In every foreclosure procedure, three different real estate investment opportunities open up to house buyers – Default Phase, Auction Phase and REO Phase. Each stage offers its own risks and rewards, highlights different possibilities and follows different procedures for a successful purchase.
The first stage of foreclosure, also known as the Default Phase or Pre-foreclosure, involves working directly with the lender or homeowner. Since you are eliminating most of your competition by being the first to negotiate, your goal is a successful win-win scenario – the homeowners make a fair sale, while you buy the repossessed home with a significant discount.
If no investors or homebuyers negotiate with the seller during the default phase, they can still purchase the homes in foreclosure during the Auction or Sale Phase. During this stage, you compete against fellow investors, homebuyers and lenders because the property will be publicly auctioned off to the highest bidder. As such, the foreclosure process moves extremely fast.
The REO (real estate owned) Phase is the easiest stage to buy foreclosed homes because this is when the lender takes back the property in order to cut its losses. However, since the lender does not want the repossessed home because it is no longer in the real estate market, he or she is motivated to sell the property as fast as possible.
According to experts, buying pre-foreclosed homes is a great investment opportunity if the process is done correctly because discounts could range from 20 to 30 percent. Another advantage is that if structured properly, buyers can save money from a low cash down payment. Moreover, flexible agreements are possible because you are negotiating with the homeowner directly.
On the downside, buying pre-foreclosures can also be a difficult process since property owners are not always easy to contact. Plus, many investors want to take advantage of lower prices during the default phase, so don’t be surprised to have a lot of competition. Of course, the most difficult part of buying pre-foreclosed homes is researching through courthouses, which can be burdensome. As such, you may need to look and negotiate with lien holders.
The good thing about buying during the Sale Phase is that investors can receive up to 45% discount and immediately earn a first-rate return on investment. Compared to pre-foreclosures, buyers can really take advantage of auctions and get amazing deals.
On the other hand, auctions are usually postponed. These repossessed homes for auction are rarely open for inspections. Because of these, buyers are required to perform a title search, which can be extremely costly.
When buying REO properties, buyers will have no worries because the lender will act as the main lien holder and offer a clear title. Usually, the lender has already paid property taxes and other arrears before the sale.
Since most lenders allow a significant discount to buyers for them to accomplish house repairs, there will be a larger possibility of low ROI. While many first-time buyers will rejoice with a 15% off market values, many are not aware that they can save up to 25% for the newly bought bank home.
Foreclosure investments can provide buyers outstanding discounts and profits. However, since any of these phases can present certain risks, it is best to do your own research before buying a repo home.