Buying Foreclosed Properties

The Process Isn't Pretty, but the Rewards Can Be Profitable

During the 90s, you sat and watched as your neighbor across the street made money doing some amorphous job at a sky's-the-limit dot-com. He drove a much nicer car, and his house was much nicer, too. (In fact, he owned his house.) A daily wave of envy hit you as you came home from work, wondering why you stayed with your seemingly boring, stable job that was oh so 20th century.But that was then. Your then-neighbor is now long gone, his car having been repossessed and his home sold to others. You're still renting, but you wonder: "Could I have bought his house? Could I afford to buy a house if I looked at foreclosed properties, or homes where the current owners are in default?"Perhaps, you think, this is payback for all of those days when you walked by, shoulders slumped, wondering what was wrong with you, why you didn't have the nice house and the fancy car.But the reality is that purchasing a home that is troubled or in foreclosure is not easy to do, and rarely will you find a home (particularly in the Bay Area) that is considered a bargain.Lenders with loans in default either handle the foreclosure process themselves, or more likely, turn over the loan to another company that specializes in such properties.GRP Financial Services Corporation is just such a company. Based in White Plains, New York, the company "buys portfolios of under-performing loans for homes throughout the Untied States," says Doug Lombardo, its Director of Valuation.Lombardo cautions would-be homeowners about homes in foreclosure, and states that the chances of getting a better price on such a home are "unlikely".Lombardo says that trying to buy a foreclosed property at the foreclosure sale itself involves huge risks -- and considerable capital. "You don't know what's inside," he explains. "You don't know what the interior looks like at all. And then, if you are the winning bid, you will probably then have to go through the eviction process to get the current residents out of the home." Lombardo explains that the likelihood of major repairs required, and the additional legal expenses involved in eviction, are going to elevate the real cost of such a home. Since the previous home owners did not have money for their mortgage, the chances that even routine maintenance was ignored are substantial. Time is also a consideration. The legal process of eviction, he estimates, can take as long as three to five months, particularly if the residents fight the eviction order.In addition, foreclosure sales are often attended by the very bank that is foreclosing on the property. "Banks will usually attend and bid what they are owed. And if there are other bidders, the house will go at market value," Lombardo explains. "Just because it's a foreclosure doesn't mean the bank will give it away."Rarely does a bidder come away with a deal. "If the lender is owed less than the property is worth, and there are few bidders, you may get a deal, but that's assuming you get inside and the interior is decent," he explains.That doesn't mean buying foreclosed properties should never be considered, but Lombardo says it is unlikely the average home buyer would find the process worthwhile. "You're buying a closed paper bag," he explains. "You really have to do it from an investment standpoint. Particularly if you're trying to buy your first house, it may not be worth pursuing a house in foreclosure."In fact, foreclosures usually will not accept a bid that is backed by financing, but instead, require the successful bidder to have the full purchase price at hand. Lombardo says common terms are requiring ten per cent of the cash the day of the sale, with the rest of the money due within 48 hours. Foreclosure sales in California generally require bidders to have cashier's checks or similar instruments for the entire amount bid.If banks bid successfully, or no bid is successful, the bank may then be in the business of reselling the property.For those interested in such an investment, Lombardo says there are several sources available. However, entities such as GRP must abide by the Fair Debt Act, and therefore, don't send out lists of properties to prospective investors. "We only list properties on the Internet we already have title to," he explains.