The best way to make money in real estate is to buy a property for the right price in the first place. No matter what you do to the property later, getting a good deal up-front makes all the difference. One of the best ways to get a good deal is to buy a foreclosure.
I bought my first place back in 1992 and it was a HUD foreclosure. I made a blind bid and won the auction by $500. I think the price was $65,000 and it was purchased with a minimum down FHA loan with my parents as co-signers. After living in it for 2 years, one with roommates and one with my newlywed bride, we turned it into a rental. After 8 years as a rental we sold it for $182,000 and bought two rental properties with the profit. Foreclosures combined with good market timing can provide a great springboard.
Over the last few years foreclosures have become a large part of the market in some areas. Historically, 5% of all outstanding mortgages are in some stages of delinquency. Currently that has doubled to 10%. Clearly, the combination of low equity loans, the abundance of secondary financing (HELOC’s), falling home prices (in some areas) and the recession have stirred up the perfect foreclosure storm.
They are out there, so how to buy them and profit from them? First off, buying a foreclosure is not for the faint of heart. In most cases these properties have been vacant for awhile and in many cases they were at best lived in very hard and at worst vandalized and stripped before the distressed owners left. You will not get a move-in ready house unless you are very lucky.
In my area, Boulder County and the surrounding suburbs, there has been a steady stream of foreclosures, but the vast majority have been in Longmont Colorado a town roughly 17 miles NE of Boulder. Longmont and Boulder have very different real estate markets. Boulder’s median price is somewhere near $550,000 and Longmonts is at $220,000.
If you are looking for a Longmont type deal within the city limits of Boulder, think again. There are very few foreclosures within Boulder and those that are out there sell at a discount when compared to the rest of the neighborhood, but finding a super screaming deal is very rare.
So how do you find a foreclosure? There are three types of foreclosures I will quickly highlight upon. First let’s look at the homes that are auctioned at the Boulder County Trustee’s Sale.
The homes at the trustees sale are fresh foreclosures. The owner’s have been given a chance to bring their loan up-to-date and keep their home but have not. The homes are then sold by a live auction process with the minimum bid provided by the current lender in advance of the sale. Bids must be a minimum of $1.00 over the lender’s bid. The successful bidder must provide certified funds for the exact amount of the winning bid by 1 pm the day of the sale. If you buy a home at the public trustees auction there is no inspection period or financing period. Have your cash ready. After the auction, the current lien holders have an opportunity to redeem the property and try to recover some of their losses. If no redemption attempts are made the sales is complete and the deed is issued 15 days after the sale. If a redemption is made the successful bidder will receive their funds back with interest. For more information about this type of sale in Boulder County and a list of properties for the upcoming auction go to Boulder Trustee Website.
In most cases banks end up owning the home after the public trustee auction. The homes then go through their REO (real estate owned) department and then re-sold through local Realtors. This process can take awhile but with patience they end up for sale on the MLS. These properties are identifiable as foreclosures by the ownership type and I can search for just REO homes. A buyer then negotiates with a representative at the bank. The properties can be financed and inspected, but all houses are transferred in as-is condition.
When a home with an FHA loan is foreclosed upon the U.S. Department of HUD takes the property and re-sells it via an online auction. These properties can be viewed in advance by contacting a HUD authorized broker (I have this certification). Bids are accepted online and you just have one chance to bid. The nice thing about HUD homes is that a buyer can get good FHA financing on the property with a minimum amount of down payment. Local information about HUD homes can be found at McBreo.com. If you would like help with a HUD home give me a call.
Now is a great time to buy. The interest rates are low (for now anyway), jobs are becoming more stable and there are some good deals out there. I’d love to help you make a good investment.