What Exactly is a Foreclosure (And How Do You Buy One)?
Did you know that the word “run” has 179 different meanings?
The word “take”, according to Dictionary.com, has 127.
You can use these words as a noun, verb, or in verb phrases. Thanks to the website EnglishWithATwist.com for these examples for the word “run”:
My dog loves to run about in the park (move quickly with legs)
She runs a very successful business (manages)
The bus company runs a regular weekend schedule (offers a service)
The play has had a successful run (period of time)
He is on the run from the law (trying to escape or hide from the police)
Defining Foreclosure
The word “foreclosure” has several meanings too. Well, three to be exact.
Most people think of a foreclosure as a property that has been foreclosed on by a bank or lender. But a house can be “in foreclosure”. It can also be “foreclosed on”. And, it can be a “foreclosure”.
Confused yet?
All you need to remember is there are three phases of the foreclosure process, and how you buy the property (and from who) will depend on which phase of foreclosure the property is in.
Here are the three phases:
Pre-foreclosure (or in foreclosure)
Foreclosed on (auction)
Foreclosure (bank owned or REO)
Pre-Foreclosure
When a homeowner gets behind on their mortgage payment (usually 90-120 days), the lender will initiate foreclosure proceedings. The borrower receives a notice of default and is given a window of time to pay the arrears (back payments, legal fees). If the arrears are not paid by the auction date, the lender will foreclose (at a public auction).
Most professional real estate investors refer to a property in this phase as a pre-foreclosure.
How do you buy a property in pre-foreclosure?
The only way is to purchase it directly from the homeowner. Many people mistakenly believe they can buy the house from the bank.
Wrong!
The bank doesn’t own the property in this phase, the homeowner does. Of course, if you can make contact with the homeowner and agree on a sales price, the lender must be contacted for an updated payoff amount for the loan.
If you find a homeowner in foreclosure that wants to sell you their property, be sure to use a title company. The can find out if the seller has any other liens on the home.
Foreclosed On (Auction)
If the homeowner fails to bring their loan current, or sell the property to pay off their loan, then their house will be foreclosed on at a public auction. They typically take place at the county courthouse steps, or in an attorney’s office.
These auctions are one of the rawest forms of capitalism on the planet. Bidders often aggressively compete against each other, and some times collude, in order to buy foreclosed properties.
How do you buy a property at auction?
You show up the day of the sale and you bid. But, be prepared to compete against professional bidders that know a lot more about the process than you do. Most of these auctions require you have certified funds, up to $10,000 in order to bid, and you must have the cash to pay for the property in 24 hours or less.
Foreclosure (Bank Owned or REO)
If no third-party bidder purchases the property at the auction, the house ends up with the bank. At this point, the home is referred to as bank owned, or an REO (real estate owned).
Why does this happen?
Well, the bank sets the opening bid for the property. Most of the time, the lender establishes the opening bid based on what the borrower owes, plus arrears. And, in many cases this amount is much higher than the value of the property.
When this happens, third party bidders wisely pass and the bank ends up with the house.
How do you buy a bank owned foreclosure?
It depends on the bank. Some lenders list their REO properties on the multiple listing service. Others get cute and hold public “auctions” for their properties (see Auction.com, or Hubzu.com).
Just remember, you can’t buy a bank owned foreclosure that isn’t for sale yet. I get calls all the time from new investors and contractors that say, “Hey, I know this house is a foreclosure, I want to buy it.” I tell them you can’t buy it yet because it’s not listed for sale.
Buying the Best Type of Foreclosure
I’ve bought distressed properties in all three phases of foreclosure.
When I first started in the business, I got a list of homeowners in foreclosure and knocked on their doors. If I could convince them to sell me their house, I’d have them sign a contract and then contact the lender for the payoff info.
After the real estate market crash in 2008, my business partner Manny Romero and I started buying houses at the courthouse steps.
And lately, we’ve been buying a lot of bank owned properties in the Milwaukee area.
I’ve learned there’s really no best type of foreclosure to buy. It all depends on the seller and their level of distress. The more motivated the seller is, the better the deal.
It’s best to keep your options open and consider buying in all three phases, if possible.
Now if you’ll excuse me, I’ve got to run (not to escape or hide from the police, but from my wife, she wants me to help her with the laundry).
