Foreclosure Investments

A foreclosure property is a home that has been repossessed by the lender because the owners failed to pay the mortgage. Tens of thousands of homes end up in foreclosure every year. Economic conditions affect the number of foreclosures, too.

Divorce, loss of employment or loss of life are the most common reasons for a foreclosure to occur. When one of these three things transpires and the home buyer is not adequately prepared a foreclosure is most likely to be the end result. Soon after one of the big three occur the homeowner is several months behind and the mortgage holder will not negotiate with the homeowner as special exemptions cannot be made for every home owner going through difficult times. It seems evil and possibly oppressive but very often a foreclosure can be the best thing for the homeowner except it ruins your credit history. Removing the pressure and allowing the homeowner to potentially live in the house for several months free of charges.

First of all, you should know that a home becomes a HUD (Housing and Urban Development) Home because someone that had an FHA (Federal Housing Administration) Insured loan, defaulted on that loan and was foreclosed by their lender. The lender in turn collects from FHA any losses they incurred from foreclosing. FHA is part of HUD. HUD in turn eventually gets the deed to the property and offers it for sale to the general public.

The reason lenders can recover their losses is that everyone, yes everyone who gets an FHA Insured loan pays what is called "mortgage insurance". These insurance premiums show up on your settlement sheet as an initial premium, which is usually added to your loan amount and then an additional monthly premium is added as part of your mortgage payment. These premiums go into a fund to payoff lenders.

If you are strapped for cash and looking for a bargain, you may be able to buy a foreclosure property acquired by the HUD for as little as $100 down.
With HUD foreclosures, down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from 5 to 20 percent. But when the property is FHA-insured, the down payment can go much lower.
Each offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price, not to exceed $2,000 but not less than $500.

The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner-occupants and investors. HUD Homes typically have been vacant for an extended period of time often without any utilities turned on. HUD is working with its private Marketing and Management contractors (M&Ms) trying to come up with an efficient way of keeping things like sump pumps running and getting utilities turned on before the appraisal is completed. Until recently, appraisers did not necessarily have the benefit of having gas and electric service. How could they give a reasonable determination of value without knowing if the plumbing, electric, heating and air conditioning works? These procedures have been changing and result in better appraisals. However, home inspections should be conducted to see for yourself exactly what the condition is so that you go to the settlement knowing what to expect from the home and what repairs will be needed.

Insured with an escrow means that HUD's inspections and appraisals indicate that there is less than $5,000 in repairs needed for the property to meet HUD's minimum property standards. This is important because you need to know that the minimum property standards are in fact very minimum. Do not give up on your right to a home inspection just yet. You need to know that HUD expects you to complete the repairs and then get your lender to inspect and approve the repairs before you can get the funds from the repair escrow. This means that you need to get someone to do the repairs that will wait to get paid when you do or you must lay out the money and get reimbursed by your lender.

Uninsured properties require you to pay cash or get some kind of rehab loan. These homes need more than $5,000 in repairs and often need $10,000 to $20,000 or more. HUD offers the FHA 203k rehab loan, which works very well if your "team" helping you knows what they are doing. An experienced real estate agent as well as a lender experienced in the processing of FHA 203k loans will help save you time and money. The interest rates and the amount of loan discount points is usually a little higher than a standard FHA loan, but you can often buy these properties at significant below market prices if you are willing to put up with the higher fees and the hassle of fixing them up.

Buying directly at a legal foreclosure sale is risky and dangerous, especially for the novice. Many experts, in fact, advise inexperienced buyers to hire an expert to take them through the process. It is strictly caveat emptor ("Let the buyer beware"). Usually, you buy a foreclosure property "as is", which means there is no warranty implied for the condition of the property (in other words, you can't go back to the seller for repairs). The condition of foreclosure properties is usually not known because an inspection of the interior of the house is not possible before the sale.
In addition, there may be problems with the title; though that is something you can check out before the purchase. It is important to have the house thoroughly inspected and to be sure that any liens, undisclosed mortgages or court judgments are cleared or at least disclosed.

One reason there are few bidders at foreclosure sales is that it is next to impossible to get financing for such a property. You generally need to show up with cash and lots of it, or a line of credit with your bank upon which you can draw cashier's checks.
In addition, only estate (probate) and foreclosure sales are exempt from some states' disclosure laws. In both cases, the law protects the seller (usually an heir or financial institution) who has recently acquired the property through adverse circumstances and may have little or no direct information about it.

In most states, a foreclosure notice must be published in the legal notices section of a local newspaper where the property is located or in the nearest city. Also, foreclosure notices are usually posted on the property itself and somewhere in the city where the sale is to take place.
When a homeowner is late on three payments, the bank will record a notice of default against the property. When the owner fails to pay up, a trustee sale is held, and the property is sold to the highest bidder. The financial institution that has initiated foreclosure proceedings usually will set the bid price at the loan amount.

Despite these seemingly straightforward rules, buying foreclosures is not easy as it may sound. Sophisticated investors use the technique so novices may find themselves among stiff competition.
Judicial foreclosure action is a proceeding in which a mortgagee, a trustee or another lien holder on property requests a court-supervised sale of the property to cover the unpaid balance of a delinquent debt.
No judicial foreclosure is the process of selling real property under a power of sale in a mortgage or deed of trust that is in default. In such a foreclosure, however, the lender is unable to obtain a deficiency judgment, which makes some title insurance companies reluctant to issue a policy.

Trustee sales are advertised in advance and require an all-cash bid. The sale is usually conducted by a sheriff, a constable or lawyer acting as trustee. This kind of sale, which usually attracts savvy investors, is not for the novice.
In a trustee sale, the lender who holds the first loan on the property starts the bidding at the amount of the loan being foreclosed. Successful bidders receive a trustee's deed.

One good source to learn about HUD foreclosures is their Web page.

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