the legal property owner, can do anything it wants with the property, Rent it, keep it, whatever. It can also sell the property for any amount it so desires.
Condition of Title
Often when purchasing foreclosures buyers are concerned about the quality issued by the lender. A common belief is that there may be liens or judgments clouding the title. This is a myth. The lender will bid at auction only if it wants the property.
The lender, typically the senior lienholder, wipes out all junior lienholders or judgments in the process.
If the foreclosing lender does not bid at the Sheriff's Sale or auction, it probably doesn't want the property. This may be due to excessive superior liens, such as IRS or tax liens. And, if the lender doesn't bid for the property at auction, you probably shouldn't either.
The lender, in an effort to recoup its losses, will bid on the property, wipe out other lienholders, then pay the balance of outstanding property taxes to secure the property's clear title. No lender will go through the time, effort and expense of foreclosing, only to lose the property for a few thousand in back taxes.
Having absorbed these costs, the lender generally adds them to the asking price and will sell the property with clear title.
If you have heard that the lender must sell the property for what they paid for it at auction, forget it.
Another common myth is that all banks are bending over backwards to give away foreclosed homes. It's true that the lenders want to sell their foreclosures. Lenders, banks in particular, are corporations. These corporations are driven to make money, not to lose it. A bank has to answer to its shareholders just like other corporations do.
The business of repossessing properties is not new. Over the years, many lenders have developed effective methods of selling their foreclosed properties, or REOs (Real Estate Owned), quickly with minimal loss.
Foreclosure Property Disposition
Lender practices and procedures vary greatly. Some widely market their inventory of REOs, while others practically hide them.
We know of some banks that advertise foreclosures in daily newspapers, while others demand that you maintain an account with them (or better yet, become a stockholder) just to get their list of properties.
Lenders are in the money business, not the real estate business. This is why most properties are marketed through recognized real estate brokers or agencies. Some agencies specialize in foreclosures and may represent several lenders' properties.
Brokers may have several investors lined up just waiting for a good property to turn up. Brokers can also assist the lender in determining market prices, suggest marketing strategies, recommend appraisers or contractors, etc.
Some lenders establish a set price for the property and will not allow the sales agent to consider offers for less.
Many lenders dispose of their own properties. Depending on the size and complexity of its REO inventory, the lender may have one part-time clerk or a staff of special asset managers handling property sales.
Lenders with larger inventories often have a staff dedicated to analyzing and managing the properties, while at the same time coordinating and managing the brokers retained to market the properties. The lender determines the strategy and the broker markets the properties accordingly.
Foreclosure Investing Overview
Purchasing directly from the bank is the most popular way to buy foreclosures. It's fairly easy and less of a headache than other investing methods because it involves less complications and risks.
Depending on the property and several other variables, you may want to buy a property at 15 to 25 percent below market value. Start your offers accordingly.
Unrealistic offers will be rejected quickly. Learn to work with the banks. You can negotiate around interest rates, price, down payment, whatever, just stay within reasonable boundaries if you want to succeed.
Some lenders sell thousands of REOs every year. Many sell their properties at or near market price. Although some lenders have been known to sell their properties at 99 percent of market value.
Not all lenders behave the same way. Try to locate those that are more flexible in their property disposition policies.
When the bank accepts your offer, close as quickly as possible. Avoid delays and complications from competitive offers.
Advantages of Buying Foreclosed Properties
The advantages of buying foreclosed properties are many.
For those looking to save money buying their first home, this is usually the way to go.
Disadvantages of Buying Foreclosed Properties
In this industry the rewards follow the risks. Therefore, the pay off from this investing method is typically lower than that of buying pre-foreclosures or buying at the auction.
An REO investor should have no problems achieving 10 to 20 percent discount from the market value of comparable properties. Savings of 25 to 35 percent are harder to find. Savings of 40 to 60 percent are possible, but getting rarer.
Other disadvantages include: