Strategies and insights for real estate wholesale transactions

Wholesale


<p>The concept of foreclosure is closely tied to mortgages, so let’s briefly define it. A mortgage is an agreement where the borrower, a homeowner, uses their property as collateral to request a loan – usually to a bank. The bank gets back, in return, the principal – the original amount loaned – plus interests. In the US, mortgage terms range from 3-30 years. </p>



<p>But what happens if the homeowner fails to make their scheduled mortgage payments? In that case, the bank moves in and forecloses the home, selling it to recoup its investment.</p>



<p><a href="https://www.realtytrac.com/resources/how-to-buy-foreclosures/">Buying foreclosed homes</a> can be a golden opportunity to find your dream home at a below-market price, as the bank is looking to recoup their losses as soon as possible. The foreclosure process usually takes between 3-6 months. </p>



<p>In the first quarter of 2023, more than 95,000 foreclosure filings were submitted. </p>



<p>Buying below-market-price properties sounds great in theory, but navigating the real estate market can be difficult if you don’t have a lot of experience. Here are the 5 most common mistakes to avoid when buying a foreclosed home:</p>



<h2 class="wp-block-heading" id="h-1-not-investing-in-a-home-inspection-early-on">1. Not Investing In A Home Inspection Early On</h2>



<p>One of the most important things you should do when looking to purchase a foreclosed home is a home inspection. A thorough inspection done by professionals will reveal any issue with the property that the bank foreclosing the home may be unaware of. It will save you a lot of headaches in the short term and thousands of dollars in the long term.</p>



<p>Some of the most common property issues arising from foreclosures are:</p>



<ul class="wp-block-list">
<li>Intentional neglect by previous owners</li>



<li>Damage and disrepair</li>



<li>Foundation cracks, leaks, or exterior damage</li>



<li>Water heating, electricity, and mechanical systems.</li>
</ul>



<p>It’s crucial that you do your due diligence. Compared to regularly listed properties where the seller has to complete a Seller’s Property Disclosure Statement (SPDS) – and is financially  liable even after the property is sold – <strong>foreclosures are always sold ‘as is’</strong>. </p>



<p>The bank (or lender) selling the property doesn’t offer a history of the property’s condition. It’s up to you, the buyer, to ensure the right balance between cost and quality. </p>



<p>Foreclosed homes are usually sold at a <strong>below-market price</strong> and there’s a growing demand demand for cheap homes. Chances are there’ll be multiple bidders interested in the property so the sooner you act the more likely you are to secure it.</p>



<p>For those reasons, reaching out to the bank and scheduling a home inspection as quickly as possible is key to finding a good deal.</p>



<h2 class="wp-block-heading" id="h-2-not-familiarizing-yourself-with-the-local-laws">2. Not Familiarizing Yourself With The Local Laws</h2>



<h3 class="wp-block-heading" id="h-local-laws">Local Laws</h3>



<p>When it comes to foreclosure in the US, there’s no one-size-fits-all. <a href="https://www.realtytrac.com/resources/foreclosure-laws/">Laws will vary from state to state</a>, so familiarizing yourself with local and federal laws – even a cursory understanding – will help you identify some red flags. As always, we recommend getting qualified legal advice from local real estate attorneys.</p>



<p>A quick way to get an idea is to check whether your state is a mortgage or a deed of trust state. <strong>Mortgage states</strong> deal with foreclosures through the court system – also known as judicial foreclosure).<strong> Deed of trust states,</strong> on the other hand, rely on a legal agreement – similar to mortgages, but with an additional neutral third party –, and are settled out of court (non-judicial foreclosure). </p>



<p>Non-judicial foreclosures are significantly cheaper and faster for everyone involved, which should be an important factor when looking for a property.</p>



<h3 class="wp-block-heading" id="h-property-liens">Property Liens</h3>



<p>Some regulations that are often overlooked are those related to maintenance. Depending on the municipality, a vacant property may incur maintenance that, if not covered by the bank, is covered by the municipality <a href="https://www.realtytrac.com/resources/how-does-a-tax-lien-foreclosure-work/">in the form of liens</a>. These include:</p>



<ul class="wp-block-list">
<li>Removal of ice and snow from sidewalks</li>



<li>Grass height maintenance</li>



<li>Littering </li>



<li>Utilities</li>
</ul>



<p>Even if the previous owner (or bank) failed to pay for these, you, as the new homeowner, may be liable.</p>



<p>How can you check if a property has a lien? Easy. In most states you can run a property lien search for free at your town’s County Recorder’s Office. </p>



<p>Before purchasing a foreclosure property, check all the documentation and make sure the proper borrowers are named as defendants and that the property is not subordinate to other liens. Otherwise, you may be responsible for part or all costs as the new homeowner.</p>



<h2 class="wp-block-heading" id="h-3-not-narrowing-down-your-search">3. Not Narrowing Down Your Search</h2>



<p>Sometimes, the hardest part of buying a foreclosure home is finding the right balance between cost and quality. After you’ve decided how much you can realistically spend, the next step is finding the right property. Depending on your location, some of the best ways to find foreclosures are:</p>



<ul class="wp-block-list">
<li><a href="https://www.realtytrac.com/">Real estate listing sites</a></li>



<li>Local real estate agents</li>



<li>Public records</li>



<li>Brokerage firms</li>



<li>Bank websites</li>



<li>Live auctions</li>
</ul>



<p>A little-known fact is that all documentation related to foreclosed homes is part of the public record, and accessible for free at your town’s County Recorder’s Office. So, if you keep a close watch on the document filed, you can get ahead of some of the largest real estate listing sites like Zillow and Realtor.com.</p>



<h2 class="wp-block-heading" id="h-4-not-planning-for-the-future">4. Not Planning For The Future</h2>



<p>Due to the very nature of foreclosure, it’s very likely that the property you end up purchasing will require some level of maintenance and repairs. A lot of buyers expect to move into a foreclosed home with little to no additional investment. In almost all scenarios, this is not the case.</p>



<p>Some, if not most, foreclosed properties have been sitting for months – or even years, for bank-owned properties –, with little to no maintenance. Some are subject to intentional <a href="https://www.realtytrac.com/resources/how-to-spot-a-good-deal-at-a-foreclosure-auction/">neglect by previous owners</a>, damage and disrepair, or even vandalism.</p>



<p>All of these should come up during the home inspection, but depending on your long-term goals – flipping the house for a profit, holding, or as a living place –, you will need to make an investment. A good rule of thumb is to save 1% of the value of your home for repairs and maintenance every year.</p>



<h2 class="wp-block-heading" id="h-5-be-prepared-to-walk-away-from-the-table-without-a-deal">5. Be Prepared To Walk Away From The Table Without A Deal</h2>



<p>This will help you not only in picking the right property but also in your everyday life. If you find yourself in a bidding war over a promising opportunity, you have to be able to look at it objectively and walk away if it escalates and no longer fits into your long-term plan.</p>



<p>Before walking into a negotiation, define clear deal-breaking factors. Common deal breakers can be things like price, timeline, or even bids if you enter a bidding war with another prospective buyer. Never lose sight of your budget and your long-term strategy.</p>



<p>A side benefit of having solid, thought-out boundaries is that it’ll be tough for people to take advantage of you during negotiations. If you’re willing to walk away from any unreasonable offer, competitors will need to tread lightly. That’s not to say you shouldn’t be flexible, but have clearly defined limits from the get-go. Sometimes no deal is the best deal.</p>



<h2 class="wp-block-heading" id="h-faqs">FAQs</h2>



<h3 class="wp-block-heading" id="h-why-do-people-lose-their-homes-to-foreclosure">Why Do People Lose Their Homes To Foreclosure?</h3>



<p>In the US, mortgage companies tend to start the foreclosure process 3-6 months after the borrower fails to make their mortgage payment. Some of the most common reasons people fall behind on payments include:</p>



<ul class="wp-block-list">
<li>Unexpected illness or medical expenses</li>



<li>Deceased family member</li>



<li>Increase in taxes</li>



<li>Natural disaster</li>



<li>Job loss </li>



<li>Divorce </li>
</ul>



<h3 class="wp-block-heading" id="h-how-many-people-are-in-danger-of-foreclosure">How Many People Are In Danger Of Foreclosure?</h3>



<p>According to the Consumer Financial Protection Bureau (CFPB), in 2021, more than 11 million families were behind on their mortgage payments. Out of those, 2.1 million were behind at least three months.</p>



<p>If you or someone you know is at risk of foreclosure, reach out to the Department of Housing and Urban Development (HUD) before it’s too late. The HUD is a US government agency that supports homeowners and community development and enforces the Fair Housing Act. This service is completely free. </p>



<p>In the US, around 40% of the population doesn’t own their own homes.</p>



<h3 class="wp-block-heading" id="h-what-are-the-disadvantages-of-buying-a-foreclosed-property">What Are The Disadvantages Of Buying A Foreclosed Property?</h3>



<p>Due to the very nature of foreclosure, foreclosed properties tend to require some level of maintenance and repairs. A lot of buyers expect to move into a foreclosed home with little to no additional investment – or in a very short time frame. This is usually not the case.</p>



<p>Some foreclosed properties have been sitting for months – or even years –, with little to no maintenance. </p>



<ul class="wp-block-list">
<li>Most foreclosed properties require maintenance and repairs</li>



<li>Very competitive market</li>



<li>You’ll need cash upfront if you’re planning to purchase a property at auction</li>



<li>Not the best option if you’re looking to move in immediately</li>
</ul>


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