With foreclosures on the rise, property values, which had surged during the late 1990s and early in the new millenium, have taken a nosedive, and many homeowners and real estate investors who thought they would never have the opportunity to buy real estate at a reasonable price are now finding it a much more affordable option.
One of the best ways to buy low in today’s housing market is to buy property in foreclosure — properties often described as distressed. And you don’t have to be an investor to cash in on these bargains.
Myth #1: You are taking unfair advantage of someone else’s misfortune.
Fact: You could be saving their financial lives. Unless the homeowners can secure the funds to bring the mortgage current — which is called reinstating the mortgage — or work out some other deal with their lender, they will lose their home. It’s that simple, and it’s not your fault.
A mortgage creates five covenants:
1. The homeowner promises to repay the debt.
2. The homeowner will insure the building against fire or damage to protect the lender’s interest in the property.
3. The building cannot be demolished or removed without the consent of the lender.
4. The entire principal will become due in the event that the borrower defaults on the payment of principal, interest, taxes, or assessments.
5. The lender will consent to the appointment of a receiver in the event of foreclosure.
The last two covenants give the bank the means to foreclose. One provides for the appointment of a receiver — typically a lawyer — who conducts the sale of the property. The other allows the bank to accelerate payments and ask for the entire balance. If the bank’s lawyers take a homeowner to court, they want all of the money, and if it can’t be paid, they want a judgment against the homeowner. The bank wants out of the deal because the homeowner has not lived up to his obligations.
Until a judgment has been obtained, the homeowner is not under threat of foreclosure. Once the judgment is obtained, the lender can take action to sell the property or its interest in the property, and eventually have the homeowner evicted, unless he moves out voluntarily.
Whether you buy a home at auction or purchase directly from the homeowners in pre-foreclosure, always treat the homeowners with empathy and a sense of fairness while still working to earn a reasonable profit. In addition to making you and the homeowners feel better about what happened, demonstrating compassion will improve your reputation in the area and help convince other distressed homeowners to call you instead of someone else when they need to sell their home in foreclosure.