Foreclosure is an unfortunate experience for the homeowners who are involved in the process. Nobody wants to lose their home. But it also represents a unique investment opportunity for home buyers. In fact, buying a foreclosed home often means that you can get the property for less than its true market value. Upon hearing this, most people immediately want to know how it's possible. Here's how it works.
Buying Foreclosures Can be a Good Investment
The previous paragraph states that buying a foreclosure "can" be a good investment, suggesting the possibility (but not the certainty) of a good deal. This is what attracts people to the practice of buying foreclosures in the first place, the possibility of getting a home for less than market value.
Some people use this practice as a way to purchase the home they intend to live in. Other buy foreclosure homes for a living, turning them around for a profit and moving on to the next deal. Regardless of which camp you fall into, there are certain things you need to know about buying a home in foreclosure before you venture into the process.
Why It's a Good Investment
Foreclosure can be an expensive and time-consuming process for the lending institution. Lenders are good at making loans -- it's what they do. But they're not so good at managing and marketing foreclosed homes. On top of that, many foreclosure properties need maintenance and/or repairs, which adds even more costs that the lender must pay.
With this in mind, it's easy to see why most lenders want to avoid the foreclosure process as much as the homeowner wants to avoid it. And when they do take possession of a home, they want to sell it off their books as quickly as possible. Typically, this is done through a real estate auction. Many homes sold at auction start out below market value. And unless inexperienced bidders drive the price up at auction, the buyer often comes away with a great purchase -- below market value.
So the real estate auction is one way to purchase a foreclosed home, but it's not the only way. In some cases, the homeowner will avoid foreclosure by selling the home through a "short sale." In this scenario, the lender allows the homeowner to sell the home for less than the amount owed to the lender. Pricing a home this way will normally ensure a quick sale, which is what both the homeowner and the lender want.
The longer the lender keeps the non-performing loan (a mortgage that is not being paid by the homeowner), the more money they lose. That's why they are usually eager to get the loan off their books quickly, and it's also why lenders sometimes agree to short sale strategies in the first place.
So now we have talked about two ways the savvy investor / buyer can get a foreclosed property on the cheap. One is through a real estate auction. The other strategy is to buy a short sale.