What Is Home Foreclosure?
With the economy tanking and going nowhere, the housing market is not terribly great. Because of the bad economy, you hear a lot more about home foreclosures in the news, on television, and even on the radio.
Given the surge of subprime lending and house flipping, home foreclosure is, of course, the inevitable result of overinvestment by people that either got unlucky or perhaps were foolish in their ideas of what they could or could not afford.
The real question you might have is this: What Is Home Foreclosure?
Home foreclosure is a pretty simple thing. It is when you have a loan on a house that is unpaid and thus goes into default. At that point, a series of things can happen. It’s possible that the bank might renegotiate the terms of the loan such as the loan rate.
Then again, most of the time what tends to happen is that the bank or the originator of the loan will try to sell the house on the open market.
Usually, banks tend to work with the same handful of realtors who are comfortable with the entire process of selling or buying a foreclosed house. If it is a government house foreclosure, then they almost always use the same realtor or real estate agency in your town.
The house will sit on the open market for a period of time until either it sells or the mortgage company or bank decides that they need to sell the property quicker. In those instances, they will either slash the price on the house or they might sell the house via auction.
House foreclosure auctions are a whole different ball of wax and I won’t go into it in this post. In some cases, a home auction can get you a house for less than 50% of the original value. Recently, I’ve seen reports that in Detroit some of these house auctions or even just straight up foreclosures were being bought for $100 or even $1,000.
Those kinds of prices are absolutely outlandish, but it just shows you how bad the housing market is right now in different parts of the country. The manufacturing centers are being hit hard right now, so houses can be had for next to nothing. The only problem is that there is nobody around to actually buy them. Go figure right?
What You Need To Know
What you need to know about home foreclosure is that if your house is being foreclosed on, you do have options. It is not in the bank’s best interest to have their loan in default. They lose a lot of money on the loan if that is the case.
Also, if they have only had your loan for a year or two, they probably are barely at break-even in terms of interest payments vs. their cost.
If you are in an adjustable-rate mortgage right now, you should try to get into a fixed-rate mortgage. A 30-year mortgage is around 5% and a 15-year mortgage is hovering around 4.5%. Those kinds of rates are outstanding. Simply outstanding. You can’t beat them.
When I first bought a house I had an adjustable-rate mortgage and it was awful. I think we were paying something like 11% or higher interest rate. Our house was very cheap, like less than $100,000.
We could barely afford it, but a few years later we got locked into a 15 year 5.25% mortgage. Our monthly payment is the same, but we’re going to pay off the loan in less than half the time.
There’s a lesson to be had there for you home buyers. If you are buying a house or have a loan, get a shorter loan period. It costs a little more each month, but that money goes towards the principal on the loan, not the interest. That’s a HUGE money saver, but I digress.
Here’s What To Know When Buying A Home Foreclosure
When you are buying a foreclosed house or any house for that matter, you should know that you’ll only make money when you buy the house, not when you sell it. Let me repeat….
You only make money when you buy a house, not when you sell.
That is the single biggest reason so many people got in over their heads in this latest housing crisis. They all thought they could buy at market prices and since the market price kept jumping, they’d be stupid rich in a couple of years because prices only go up, right?
Well as it turns out, house prices can and will go down at various times for various reasons. So, if you are buying a house, whether it’s foreclosed on or not, if you want to make money from your investment you need to do it on the original purchase, not when you sell it.
So, for those people who are good at math, if you want to make $10,000 on your house when you sell it, you need to actually purchase it for $10,000 less than it’s worth.
Ideally, you would purchase for $20,000 or more less than market value so that if the market value drops, you still are $10,000 ahead on the deal. I call this purchase concept of “buying equity“.
It’s similar to when you purchase shares in a company. You are buying an equity stake in the company. Usually, when you purchase a house, the only equity you have in it is the down payment. When you buy something for less than it’s worth you have instant equity. That means you could turn around and borrow against that equity if need be.
If you are g0ing to save yourself a truckload when buying a house, you need to buy it for less than it’s worth. Period. That’s how smart people purchase a property. If you are buying for market value and hoping that the market will keep going up, you might as well buy a lottery ticket.
Wow, I think I may have got a bit off track here, so I’ll close it up with this simple thought…
Home foreclosure is a serious thing for both the borrower and the bank. Don’t take it lightly. However, it’s also a way to keep our financial system in check. The risk of foreclosure is supposed to keep banks from over-extending credit to people who aren’t going to be good borrowers.
At the same time, if people can’t afford to pay their bills, they don’t always deserve to keep their house no matter how much they would like to.
In the end, home foreclosure is kind of like a band-aid. It helps in some cases, but you’d wish that you didn’t get cut in the first place.
Things To Know Before Buying Foreclosed Homes
Buying foreclosed homes can be a very straightforward process if you are prepared before you get started. The basics of buying a foreclosed home are not complicated or all that different than buying a traditional home. The biggest difference is in cost. Here are a few things to consider before buying forclosed home properties.
Have A Goal In Mind Before Starting The Process
The area where most home buyers struggle is knowing and understanding what they are buying and why they are buying it. What is your goal of buying a house? Is it going to be a rental property? Is it going to be a house flip? Do you want to remodel it and live in it?
All of those are important things to consider. If you are going to do a house flip or a rental property you need to be very price-conscious and budget-conscious. Most importantly, you need to consider the housing and rental market. How much can you sell the house for? How much can it rent for?
You will need to know all of those things before you even start shopping for a forclosed home. It is essential that you understand the market so that you can shop intelligently.
Know Your Budget
Knowing your budget is another essential piece of information before you buy a foreclosed house. Talk to your bank to learn about your financing options. How much the bank will lend you will largely limit your buying options. However, you should consider how much you can afford within a reasonable budget.
For example, if it is a rental, you should plan as if it is never rented. Can you afford the monthly payments without any renters? You can never be sure if someone is going to be willing to rent the property or how often you will be without renters.
Also, if you are going to do a house flip or a renovation, you need to understand your budget in that instance as well. You usually can’t finance such projects unless your credit is quite good or you have equity in the property. Thus, you must have some nest egg set aside to do the work yourself.
Have A Down Payment Ready
In this economy, cheap and easy credit is hard to come by. Equally difficult is finding a zero down payment home loan. If you can find one, you are likely to pay far too much in interest and fees than you should.
Instead, you should make sure you have at least ten percent ready to be put down on the purchase of a house. When you are buying foreclosed homes, you should always have a down payment of at least 10%.
Down payment does two very important things for you. One, you will get much better financing rates. It lowers the banks risk on the loan and it lowers your monthly payments.
Ideally, you’d be able to purchase the home for cash, but very few people do this anymore. Instead, many people are unable to wait and raise the cash to buy a house, even a foreclosed home. It is unfortunate because it is costing them 5-10% interest every year. Tax laws are favorable towards home loan interest, but it is still a drain on most people’s budgets.
Don’t Buy A Foreclosed Home on Emotion
Buying a house because you “fell in love” with it is foolish and stupid if the financing doesn’t make sense. You don’t deserve a house just because you want one. Nobody does. It’s just a house anyway. It’s a place where you sleep and eat, but let’s be real. It’s still just a house.
When buying foreclosed homes they are often much cheaper than the market price, so it’s easy to really want to buy one. However, don’t buy the house unless it makes good sense for what you can afford.
How To Buy Foreclosured Houses?
Buying foreclosures is not as complicated as some people would make it seem. It actually isn’t a whole lot different than buying a traditional house. The biggest difference between buying a foreclosed property and a traditional property is who is doing the property selling.
Foreclosures are usually handled by banks or the government. A foreclosed house is by definition a house where the buyer was no longer able to make payments on their loan and they defaulted on it. The ownership interest then moves to whoever has a lien on the property, aka. the entity who loaned the money.
Buying a Foreclosure property is a fairly straightforward process. It involves three major steps: setting your price range and objectives, finding the right property, and then purchasing the property.
Setting your price range and goals is the most important step. If you are buying a foreclosed property to live in yourself, you want to find a house that is going to fit your needs and your price range. Don’t buy too much house that you can’t afford. You don’t want to find yourself in foreclosure either.
If you are planning on renting the property, I suggest buying something where the total rent you can charge is roughly twice what your monthly payments will be. That way, you come out ahead each month you have renters and can pay down the mortgage quicker.
Second, you need to find a good foreclosed property. Ideally, you will want to find a house that doesn’t have a lot of work that needs to be done to it. Perhaps installing some appliances and do some minor repairs such as hanging window blinds. that way you don’t have to spend a lot before you start making your money back. Don’t buy a true fix-er-upper unless you really know what you’re doing.
A great way to find foreclosed properties is to search for the cheap end of the housing market in your area. Then, find out what realtor handles most of the foreclosure properties in the area and contact them. They can help you find the best property available.
Last, you must purchase the property. If it is a bank-owned property, it is not very difficult. Mostly you will just have to negotiate agreeable terms, pricing, etc. with them. If it is a government foreclosure, you will have a more interesting time. The HUD program usually auctions the houses off via an online auction system. Your real estate agent will be able to help you with the process.
Buying a foreclosure is a great opportunity to buy a great property at a very low price, especially in the current market. I’ve seen houses go for nearly 50% of their assessed value.
Granted, in some markets, that might not be a great deal, but most places the housing market hasn’t completely cratered and great houses can be found.
Flipping Foreclosed Houses
House flipping can be a very lucrative investment, potentially tens of thousands of dollars can be made in a short amount of time. Not only that, but the investor uses other people money in the form of loans to get started.
There are a few basic pointers any house flipper should follow if they want to be successful. Once they get the hang of it, it will almost certainly be a profitable venture.
Type of House
Many good deals can be had on condos, or large homes, or small homes in foreclosure. But in reality, the best homes would be midsize, for a small family. That is the sweet spot for real estate, and the easiest to move.
This is because a small family wants to buy a house more than someone looking at a condo or large place, they are a lot more motivated, and much more likely to go through with it.
A bad house in a good neighborhood is much better than a good house in a bad neighborhood. That is the nice think about fixing up and flipping a house, is the house can be cleaned up, and even added on to.
Yards, fences, new paint, even putting in a porch can be done to maximize value. In a run-down area, it is much harder to attract serious buyers even if the house is pristine.
When renovating a house, a flipper wants to get the most money dollar for dollar. Though a nice pool or expensive granite top may look nice, this should not be a priority. Instead, focus on things that are universally liked, such as having a nice manicured front and back yard, and having everything function.
The money is almost never recouped in putting money into luxurious upgrades. One of the best ways to spend money on a house that is going to be flipped is making the kitchen nice. Just functioning with a decent layout.
Before buying, get as much information on the house as possible, noting any serious damages or problems. It can sometimes be difficult to get the full picture on a foreclosed home. But the more information the better, this can help save headaches and huge issues down the road.
The thing with flipping is the buyer should look at the worst-case scenario when buying. That is to say if the house does not sell, can the owner rent it out while the market improves.
Many people who flip homes get stuck in this position, and ironically, the home can be foreclosed on. It would be a good idea to have enough cash saved up to pay the mortgage for six months, or even more.
Any neighborhood in a good school district should do well. Even if the house is not so nice, many people seek out a neighborhood with excellent schools. Just buying a foreclosed home and bringing up to livable standards should be enough to make a profit.
Be sure to do your research and see how much it’ll cost to invest in quality insurance for your new property. In some areas, the rates might not make the leap of faith worth it! Obviously, you need to find the right balance between risk and security here, and when insurance comes into play, it’s very multi-faceted.
Flipping foreclosed houses can be extremely profitable and rewarding. But it does have its pitfalls, it is best to do as much research as possible. The buyer should certainly have enough money on hand, or loans, to make all the necessary upgrades and repairs. When done right, it will almost certainly be highly profitable.