Buying Foreclosures

Heard the news lately? Foreclosure rates have skyrocketed. Fueled by risky mortgage products and too many people buying homes they couldn’t really afford, there are tons and tons of homes in various stages of foreclosure right now.

Is this a buying opportunity for you? Is this a good time to pick up a home or homes at bargain prices? If so, how do you go about doing it?

As with any topic where there is an air of mystery and the potential for financial gain, there are many places who will sell you the know-how you need, “all for the low, low price of…” Again, we have nothing against this products and programs - we often promote some of these types of products ourselves (Governmentauctions.org being our favourite online search tool) - but before you begin, you should have a basic understanding of how the foreclosure market works.

And if, after getting the big picture and potential benefits and pit-falls that can occur, you want to move forward with this idea, then you should get as much information and help as you can find. Knowledge is power. People can and do make money buying and selling foreclosures and this could be a great opportunity for you. But you should enter in to it with your eyes wide open, and not because the infomercial guy promised you that any idiot can do it “and all you gotta do is dial 1-800-ImAnIdiot…”

How Do I Buy A Foreclosure?

Laws and procedures vary from state to state, but the most common arrangement you’ll find has to do with the steps at the county courthouse in your area. Most homes that have been foreclosed on will be auctioned off to the highest bidder right out in the open in front of the county courthouse. Picture those old Western movies and them cowboys gathered around trying to outbid each other. That really is how most foreclosure auctions are done. (And for some reason, and it doesn’t matter which part of the country you live in, many of the bidders still come dressed up as cowboys – weird).

What you need to know right up front is that most of these auctions require cash or cashier’s check – on the spot – to buy the home at auction. You got a couple hundred thousand bucks sitting in the bank? Then a foreclosure auction can be a great place to pick up a bargain investment.

But I Don’t Have That Much Cash! So I Can’t Buy A Foreclosure?

Not necessarily. In most every county, you can find foreclosure buying services you can utilize to buy at auction. Most of these services are run buy private investors in partnership with real estate agents. They will help you select and screen homes coming up for auction, will go to the auction to help you place your bid, and will provide that cashier’s check to purchase the home.

Is this service free? Hardly. These are going to be very expensive loans – high interest rates, high fees – but if you don’t have cash, this will likely be the only way you’ll be able to bid. A typical foreclosure buying service will require that you have approx 20-25% of your own money into the purchase and then they will lend you the rest of the money at 12-14% interest with 4-6 “points” as a loan fee.

Yes, this is expensive money to get, but if you do end up buying a nice home at 70 cents on the dollar, it can be money well spent. But buried within that last paragraph was the “20-25% of your own money” clause. On a $200,000 purchase, you need around $40,000-$50,000 of your own money. If you don’t have this much in your checking account, you’re going to be out of luck.

Now, one place many people get this kind of money is with a home equity loan against their current home. If you have a nice equity position if your current home, you can pull some out and become a real estate investor. Risky? That’s up to you – but a LOT of foreclosure buyers are doing this.

A Word Of Caution

First-timers in the foreclosure buying game can run in to trouble by not being aware of certain pitfalls. If you’re at the auction, bidding on a screaming deal, and none of the veterans (who are dressed like cowboys – and again, I have no idea why) are bidding against you – get very nervous. Many of these cowboys actually do this for a living. They’ve been burned enough times in the past that they’ve learned where the potential trouble is. And even with them, the rule of thumb is , “If you can get it right 7 out of 10 times – you’re good!”

Buying Foreclosures Ain’t For Everyone

Buying homes at foreclosure auctions can be high risk and high adventure. Again, people can and do make good money doing this. But you can also make mistakes and get burned. If it’s your first time, you need help to put you in the best position possible to have a successful transaction. Don’t go it alone the first few times - in fact, many of those cowboy veterans will still utilize those buying services and pay those high service fees just because the extra information and security they get is well worth the fee.