Pre-Foreclosure Investing

What is Pre-Foreclosure investing?
The profit margins are huge in any foreclosure and this is what makes foreclosure extremely lucrative. However, this is a tricky arena and requires a lot of knowledge. A wrong decision in the foreclosure can actually ruin out your entire capital and enthusiasm for all real estate investing.

There are three fundamental approaches to buy properties in foreclosure depending on the stage of the foreclosure process:
► Buying pre-foreclosures (when the property is bought before it goes for auction)
► Buying at foreclosure auctions
► Buying from creditors after a foreclosure sale (when there are no bidders in an auction, the real property automatically goes to the lender). This process is also known as buying REOs or real estate owned (and also Repos or repossessions). This is also referred to as “corporation owned” and “lender owned”.

REO:
REO is possibly the least risky method of buying a property as it is somewhat similar to a regular sale. It is not mandatory for the seller to provide the buyer with a seller’s disclosure. In the state of California, a lender who gains a property through foreclosure is not bound to show the disclosure to the buyer. Nevertheless, if problems and issues crop up after the sale, the buyer has every right to sue the lender. The lender then can pay the cost to put things in place.

What are the risks involved in buying pre-foreclosure real properties?
Buying properties from pre-foreclosure might be a little risky option. There might be chances of the owner disappearing after the sale and you might land up with nothing. There might also be some unmentioned details which can be conveniently summed as “forgotten”. Unpaid property taxes as well as other real estate related expenses become the buyers’ responsibility if he has missed out on them. Complications like signatures of other people who have not signed the deed may also appear. Certain states like California have introduced special laws to handle such situations when the original owner has defaulted on his payments.

If the sale is not done according to the law, the seller has every right to annul the sale and declare that such a sale has never occurred. There are no excuses for not knowing the relevant laws and it is important for all to know the laws of the state when one is investing in pre-foreclosure.

The next question that arises is whether the seller can legally transfer the property to the buyer. What if he is already in bankruptcy?

In such a case, the deed is not valid unless it has gone though the bankruptcy court. The buyer needs to call the local bankruptcy court for the details. Of course there is always a possibility that the buyer had filed the bankruptcy in some other court which you had not contacted.

If the property was sold in a condition that had made the seller indigent, and the sale was made at a much lower rate than the market value, the bankruptcy trustee can ask you to deed the property into the bankruptcy estate on grounds that the sale was a “fraudulent transfer” where the seller had deprived his lenders of an asset that could have helped him to pay off his debts. In this situation, the buyer becomes the creditor of the bankruptcy estate (not something that someone would have actually planned while buying a pre-foreclosure deal). Such incidents are fairly common as many pre-foreclosure buyers miss out on certain inspections because they are in a hurry to close on the deal before a foreclosure auction.

What are the risks involved in buying from foreclosure auctions?
Purchasing property from a foreclosure auction is the riskiest of all methods. This is because during an auction, the buyer has no real estate agent or guide to take him through the whole process. In almost all the cases, the auction is an all cash sale. You might be given a month’s time to pay the money, failing which you not only lose the property but also the deposit. The winner at the foreclosure auction receives a “no warranty of any kind” document which makes the buy very complicated. If by chance, you have bought an occupied property, eviction becomes your responsibility.

Thus before investing in foreclosure, do your homework properly. It is essential to have a strong foundation before you start venturing into such investments.