Real Estate

Opportunities in the Subprime Meltdown?

Investing in foreclosures is risky and not for everyone. But returns can be great.

By Pat Mertz Esswein, Associate Editor, Kiplinger's Personal Finance

March 21, 2007

Foreclosure laws vary by state (for an overview, go to www.realtytrac.com, then verify the information with your county's clerk of court). You can buy foreclosures three ways: negotiate with a homeowner before the bank forecloses, bid at a county foreclosure auction, or, as Reeks does, buy a real estate owned property, or REO (see below).

Plenty of pitfalls. At a foreclosure auction, you'll buy a home "as is," and you might not be able to do more than peek through the windows beforehand. Cleveland agent Mike Phillips says you could be bidding on a home that has been vandalized -- sometimes by a distraught owner who has stripped it of everything valuable. Long-vacant homes may have water or mold damage. And the property may have legal warts: liens, difficult-to-evict tenants or, in some states, a mandatory "redemption period" that gives the former owner time to try to get the home back.

REOs, properties that lenders have bought back at auction, generally offer the easiest route for novices. With an REO, you won't become entangled with a harried homeowner facing foreclosure. You'll probably find nicer properties than the dregs left on the courthouse steps by lenders. And although an REO is likely to be sold "as is," you will have the right to an inspection, a title search and contingencies. Another advantage: You can finance the purchase with a conventional loan. However, the buyer of an REO is generally not likely to get as deep a discount as an investor in other kinds of foreclosures.

In Stone Mountain, Ga., Kelly Wiley shopped REOs but took a slightly different tack on buying-and-holding. Wiley, a real estate agent with Metro Brokers/GMAC, decided to look for a foreclosure large enough for herself and her sons, Javon, 13, and Juwan, 11, and to rent out her former home. To start, she focused on a few desirable neighborhoods, setting strict standards for price and condition. Over two and a half years, other buyers outbid her on several homes, mainly because she took anticipated repairs into account when calculating her offers.

Last summer, Wiley finally found her dream home: a four-bedroom, two-and-a-half bath house in Stone Mountain. It was in move-in condition and listed for $214,000. Wiley bought the property for $199,900 with a no-money-down, fixed-rate mortgage, for which the rental income on her former home helped her qualify. Her new home appraised for $221,900. "I had instant equity," she says.

Buying it back from the lender

For novice foreclosure investors, the best bet is often a real estate owned home, or REO, a property that a lender bought back at auction to resell for close to market value. You can find REOs on local multiple listing services, which may be available online. Other sources include the Web sites of federal agencies and government-chartered corporations or their affiliates, such as HUD.gov, Ocwen.com (for VA-owned homes), FannieMae.com and FreddieMac.com; national online listing services, such as Realtytrac.com and Foreclosure.com, available by subscription; or property wholesalers, such as Homevestors.com (the "We buy ugly houses" people).

• < PREV
• 1
| 2

• Print
• Comments
• Email
• RSS