How To Invest In Foreclosed Properties
/You’ve been to the sheriff’s sales and know that valuable real estate can be had at bargain-basement prices. Buying these properties is not without risk, however. Here’s what you need to know to get started investing in foreclosures.
What Happens in a Foreclosure?
Foreclosure is the legal means by which a lienholder extinguishes the ownership rights of a homeowner. Depending on what state the property is in, there will be a non-judicial or judicial proceeding.
In a judicial foreclosure state, the lienholder must file a foreclosure lawsuit against the homeowner. In a nonjudicial foreclosure state, the lienholder can foreclose without going through the court system. In these states, mortgage lenders typically include a clause allowing for self-foreclosure in the mortgage documents called a “power of sale” clause.
By the time you become aware of a property you are interested in purchasing, either of these processes is complete and the property is being offered at sheriff’s sale or trustee’s sale. The sale will have been advertised a statutory amount of time prior and will be public.
The mortgage lender will have set a minimum amount it will accept for the property and the maximum bid must exceed that amount, otherwise, the lienholder will retain the property. The property will then be REO, or “real estate owned.”
Prior to setting your maximum bid, you need to know a few things about the property.
What Type of Foreclosed Property Should I Invest In?
If you intend to purchase a property at a foreclosure auction to rehabilitate and sell it (called “flipping”), you must take the following risk-mitigation steps.
Find Out if the Property is Vacant
If the previous homeowner or a tenant or a squatter is still residing in the property after you purchase it, you will have to evict them. In most states, eviction is a legal process requiring an order from the court. This will delay the process of flipping the property a month or more, so calculate the carrying costs of the property into your maximum bid if the property is not vacant.
If you proceed with purchasing an occupied property, to gain possession of it you must first provide written notice to the person(s) residing in the property that they must leave because you are the legal owner. This is called the Three Day Notice to Quit.
If the residents do not quit the property within three days, you can file an eviction lawsuit in the county court where the property is located. In most states, after you have served the occupants with the filed complaint and summons, the occupants will have 30 days to file an answer. If they do not answer, the judge may enter a next-day eviction order. If they do answer and there are mitigating circumstances, the judge may give the occupants more time to move.
File an eviction lawsuit with the county court if the previous owner does not vacate the premises. According to the Housing and Economic Rights Advocates, you cannot file suit until after you’ve given the former owner three days to vacate after a notice has been issued. To file the lawsuit, you will need to fill out a short form at the county courthouse and pay a small filing fee.
The county sheriff will post the eviction notice, go to the property on the eviction date, and remove the occupants if they have not left. At that time you can enter the property.
The Previous Owner Has the Right of Redemption
Most states have enacted statutes that give homeowners the “right of redemption” allowing them to reacquire the property. The statute will give a specified period of time, for example, ten days, after the sale for the homeowner to cure the default or come up with a specified percentage of the lien.
Research your state’s redemption statute prior to purchase. It would be in your best interest to wait to start renovations until this period has expired. Use this time to inspect the property, if you have access to it, and make your plans.
Research the Neighborhood and Comparable Properties
Before considering purchasing a property at foreclosure to flip it, you need to know what it can sell for. This is easily determined but also changeable with market conditions. Plan on selling within a range that takes into consideration purchase price, holding costs, and renovation costs.
Don’t just look at comparable properties online - drive the neighborhood and get to know it. Is it a neighborhood of 3 baths, 2 bedroom family homes? It is a neighborhood of rental shotgun cottages? Is it near an elementary school? Is it near to public transportation? Who would want to buy the property you are interested in flipping?
Once you determine who your buyer is, you will know what their expectations are and what improvements you can make to the property to increase value to them.
Know that the Market Changes Quickly
Obviously, the faster you can renovate the property for sale, the less it will cost you in carrying costs. Also, know that the market changes quickly, for better and for worse. This is why it is necessary to set a range of possible listing prices, and also why you want renovations to be completed as soon as possible.
What if My Investment Property Does Not Sell?
It is crucial to have an exit strategy. If by the time your renovations are complete the property will not command a price that makes your investment worthwhile, or if it just does not sell, you must exercise plan B which is to rent the property until the market improves.
Prior to purchasing the property and as part of your research, you will have determined what the property could rent for in it’s rehabilitated condition and in that neighborhood. Hopefully the monthly rent will cover the costs of holding the property and then some.
Holding a property until market conditions improve is called “seasoning,” and it is common for foreclosure investors to do this. Knowing that this contingency may occur through no fault of your own, you won’t be disappointed if it occurs and you will be prepared for it.
Good luck!
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy attorney.
