Foreclosure
Buying Foreclosed Property
By
Feb 22, 2006, 19:58

The source of any good real estate deal is a motivated owner. There isn't a more motivated owner than one in the process of foreclosure. Distressed real estate is creating attractive deals, because the owners or partners need cash in a hurry. These include developers who are overextended, families who fell be-hind their payments when their ARM interest went up or when their balloon loans came due, and people facing unemployment, tax troubles, or maintenance difficulties. Many of these properties are bought by professional investors for just the delinquent payment. Little or no money was paid for the equity. The investor was able to buy at substantially below the market value, deduct from his taxes the money paid for delinquent payments, assume the old loan at the old rate and terms, and use leverage to the maximum. The savings can be considerable¡ªsometimes as much as 50 percent below market value. Some people have the misconception that foreclosures happen only in the slums. They happen all over.

To locate distressed properties, check legal notices in newspapers for foreclosures, bankruptcies, and tax delinquencies. Peruse the records at the municipal clerk's office. These records list those properties facing pending legal action. Contact real-estate agents, lawyers, accountants, and managers. They sometimes have clients who are eager to unload their property. Be alert for houses placed on the market for quick sale by contractors having trouble with unsold houses or recently divorced couples who are desperate to get rid of the house.

Buying foreclosed property can be a bargain. But often it only looks like a bargain. Sometimes the property's back taxes exceed its market value. Zoning restrictions may prevent renovation or conversion. The previous owner may have the right to reclaim the property after paying the back taxes and penalties. The result is an unclear title, making the property hard to resell. The foreclosed property may be more trouble than it's worth. Most foreclosed properties have been poorly maintained and vandalized. Previous owners may have even stripped the house of its wiring and plumbing. Inspect before you buy. Finally, some banks may not permit bids lower than the money they loaned out. For example, on a property with an original selling price of $100,000, the foreclosed owner financed 90 percent. The bank's minimum bid will probably be $90,000, even though the property has deteriorated so that it's market value is $70,000. If the owner previously owned the property free and clear and used the property as collateral on a defaulted loan, the bank's minimum bid will probably be its appraised market value of $70,000. These bids sometimes re-quire high, non-contingent, nonrefundable escrows. Real-estate brokers will also snap up foreclosed properties that are truly desirable and resell them at fair market value. Brokers can do this because they are in constant contact with the banking and legal community. These negatives all militate against the small investor acquiring a "steal." It isn't impossible, but it's rare.