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You've driven around town and noticed all those "For Sale" signs. Some of them even say foreclosure, or for sale by owner. What is that all about, you're asking? Good question.
Those foreclosure signs have definitely multiplied. In California, one of the states hardest hit in the recent housing crisis, over 400,000 bank-owned homes sold in foreclosure. Even in good times, bank foreclosure is a common occurrence. For those with good credit and some extra cash available, opportunities for bank foreclosure investments are definitely out there, but you have to know what you are looking at.
Are Bank Owned Properties an Investment for You?
When a borrower takes out a mortgage loan from a bank the loan is typically secured by the property being bought. This means the borrower must make monthly payments to repay that loan. If the borrower/owner doesn't settle up, or defaults, the property that was put up as collateral for the loan becomes a bank foreclosure. In other words it will likely become a bank owned, or REO, property.
Is a bank owned property an investment for you? It could be. With the upheaval in the real estate markets over the last year in particular, many more bank owned foreclosures are available, often at very affordable prices. It's this below market value concept that makes bank owned properties such a good investment.
According to the Center for American Progress, banks put up for auction, or took possession of, more than 165,000 homes during November of 2008 alone. And when the supply goes up, economics tells us that prices goes down. It's safe to say that it's a buyer's market everywhere.
Bank Foreclosures Are More Ideal for Home Buyers than the Lenders
You might find it surprising, but banks are just not that into foreclosures. That's because most banks are not in the property management business-instead, they prefer to make money by lending money. If a borrower has defaulted on their mortgage payment, the lender's main concern is that the property provides a return on their investment.
When a home is in threat of foreclosure, banks will contact the mortgage holder to try to work out a deal for repayment. If no agreement can be reached, the home will proceed into foreclosure and the lender will then begin the process of selling the new bank foreclosure property.
What does that mean for home bargain hunters?
- Bank owned properties are often available below market value, which translates into huge savings for you.
- Many bank foreclosures are "fixer-uppers" in need of repair. You’ll be able to add value with some improvements that will multiply your profits if you resell the property.
- If you’ve spotted a house that is being sold by the owner, it means that there won’t be a realtor to negotiate with. Be aware that it will be up to you and your realtor to make sure everything is handled in the correct, legal manner.
- If it’s bank owned, chances are that the property liens, or financial claims by others against the property, have been paid by the bank. The title is clear as a new owner, you won’t inherit an old liability.