Many people will come to this section first, but most will never get involved with the foreclosure market. They are drawn to this vehicle with visions of buying property at fifty cents on the dollar. They are driven away from this market because foreclosures are a cash transaction. Hear this now: If you are going to buy a property on the courthouse steps, you will pay cash for the entire sales price. If you need to use conventional financing, you will not be able to access the foreclosure market.

People often mistakenly say they want to deal in foreclosures when what they really want is either Pre-Foreclosures on the NOD list or properties owned by the bank. These other two vehicles can be purchase via conventional financing, and this is what most people new to foreclosures really need.

Dealing in cash does not mean that you have to have all of that cash in the bank. There are many private lenders out there that are not conventional lenders that can provide you with the cash you need to buy foreclosures. I know of one lender that will work with qualified buyers who will provide the majority of the cash for a total of $600 with a balloon payment when you sell or refinance the property based on an 18% annual interest rate. While 18% might sound high, you're only using it to have "cash" for a transaction. You will definitely want to refinance as soon as practical into a much more reasonable interest rate, and because the only fee associated with the cash financing was $600, it's not like you spend a whole lot to get access to the cash.

If you are comfortable getting into the more creative financing involved with foreclosures or if you have enough cash to finance the deal yourself, then foreclosures may be a good place to find property.

As the foreclosure market has developed and become popular, the competition has increased therefore decreasing the profitability. This is why breaking into the foreclosure market is very hard. In most counties, there are 5-10 key players who are on the courthouse steps each and every auction (which can be every single weekday in some markets). These key players will intentionally antagonize any newbies. The newbies will likely be outbid to the point where they can't afford the property. Worse yet, the newbie will bid well above what they should or well above what they wanted, and they end up with an overpriced property.

For someone new to foreclosures, there is no question you need the help of well established players in that market. This vehicle absolutely requires an agent who is connected in the foreclosure market. Not all agents are familiar with these concepts, so make sure the agent you select is familiar. At NARREIA, advisors who are familiar with the concept or who have a direct connection to someone who does will indicate as such on their profile.

Going, Going, Gone ...
Here's a brief outline of how foreclosed properties are purchased. The process of foreclosure is a long one and varies from state to state. It takes longer than 90 days from the time they are put on the NOD list. Eventually the property will be added to the list of properties to be sold on the courthouse steps.

At some point, a date will be set for the sale. This date can be and is frequently delayed or canceled. There may be 50 houses scheduled for sale on a specific date but only a handful will actually go to auction. This is because many times the owner will catch the loan up or will get the house under contract and convince the lender from foreclosing.

One of the main downsides to buying houses on the courthouse steps, aside from having to pay the full amount in cash, is that you rarely get to see the inside of the property. Frequently, houses are bought without having a fully comprehensive idea of what repairs are needed, whether or not there is mold or water damage, or what appliances are conveyed with the property.

Bidding on the property standing on the courthouse steps is quite an interesting event. If you've never been, you should visit an auction to experience it for yourself. Depending on the State and County in which the auction takes place, you may be required to pay in cash immediately after the completion of the bidding. Many counties require that bidders qualify before the actual bidding on a property begins. This is done by the auctioneer ensuring that the bidders have cash (most likely cashiers checks) with them.

The bidding is usually controlled by several regular players, and outsiders are not treated well. They will intentionally outbid outsiders, or at the least, bid their price up, in order to discourage newcomers. This is why it is very important to ally yourself with someone who is actively involved in the process.

Back to the Basics
Once you take possession of the property, treat it as any other rental or rehab. There are no restrictions for how you dispose of the property.

Realize that foreclosures aren't a great vehicle in all markets. Generally speaking, this vehicle is not strong in hotter markets with shorter days on market. This is because when the owners get behind in the payments, it's easy for them to throw their house on the market, sell it, and stop the foreclosure process. But in slower, bear markets, it's not so easy for the owners to bail out, increasing the number of foreclosures that hit the court house steps. Another market-related factor is the number of investors seeking properties. In hot markets, there are many investors, and when competition in the more traditional vehicles gets too high, they look toward the foreclosure market.

If you have access to cash, foreclosures might be the investment vehicle for you. While there are potential risks of not knowing the exact condition of the property, there is potential for buying below the market value.

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