Foreclosure is the process a lender uses to recover a property when the borrower fails to meet their mortgage payments.
It is important to understand that foreclosure is generally a last resort for lenders.
They would much prefer to collect interest payments than undertake the unsavoury process of having to repossess and dispose of property.
In California, there are two types of foreclosures – judicial and nonjudicial.
When they occur, foreclosures present unique opportunities for flippers and developers to acquire properties and can offer handsome profits.
They do however carry some inherent risks and require significant research and work to crystallize profits.
Judicial and nonjudicial foreclosures
In California nonjudicial foreclosures are more common than judicial foreclosures.
Judicial foreclosures
A judicial foreclosure normally occurs in the unlikely event the property has no “power of sale” clause that gives the lender the right to recover the property if the borrower defaults on payments.
It demands a lawsuit to trigger a court-directed sale.
A judicial foreclosure gives borrowers greater opportunity to contest the foreclosure.
In rare cases, homeowners may be allowed to repurchase their property within a specified timeframe after the sale.
Nonjudicial foreclosures
Nonjudicial foreclosures are generally faster, less expensive and used when the mortgage has a “power of sale” clause.
The property is typically sold at auction without the need for a lawsuit or judicial hearing.
The lender cannot pursue a deficiency judgement allowing them to recover any additional debt after the sale of the property.
The process of foreclosure
Foreclosures tend to rise when interest rates climb unexpectedly leaving some borrowers in over their head.
Many will have overextended themselves when interest rates were low, only to find they cannot meet skyrocketing payments as rates rise.
Others make the mistake of trying to make money in a property boom but buy too late in the cycle.
When interest payments are missed, lenders are legally allowed to recover the property which has been used as collateral against the loan.
At least one interest payment must be missed before the process of foreclosure can begin.
That process normally starts with a ‘Notice of Default’.
The property then goes into a state of ‘pre-foreclosure’.
The homeowner has 90 days to ‘cure’ the default and remedy the missed payments to avoid repossession.
If that fails to occur, the lender may record a ‘Notice of Sale’ and the property may be sold at auction when it becomes an REO (real estate owned) property.
Advantages of buying a foreclosed property
There are several very good reasons why flippers and developers hunt property foreclosures.
Discounted acquisitions – Foreclosed properties are often sold below market value. This creates the potential for increased profit margins after renovation and resale.
Less competition – Foreclosures and specifically pre-foreclosures or off-market auctions tend to fly under the radar and are missed by a large number of potential buyers. This also produces discounted sales.
Faster closings – Banks and lenders don’t like having foreclosures on their books and are motivated to offload these properties quickly. It accelerates the acquisition process for cash or hard money buyers.
Risks of buying a foreclosed property
When it comes to buying a foreclosed property, it is very much ‘buyer beware’.
That’s why it is critical for potential buyers to learn everything they can about why the owner defaulted.
Investigate their personal circumstances, consider the vibe and status of the street and neighborhood as well as wider market trends.
Is it in an emerging area or could it already be overpriced?
Think about how the property can be improved for resale.
And as always, prepare multiple exit strategies.
The chief risks when buying a foreclosed property are:
Property condition – Many foreclosed homes are sold “as is” and may require signifiant work. Others may not need any improvement at all, leaving little room for profit.
Title issues – Always conduct due diligence to avoid liens, unpaid taxes or legal complications and ensure you understand local government planning and development laws.
Access limitation – Some foreclosed properties cannot be inspected before purchase, especially if auctioned. This leaves flippers and developers with significant risk when buying a property sight unseen.
Acquiring a foreclosed property
Not every foreclosed property is acquired at auction.
There are ways to circumvent the process and potentially acquire properties even cheaper.
Contact owners directly – Search publications listing properties going to auction and contact owners directly, offering them a fast sale and route out of their predicament.
This is also an excellent way to better understand the reasons for foreclosure and examine the property.
Buy multiple properties – To avoid having multiple REOs on their books, lenders will often sell multiple nonperforming loans at a substantial discount.
It’s a clever way investors can ward off rival buyers, allowing them to hold and repair desired properties and on-sell others. It does however require significant capital which will require a hard money loan.
Get funding for your next property project
Scouring the foreclosure market can be a lucrative strategy but it is not for the faint-hearted.
It requires immense strategic planning and execution as well as a great deal of hard work in terms of acquisition, renovation and disposal.
That’s why having an experienced mentor in your corner is so valuable.
In California, Equidy has a long and established pedigree working with investors who target foreclosure properties.
Indeed, Equidy has an intimate and personal history with all aspects of real estate and property development in California for more than 40 years.
They work creatively with their clients every step of the way, sharing their wealth of knowledge and support network as their projects take shape.
Best of all, Equidy doubles as a hard money lender, offering fast funding and flexible terms to flippers and developers who need capital at a moment’s notice.
It makes Equidy a one-stop shop for both expert advice and instant funding for your projects.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in challenging economic times, they strive to reward entrepreneurship and love to see their clients realize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimise the risk to all parties.
Contact Equidy today to book your free strategy call.
