Real Estate Investing in Foreclosure Properties for Beginners
Interested in buying foreclosed homes as investment property to fix and flip or hold onto as rental units? You’ve come to the right place.
I’ve been investing in foreclosed homes for a few years now and think it’s a smart way to go to find real estate at a discount to market value. (Check out my story buying a distressed home at age 20 here.
Here is a short video on investing in foreclosure properties as I share a few tips and basics for the beginning real estate investor.
What is foreclosure?
When a homeowner takes out a mortgage on a property, they sign a promissory note saying that they promise to pay back the loan to the lender. A mortgage document is also signed which backs up the loan by using the house as collateral.
In the event the homeowner stops making payments, the lender can take possession of the home and sell it to recoup their losses from the loan.
Resources:
- Real Estate Investing School: How to Retire on Passive Income
- Personal Finance School: How to Maximize Money
Benefits of Investing in Foreclosed Homes
As a real estate investor, you want to bargain hunt and find homes that are under valued. One of the best places to look is foreclosed homes that are owned by the lending institutions.
Buying foreclosed homes at auction can be risky, so most beginning investors will focus on Real Estate Owned (REO) properties which are homes that were foreclosed on but didn’t sell at auction.
In other words, the banks had to retain title of the property after no one bought it at auction and now they are listing it on the market for sale via a real estate agent.
Banks are concerned with recouping the amount owed on the loan which means you have the opportunity of getting an undervalued investment property.
The bank will price it below market value in most cases depending on the current real estate market to help it sell faster and to get it off their books (balance sheet).
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How to Find Foreclosed Homes for Sale?
The best recommended resources I can give you include the following:
- Speak with a real estate agent
- Speak to a local bank
- Search on Zillow
- Search on other online websites
Speak with a real estate agent
There are agents who specialize in foreclosed homes and have a listing inventory they can send you to look through.
If the agent doesn’t have an existing list, they can go onto the MLS and pull homes for sale. The MLS is a platform only agents have access to and it allows them to screen for specific property characteristics.
Your agent will screen for REO homes and you can set a certain amount of days the home has been for sale if you’d like.
For example, you can screen for homes that have been for sale at least 90 days because this means there is less competition as many investors have already bypassed this property and were not interested.
It also could mean the bank will be willing to come down on price even more since the property has been sitting on their books for some time and they desperately want to get rid of it and earn income from the sale.
Speak with a local bank about REO Properties
There are bound to be banks in your city who have foreclosed homes they are sitting on.
You can contact these banks and ask for a list of REO properties as well as a list of properties that are going to auction soon and what dates they’ll be at auction.
Search on Zillow for Foreclosed Homes
I mentioned that real estate agents have access to the MLS earlier.
Think of Zillow as your MLS platform. Zillow allows you to screen for different properties based on different criteria you set.
You can scroll the navigation menu and check different boxes if you want to set specific criteria. One criteria you can set is foreclosures.
Check out this tutorial on how to use Zillow:
Search on Other Websites for Foreclosed Homes for Sale:
There are several websites that focus solely on finding foreclosed homes for sale. These websites often require membership or payment but it will save you time.
You can buy foreclosure lists from these websites and begin screening through the list to see if any of the properties meet your investing criteria.
There are also some free websites that you may come across listing foreclosed homes for sale. These can include but not limited to:
- Trulia
- Realtors.com
- Redfin
- Loopnet
Drive Your Local Neighborhoods
Another great way to find foreclosed homes that not everyone else knows about is driving local neighborhoods. It’s a strategy many refer to as “driving for dollars” and is very effective.
While driving through the neighborhoods, keep an eye out for vacant looking houses, distressed houses, poor landscaping upkeep, etc.
Another giveaway is colorful stickers and notes taped on the front windows or doors of the home. These are often public notices that detail information about the foreclosed property and sometimes auction date information.
Final Thoughts on Foreclosure Investing
Overall, as a real estate investor you are hunting for properties you can acquire at a discount to their true value.
Start by looking at foreclosed homes that have sat awhile that nobody else wanted. Eventually the price will come down enough to where the numbers make sense as an investment.
Run your financial calculations (free spreadsheet) on each property you analyze and determine a target purchase price.
Then make that offer to the bank even if it seems ridiculously low compared to the current listing price because you never know, they may accept your offer if they are desperate enough.
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