Foreclosures can be a gold mine for fix and flippers looking to "buy low". The good: often priced well below market, in desirable locations, and in desperate need of rehab, they are just what flippers are looking for. The bad: they are not such a big secret anymore, and there is a lot of competition to get them. The ugly: often the properties themselves are in pretty bad shape, and many will not allow inspections so they can be risky. But there are still great deals to be had if you know where and how to look for them. Read on to find out about the different types of foreclosed properties and how to find them!
Smart flippers count on buying low, fixing smart, and selling quickly to maximize their profits. In order to buy low, flippers generally need to purchase the property at below-market prices, and many flippers do this by buying foreclosed properties. There are several types of foreclosed properties, each with their own benefits and challenges. Here's some intel on all of them to help you find the best deal!
- Pre-foreclosures (short sales). The homeowner still owns (and usually still lives in) the property but has stopped making payments for a variety of reasons. The owner knows that he/she will need to move out when the sale is complete, and has negotiated with the lender to sell the property “short”, often below market value, so that the lender can recoup some of their costs while avoiding the longer foreclosure process. These homes are listed on Zillow under “pre-foreclosure” properties as well as many other online and bank websites. Justnewlistings.com is just one site that lists pre-foreclosures by zip code and state.
- Foreclosures/Auctions. When a lender and/or owner cannot agree on a short sale amount or terms, or the home does not sell during the short sale process, the home will often go into full foreclosure to be sold at auction. This auction is usually done by a third party. Your state or county courthouse has lists of auction dates and summaries of properties to be auctioned. Online sites such as Auction.com have databases, searchable by city, zip code and starting bid price. By this time in the process, the owners have moved out or been evicted and the house is vacant. Keep in mind that nearly all houses sold at auction are sold “as-is” and inspections are often not allowed, so plan accordingly when bidding; you may have some unforeseen surprises with the condition of the property.
- Bank Owned Properties (REOs). If a property does not sell at auction, the lender takes ownership. Banks do not like to own actual real estate, and will put it up for sale, slightly below market rate so that it sells relatively quickly. Buying REO properties is less risky than at auction or foreclosure. For example, inspections are usually allowed at least for informational purposes, and real estate agents are usually involved which can simplify the process . However, banks often price houses closer to market value than during the pre-foreclosure or foreclosure process, which means less of a “deal” for flippers. And because these properties are advertised in the MLS, anyone can easily find them which means more competition among buyers.
- Government Owned. The government owns homes for a variety of reasons. Some had been used by government agencies as homes or offices, and some were seized by the IRS for tax liens. This category often has some more interesting properties for sale such as bunkers and ranches. Most government agencies selling homes require the buyer to work with a licensed real estate agent, and the process for buying these properties can be long, cumbersome and involve a lot of paperwork (imagine that!) HUD (US Department of Housing and Urban Development) has a comprehensive list of homes for sale by a variety of government agencies.
Information brought to you by Walnut Street Finance, providing private money loans for real estate investors in the Washington DC area.