You may have heard that purchasing a foreclosure or bank-owned property is a way to get a great deal on your investment. But the truth is, there is a lot more to think about before you decide which investment strategy is right for you. Like…
- Are you pre-approved for a mortgage?
- Do you have a home to sell?
- Are you up for doing a renovation and purchasing a property in ‘as is’ condition?
If your answer after these questions is “No, I just want a good deal to flip and make money,” then you may want to consider other investment strategies.
Steps to Getting a Good Deal on a House
My point is, if you are serious about buying a home, investing in real estate, and getting a good deal, it’s important to take the right action steps, in the right order before you decide on what property type (like a foreclosure) that you’re going to invest in.
Step 1: Get Your Mortgage Approval or Proof of Funds
In order for anyone to take you seriously about purchasing a home or investment property, you must have a mortgage approval, or proof of funds if you are purchasing with cash.
A mortgage approval that already went through underwriting is ideal, this will make you as strong as you can be compared to a cash buyer, without actually being a cash buyer. This is where the mortgage company has already run your credit and reviewed all of your financials – and now you just have to find a property and get the mortgage appraisal.
Proof of funds can be a statement from an online banking account, a home equity line of credit, or any other funds that you have fairly easy access to. Your name needs to be on the statement and you can cross out your account number and personal information.
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Step 2: Review your Financials
Your financial savviness and knowledge about your financial health can be great tools to getting a good deal on a house. The more you know about your purchase power, the easier it is to make smart financial decisions when purchasing your next home.
- What can you realistically do? Meaning, what can you comfortably afford (no matter how much your mortgage approval says) and what is a stretch?
- Do you want to pay off any other debt before you obtain financing or use your liquid funds for a purchase?
- Is there anything you can do to increase your credit and get a better interest rate?
Examine those aspects and make sure you have a clear picture of your finances.
Step 3: Accounting and Legal Set up
Will this next purchase be your primary residence or an investment property?
It’s incredibly important to discuss with your accountant the best way to purchase the home. If you are purchasing this property as a primary residence, it will go in your name or maybe a living trust. If you are purchasing an investment property, it is a good idea to purchase the property in a Limited Liability Corporation (LLC).
If you are obtaining financing, make sure your accountant and mortgage rep are on the same page when it comes to this.
Foreclosures and Short Sales
Is a short sale or foreclosure still the right investment strategy for you? Let’s explore! Now that you are set up with your financials, it’s time to dive into what a “foreclosure” actually is- and the difference between a short sale and a foreclosure.
When you’re thinking about short sales as an investment strategy, it should be called a long sale because they typically take a while… If you’re on island time and you can wait around for a short sale to get approved, then this could be an option for you. But, if you’re in a hurry and you need an answer quickly, a short sale is most likely not the best option for you.
So what’s a short sale?
A short sale means that an individual purchased a property and can no longer afford the monthly mortgage payment. Now, they owe more on the mortgage than they can currently sell it for, so they are looking to sell the property for short of what is owed on it.
Example Financial Situation:
Let’s take a look at how someone might find themselves in a short sale situation.
Current Market Value of Home: $450,000
Mortgage Balance: -$500,000
Selling Fees: -$30,000
Balance Owed: -$80,000
In this example, the owner can’t afford to pay the mortgage payments anymore. They also can’t afford to come to the closing table and pay off the $80,000 that they are short to the bank.
Lis Pendens and Pre-Foreclosure
Once the owner is 3 months behind on the mortgage payments, they go on a lis pendens list. Lis Pendens is a Latin word meaning foreclosure pending; it is commonly phrased as pre-foreclosure. You will see pre-foreclosure pop up on many real estate websites, like Zillow and Trulia.
Once someone is 3 months behind on their mortgage payments it becomes public record. Once it’s public record the property gets published on various real estate websites, tax records, and other relevant sites.
At this point, the owner can come up with the balance owed to the bank and get removed from the lis pendens list. But, sometimes these properties do in fact become short sales. Sellers can raise their hand and call in a professional for help to do a short sale. Other times, they will work out a refinance or loan modification with the bank so they can afford to stay in the property.
Other times, they just let the bank foreclose on the property, meaning they reacquire possession at a sheriff sale, and then it’s sold as a bank-owned property. Which brings us to the difference between a short sale and a bank-owned property.
Foreclosures: Bank-Owned Properties and REO’s
In a short sale, the individual still owns the property and is asking the bank to take a loss on what is owed on the mortgage. A bank-owned property means the bank has already acquired possession of the property through foreclosure and they are selling it as a bank-owned property. These can also be an REO, a real estate owned property.
In this case, the individual no longer owns the property. It’s now owned by the bank and the bank is selling it. Sometimes these properties are in terrible condition, sometimes they are in okay condition and other times, the bank will come in and do a renovation similar to an investor. They may choose to renovate in order to get a better return on their investment and generate a higher sales price. It really depends on the property, value, and the bank.
Purchasing Bank-Owned Properties
Bank owned properties are sold in a number of different ways. Most of them are put on the multiple listing service (MLS) and are sold through an agent that represents the bank as a listing agent. These agents are often referred to as REO agents. Other times a bank-owned property can be sold through an auction or online auction. Either way, your local real estate agent can sell you a bank-owned property and guide you through the process.
You can also purchase one of these properties at a Sheriff Sale at your local municipality. Towns across the county may do this differently, so it’s best to find out the process in that particular area before you dive in. It’s important to note that most of the time, you can’t see the property prior to purchasing at sheriff sale. You would also need to do a title search before the sheriff sale to make sure there are no additional liens or judgments on the property that you are unaware of.
What Should You Do Next?
If you are looking in New Jersey or Florida for your next investment, we’d be happy to help you. If you are looking in another part of the country, let us know we have referral partners nationwide that are well versed in investments! And if you have questions, comments or would like more information about available opportunities in your area, please message me and we will get right back to you!