Definition of Foreclosure
Foreclosure, literally, refers only to a home that has been auctioned off by a court. In reality, it encompasses a complete process whereby a creditor, usually a bank, recovers the loan by selling or repossessing the title in the event that the lender or owner is unable to repay the mortgage.
It usually consists of the following three processes:Sale at a loss, public auction and bank holding. Different processes correspond to different types of foreclosures.
The three types of foreclosures and their advantages and disadvantages
Short Sale or Short Sale Homes
In the United States, when people are unable to make their monthly mortgage payments on time, they sell within a certain grace period given by the bank, usually 3 months, at a below market price, usually with a 10%-15% discount, to pay off the loan so that they do not have another bad record on their credit file.
Often, the bank needs to decide whether to agree to a loss-making sale based on the owner's financial situation because the sale does not generate enough revenue to pay off the loan and the bank needs to take some losses. At this stage, the owner still owns the title to the home.
Pros and cons of investing in short sales
Cost-effective:Short sale homes are usually priced below market price, with discounts usually in the range of 10%-15%. Whether it is a self-help or investment, it is quite cost effective. And the investor has enough time to investigate the ownership and status of the home.
Long investment cycle:Buyer purchase transactions require bank approval, so the waiting time for approval can be long. 2 months if it goes smoothly; otherwise it takes 4 months or even longer.
Investment risk:Because the bank wants to minimize the loss, if the transaction price is too low, the transaction will be rejected and the investor will waste months of time for nothing.
Investment advice
Short sales are suitable for investors who have patience and some financial strength. This is because the final decision on a short sale home rests with the bank, which prefers cash transactions to reduce uncertainty in the transaction process. For strong investments, the success rate of the investment can be greatly improved.
Foreclosed Homes at Public Auction
After the grace period ends, if the owner still cannot make timely payments, the foreclosure on the home that the owner has mortgaged to the bank will be foreclosed and his or her property will be sold to a third party through a public auction.
Typically, the public auction will be held within 1 month of the end of the grace period and the owner will be notified by letter of the auction date. At this stage, the owner no longer holds title to the property.
Pros and cons of investing in a public auction home
High investment risk:The buyer does not have the opportunity to inspect the house, and does not know much about whether there are other creditors, whether taxes are owed, or the actual condition of the house, but the auction is held on the spot; the buyer must buy the house in cash, cannot take out a loan, and does not have property insurance. Once the transfer is made, the bank does not take any responsibility and everything is borne by the buyer; if the original owner can also ask for a loan at this time, then he has the priority to buy back his house.
Great return on investment:The greatest investment risk also means a greater return on investment! Typically, public auctions offer price discounts of about 15-30%. If done correctly, this can be very profitable.
Given that public auctions carry the greatest investment risk, participation in this area requires investors with professional experience and extensive resources. Therefore, it is not recommended for ordinary investors to participate. Most of the current participants are experienced investors or investment institutions.
Foreclosed properties held by banks
After a public auction, the title of the property that fails to be auctioned will be transferred to the bank, and the bank will usually appoint a broker to sell it, so it becomes a bank-held foreclosed property. Most of the auction houses in the real estate market today fall into this category.
Analysis of the pros and cons of investing in bank-held foreclosed houses
Cost effective price:For banks, quick sale is the biggest purpose to recover money, so most bank held foreclosures are priced below the market price with discounts of around 5%-15%.
Complete title:Generally speaking, the title of the house is fully given to the bank at this time, and the bank will make the necessary repairs to the house. Of course, there will still be many auction houses in poor condition, but the good thing is that the buyer has enough time to inspect the house.
The most competitive:At this stage any auction house can participate in the investment through a real estate agent, so the competition for the purchase of a bank-held auction house is far more intense than in the previous two stages. This also leads to a lower return on investment.
Most of the auction houses that people encounter in the real estate market are bank-held auction houses. Because of this, it is advisable to have a professional expert come and take a closer look at the property and learn more about it before making a purchase.
In addition, against the backdrop of an increasingly recovering U.S. real estate market, the investment market for auction houses is becoming increasingly hot, so once selected, remember to make your bid as soon as possible!
