Tips for Buying Foreclosure and Flipping | Homes

One of the top questions I have is how to find these low cost foreclosure homes so the time and effort spent on flipping the house is worth the investment. I have seen so many episodes of TV shows that spend all their time on the rehab and never mention how they found the house to being with. If they purchased a foreclosure then explain how they found it and why they chose it for the show. I would love to see an episode where they visit the auction house or talk to someone who is foreclosing with tips on negotiating.

The foreclosure market offers an opportunity for an investor to fix and flip a single family home and maximize their profits. I tried to find and consolidate tips for finding and negotiating a foreclosure purchase as well as the negatives to watch out for while looking.

When I attempt my first flip, it could end up being a foreclosure.

What is a Foreclosure?

The foreclosure is a legal process where the lender moves to repossess the property after the borrower has failed to make payments on the loan. There are tax foreclosures, bank owned, pre-foreclosures and more. The investor is looking for a house that is in good shape and can be fixed up and sold at the market value. The foreclosure is a good source of low priced property for the house flipper as the home may be in a good state but part of certain circumstances. This can be a tricky method to find flips and can take much more time due to paperwork past due debt, taxes and red tape.

Foreclosure Pros and Cons

The average foreclosure will require more attention and possibly cost more than an average Fix and Flip property. A foreclosure can happen for many reason such as divorce, death of the home owner, owner is unemployed and gives up, failure to pay taxes and many others. Before considering a foreclosure for a flip we should review some of the more obvious pitfalls and the possible benefits. Here are some tips to consider:

Foreclosure Cons

The house has not been maintained well and will need more work
Homes that have been abandoned can have trash, bugs and other issues
The house could have been looted for fixtures, wiring, copper and plumbing
Limited lending options as lenders do not prefer to buy foreclosures
Heavier cash requirements from lenders or you have to buy it all cash
Unable to get access to the property before buying it at auctions
Owners may still be living there and meed to be evicted

Foreclosure Pros

Buying at well below the market value and therefore higher profit
More room to cover additional costs or turn it into a rental
REO Properties will have liens, title issues or any debts covered
Short term equity improvement
Opportunity for a Live-in Flip with a very low mortgage
Lemons to Lemonade; major rehab means cutting down to the studs and easier to install or renovate

What is Pre-Foreclosure?

When the borrower is unable or unwilling to pay the balance of their mortgage the lender will file a “Notice of Default” (NOD) to start the foreclosure process and retake possession of the property. This stage is called Pre-foreclosure. This is the period between the NOD and the public auction.

The current owner can still reinstate the loan at this stage if they bring all past due payments and the account current. Additionally the real estate investor has an opportunity to work directly with the owner to purchase the property before the official foreclosure. This is where you can negotiate with the owner directly and make a deal that will allow you to pay the smallest amount for the home possible while helping the owner avoid a foreclosure. This is what they call a motivated seller.

At this stage you will need to take note of any and all debt or liens placed on the property in addition to the mortgage(s). The owner may owe for property tax or have 2 mortgages with a house value that is less than these debts. This is a great time to negotiate as the owner can allow you access to the property for inspection. As long as you perform your due diligence and understand all of the costs involved when buying the property this can be a good source.

What is a Real Estate Auction?

The public auction is where the lender will put the property up for sale to the public at a reduced price that is much lower than the market price and lower than what they are hoping for. The county usually sets an initial price somewhere 50-75% of the market value of the house. The initial price can be affected by the state of the property but this is unlikely as nobody is allowed to enter the property. In fact the previous owner may still be living there and need to be evicted before renovation and sale.

You can find property auctions on Xome.com, Hubzu.com, craigslist.com and auction.com as well as local newspapers. If you have a good real estate agent in your network you can hit them up for local auctions as well as bankers and lawyers dealing with real estate. The auction will usually have plenty of bidders, some of which are professionals that go from auction to auction for their clients.

There are government agencies that will also have auctions for property. This includes the U.S. Treasury (taxes), U.S. Department of Agriculture and the Federal Deposit Insurance Corporation (FDIC) too. You can visit their websites and find out when auctions are schedule, entry fees and financial requirements. In order to place a bid you may need to provide funding proof or cash up front.

As always I like to preset the positive and negative side in these posts. It’s important to understand that the properties are usually neglected and may have been that way for a long time. Some houses can have serious structural problems or other issues not easily seen from the outside. As with any investment there are risks in investing. I found a great article on biggerpockets.com where the investor “almost” bought at auction and explains why she stopped.

What is Real Estate Owned (REO) Property?

The public auction is the lenders attempt to recoup losses from the property by selling it at a lower than market value. The property does not always sell for the prices that is asked. In this case the house is owned by the lender, which is usually a bank, and considered Real Estate Owned or REO.

At this point the bank will list the property online or attempt to find a seller through a real estate agent. The property taxes, liens and judgements are all paid by the bank and the price they ask for it will reflect this too.

The good aspect of this is that the property can now be found by your agent or online in many of the search engines like Zillow.com. You can then include the house in your calculations and make an educated guess on the price. The bad news is that the house may have more serious issues since nobody wanted to or was able to buy it during the foreclosure process.

What’s a HUD Property?

HUD stands for the U.S. Department of Housing and Urban Development and it is a government agency that focuses on managing the housing for low-income residents. They also administer Federal aid to local housing agencies and also have properties that go up for sale to individuals and non-profits first and then everyone. This is an opportunity for an investor to pick-up a fix and flip home at a very discounted price.

HUD would rather have occupants buying their homes but this isn’t always the case and they open the purchase to investors. They have a 15 day window called the “Exclusive Listing Period” that limits who can bid on a property to only owner occupants, non-profits and other government agencies. The bidding is done through their website at https://www.hudhomestore.com.

As an investor you will need a HUD Registered Bidder to submit the bid on your behalf. This person is usually a real estate agent that is registered to place bids. When buying the property you will provide a non-refundable deposit in the form of a cashiers check payable to HUD. Since it is non-refundable you will want to perform all of your due diligence first before even bidding.

What is a HUD 203K Loan?

The FHA 203k home loan wraps the purchase and renovation or refinancing and renovation costs into one loan. This helps support neighborhoods by simplifying the costs of buying and renovating property that is not market ready. A home owner can refinance their current mortgage and add more for home rehab too. This means you don’t need a home equity loan or a certain level of equity in the property to borrow for rehab work.

You must qualify for the purchase price and the full costs of your renovation and you must be the “owner-occupier of the property”. This limits how quickly you can sell the house as you will need to live in it for at least a year. The benefits are the down payments are low and the interest rates are also lower and HUD covers some fees as well.

The way I see this option work is if you plan to do a Live-in-flip and sell the house after 12 months. You will need to speak to your tax professional as there are also benefits with a live-in-flip that may not apply when using this type of loan or you might need to stay in it longer.

https://www.hud.gov/program_offices/housing/sfh/203k/203k–df

Tax Foreclosures

A foreclosure due to taxes is a common source for investors. This is where the property taxes are not paid for many different reasons and the government forecloses on the house to recover the tax money. The property is sold at a local tax auction (tax deed sale) similar to the previously mentioned homes.

Taxes can go unpaid for many different reasons and the government will eventually foreclose on the property to recover tax money after 2 or 3 years. The home then gets sold at a local tax auction. Since the home owner has not paid their property taxes the buyer or winning bidder will need to pay the taxes due to take possession.

What is a Short Sale?

A short sale is where the property owner is trying to sell the property for less than the remaining balance of the loan. This would fit under the pre-foreclosure process where we would negotiate with the owner on the price even if it slower than the loan and the sale amount would all go to the lender. At this point the lender will zero out or forgive the remaining balance of the loan or go after the owner for final payment. In some states the remaining balance must be forgiven when agreeing to a short sale.

Another name for this process is a “pre-foreclosure sale”. The lender must agree to this sale and the price being payed. According to Investopedia the lender “needs documentation that explains why a short sale makes sense” as they stand to lose money on the deal. Due to these requirements and the lenders approval the process tends to take very long to complete.

There are benefits for each party with this type of real estate deal. If we assume the home owner is unable to pay for the mortgage than they are already looking at a default and then a foreclosure on their credit report. A short sale does not negatively affect their credit as a foreclosure does. In this instance the lender is looking at having to go through the full foreclosure process and auction the property off, it’s likely they will not get as much as a short sale. Finally, the flipper is coming in as a buyer that will take the property off both the owner and lender and make a profit in the process.

The downside for a professional flipper is that the process takes very long to complete. They may not consider this route unless there is a large upside to the final profit for this deal.

How To Find Foreclosures

Here are some resources to find owners that are motivated and houses that have entered into pre-foreclosure or are heading to auction. Part of the foreclosure process is filing public notice. You can find auction information at your local courthouse or we can use google searches to find public notifications and possible opportunity before the property gets to the auction block. Try using the following search criteria for the county and city your looking at.

Google: [county name] Foreclosure Legal Notices

When I tested this search it returned the sheriffs office, public notice websites and some classified sites. It’s a starting point for catching some of these foreclosures and auctions when they are scheduled.

Google: [city] Tax Assessor

This search returned the county fiscal office and the treasurers office where you can look up a specific property and view past due tax. More cities are converting their records to digital and placing them online for you to search.

Real Estate Owned (REO) Agent

What’s probably the best resource is a Real Estate Agent that specializes in foreclosures. Using some of the website listed above you can find agents like this. Look for agents hat are designated Certified Distressed Property Expert (CDPE) or the Short Sales and Foreclosure Resource (SFR). You can let them know the price range and type of home you looking for and they can let you know when it becomes available. Due to the extra time and requirements needed you will need to jump on opportunity quickly.