The opportunities for making good investments in
foreclosures is widely misunderstood. The softening
real estate market, which has led to more
foreclosures occurring, makes this a topic worth
spreading some sunshine over.
The primary reason potential investors are drawn to
the idea of foreclosures is the basic human desire foe
a bargain purchase. There is no other reason I can
think of that would suggest a foreclosed property
would be better than any other property as an
investment. The problem lies in the fact that in almost
all cases there are no bargains in foreclosures. There
are no bargains because there is no equity (the value
is less than the total of the loans), and that's why the
property is the subject of foreclosure.
During the long local real estate boom, there were
very few foreclosures. The reason is a homeowner
who got into financial trouble could generally sell the
property prior to a foreclosure and realize their equity.
Now that the softening market has eroded equity, in
some cases to the point the loan balance exceeds the
current value, troubled owners cannot sell and those
properties are often the ones the subject of
foreclosures.
No one wants to sell below fair market value.
Whether you consider a property prior to the
foreclosure sale or afterward when the lender owns it,
no one wants to sell below fair market value. To
achieve a bargain purchase, however, an investor
must buy below fair market value. Since I am
assuming that no rational seller is selling below fair
market value, I struggle to see the opportunity for a
bargain purchase.
Buying on the courthouse steps
The only other opportunity would be to buy a property
at the trustee's sale itself. This is very tricky business
and not for the uninitiated. It also requires cash, as
trustee's sales to not allow the typical financing and
inspection contingencies that protect buyers in most
sales. Even at trustee's sales there is usually no
equity, and that's why the property is being forecloses
to begin with.
The one possible exception would be an instance in
which the present owner had equity, but had dallied in
selling to realize that equity, and the trustee's sale
was imminent. A potential investor might strike a deal
to purchase below the market, but give the seller a
portion of their equity, which would all be lost if went to
trustee's sale. It's my guess these opportunities are
few and far between.
It's possible that the only people making money in the
foreclosure field are those selling books and tapes
and otherwise selling service to investors chasing
after the elusive bargain. My suggestion is to fish in
other ponds for investment
