Profiting from Foreclosures

John M. Lee

As foreclosure rates increase throughout the Bay Area, I am getting many questions on how to purchase foreclosure properties. The thought is that foreclosed properties will sell at a discount, and thus buyers think that they can profit handsomely from such a transaction. In some cases, that is true, but in others, disaster awaits so be careful when contemplating a purchase.

Foreclosure is a process that allows a lender to recover the amount owed on a property in the event that a borrower defaults on the loan. Typically, the lender will try first to work with the owner to come up with a repayment plan.

Usually, if a borrower is 90-days late the lender will start the foreclosure process by recording a Notice of Default on the property. This gives public notice that the borrower is delinquent and that, unless they make good on their loan payments, the lender will do what it can legally to recover what is owed, including the principal, back interest, late charges and legal fees.

There are four results in foreclosure proceedings:

• The borrower can reinstate the loan by paying off the default amount during the grace period;

• The borrower can sell the property to someone else to pay off the loan and other charges;

• The bank can sell the property at auction;

• The bank takes ownership of the property.

During each stage of the proceedings, there are opportunities to create a win-win situation for both buyers and sellers.

Initially, during the foreclosure period, the buyer and seller can agree that the buyer will pay the seller a certain amount and assume the balance of the loan. The buyer can then apply for a loan from a bank. Both parties benefit because the buyer gets the house and the seller avoided further foreclosure actions.

If a trustee sale occurs, the buyer may purchase the home at an auction sale, which is usually held in a public place, such as City Hall. The bidding process occurs fairly quickly, and buyers must purchase the property on the spot for cash. The disadvantage is that most of these properties are bought sight unseen, which brings its own problems, such as deferred maintenance, tenant issues and/or owners refusing to vacate. Because of these potential problems, the number of buyers is limited, resulting in an opportunity for those willing to take a risk.

Once a foreclosure occurs, the bank becomes the owner of the property. They normally will evict the occupants, clear the title, do some minor cosmetic touch-up work, and market the property on the Multiple Listing Service through a local agent. It becomes a normal sale with the bank, except it is exempted from disclosure requirements.

There are different opportunities for buyers of foreclosure properties along each step of the way. The most difficult parts are identifying and contacting the parties involved and negotiating the transaction because there are strong emotions involved.

But with persistence and some experience, foreclosures can be a way to riches for some investors.

John M. Lee is a broker with Pacific Union. For questions, call him at (415) 447-6231.