Foreclosures: Sweet Deals or Sour Grapes?

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Foreclosures: Sweet Deals or Sour Grapes?

Foreclosures: Sweet Deals or Sour Grapes? Foreclosures often look irresistibly attractive to the novice real estate investor. Who wouldn't want to make a quick profit of 50% or more? But whether a foreclosure is really a sweet deal or sour grapes depends on a list of complex factors.

Foreclosure is a legal procedure in which a mortgage holder reclaims a property due to default on a loan. Some states in the U.S. allow 'strict' foreclosure — the borrower has a certain period of time to bring the debt current, after which the title to the property reverts to the lender.

Be careful however, you don't want to get in the middle of someone's legal process. Any thought of holding out a promise to 'rescue' to the current owner in exchange for part or whole ownership is suicidal. Look elsewhere for that great deal.

You also need to keep in mind that the foreclosure proceedings in some states provide the borrowers with a 'right of redemption'. This allows them a specific period of time in which to 'cure the loan' — in other words, make back payments, shore up credit, etc — and reclaim title to and possession of the property. Stay clear of these situations.

Once the foreclosure process is complete, or at least inevitable, you can take action on a plan to acquire the property. Look for prospective deals in which, at minimum, a Notice of Default has been issued by the lender and recorded in the County recorder’s office.  This is also known as the pre-foreclosure stage.

Auctions on foreclosed property are common but tricky. Never bid blind on a property. There's no substitute for first-hand knowledge of the physical condition and legal status of a property.  Do your homework and view the property – there are cases where the property was just a vacant lot.

Keep in mind that foreclosures are sold 'as is'. Unlike other property sales, no warranties are provided and no title insurance granted.  You area also required to complete your purchase with cash or certified funds – financing is not an option.

At minimum, you'll need to have a professional inspection performed, even if you are a knowledgeable investor. Some investors are, of course, professional inspectors themselves — along with wearing many other hats. The property needn't be free of every tiny defect, but you'll want to know that the roof doesn't need to be replaced, that the plumbing is sound, there are no serious foundation cracks, or potential for flooding, etc. If any of those are present, they can be acceptable if you're looking for a 'fixer-upper' and have the time and funds to fix it up. Be sure to discount your offer accordingly.

Eventually you'll hear about someone entering a 'short sale' deal. This occurs when the lender is willing to accept less money for the property than the outstanding principal on the loan.

Another type of foreclosure opportunity is the REO — short for 'real estate owned' (by the lender). These are properties sold directly by the lender, and usually through a real estate agent. It's possible to get some very good deals, but often these deals are sold in larger blocks of multiple properties, or individually at near retail prices. As usual use extreme caution.

Do your research. Get a thorough inspection and perform adequate title research. Any major defects or encumbrances in the form of tax or other liens has to factor large in your plans.

Learn to tell the difference between a sweet deal and sour grapes.  They may look the same on the surface but one will make you money, the other will cost you money.