How To Buy Foreclosure Property To Rent?
Buying a Foreclosure Property is among the top 5 ways that I have discussed in my earlier article to make money with Real Estate. You buy a property at a discount, rehab it, and then sell it for a Profit. Without a doubt, a good way to make a lot of money if done right. But here, we are talking about buying a foreclosure property to put on rent. Renting requires you to hold the property for a long time. And if somehow, you invested in a shitty foreclosure, you will be stuck with it forever.
When You Buy a Foreclosure Property, you need to be very careful. You are buying something that was given up by its previous owner due to default on the Mortgage. There can be lots of hidden layers with this property. Try to understand what caused the owner to make the default. This way you can learn a lot about the property, you are going to invest in. Perform Due Diligence before you make an offer and never hurry to close on a foreclosure property fast.
What is a Foreclosure Property?
When a homeowner or an investor starts to make a default on paying back the money owed where the said property as collateral. Then the lender forfeits the property and puts it up on sale to extract the money owed by the borrower.
In general, you will find a Property in a Foreclosure due to.
- Foreclosure by the Banks: These are the properties that are foreclosed by the banks due to Default on Mortgage Payments by the Borrower.
- Foreclosure by the Government: When the Homeowner is unable to pay taxes, the Government foreclosed on that property under the Unpaid Tax Liens.
What are the Stages of Foreclosing a Property?
As an investor, it is important to understand the stages of how a property goes into foreclosure. Because if you can get hands-on the property in the initial stages, there are chances of getting a better deal.
- Pre Foreclosure Properties
A Pre Foreclosure is a stage when the property is about to get into foreclosure but has not yet entered into it. The Borrower is struggling to make mortgage payments and receiving notices from the lender to make payments. Generally, the lenders take 3-6 months after payment defaults to actually put the property in foreclosure. Buying a Property during a Pre Foreclosure, you mostly work with a motivated seller. And there are high chances of securing a good deal.
- Auction of Foreclosure Property
Even after the reminders, the owner was unable to make the payments. The Bank or the lender then finally foreclosed on the property. At this time, you can buy this foreclosure property at an auction held by the lender or the trustees of its institution.
Banks and lending institutions want to quickly recoup their money. So they try to sell the property as it is without even making any of the necessary repairs. During these auctions, the main motive of the lender is to extract the money owed by the borrower. They necessarily don’t try to profit from the auction. There can be a chance that you can secure the property at a very high discounted price.
- REO (Real Estate Owned Property)
Sometimes, the lender is unable to sell the foreclosure property in the auction. And ya! for the obvious reasons that we will discuss in sometime within this article. So, when the property isn’t sold at the auction, the property goes in the open market for sale one more time.
The Lender now gets the ownership transferred on his name and the property is completely owned by the bank. Usually you will find these properties sold through the channel of the real estate agents specialized in foreclosure properties. Or, you can find these properties listed on MLS or other such portals.
So, at what stage you should buy the Foreclosed Property???
→Buying at a Pre Foreclosure stage, you can have the due diligence on the property very well from having an appraisal to home inspection. The only downside is there can be tenants already living on the property.
→When you buy the foreclosure property at an auction, you might get it a very low price and completely vacant. But there are chances of you having huge repair costs after buying the property. Because at this stage, the lender sells the property as it is and you have no chance of seeing the property from inside before the purchase.
→Buying the Property from REO, you will get a discounted price but not much. You can expect to pay about 10% less than the original market price. Though there are still chances of securing a good deal if the property is listed for a long time.
Is It Worth Buying a Foreclosure Property?
Though I feel there are lots of ins and outs in buying a foreclosure property. And, the investor must be very careful when dealing in foreclosure. But still, I feel buying a foreclosure property is worth your time and money. Done right, a Foreclosure Property has enough potential to be among the wise investments.
-
You Save Money with Foreclosure Properties
With absolute certainty, you save a lot of money when you invest in Foreclosure properties carefully. Most Foreclosure properties are selling at a 10%- 30% discount from the current market price. Imagine buying a $250,000 property at only $190,000. These are the types of deals, you can get with Foreclosure properties.
You may be chasing property in one locality from long but all the properties that are on sale are beyond your budget. But now, due to foreclosure in the same locality, you can buy a property there at a discounted price that too in your budget now.
-
Forced Appreciation With Foreclosure Properties
You are buying a property that has a lot of scope of improvement. This is when the concept of forced appreciation comes into play. You buy a property, make improvements, and force appreciation into it. The benefit, you have access to free equity from Day One.
If we again take into consideration the $250,000 property that you can buy at $190,000 due to foreclosure. Imagine if you buy this property, do some rehabbing and your property appreciates to $250,000. Isn’t it great?
Let’s suppose, it cost you $10,000 to make repairs on this property to bring it back to market prices. So, technically, you are just putting $10,000 in the property, but now have access to $50,000 worth of extra equity. A $40,000 profit from Day one.
How to Buy Foreclosure Property To Rent?
In this section, you will learn how to buy a Foreclosure property the right way. From finding the Foreclosure Property to closing the deal, you will learn everything.
1. Getting a Mortgage For a Foreclosure Property
Unless you have all the cash sitting in your account to buy a foreclosure property. You are required to obtain a mortgage to make the purchase. And if you see, you are in the market to buy something that its owner or the lender wants to get rid of it as fast as possible.
So, it is important that you sort the financing part prior to entering into the foreclosure deal. And, getting a pre-approval is what you should do when you are to buy a foreclosure property.
- Having a Pre Approval can help you close on the deal with confidence.
- With a Pre Approval, you will have an edge over other buyers and the seller will prefer you more while selling the property.
- With a Pre Approval letter from your mortgage lender in your hand, you can negotiate on the prices as the seller can close the deal faster and recoup its money.
- When you get pre-approved, you will get the idea of how much you can afford. This way you can narrow down the properties accordingly.
Remember, it is only with Pre Foreclosure and REO Foreclosure Properties that you can secure the mortgage the regular way like the Conventional Loans and the Government-Backed Loans.
But when you are to buy a foreclosure property in an auction, the seller requires you to make immediate payments. In some auctions, even you need to deposit a 5%-10% bid amount as an advance. You can’t rely on a mortgage if you are purchasing foreclosure at an auction. Though you can work up with a hard money lender and refinance the property afterward in a conventional way.
The Mortgage Options Available for Foreclosure Property Buyers are
- Fannie Mae’s Homestyle Renovation Mortgage
- Traditional FHA 203(K) Renovation Loans
- Streamline FHA 203 (k) Renovation Loans
- Equity Loans (Using Equity From Your Preowned Property)
Types of Mortgages Credit Score (Minimum) Down Payment
(Minimum)Debt To Income Ratio
Fannie Mae’s Home Style Renovation Mortgage 620 3% for one-unit homes.
5% for manufactured homes.
10% for one-unit second homes.
15% for two-unit homes.
25% for three- to four-unit homes.45%
Traditional FHA 203(K) Renovation Loans (For Rehabbing Works above $35,000)* 580 3.5% (For 580+)
10% (Above 500)43%
Streamlinel FHA 203(K) Renovation Loans 640 3.5% 43%
Read: How to come up with a Downpayment if you have no money to start?
2. Where to Find the Foreclosure Property?
There are lots of foreclosure properties available for sale in the market. But where will you find them? Most importantly, where can you find the genuine foreclosure listings? Because most of the foreclosure you see that is listed somewhere are outdated and have sold already.
-
Working with Real Estate Agents
The Real Estate Agents who are specialized in Foreclosures have a database of a lot of foreclosure properties that never make it to public eyes. These agents have close-knit networks and have access to various MLS (Multiple Listing Services).
Not only can they help you find a good deal but can also help in a lot of tasks while securing a deal. You can locate these real estate agents in your local real estate groups and by talking to agents in your area.
-
Bank Websites
It is very unlikely that the bank deals with an individual buyer who is interested in buying one of their own foreclosure properties. Banks generally list all such properties on their websites and assign agents to work with individual buyers. You can find foreclosure properties listed on the websites of all major lending banks like Bank of America, Wells Fargo, Chase, and the U.S. Bank.
-
Government Websites
The government also maintains data of Foreclosed Properties on several of its websites. However, in order to make an offer to the government website listed foreclosure properties, you may need a real estate agent to make an offer on your behalf. Though some may also allow you to make your own offers.
→HUD Website: On this Website, you will find a list of Foreclosed Homes by the U.S. Housing and Urban Development Authority.
→Department of the Treasury: You will find those properties in the Department of the Treasury that are foreclosed by the IRS.
→Fannie Mae Website: On the Fannie Mae website, you can find thousands of foreclosed properties in different localities around the country.
-
Auction Houses
Auction Houses have thousands of Foreclosure Properties at their bay, even selling over hundred of properties in a day. You can easily find a foreclosure property at these auction houses.
-
Multiple Listing Websites
There are various websites on the internet that have multiple foreclosure properties listed by either direct homeowners or real estate agents. These websites include
-
Searching Public Records
You can find those foreclosed properties in public records that are no longer owner-occupied and have been transferred in the name of the lender completely. Just visit your county’s record office to get your hands on the foreclosure properties of your area.
-
Driving Around Neighborhood
You can drive around your neighborhood to get a glimpse of what properties can be possibly on the verge of foreclosure. There is a good chance of finding such properties by putting some attention on various types of signs like
→Having notice of Foreclosure on the Property
→Some Vandalized Properties
→Property Landscape is falling apart
3. Performing Due Diligence on the Foreclosure Property
It is very important you do your due diligence while buying a Foreclosure Property. Performing Due Diligence, you are reducing the risk of investing in the wrong property and regretting later.
-
Inspecting The Property
The biggest concern with foreclosures is closing on a property that requires major repairs. You don’t want to invest in a property that is in terrible condition. However, the real catch here is that you can check the condition of the property in a pre-foreclosure stage and when the property is listed as REO`s.
But when you buy a foreclosure property at an auction, you aren’t allowed to enter into the property to check the condition of the property first hand. In such cases, it is always advisable that you check the history of the property.
→The Property that looks good on the outside is mostly also good from the inside.
→Whether the property was owner-occupied or rented to tenants. There is a high chance that the property is in good condition when it was owner-occupied compared to when it was rented.
→You can always talk to the neighbors about the previous owners of the property. It can give you a glimpse of how well the property was kept by the owners.
-
Check For Pending Liens
When you buy a Pre Foreclosure Property or buy a property at auction, there are chances of having pending liens on the property. You don’t want to end up in a situation where you buy a property worth $200,000 which may be having $50,000 worth of lien on it. It is always a good idea that you work with an attorney to rule out any chances of occurring to pending liens on the property.
-
Buying an Already Occupied Property
When you deal with pre-foreclosures, the properties are already occupied. And if the property is occupied by the tenants, you can experience trouble after closing the property. There can be a chance that the tenants that are living on the property will refuse to leave even though you want them to leave. You have to anyway honor their existing lease with the previous owner.
Read: How to Buy a Rental Property that is already Occupied?
4. Making an Offer to Buy a Foreclosure Property
It is important that you make the right offer to buy a foreclosure property. Foreclosures are selling at a lower price than the market prices which makes it a hot deal for other investors also. Both the investor and the seller are in a hurry to close the deal faster.
In such cases, you can occur to FOMO (Fear of Missing Out). But remember, never to get too motivated to pay more than what the property is worth. Also, you can`t make an offer which is too low as it reduces your chances of securing the property. You need to put a close attention to what you offer.
It is always a good idea to work with a real estate agent in such cases. The real estate agents are aware of the markets and can help you make the right offer. Also, you can get the idea of the price of the property by looking at the comparable properties of that area.
However, an offer of 80% appraised value of the property minus the estimated repair charges is a good bid for a foreclosure property.
5. Closing on a Foreclosure Property
You made the offer. The seller accepted it. Now you are ready to close on the property. But do remember, there are redemption laws that can affect your chances of closing on the foreclosure property.
A property may be in foreclosure but that necessarily doesn’t mean the homeowner has to vacate the premises immediately. The Right to Redemption allows the homeowner to redeem and buy back the property until the court confirms the sale. The Redemption Period can stay anywhere from 6 months to 3 years depending upon the laws of the state.
The Bottom Line
Foreclosure Properties are a great way to buy the property at a discounted price. You sure get a little cushion with the discounted price which can ease your Rental Journey a bit. But remember, buying a foreclosure property is like betting on an opportunity where things can take a downturn. Be careful because buying a Foreclosure Property is not always rainbows and sunshine.
And, once you are up and ready after securing a foreclosure property. Here is an excellent resource for you to Start Your Rental Business in easy 14 Steps.