Buying Foreclosures = Risky Business

Booby traps are everywhere! You must be liquid and quick!

In the complicated, yet bargain-filled, foreclosed and distressed properties business, one person's tragedy could be another's opportunity. 

In Colorado we have seen blazing wildfires devour property after property in the last few years and sharp investors have realized how the altered landscape of supply and demand would add tinder to the housing market -- if one is educated in buying distressed properties. Many have been racing across the area, identifying and snatching up undervalued properties -- and having fun to boot.

But buying foreclosures at a true discount isn't always easy or even fun, and it's not for the faint of heart. Like many real estate investments, locating a great deal requires a commitment to performing copious amounts of research, plus a working knowledge of your state's title and lien laws. 

Further complicating matters, there are three main stages of foreclosure investing -- 

• pre-foreclosure, 
• foreclosure auctions, 
• real estate owned (REO) properties

--  each with its own set of tactics and strategies. Additionally, the burgeoning number of online foreclosure-education and listing sites can present an onslaught of misinformation or saturated leads.

Ultimately, it's up to the house hunter investor to separate the wheat from the chaff. 

"The average buyer will find the foreclosure market a very tough one because one must be very knowledgeable, quick to act and liquid enough to close very quickly -- usually within a few days, " says Darrel Stilwell, a Denver real estate broker. "The key is 'pre-foreclosures'."

Pre-foreclosures are properties whose owners have notices of default or lis pendens, but have time before they lose their home, equity and credit in a foreclosure auction (sold by the foreclosure process at the county courthouse steps). These owners are "motivated sellers". And, the more they have in equity (value of the home less the mortgages), the more motivated they are.

One recent transaction where the property owner was in "pre-foreclosure" state came to a "win-win" conclusion when the investor, sincere in his approach to helping the owner out of a challenging situation, helped avert the foreclosure. The investor paid the owner cash for the remaining equity and took over the first mortgage. After spending about $15,000 to fix-up some of the deferred maintenance, he quickly sold the property and made over $50,000 in profits... 

That's how it works. But here's the problem:

Pre-foreclosure investors often times get hosed... 

• buying property without title insurance at a trustee auction,
• not being able to perform a thorough property inspection to estimate the repair costs
• not realizing that the process is complicated with many stages

Distressed property investing is a very specialized business requiring specialized knowledge. The business can be so highly rewarding but at the same time ignorance is so harshly punishing. Many are ripped off.

Any, many think that we have reached a peak in foreclosures resulting in more competition among investors for the best deals. And the "sellers market" usually lags economic recoveries. 

Where to start?

Where does a liquid investor find these foreclosure properties listed? Traditionally, newspapers run notices of local foreclosure auctions; local state and county offices usually provide information as well. Research firms, like those online listed in the right column of this article, collect pre-foreclosure data from various local county recorder offices for their active members.

Despite a wealth of online resources investors might find it difficult to find undervalued houses on the Web, mostly because these listings are REO (Real Estate Owned) properties: homes that went to sale at foreclosure auction, but nobody wanted. That means the lender retains ownership of the defaulted property, now a non-performing asset; they usually then fix it up and sell. 

REOs are always going to ask for retail because they have no incentive to discount. The best opportunity is to deal directly with the owner before the loan is foreclosed. The difficulty in finding bargains at the REO stage is related to general strength in the housing market. REO bargains can sometimes be found when realty agents can't keep up with the number of incoming properties and are content to sell "as is," or when they have a number of bad loans. These conditions usually exist in a declining market. Hint: not now, in most places.