Oct 21, 2020

Should I Buy a Foreclosure?

Do you still think foreclosures are good deals?

Think again.

In the current real estate market, foreclosures are not good deals.

Before purchasing a foreclosure, remember a basic rule of real estate investing: You need a motivated seller willing to sell you the property at a discount.

Why Foreclosures Used to Be Good Deals

In 2009 and 2010, lending institutions were still dealing with the 2008 real estate crash fallout. Major lenders across the U.S. were highly motivated sellers because they had thousands of bad assets and bad loans they needed to liquidate. 

As a result, banks unloaded residential and commercial real estate at a deep discount. The mass movement of foreclosures caused a deflation in the real estate market until 2011 when the market started to regain upward mobility.

The Current Real Estate Market

Right now, banks are not motivated sellers.

Consequently, larger banks with foreclosures on the books will not offer good deals to real estate investors because lenders have the capital and resources to renovate properties and list them at retail prices on the real estate market.

There may be some exceptions with small community banks with several bad loans and mortgages they need to get off the books. In these cases, banks may be motivated to sell you a property at a discount. Otherwise, investors can no longer spend a lot of time and money investing in foreclosures at deep discounts.

Why Are Investors Still Interested in Buying Foreclosures?

Why are investors still looking for foreclosures?

The sudden interest in foreclosures has occurred as a result of the COVID-19 pandemic. The trend toward investing in foreclosures is not totally unfounded. After all, there is a current nationwide real estate crisis in which thousands of homeowners are in danger of losing their homes due to mortgage non-payment. In a normal economy (or at least under normal circumstances), many of these homes would go into foreclosure after 90-day delinquency.

However, the 2020 CARES Act protects homeowners with federally-backed mortgages. Banks may not legally foreclose on homeowners with past-due mortgages because mortgage holders may have the option of extending or modifying the loan once the pandemic has ended. Under the act, they do not have to pay the mortgage for 12 consecutive months. The loan can go into forbearance without the bank foreclosing on the house. 

Current data has shown that thousands of homeowners whose mortgages are 90 days to six months past due are applying for the CARES act benefits.

Should Real Estate Investors Avoid All Foreclosures?

Does this mean that all foreclosures are off the table? 

The answer is no.

There are potentially great deals on the market. However, to take advantage of foreclosure discounts, you must have a strong relationship with asset managers at banks holding the foreclosures. As you build your real estate investment portfolio, you can foster strong relationships with bank asset managers through networking strategies, using whatever means necessary to build your credibility.

Once you have built your reputation as a reputable investor with a solid track record, you will have opportunities to access a bank’s portfolio of foreclosure discounts. Until then, most bank asset managers will work with you unless you are ready to buy properties in bulk. For instance, If the bank has a portfolio of ten bad loans, you will have to buy all ten properties at once.

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