Believe it. Your bank can make you rich. One of the investment principles any lay person can easily understand is the concept of buy low and sell high. When you buy low, you make instant profit and when you sell high what you bought low, you make unusual profit. One of the best ways of experiencing this in real estate is to buy foreclosed properties.
Foreclosed properties (or foreclosures) are properties whose owners used bank or other financial institutions loans to buy them or who have used them as collateral for a loan and have failed to meet their payment obligations in spite of several opportunities to do so. Prior to giving out loans, banks normally request for a collateral or something that could be sold to recover the money in cases of default in repayment. The bank also ensures that the borrower signs documents that effectively make the bank the legal owner of the property if there is a default in repayment. With these documents, the bank can sell the property.
Moreover, after the bank has accepted the use of a property, they will only lend an amount that is the equivalent of what is referred to as the 'forced sale value' of the property. This is the amount that a desperate seller would get if he wants to sell the property quickly. So, whenever the bank wants to sell such properties it almost always ends up being sold at a discount. And this is where you can make money in foreclosures.
How do you know foreclosed properties? Ask your banks mortgage department or ask a savings and loans/mortgage bank. Most banks have a ready list of properties that fall within the above categories. When you buy such properties you are helping the bank and the borrower. Sometimes your intervention may be the saving grace that the borrower may have from losing all. Because if sold at a good price the borrower may still have some money that could help him. A well brokered deal should be a win-win for all the parties concerned.
At the same time, there are things to watch out for when going into this area. Firstly, never pay for a property you have not inspected or evaluated personally. You need to go beyond the attractive pricing to the business sense of the purchase. Sometimes the banks may over value the property and sometimes the state of the property may be such that considerable renovation work that could cost you millions may need to be done before you can recover your money and make a profit. Sometimes the location may not be an area that is attractive and strategic for your purpose. Don't just look at the price, visit the property and evaluate the environment.
Secondly, ask the bank for the title papers and get your own lawyer to do a due diligence on the property. The bank employees are not angels and sometimes omit important documents from what they should have. There have been cases of misplaced certificate of occupancy. In addition, the borrower may institute legal proceedings against the bank to stop the sale. If this has been done, the bank owes you a duty of disclosure. But I also say, you owe yourself a duty of asking. Banks, as a rule, are selling to you as it is and do not necessarily have to disclose every information they have on the property. So, do your due diligence. Your intention is to buy a bargain not a lawsuit.
Thirdly, the issue of possession should be carefully considered before you make the purchase. In some cases, where the property on offer is being occupied by the owner and he has gone to court to resist a sale, this may be a clear indication that possession may be difficult. In other cases, where the property is owner occupied, and the owner partners with the bank to facilitate the sale, then possession may not be an issue. At other times, the property may be occupied by tenants who have decided to side with the owner and make possession as difficult as possible. Each case will differ and it is advisable to get professional counsel so that you do not acquire a property that is not generating rental income and could also not be sold.
And in cases where a certain portion of the proceed of the sale is to be paid to the former owner who is still in possession, such monies should not be paid until he has implemented his own side of the bargain. The key point is to avoid as much litigation as possible and to get maximum returns on your investment within a reasonable time.
