REAE 3325
Bonus Point Submission
Ju H. Kim
IntroductionEveryone might want to buy a foreclosure at 50% of market value, change the locks and put a real estate sign in the front yard and make a ton of money. However, the reality of foreclosure investing is far different than what many people have seen either through commercial or books. First, houses that are going to sale almost always need a lot of work to bring them to market value. Second, finding a solid property to purchase is not a matter of picking what you want, it is a matter of finding something that works economically, keeping track of it, then beating out all the other investors who are interested in it. The most important issue would be money. It certainly helps if you have got a good amount to back your purchases, but if you don't, it is not impossible to do deals. You do need enough to be able to find properties, keep track of properties and cover on-going office type expenses. The famous author of “Rich Dad Poor Dad”, Robert Kiyosaki said in his “Guide to Investing”, “It does not take money to make money”. Money should never stop you from doing a deal. It's true. If you have a deal, someone to invest in it is easy to find. If investors don't want to invest, it's not a deal.
Although the investment in foreclosure looks complicated the basic principle is “Buy low, and Sell high”. This post will discuss why the investment in foreclosure is profitable, investment of time, investment steps in foreclosures, the auction market, and getting started.
Why Foreclosures?The foreclosure process starts when a property owner falls behind on mortgage payments. Many owners of homes that go into foreclosure have been struggling financially for almost a year before they give up, which usually means that the house has not received needed repairs or general maintenance for a while.
This may include everything from missing light bulbs to roof leaks. Tree limbs in front yards, broken appliances and windows, and dirty carpets, floors and walls are found in even very-affluent area foreclosures. Houses in poor condition might fetch bargain prices, but repairs can boost the cost again. The first rule of real estate, "location, location, location," applies in these situations. If there is trash in every room of the house, but the foreclosure is in a good area with high property resale values, walk through the entire house and consider making a low offer.
Investment of TimeThe current market conditions make it a perfect time for a small investor to purchase one or more foreclosure properties for their private residence, rental or resale. During economic downturns, more upscale homes go into foreclosure, so the notion that foreclosure homes are only available in crime-ridden areas is inaccurate. Beachfront and homes in affluent areas are part of the mix of foreclosed properties available.
For most consumers, however, the foreclosure process can prove daunting. Todd Beitler, owner of the Real Estate Library in Boca Raton says, “Good buys are available, but they require research, preparation, patience and persistence”. 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. This document is a public record, and for buyers, it's the first step in locating a property in foreclosure. A buyer looking for foreclosures also can buy magazines and newsletters that list properties in default. The local foreclosure lists are available at http://tx.foreclosure.com
Investment Steps in ForeclosureOnce a home has been located, search public records. Look for liens on the property, since they can drive up the purchase price. Liens typically are placed on a house for unpaid property taxes. Also check assessed values and sale prices of neighboring properties. Research local state foreclosure laws, since they differ. Some states such as California and Texas follow the non-judicial foreclosure process, which doesn't require a lawsuit. Also, local state foreclosure law is available at
http://www.foreclosurelaw.org/ For most investors, buying from the lender would be the safest way to buy. Most foreclosures are taken back by the bank during auction. Often, the banks hire a real estate agent and sell foreclosed homes in the traditional manner, Reed says. But sometimes buyers can succeed by pestering bank loan officers with low offers.
The Auction MarketMost auctions take place at the county courthouse steps, and they pose disadvantages: buyers might not be able to inspect the property, and they'll have to put up the entire purchase price the same day. The U.S. Department of Housing and Urban Development also runs auctions to unload homes it has acquired through defaults on federally backed mortgages.
Getting Started With good credit, many banks will loan the full price of the foreclosure or more. If the home is to be used as a rental, many banks will require only a 10% down payment.
Individuals with a large amount of equity in another home may get a line of credit from their bank to purchase a foreclosure. When they convert the line of credit to a mortgage, no down payment may be required. Foreclosure homes bought in good areas at below market values that appreciate annually can be a sound investment strategy for many investors. The appreciation of the homes is tax-exempt until the home is sold. If the home is a primary residence, the appreciation may be tax-free.
Homes used as rental properties give most investors valuable tax deductions while the house increases in value and builds equity. This like-kind asset exchange information is also available at http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html
ConclusionAs an investor, you search carefully to find out what, when, and where to invest. With the right knowledge and timing, you can make a wise investment move. With many stock portfolios down, foreclosure real estate investing may be the alternative many people are seeking. Lastly, here is a great video clip about the investment in foreclosure I found http://www.youtube.com/watch?v=DWYLt6g4TMw&feature=related
Work Cited"About Buying HUD Homes." U.S. Department of Housing and Urban Development.
U.S. Department of Housing and Urban Development. 02 Nov. 08 http://www.hud.gov/offices/hsg/sfh/reo/reobuyfaq.cfm
"Foreclosre Investing." All Foreclosure Information. http://www.all-foreclosure.com/foreclosures.htm
Kansas, Dave. Complete Money & Investing Guidebook. New York: Three River P, 2005. 62-75.
Kiyosaki, Robert T. Guide to Investing: What the Rich Invest in, that the Poor and Middle Class Do Not! Boston, New York: Warner Business Books, 2000. 111-49.
"Questions and Answers on Home Foreclosure and Debt Cancellation." Internal Revenue Service. United States Deparment of the Treasury. 02 Nov. 08 http://www.irs.gov/newsroom/article/0,,id=174034,00.html
"The safest ways to buy foreclosures." MSN Money. The Bankrate. 02 Nov. 2008 http://articles.moneycentral.msn.com/investing/realestate/thesafestwaystobuyforeclosures.aspx?page=1
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