How to get into the real estate market Part 1 - Foreclosures

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There's been a lot of hype about the so-called "Real Estate Bubble" bursting. It would appear that high level of growth and appreciation in the real estate market is now taking a tumble. Does this mean it is the perfect time to invest in real estate as the market has come to a halt?

Although real estate has its ups and downs, it is generally a stable investment. Real estate is a basic necessity - people will always need a place to live. But, is there money to be saved by surpassing the normal realtor and looking into a more unconventional method of real estate purchasing? A tempting method of real estate purchasing is buying foreclosures.

If a homeowner stops making mortgage payments, the bank may repossess the house and put it up for sale, known as a "foreclosure." Many times, bank-repossessed houses can be purchased for well below market value. Although the profits from foreclosure investing can be substantial, it is not always a good investment approach for beginning real estate investors. There is a lot to know about foreclosure investing in order to avoid potential problems that can occur.

Finding Foreclosures

The key to foreclosure purchasing is to know how to locate these types of properties, how to identify those with the highest profit potential and how to close the deal with the banks that own them. Probably the easiest method used for finding foreclosures is through the newspaper. Foreclosures are usually listed in the "legal notice" section, which shows properties coming up for sale at a public auction. It is a good idea to attend a few of these listed public auctions, even if you're not interested in buying the property, to become familiar with the auction process.

There are three ways to purchase properties in foreclosure: buying pre-foreclosures, buying at a foreclosure auction, and buying from a lender after the foreclosure sale.

Pre-Foreclosures

A pre-foreclosure is a delinquent property that is purchased before it goes to auction. If a homeowner stops making payments on a property, a formal notice will be filed declaring that a default has occurred and that legal action may be taken, known as a Notice of Default. You can also go through your local county court to request any Notices of Default that have been recorded. Once a Notice of Default has been filed, the owners are in foreclosure and must do something or risk losing their property, equity and credit. Months before the auction, a buyer can contact the owners directly and offer to purchase their home in a pre-foreclosure sale.

If looking into a pre-foreclosure sale, determine the most you can afford to pay in cash before you meet with the seller. The amount of cash you pay is always negotiable, but make sure your offer is contingent upon all existing liens, loans, etc., and verify that the seller has disclosed a complete list of all debts. Pre-foreclosures can be risky, in that the owner may "forget" to disclosure negative information about the property. If the owner conveniently disappears after the sale is completed, the buyer may be left holding a hefty bill if undisclosed debt arises.

Auction Purchases

Buying at an auction is probably the riskiest foreclosure purchase. Unlike a normal real estate purchase, there are no real estate agents at auctions to assist buyers with the purchase. There is also no escrow, no title report, and no title insurance available at the time of purchase, as in a conventional real estate sale. And in many cases, auctions are a cash-only sale.

Another stipulation in auction sales is that the successful bidder of an auction purchase receives "No Warranty of Any Kind," meaning there is no assurance that there are not other liens or loans on the property. In addition, you will not receive a disclosure from the seller regarding the condition of the property.

Before any auction takes place, an Auction Notice is filed. The opening bid is set by the lender and is based on the full amount owed on the loan, including principal, interest, late charges, penalties, and foreclosure fees, as of the date of the auction.

Before attending any foreclosure auction, make sure you research the property. Since these purchases are "as is" with no warranties given, no title insurance provided, and in most cases are cash-only, you need to know as much as you can about the property you're bidding on before the auction takes place.

REOs

If you buy a property from a lender after an auction is completed, it is referred to as a real estate owned (REO) purchase. A realtor will put an REO property up for sale in a similar fashion as a regular real estate sale, making REOs probably the least risky way to purchase a foreclosure. Unlike a pre-foreclosure seller, who could simply disappear after the sale is completed, a bank lender will still be available after the sale if unexpected mishaps aren't disclosed. And since most lenders have Web sites, it may be easier to research an REO before the purchase takes place, unlike an auction foreclosure, which may require more extensive research practices.

Educate Yourself

As with any major purchase, it is always important to do your homework before investing in real estate. There are books, classes and Web sites that will help you become a more informed purchaser, and there may be real estate investor groups in your area that could make the purchasing process a bit easier. Another resource to research foreclosures is www.netronline.com, which lists real estate information, public data, and various real estate-related offices by state.