When a mortgage company is forced to foreclose on a property, it’s typically the action of last resort. Lenders won’t be lenders for very long if they establish loans and then later foreclose on them. Lenders offer workout arrangements and loan modification options to try and keep the loan out of their own REO (Real Estate Owned) portfolio; however, if such arrangements cannot be made, the lender has no other option but to foreclose on the property and put it up for auction.
If you’ve never been to a foreclosure auction it’s probably very much like you’ve imagined it. The auction is held at the county courthouse on a regularly scheduled date. The lenders who own the properties release the addresses of available homes to be auctioned along with a minimum bid amount. You won’t be able to buy a foreclosed home for $1.00 for example because the lender has instructed the county to start the bidding at a particular amount.
At the auction, you will compete against others for the properties as the county goes down the list one by one. When you’ve successfully won the bid, you’ll need to have your funds readily available. Unlike a conventional loan, you won’t have 30 days in order to close your deal. Instead, while you’ll be able to make a cash deposit on your property, it’s expected that you’ll need to pay the full price immediately. Depending upon where the property is located, you might have to pay within 24 hours or at least the next business day. That means your financing needs to be lined up and ready to go.
A private money loan will be able to help finance the property quickly while at the same time provide additional funds needed for repairs. Let’s say you see a property up for auction that catches your eye. You know the neighborhood and you understand that the property once rehabilitated will sell for $250,000. You visit the property beforehand with your contractor and determine the home will need about $25,000 in repairs. The minimum bid for the foreclosed home is set at $125,000. You arrange for financing and make the winning bid of $200,000. You make the purchase and begin the repairs. After 60 days, the property is completed and ready for sale. You price the home a bit below market value for a quick sale and soon thereafter a buyer shows up and makes an offer of $225,000. Your gross profit is then $25,000.
Real estate investors will suggest that you visit a foreclosure auction and watch the process so you’ll understand what you’re getting into. Once you get the feel for the dynamics of an auction and you have your private money loan ready to go, you’ll understand why real estate investors tap into the foreclosure market.