Understanding what area of foreclosures to invest in and what area is the best at what time in the cycle will be critical to your success in foreclosure investing

Within the realm of real estate investing each type of investing has its good and bad times to buy. Understanding not only what market you should be investing in, what area within the category you should look to specialize in, and when to buy in the cycle will be critical to maximizing the potential of your investment while reducing the risk to the lowest possible level. Whether you are an investor, realtor, or potential home owner this understanding will fast track you to put you in the right area of foreclosures investing at the right time.

So you are brand new to real estate investing (or not) and you have heard that foreclosures will offer you your best way to gain instant equity in real estate. That all could be very true. But the term foreclosure covers a very wide area with many sub-groups within it.

It will be of the utmost importance to have an understanding of the different types of foreclosures there are, where in the timeline the foreclosure stands and which type of foreclosure is hot at what time and why. This way you can concentrate on the area that will meet your goals as an investor.

Within the circle of foreclosures there are three basic categories to recognize, the first of these categories has investors buying before the foreclosure auction. The second area is buying homes directly at the auction. The third and final group is to buy after the auction is over, from the bank or an auction company. These bank owned properties are referred to as (REO's) real estate owned.

Let us take a look at each of these three segments to see which area is hot right now and which is not. This way we can save you lots of time and trouble and fast track you to look at the best segment of the foreclosure market. First we will define what parts make up the segment. Then we will look at the reasons why this is a good time or not to be in that segment.

The first segment of foreclosures, buying before the auction, is an area were home owners are getting in to trouble but not yet foreclosed on. This area will include listed properties from the multiple listing service (mls), short sales, notice of defaults (NOD'S) and notice of trustee's sales (NOTS). Because of the sluggish nature of the housing picture at this time, the excess inventory of existing foreclosures on the market, the restriction of lending, and the anxiety of home owners and investors willing to sit on the sidelines till something breaks, this is not a good time to be selling retail. In fact it could be one of the worst times ever to be attempting to sell your home retail.

Sellers cannot compete against foreclosures so unless they too become a foreclosure they have no viable way to sell their home. Meaning we as investors have no way to be able to buy a home, with equity in it, at this stage of the foreclosure process.

There is one segment within this first stage that we should address here, that being short sales. A short sale is where an owner is in trouble and has a buyer come in and negotiate with the bank to let the home go for a value less than the loan amount owed on the home.

This is but one solution to the home owner and a method for an investor to get a home at below market value. Note that home sellers may suffer tax consequences in selling the home involved in a short sale. In general short sales are taking way too long to complete (4-6 months on average), the banks are understaffed to handle the huge volume of short sales at this time (with many more coming in the future) and investors impatient for a good deal are dropping out of deals before they close.

Some figures have only about 20% of short sales actually closing. Now don't get me wrong as there are many companies, realtors, and investors that are quite successful in short sales but the niche is not one most are successful with.

The second step of buying a foreclosure involves buying directly at the auction. Note that some states have judicial proceedings while others like California and Nevada have trustee's sales that are held on the courthouse steps.

On the positive side the competition is not all that much however in trust deed states you must have cash or the equivalent of at the time of the auction to be the winning bidder. This eliminates a huge majority of potential buyers as most folks do not have a $100,000 or more easily accessible to be buying at the auction. Because REO properties are now selling for levels under amounts owed on comparable properties in the (NOTS) stage, buying at the trustee's sale is not a viable way to buy in most situations. Most properties are reverting back to the banks and becoming bank owned REO's.

Again there are professionals that are buying good properties all the time at trustee's sales auctions but it is not an easy way for a beginner to break into the foreclosure arena and it is a very small segment of the market at this time.

Note that there are no commissions paid at the trustees sales auctions and very small realtor commissions paid at the after bank owned foreclosure auctions. This is a good area for the investor to buy but not a good area if you are a commission based real estate agent. And unfortunately there are many of those type agents out there.

By far the best, easiest, safest, and most lucrative way to buy foreclosure properties at this time in the cycle is to be buying at the third and final stage of the process, that being bank owned properties (REO's) after the auction is over. Because of the huge volume of foreclosures now on the market at record levels, the huge number that will be coming in over the next 12-18 months, banks are lowering their prices daily just to move inventory.

Banks are placing homes with listing realtors that specialize in listing REO homes. If homes do not sell in a 60-90 day period after price discounting from the original listing price many homes are going back to the bank and relisted with an auction company or potentially sold off in a bulk portfolio to much larger investors that have the ability to take down packages of $5 million and up.

This secondary after REO auction scenario has major issues that make it an undesirable way to buy real estate at this time. One must be very experienced if attempting to buy homes at any type of auction.

Markets like Southern California, Las Vegas, Phoenix, and Florida are seeing prices that could drop to 50% of highs of just 2 years ago. Cash buyers are now coming in and taking properties at near 50 cents on the dollar. What makes it exciting is that because of the new lower prices homes will once again cash flow positively with 20% down fully amortized investments. As many first timers are out of the market or sitting on the sidelines the pros will be setting themselves up with tremendous appreciation on homes they are acquiring at this time.

Buying a bank owned property is also much less risky than investing your life savings in trying to buy at a trustee's sale auction. The process is much faster than that of a short sale and negotiations are generally done within a week or two vs. the 4-6 months for a short sale. Bank owned properties are almost always vacant making it easy to get inside, inspect and run the numbers to see what amount of time or money the home may need to get it up to speed. I would encourage every investor to get a good home inspection on any property they are looking to buy. Every good investor should always have an exit strategy in mind before you even buy and having the most amount of information available to you will help you in making the best decision possible.

Note from a realtor point of view some specialize in helping sellers in trouble through the short sale process. Commissions can be negotiated down from the bank past the standard 3% on each side. Some mitigation specialists ad in a "loss mitigation fee" to receive compensation for the extra work involved with doing a short sale. But again the process is long and tedious and you must have the capacity for constant follow up to assure the transaction closes. If the home should move on to the foreclosure process and go back to the bank there will be no realtor commission involved as the bank literally takes the property back.

At that point many realtors are specializing in the listing of bank owned properties (REO's). There are many other niches in this market from doing broker price opinions (BPO's) to the security and safeguarding of vacant REO properties, and on to loss mitigation specialists.

As an investor and licensed realtor that has bought homes in all stages of the foreclosure process, for myself and my investors and clients, I am directing my clients to take full advantage of what could be one of the best foreclosure buying markets we will ever see. Based in the Las Vegas market for the last several years I have seen this market go from the number one hottest market in the nation in 2004 to one of the slowest in 2007 back to one of the best and busiest markets in the U.S. this year. All because of something we like to call the foreclosure.

Published: October 20, 2008

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