Is Foreclosure Investing For You? - Posted by Ronald * Starr
Posted by Ronald * Starr on July 13, 2002 at 17:29:27:
David Chambers---------------
The profits from foreclosure investing can be extreme, which makes foreclosures attractive. You are seeing that. Many people see that and are attracted to it. However, I do not recommend foreclosure investing for beginners.
Yes, foreclosures can be profitable. However, I suggest that foreclosure investing is NOT A GOOD INVESTMENT APPROACH FOR A BEGINNER. I recommend that you have at least a couple of years experience with more traditional real estate investing first. There is an awfully lot to know to avoid the many problems that can occur. As a beginner, you don’t know how much you don’t know about real estate investing. Not knowing what you are doing is a situation waiting for a disastrous foreclosure investment to wipe out your capital and your enthusiasm for all real estate investing, not just foreclosures.
I want you to be realistic about what you are facing. If you feel more sober about foreclosure investing after reading what I have written below, I will have accomplished my goal.
When I talk about foreclosure investing, I am mostly thinking of buying at the foreclosure auction. Besides loan foreclosures, there are foreclosures for delinquent taxes, sheriff’s sales on court judgments, and some less frequently seen sales such as condo association and homeowner association foreclosures as well as some on irrigation or drainage district fees and so on. I will talk about loan foreclosures, but what I say applies to most of the other types of foreclosure sales also.
There are three basic approaches to buying properties in foreclosure, distinguished by the stage of the foreclosure process. They are preforeclosure, foreclosure auction buying, and buying from lenders after they acquire the property on the foreclosure sale.
If you buy from the delinquent property owner, you have bought a preforeclosure deal. Buying at the sale is self-explanatory. If nobody else bids at the foreclosure auction, the lender ends up with the property. Buying from the lender after the sale is calling buying REOs–meaning “Real Estate Owned.” or “Repos,” short for “repossessions.” Sometimes you will see them referred to as “Corporation Owned,” or, my favored term, “Lender Owned.”
I feel that REO or lender-owned buying is the least risky, buying from the owner in pre-foreclosure is intermediate in risk and the most risky is buying at the auction.
At the auction you have no real estate agent to lead you through the process. You have no escrow and no title report let alone title insurance. In most jurisdictions it is an all cash sale. In some states you may have a week to a month to come up with the full purchase price. If you do not get it together, you lose your purchase deposit.
At the auction the people conducting the sale will announce that the successful bidder will receive NO WARRANTY OF ANY KIND. You have no assurance there are not other liens or loans on the property. Here in CA, they say they are not guaranteeing the address of the property. So the address you see in the notice of sale and actually go look at may not be the property which is actually sold on the foreclosure.
You do not have any inspections by contractors, roofers, pest inspectors, building inspections, water well or septic system experts. You get no disclosure from the seller as to the condition of the building or what is happening in the neighborhood. Usually you cannot see the inside of the building; perhaps not even the back of the outside. You know nothing about the electrical system, the plumbing, the heating or air conditioning.
If you buy an occupied property, you have to do an eviction, which, in some states, can drag out for a while, preventing you from getting into the property quickly to start preparing for resale. Occasionally the occupants, if they are former owners, will vandalize the properties before leaving, or steal items: cabinets, doors, fixtures, lamps, etc.
If you are buying to resell the property quickly for a profit, you had better know whether your buyer will be able to readily get title insurance when buying your foreclosed-upon property. You need to check with title companies about their policy issuance after a foreclosure sale.
When you get a very good deal at a foreclosure auction, you may find that the former owner files a lawsuit to attempt to overturn the sale. So be prepared to hire an attorney and fight for your profit. This happens only occasionally, but it does happen.
When you buy REO or pre-sale, you may experience some features of a foreclosure sale, mixed with some features of a standard real estate sale. You may have more risk than in most ordinary property purchases but less risk than in buying at the foreclosure auction.
With REO buying, you can probably have many of the features of a regular sale. So it can be pretty safe. You might not get a seller’s disclosure. In CA, anyway, a property seller who acquired the property through foreclosure does not have to offer a disclosure to you as a buyer. If there are problems after you buy the property, you might be able to sue the lender that sold you the property. Or you might at least threaten to sue them, and they might make things right or at least pay part of the cost. They probably will still be around after the sale.
If you buy from an owner before the foreclosure, s/he may disappear and you could not get anything from him/her after the sale. Even if the owner is still around that person may not have much money to help you out if there is a problem with the property, even if they would like to help you.
If, when you buy preforeclosure, you sign a proper sales contract with the owner, get appropriate inspections, go through an escrow with a knowledgeable escrow agent, and look at the property yourself, you probably will not be at great risk.
A preforeclosure seller might also be desperate and lie to you about the condition of the property and the neighborhood. To the extent that you have the safeguards I listed above, you are going to have less risk buying preforeclosure than in most foreclosure auction buys.
When you are a foreclosure investor, you are on your own. You have to know what you are doing. You need to understand the physical aspects of houses; you need to know the local building codes so you can if tell the property is up to code. You need to know the property values in the area. You need to know a lot of real estate law, especially related to the type of sale that is scheduled
But a lot of preforeclosure buyers may forego some of the inspections, because they are hurrying to buy before the foreclosure auction. Sometimes the buyers will give money to the owner, get a deed, and record the deed themselves in the land records office of the county.
This is where you could have the problems that you will see mentioned if you read the posts regularly on CREONLINE.COM: seller “forgot” to mention a loan or some lien on the property. The big utility bills become the buyer’s responsibility because the preforeclosure investor did not think to check them out. Ditto for big unpaid property taxes. There may be some other person on title who did not sign the deed. And so on. The preforeclosure buyer has to be very alert to a lot of possibilities and check them out. You have to have superior knowledge of real estate and real estate investing before you start doing preforeclosure investing, in my opinion. Especially if you do not go through a standard escrow/closing process and do not get title insurance.
In CA, and, I believe some other states, there are special laws related to dealing with and buying a property from a homeowner occupant who is in default on a loan. There are even such details as to the size of type required in notices that the buyer must give to the seller. If the contacts and the sale are not done according to the law, the seller has the right to rescind the sale. Even if they do not rescind the sale and you buy the property, they could, long after the sale, sue to have the sale reversed. There are extreme penalties which the court can impose for violating the preforeclosure buying law. Some buyers have lost a lot of money because of these laws. Remember too, “Ignorance of the law is no excuse.” You need to know the state law when you do preforeclosure investing.
You also need to worry whether the seller can legally deed the property to you. What if the seller is already in bankruptcy? The deed is likely not valid, unless it has gone through the bankruptcy court. Usually you would not see a notice of the bankruptcy in the county land records. You would have to call the local bankruptcy court to check for a possible filing. And, of course, the seller could have filed bankruptcy in some other bankruptcy court, which you did not call. Be sure to ask the seller if s/he has declared bankruptcy.
And, even if the seller does not file bankruptcy until after your purchase, you may have to deed the property back to the seller, up to three years after you bought it. If selling the property made the seller destitute, and the seller sold for much below market value?which you hope s/he did so you could make a good profit–the bankruptcy trustee can require you to deed the property into the bankruptcy estate on the grounds that the sale was a ?fraudulent transfer,? wherein the seller deprived his/her creditors of an asset which could help pay the debts. At that point, you become a creditor of the bankruptcy estate. Is this really what you planned when you bought the ?great preforeclosure deal??
Now do you understand why I recommend that beginners not start with foreclosures? Start with simpler buying approaches and get some experience with properties, laws, ordinances, deeds and loans to provide a foundation of knowledge. When you know a lot of that, then start studying up on foreclosures. When you understand foreclosures, then start trying to buy that way.
If you do decide to work foreclosures, plan to study for about six months to a year before you make your first purchase. Study the laws of foreclosure in your state. Study law books on things like priority of liens, bidding at auctions, title insurance, and bankruptcy. Learn to do title searches as fast as the professionals who work for title companies.
Get to know intimately the government offices that have property records and tax assessment rolls. Get to know extremely well the property values in an area where you invest. Learn about the problems with properties in different neighborhoods, such as bad soil, poor construction in certain subdivisions, problems with septic systems and wells, contamination of the soils and so on. Remember New York State?s Love Canal?
Note: I am not trying to stop you from foreclosure investing. Foreclosure investing can be very profitable for those who can practice it well. But, in my opinion, few beginners can do it well. I’m trying to get you to be realistic and get the background that will allow you to be successful in foreclosure investing. The field is rife with risk. You can easily lose your whole investment if you make a single mistake. Please believe me, as it has happened to me, even with all my experience. Losing your investment is not fun.
Remember, when you chase the rainbow to get a pot of gold, you have to have your eyes wide open to avoid stumbling into the pitfalls and snares that surround the pot. There are a lot of them around the foreclosure pots of gold. How can you have your eyes open if you don’t know for what you are looking? Know what you are doing before you set your eyes and feet after that foreclosure pot of gold.
Good InvestingRon Starr***