Buying foreclosures is not a simple endeavor. If done correctly, you could research hundreds of properties a month and only end up buying one or two. Alain Lantiqua, a seasoned investor says, “You gotta know what you’re doing. And if you don’t, you’re going to lose a lot of money; people are losing hundreds of thousands of dollars a day.”
Check out this graph – There has been a 24 percentage change in distressed properties since January of 2012. This shows that there is a lot of competition in the foreclosure market.
There will always be foreclosures but you will need to know where to find them (see the Tale of Two Cities graph) and how to buy them.
Based on Alain Lantiqua’s quote and my experience we can see novice investors making common and deadly mistakes that can easy make them loose more than they are willing to bear. Here are a few classic examples of mistakes made by novices:
- A Fort Lauderdale businessman, admits he made a beginner’s mistake when he bid $9,100 for a North Miami Beach condo with an assessed value upward of $140,000. Less than 24 hours after submitting his winning bid, he discovered that what he had actually bid on was the right to buy a $9,000 condo lien.
- A New York real estate investor bid $95,600 for the right to pay off a $13,000 Miami Beach condo association lien. After wiring $95,600 to the county for what he thought was a clear title to a one-bedroom condo, he got a call from a Sarasota woman who told him that Indy Mac Federal Bank had a superior lien on the property and there was an outstanding $265,000 mortgage.
These are just a few examples to prove that you must know what you’re doing. Here are two rules to follow if you want to compete and protect yourself at foreclosure auctions:
I. Do your homework: I could go on extensively about this topic, but here are the key things to check for:
- Mortgage position
- Municipal liens
- Title issues/defects
- Zoning regulations
- Condition of the property
- HOA lawsuits or liens
- Environmental issues
- Local market conditions
These are in addition to doing property evaluation. Run both, comparables and the numbers on the deal (like I teach in class). The more information and data you have, the more confident you’ll be with the deal and in bidding.
II. Check for Postponements: It’s very common in the foreclosure process these days that a property scheduled for sale can be postponed to a “future date.” Below are some of the causes:
- The bank accepts a purchase contract. In today’s environment this is often a short sale that the debtor has been trying to get the bank to accept.
- The debtor files for bankruptcy protection. This process automatically suspends any collection efforts (including foreclosure) until relief is obtained by the lender of the “automatic stay” (the automatic stay directs creditors to cease their collection activities immediately).
- The debtor has made a good faith effort to cure the default and negotiated a forbearance agreement with the lender.
- Error or omission has occurred somewhere in the foreclosure process.
- Lender has sold the note and/or mortgage.
- The debtor requests a loan modification and under HAMP the participating servicer is obliged to evaluate the request.
The key here is having the right tools and knowledge to give you confidence in the deal. To learn more about real estate investment, join us for a free class at a location near you.