YOUR FUNDS
Foreclosure investing may be on the upswing, but it isn’t for the squeamish
REBECCA WARREN is a certified financial planner and certified senior adviser in Mesa. She can be reached at (480) 357-8380 or by e-mail at rebecca@warrenfinancialservices. com.
There’s that old saying that one person’s misfortune is another person’s happiness. But in these troubled times for the mortgage industry, those who consider investing in foreclosure properties should not only understand foreclosure and the importance of cash in the process, but the emotional element unique to this kind of investment. With the rise in foreclosures, you’ll definitely hear more about how “easy” it is to invest and make a killing. Those who deal regularly in foreclosures know that making a profit can be tough, and that’s true even for individuals with close ties to lenders and public officials and lots of experience. Here’s a look at the foreclosure process. A foreclosure happens when a buyerdefaultsontheirpayments and the lender takes formal legal action to seize the property. State rules govern this process, but generally, when a lender decides to foreclose on a property it files a notice of default. This document is a public record, and for buyers, including other lenders, it’s the first step in locating a property in foreclosure. A buyer looking for foreclosures can look online for lists of properties in default. You will hear about “pre-foreclosure” or “short sale” properties put up for sale by lenders who have entered into agreements with troubled homeowners who elect to give up the property to avoid a foreclosure on their credit report. You will also hear about such sales being done by intermediary companies that claim to deal in these transactions. Some are legitimate, some are not. There are three primary ways to invest in foreclosure properties. First, you will see buyers coming in at the “pre-foreclosure” stage. Second, you will see buyers going after “REO” (real estate owned) properties, literally foreclosed real estate still on the books of a lender. Third, you’ll see foreclosures auctioned off at the public courthouse or in private auctions. Each process has its own conventions for inspecting the properties, sometimes prospective buyers get time to inspect what they might buy, other times little or none. The sale of foreclosure properties is typically a fast-moving process that requires no-strings financing. Lenders like cash. And then even sophisticated foreclosure investors often discover ugly surprises when buying, property with greater damage than they anticipated, for example, and they may not have the flexibility to borrow to fix those unexpected problems after they borrowed to buy in the first place. Start with some solid advice about your personal finances and your tax situation. Your financial planner can help review your circumstances and how prepared you might be for this risky form of investment. Then, it’s a process of learning how various lenders in your community deal with pre-foreclosure and foreclosure property, and how public officials and private auction houses in your area handle the auction process for such property.
