Some people immediately cringe when the word “foreclosure” is mentioned. It’s
a fact that many people find themselves in foreclosure proceedings and other
forced sales because of misfortune. Death, divorce, illness, job loss and
economic downturns can all lead to foreclosure. So what is your role as a real
estate investor? You may be have faced the question of whether it’s ethical to
“feed” off this misfortune, or you may even have been asked that question. But
what options are there when foreclosure occurs?
The reality is that a lender is likely going to repossess property when
mortgage payments aren’t met. In almost every situation of non-payment, the
lender is bound by contractual agreements and stockholder mandates to start
foreclosure. It’s a fact of life that some of those foreclosures occur because
of death, illness or other misfortunes, just as some foreclosures happen simply
because the borrower didn’t manage their finances well. Regardless of what
prompts the foreclosure, the steps are likely to be very similar.
The lender is then faced with a couple of options – sell the property quickly
or become involved in the real estate business. Since most don’t want to be
involved in real estate, the quick sale becomes imperative. This may take place
as a foreclosure sale or an auction.
But where does this leave the person who’s facing the foreclosure? Some
people would say “homeless,” but the reality is that most who are facing
foreclosure are dealing with more financial issues than just the loss of their
home. If they can sell the home before full foreclosure comes into play, they
can sometimes salvage at least a part of their financial investment. Remember
that a lender has no requirement to sell the home for the full market value, or
even for the amount owed against the property. That means that the person who
faced foreclosure may still be responsible for payments of the property while
foreclosure is in progress, or even after. A quick sale may very well be in the
best interests of the person facing foreclosure as well.
The person dealing with foreclosure may very well offer the property up for
sale before the foreclosure becomes official. In that case, the current owner
can have some control over the selling price – perhaps even recovering the full
market value of the home and getting out of the situation with enough cash to
settle some other debts.
When faced with the question of ethics of investing in property involved in
foreclosure, it’s easy to look at the issue only from the perspective of the
person preparing for foreclosure. Even then, it’s not likely to be easy to say
the investor is callous to be making the investment. It’s also easy to say that
the investor is “saving” the homeowner, and should be commended for making the
investment. Both are extreme attitudes, but the reality is that foreclosures are
simply a fact of life, as is the practice of making investments in potentially
profitable property.