Of the three stages of foreclosure (preforeclosure, auction, or REO), preforeclosure may offer the most investment advantages, overall. Briefly, here are some pros and cons of investing at each stage.
Until it is sold at a foreclosure auction, a property in foreclosure is referred to as a “preforeclosure” property.
If you decide to invest in a preforeclosure home, remember that you’ll be dealing directly with the property owners, who might be difficult to contact. Courthouse research on preforeclosures can also be time-consuming.
But because you’re dealing directly with the owner of the preforeclosure home, it’s possible to create unique sales agreements. It’s also possible to score a 20% to 35% average savings off the property’s market value!
If the owner of the preforeclosure home cannot make the missed payments before a set date in the foreclosure process, the property is sold at a foreclosure auction.
Buying at a foreclosure auction can mean substantial discounts and great profits, offering a huge return on investment.
On the other hand, if you don’t do thorough research on the preforeclosure home before the foreclosure auction, you could lose. With foreclosure auctions, you rarely have the chance to conduct a property inspection, but you should do a title search. At foreclosure auctions, you will be required to have a large amount of cash up front for the deposit — usually much larger than when you buy a preforeclosure home. For example, you may need an up front cash deposit of 10% of the purchase price, and then be required to pay the balance in a matter of weeks or even days.
REO (Real Estate Owned)
When the lender takes back a preforeclosure home in order to cut its losses, the property is referred to as an REO (Real Estate Owned).
One advantage of buying an REO is that the title is usually clear, and the lender will probably have paid any back taxes on the property.
Profits from REO investing are generally not as great as with investing in preforeclosure homes or buying at foreclosure auctions. Though the risks are low, the savings are generally low, too.
If you do your homework, buying preforeclosure homes may result in the greatest overall rewards: lower risk than buying at a foreclosure auction, greater profits than investing in an REO, and the most flexibility as far as sales agreements, up-front cash outlay, and range of discount.