Investing in Foreclosures

What are the Opportunities?

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

Market Watch

The market continued to erode modestly over the summer months. This is marked by a slight increase in the inventory of available properties to a 10.5 month supply, and the median sale price declined slightly to $550,000.

It’s very likely the turmoil in the mortgage markets had a noticeable impact on the market making purchases of homes more difficult for all but the most financially qualified buyers.