Are foreclosures a good entry point for new real estate investors?
Maybe. Foreclosures do put pressure and stringent timelines on motivated sellers, the best kind of leads for real estate investors. There are 3 basic types of foreclosure properties you should be familiar with as a real estate investor: pre-foreclosures, foreclosure auction properties and REOs.
Pre-foreclosures
In a pre-foreclosure the homeowner is late on payments or property taxes and in some stage of the foreclosure process, which can happen fairly quickly (or not – lenders vary widely in their response time) in Texas. These can be excellent sources of leads for your real estate investments if the owner has equity.
There’s also a chance of getting the property from the bank in a short sale if the owner owes as much or more than the house is worth. In a short sale, you offer the bank what you’re willing to pay, even though your offer is less than what’s owed. Yes it works sometimes, but be warned: short sales take a lot of legwork. The easier route is a pre-foreclosure property owner who has significant equity.
Foreclosure auction properties
Note that there are two very different types of foreclosure auctions: tax foreclosures and mortgage foreclosures.
Tax foreclosures (for not paying property taxes) have a right of redemption in Texas, meaning the property owner can pay your purchase price plus 25% and get the house back for 2 years on homestead property and 6 months on non-homestead property. This makes tax foreclosure purchases much more risky, although these might be good leads to pursue for traditional, non-auction (and thus not redemption-eligible) purchases. More about tax sales on the official Travis County Tax office tax foreclosures page.
Mortgage foreclosures (for not paying mortgage payments) are final in Texas and there is no right of redemption. You may have to evict the previous homeowner if they don’t leave on their own, but you own the property at the conclusion of the auction.
Quite a few investors buy property regularly at the monthly mortgage foreclosure auction at the Travis County Courthouse, held on the first Tuesday of every month except holidays. These properties don’t always sell at a discount (banks protect their interest by bidding on the properties they hold mortgages on) and you need to do a lot of research before the auction to determine which properties you want to bid on.
You can purchase the list of properties posted for mortgage foreclosure here for $40 per month per county. The list is only available 20 days before the auction, so you have to work fast. You can make your own list from the public postings at the county courthouse, but it’s very time-consuming. Most investors contact pre-foreclosure property owners to try to buy the house before the auction date. If it’s a mortgage foreclosure, the lender may be willing to delay the foreclosure auction if there’s an active contract on the property.
Bidding at both tax and foreclosure auctions is tough. You do not get access to the properties before the auction. You also must come to the auction with cash or equivalent, and few if any hard money lenders will provide money orders for you to take to the auction. These sales also tend to be competitive. If you attend a few you’ll notice quickly who the players are. These cash buyers are probably good people to know for any properties you’d like to wholesale though.
REOs or bank-owned foreclosures
Some investors focus on properties that have already been foreclosed on by banks, also known as REOs (real estate owned). It’s not always the best strategy because these properties aren’t often offered at a discount. Banks typically want full retail value or as close as possible. The bank may run out of patience with marketing the property and you might get lucky. This usually only happens if it has serious repair needs or previous contracts have fallen through for financing or other reasons.
Notice that bank owned properties are listed by the same real estate agent over and over. Connect with the REO listing agents in your area and let them know you’re a cash buyer if they have an REO that requires a quick offer and closing.