Buying a foreclosed Property - Avoid the Pitfalls Nov 03 '05    Write an essay on this topic. Tweet Popular Products in Books Pablo Neruda - Veinte Poemas De Amor Y U From $42 Randall I. Charles, Dinah Chancellor, Ju From $67 The Bottom Line Foreclosed Properties can translate into big profits if you know what you are doing. In my previous essays about flipping houses I promised a chapter on buying foreclosed Properties. So here it is. Buying a Property at a foreclosure auction can mean big profits, especially if it's purchased as an investment. If you purchase a foreclosed property to live in yourself, you might end up with a really good bargain or a nightmare. It all depends on whether you do your homework. Over the past few years my husband and I have purchased several foreclosed properties in three States. Before going on your foreclosure adventure please keep in mind that you are buying someone's home. What leads to foreclosure Foreclosures happen for a variety of reason. Sometimes it's as simple as not being able to make timely payments on a mortgage. This could be because of a change in family status, a lay-off from a job, or large medical bills. Most of the time the current homeowners are often not aware of the foreclosure laws and what they can do to avoid foreclosure. Other Foreclosures happen purposely. If a property's cost are no longer sustainable for the current owner, he/she might place it into foreclosure. About three years ago a popular resort area went into foreclosure simply because all owners agreed that the cost of upkeep was not sustainable. In short - it cost too much to keep it open and nobody wanted to be left holding the bag. Either way, buying a property at a foreclosure auction can be a bargain. Know the right people Just like in other business ventures, knowing the right people is half the work. If you buy a foreclosed property to live in yourself, you might just want to take a trip down to the Cityhall or Courthouse and have a chat with the Registrar of deeds and the Property tax office staff. These two office can be vital in disclosing information and can keep you from making a ,potentially costly, mistake. Get to know the neighbors of the foreclosed property. For us that was easy, because the towns we bought in were really small and we knew most of the townspeople anyway, but if you are buying in a larger city, you might want to drive around the neighborhood and talk to the neighbors, the businesses, etc. This can be informal "Hello, I was just wondering if you know Mr.XYZ. I heard he had some financial problems and I think maybe I can help him out a bit" Foreclosures are posted several weeks in advance in the local paper, so don't be shy talking about somebody elses financial problems, chances are the neighborhood is well aware of it already. And if you offer to "help out" they might give you information that's not available otherwise. Why you can't approach the homeowner directly In most Counties you are not allowed to approach the homeowner directly. This will protect the homeowner in case they are able to turn the foreclosure around at the last minute and it will also protect you. If a homeowner decides to talk to you during the foreclosure process, this might be construed as a potential offer and could get him in big trouble with the Mortgage Company. We have, on occasion, approached homeowners. But not in an illegal way. These were people we knew anyway and we have offered to make a bid on the property, but made the homeowner aware that we only have so much money to spend. On one occasion we bought the house at auction and rented it to the homeowner. After several years we turned the rental into a land contract and the person now owns their home free and clear. But that was a very special occasion and not something we routinely do. Going into the neighborhood and getting information is for your own benefit. Are the homeowners suspected of being "low-lifes"? Then the property is probably a mess inside and out and might not be worth bidding on. Do they owe money all over town? Then you need to carefully research what liens are on the property. That could drive up your purchase price considerably and might not be worth it. But if you get the feeling that the current owners are decent, hard-working people that just had a bit of bad luck, you might be bidding on a bargain. Understanding a foreclosure advertisement Foreclosed Properties are advertised two ways. Once in the local paper and once at the courthouse. This is pretty much true for most states. Certain Counties only advertise at the courthouse, so you need to do a bit of research. The typical foreclosure advertisement will have information about the owners (Name, etc.) and a legal description of the property. Some have a valid street address, but for the most part it's the legal description that counts. And that's were your friends at the Registrar of Deeds office come in. In our County that's were the Platbooks are kept. Take a trip down there, find the Platbook and determine the physical address. The next item in the advertisement will often read like a bunch of "legalese". It will list not only the Property owners, but also all persons and businesses that have liens against the property. WATCH OUT - these are only lien holders that are recorded at the point of foreclosure. It could easily happen that a bunch more pop up once you buy the property or are in the process of bidding. Lienholders can be anyone from Construction companies to Utility companies. If the current homeowner is behind in paying their bills, a person or business can file a claim (Lien) against the property. Meaning when it's sold, these debts go with it. Chances are if there are a lot of liens against the property, you might not want it. Even a lot of smaller liens can add up to big bucks and you will be responsible for all. Property taxes that are still owed on the Property are not recorded in the foreclosure notice or advertisement. See the paragraph below on how to find that information. The foreclosure notice will also carry information of the original lien or mortgage holder. This is typically a law firm that is retained by the mortgage company or even the mortgage company itself. You cannot make contact with the original mortgage holder, unless you plan to pay the full price owed on the property right then and there. We did this once - BIG MISTAKE. That was one property we didn't even bid on. Time for some serious research After you have determined which property you want to bid on, you will have do a bit of legwork. Do this in person whenever possible and not by phone. You will receive much more information if you actually go to the Tax Assessor's office and the Registrar of Deeds. Be honest. Tell them you want to bid on a property that's slated for auction and need this information to see if you can do that. Some of the information will require that you fill out forms and pay a small administrative fee, other information is available for free. Go to the Tax office in the County the Property is located at and have them run a check. This might cost you a few bucks, but for the most part the tax assessors will be helpful and do it without a fee. We found that if we tell them why we are doing that, they are much more helpful, especially if they know the current owner and like him. Again you should emphasise that you are trying to "help" the current owner. Talk to a Real Estate Agent or find Real Estate Companies on the Internet that offer properties in the same area. Find out what comparable homes go for. It's no good to bid a bunch of money on a property that has lost value over the past few years, because it needs extensive remodeling or updating. Unless you can make the ratio of bidding price and remodeling budget work and still come out ahead, you shouldn't bid on the property (at least not as an investment). Viewing the Property In none of the Counties we have bid on Properties was it allowed to view the property on the inside. If you do it anyway, you might be excluded from the bidding process. This is mainly to protect and (already traumatized) homeowner. Imagine if you would loose your home and now there are people lined up at the door at all hours asking to get a tour. There are also homeowners that don't take kindly to having their property put into foreclosure. We've never been shot at, but we had a few dogs chase us down a drive-way. If you personally know the homeowner and he happens to invite you in for a chat, that's okay. It's also okay to call the homeowner if you know him personally and tell him that you plan to bid on the house. Use a bit of common sense when doing your drive-by. If the yard looks like the local dump station and the exterior of the house needs about $25.000 worth of paint, chances are the inside does not look much better. A bunch of tarps on the roof indicate a serious leak. Broken windows and doors could mean that the property has been vacant for quite some time. A property that looks decent but has boarded up windows can be okay to bid on. If the homeowner has left, the mortgage company might send someone to board up the windows and protect the property from illegal entry. This happens especially in larger towns. The actual auction In smaller towns a foreclosure auction is held on a certain day of the week. One town we know still has the sheriff auction the properties on the courthouse steps. A homeowner that has a property placed into foreclosure cannot bid, but he can be present at the auction. He can also have people bid for him. The purchase price is determined by many factors. The mortgage company or lienholder typically tries to get at least the money that is still owed on the property or even the value as determined by an appraisal. It really depends on the company here and where the property is located. We've seen houses go for as little as $30.000 and for as high as several hundred thousand dollars. I've never seen a house go for as little as $500.00 like they advertise on TV. Once you have successfully bid on the property it's time to pay up. You will need 10% of the purchase price as soon as you have received the okay. This money is paid to the treasurer or the sheriff's office. Cash is okay, but so are certified checks. We usually use cash, because we won't know beforehand how much we are paying for a property and, that way, we don't have to carry Cashier's checks for a variety of amounts. The rest of the bid amount is typically due within 30 days and cannot be in the form of a mortgage. You can't make payments to the treasurer for the next 20 years. The amount is due in full within 30 days. It is possible to get a small extension on that 30 day period, especially if you are known to the county officer who collects the money. We've filed for 10 or 15 day extensions at times and have received them, but they knew us pretty well too. Getting an extension of more than two weeks is pretty much impossible. If you can't come up with the amount required to purchase the property, you will most likely forfeit your initial deposit and the auction will begin again. County laws vary a bit on that, so check before you bid. A property that does not receive the "reserve" required by the mortgage company or lienholder, might be removed from the auction block and either sold or auctioned at a later date. Sometimes the difference between the maximum bid and the amount required can be as small as a few hundred dollars. Some auctions will start the bidding at the amount that the lienholder requires, others will leave the minimum amount open to the bidders. If a property is withdrawn, you might want to find out what the minimum amount is. If it's just a few bucks more than the maximum bid you can ask to have the bidding reopened after all the other properties are sold. This could potentially be advantageous, because other bidders for the same property might have already left, leaving you the only one there. You might want to attend a few auctions without bidding, just to see the process. Talking to other bidders We often talk to other bidders. We find out if they are local and we watch what they do. If they keep their bids very low and they are local, they might know something about the property we don't. That's when we sit on our hands (or bidding paddles) and go for another property. Pick the other bidder's brains. Find out how long they've been at it, how often they bid on foreclosed properties and what their biggest mistakes were. Most don't mind parting with a bit of advice. Learn as much as you can about local laws, people involved in the bidding process, etc. Know your limits Auctions can get heated. If there is a prime property, many people might bid on it. You should have a list with comparative property values and your maximum bid amount. It's easy to get carried away once the bidding process starts. Know your limits. Don't bid more than you can comfortably afford. Keep in mind that you might have to pay other cost, such as current property taxes, title company fees and clean-up or remodeling fees. Because markets vary wildly, there is no rule of thumb how much to bid for a property. If you find it's worth it you can go as high as you want. But make a budget and stick to it. If you don't think you can, leave after it becomes clear that someone else bid higher. Final Thoughts Bidding on a foreclosed property can net you a good profit, but can also mean potential out of pocket cost you have not anticipated. "Caveat Emptor" goes for all foreclosure bids.

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