Issue Date: August 31, 2005

Buy Your First Foreclosure

By Jody Zink
Licensed Realtor in Ohio & Michigan

The majority of new investors I meet say they’re interested in real estate because they know of someone else who made money. There is certainly a lot of money to be made! It is not, however, always as easy as what the infomercials preach during the wee hours.

The key to any good buy is finding a motivated seller who has a pressing reason to sell quickly and below market value. REALTORS can have great insight in spotting them.

If you’re new, keep this in mind: Houses attractive to investors usually aren’t the pretty ones. It’s like going to the clearance rack and picking through a few things until stumbling upon something that suits you.

We’ve all heard about foreclosures. This is when owners lose their property to their lenders, usually for nonpayment of their mortgage.

The foreclosure process goes something like this: Payments stop and the lender puts the mortgage in default. After a legally determined amount of time, the lender sells the property to the highest bidder at a courthouse Sheriff’s sale. Before that sale happens, however, owners coming to terms with their misfortune typically qualify as motivated sellers. Therein lays an investor’s opportunity.

Finding foreclosures is cake if you know where to look. Acting on a foreclosure takes courage. Getting a name and phone number is a start. Some people going through foreclosure are quite bitter about it. It should come as no surprise that they may not want to talk to you. If they’re at least agreeable to listen, explain how you might be able to help. You might be able to make up back payments and penalties to save the owner’s credit rating (and maybe some cash depending on the seller’s equity). In exchange, you get title to the property. Could be a win-win.

But wait! Before making any kind of offer to the owner, run the numbers as accurately and honestly as you can. Beware that their loan may not be assumable. If you have to secure a new one, figure those costs to run about 5 percent of the loan amount with points, fees and title insurance. Back payments could amount to as much as six months worth of payments or more. The owner will also likely have incurred penalties for each month the payment was late. All these are costs you may have before even acquiring the property. Once you’ve got it, don’t forget to figure in your property taxes and refurbishing costs if the house needs work. You may find bailing out the owner with these added costs may not be worthwhile. If it isn’t, no sweat. You have gained some invaluable knowledge and just averted a sinking ship!

Now let’s go back to the Sheriff’s sale. Can I buy at the foreclosure sale? Yes, but it can be tricky. You don’t always know what you’re getting. Typically you won’t receive any guarantees to the property’s condition or title insurance. And your offer usually must be in the form of cash, so you’d need to work out financing details ahead of time.

It is not unusual for the lender to be the highest bidder at these sales, upon which, the bank takes control of the property and tries to resell it as real estate owned property (REO) through a real estate agent. Banks are anxious to sell them, but not so anxious that they’re willing to take a loss.

So what’s this mean for the investor? There can be advantages working with lenders rather than a home seller in a foreclosure. First of all, there’s no crying. A transaction with the bank is potentially much cleaner. Sometimes the bank will even help you finance and get title insurance.

Like any investment, there is risk. But where there is risk, there’s also reward. (Let’s focus on reward. After all, I’m usually optimistic.) In real estate, the risk is often directly proportional to knowledge. You won’t know if there’s a good deal to be had without getting a little dirty.

If you think you’re serious, give yourself at least six months to see if real estate investing might work for you. I suggest first-timers do not go it alone. Find a REALTOR who will take you by the hand through the first transaction. You won’t make any money talking about it, or thinking about it. You must take action.

Jody Zink is a licensed REALTOR in Ohio and Michigan with the Loss Realty Group. Her column appears every other week in the Toledo Free Press. She can be reached at jody@jodyzinkrealtor.com or 419-725-1881.