Foreclosed property
There are excellent investment opportunities, but dangers, in foreclosed properties. First, you need to discover property to be considered. Then, you need to sort out the reason for foreclosure and decide whether or not you will face that same problem and if so, whether the price is adequately discounted. Reasons for foreclosure are discussed below: sources of foreclosed properties are offered.
Some reasons for foreclosure are:
Rent was too low caused by:
Discover the reason for foreclosure by asking the current owner, prior owner, broker or salesperson, neighboring property owners or tenants; reading the newspaper or other published material; being as resourceful as possible. Do not accept the first answer, especially if it is incomplete or illogical as an explanation. Keep probing until you feel you know the real reason. Then, evaluate the property.
If the problem is a ?fatal flaw?, such as a serious structural defect or another problem that you will acquire with the property, drop the property from purchase consideration. If it has a financing problem, such as a high interest rate or high loan balance that you will not assume or one that requires minor cosmetic improvements, pursue acquisition aggressively. In between are problems that are more difficult to address, such as remerchandising the space or altering the tenant mix. When the problem is due to market forces, such as rising vacancies or reduced rents, do not assume that your purchase will rejuvenate the market. Chances are that you are not the lucky charm that turns that market around.
SOURCES OF FORECLOSED PROPERTY
Savings and loan associations commercial banks and credit unions make mortgage loans. When foreclosure occurs, the same institution often ends up obtaining the property to manage and resell. Commonly, they will list the property with a broker. When their inventory is unusually large, it may be worthwhile for the institution to establish an in house management and sales staff. If a large number of properties are of the same type or are located in a limited area, the institution may hold an auction.
The Federal Home Administration (FHA) provides insurance against default on mortgage loans. When defaults do occur, the FHA often ends up with the property following the foreclosure sale. FHA defaults are not uncommon, which means the Department of Housing and Urban Development (HUD) usually has one of the larger inventories of repossessed properties. The FHA is part of HUD.
Occasionally, HUD will place advertisements in the classified section of local newspapers and they also list properties on their web site. Properties may include condominiums and multi family buildings. Properties must be examined carefully, for they may be in poor condition. Do not expect a luxury home in the inventory, but you may find some good property. Finally, HUD provides no financing, but the FHA may provide insurance on a loan you arrange with a lending institution or mortgage banker.
The Veterans Administration (VA) guarantees home loans for eligible military veterans. When a veteran defaults on the loan, the VA often buys the home in lieu of paying out the amount of the guarantee. When mortgage foreclosures have been frequent in an area, the VA is a good source of foreclosed homes.
Private mortgage insurance companies are another source. When a borrower defaults, the lender forecloses and often takes title. The lender then files a claim with the insurance company for a portion of the total losses incurred. The insurance company has the option of taking title to the property by paying the entire loan or reimbursing the lender by the amount of the claim thereby letting the lender keep the property. The oldest, and largest, is the Mortgage Guaranty Insurance Corporation (MGIC). These insurance companies may use a variety of marketing methods and have rigid procedure for entertaining bids. You may contact the company directly for information, or look for ads in the paper. Many properties are higher in quality and price than those held by the FHA and VA.
The Federal Deposit Insurance Corporation (FDIC) is a government agency created to insure deposit accounts at commercial banks. When a bank fails, the FDIC moves in and obtains the assets of the failed institution. These assets include any real estate owned (REO) by the failed bank.
The Federal National Mortgage Association, also referred to as Fannie Mae or FNMA, was created by the federal government to help organize a secondary market in mortgage loans. The agency uses a variety of methods to sell foreclosed property. It contracts with local brokers to list properties. It may also advertise in the local paper.
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