In today’s hot real estate market, many buyers and investors have forgotten about the foreclosure market. The market may be slower today but the foreclosure market never dries up completely. ATTOM Data Solutions reports there were 676,535 properties with foreclosure filings in 2017. That’s down dramatically from the peak in of nearly 2.9 million in 2010 to the lowest level since 2005. By the same token, there are considerably fewer buyers going after this market. It could be worth checking out in the areas where you are considering a house purchase.
The highest foreclosure rates are in Atlantic City, Trenton, Philadelphia, and Chicago. Overall, 28 major cities experienced an increase in foreclosures during 2017. Unfortunately, Puerto Rico is expected to experience a real estate melt down exceeding the Great Recession. About one-third of homeowners are delinquent on home payments. Considering the severity, Puerto Rico probably isn’t a good investment opportunity.
There are three dominate ways to buy houses that are in foreclosure or about to go into foreclosure. Real Estate Owned (REO) is the most common and least risky way. REOs are properties that have completed the foreclosure process and are now fully owned by the lender. These are generally the least risky because you know what you are buying and can have inspections and title searches done. Almost always, these homes need repairs because the previous owner stopped doing maintenance long before losing the house to foreclosure. But at least you’ll be able to learn what repairs are needed before buying. Also, second mortgages and back tax issues are usually resolved or publicly known.
The courthouse steps auction is another way to buy foreclosures but carries substantial risks. The auction is the last step in the foreclosure process before the lender takes possession. Typically, you are not allowed to inspect the inside of the house. You buy “As-Is” for all cash. This is the riskiest way to buy foreclosures. You have no escrow and no title report let alone title insurance. If the house is occupied, you become responsible to evict the previous owner which can drag out for a long time. You should expect the previous owner who has tens of thousands of dollars and is emotionally invested to vandalize the house and take all of fixtures including the kitchen sink.
You can also buy pre-foreclosure. Homeowners that know they will inevitably lose the house to foreclosure often put it up for sale trying to keep the foreclosure off their credit report and possibly walk away with a few dollars. Again, the house will be in disrepair and second mortgages along with property taxes are probably in arrears. In some states, the seller or a bankruptcy court has the right to rescind the sale or sue to have the sale reversed years after the sale is completed.
If you’ve been a student of the real estate market for a few years, you’ve likely heard of “REO Shadow Inventory”. Shadow inventory are house the lenders took back during the foreclosure peak but didn’t put on the market for sale because the glut would have further depressed prices. Some of these houses are now coming on the market. Additionally, many houses remained with the original owners although they were way past the point when lenders could foreclose. This was allowed so that vacant houses didn’t further deteriorate. U.S. properties foreclosed in the fourth quarter of 2017 had been in the foreclosure process an average of 1,027 days (2.8 years). Nationwide, 50 percent of all loans actively in foreclosure at the end of 2017 were originated between 2004 and 2008. There will be a continuing supply coming to market. Expect a small surge this spring during the hot selling season.
Please share your knowledge of the current foreclosure market by leaving a comment.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.