Back in 2004, foreclosures accounted for a mere 2 percent of real estate transactions nationwide; the fact that that number has now risen to 30 percent in Q1, according to Zillow.com gives a good glimpse into the state of the real estate market. While foreclosures are typically not a good thing, for the savvy investor, they most certainly can be. Some investors are turned off by foreclosures, because they are typically older, lower priced homes in undesirable areas, but this trend is also changing.
New homes are now making up an increasingly larger piece of the foreclosure market. In fact it is estimated by Credit Suisse that new home foreclosures will reach 1.69 million this year, according to an article from Dow Jones Newswire. This surge in foreclosures is of course in part the result of speculators who bought with the hopes of flipping the homes at a quick profit (not a very good strategy with new homes, FYI), as well as the fact that the overall market has tanked, leaving most people who bought recently (including new homes) underwater. With all these new homes coming on the market as foreclosures, investors have an opportunity to pick up some great properties that should be in good condition, assuming the homeowner doesn’t trash the place before they move out.
While the 30 percent nationwide number may seem pretty high, in some areas things are even more pronounced. Foreclosures account for 72 percent of all the real estate transactions in Stockton, Calif., and 45 percent of all the transactions in Las Vegas, according to the Dow Jones Newswire article.
Investors who are interested in going after these foreclosure opportunities should identify at which stage they want to enter the game: when the properties as pre-foreclosures, at the foreclosure auction or as REOs. One advantage to buying them as pre-foreclosures is that investors can potentially avoid much of the damage that angry homeowners tend to inflict on their homes before they take off. In addition, investors will have the opportunity to inspect the property before they buy it, and if they play their cards right, the opportunity to help someone avoid foreclosure while making some money themselves. On the other hand, the pre-foreclosure arena is quickly becoming locked down by many states as they try to protect homeowners from various scams. This is not to say it can’t be done in those states, but there are some potential liabilities and things investors need to be aware of (see our previous article about HB 2791).
Buying at auction typically allows for investors to grab the biggest bargains, but that is largely because of the extra risk they have to take. When buying at auction, buyers typically aren’t able to inspect the home prior to purchasing and there are no refunds. In addition, buyers have to bring cash to the auction, so they aren’t able to utilize leverage in these deals, at least upfront (there are some private lenders out there that will lend at low LTVs for investors to buy at auction, but all the ones I’ve seen charge ridiculous fees and interest rates).
Lastly, buying the property as an REO allows buyers to inspect the property, acquire financing and all that jazz. But in order for a property to make it to REO status it has to get through the first two stages, meaning that it is likely that the best deals have already been scooped up.