Foreclosures as Investments

A Foreclosure is a legal proceeding in which a bank, pension fund, insurance company or other secured creditor sells or repossesses a property because the property's owner failed to comply with an agreement (the mortgage, or in some places a deed of trust) between the lender and borrower. Usually, the violation is the failure to make payments on a promissory note secured by a lien on the property. When the process is complete, it is typically said that "the lender has foreclosed its mortgage or lien."

Any lien holder, (such as a workman who performed repair work on the property, a vendor who supplied materials for the property, or a government agency due taxes) that has not been paid for materials or services can file foreclosure proceedings.  

There are many types of Foreclosure, some of the more prevalent are listed below:

  1. Foreclosure by Judicial Sale - the sale of the mortgaged property is done through the supervision of a court, with the proceeds going first to satisfy the mortgage note holder, then other lien holders (such as workmen who performed repair work on the structure and have not been paid), and finally (if there are any remaining funds) to the debtor. Because it is a legal action, all the proper parties must be notified of the foreclosure, and there will be both pleadings and some sort of judicial decision, usually after a short trial.  In Oklahoma, the county Sheriff conducts the sale of this type of foreclosed property at auction, sometimes on the steps of the county courthouse.  Properties transferred by a Sheriff's sale for taxes are typically by special warranty deed; a quiet title lawsuit is brought to obtain clear title to the property, thereby "quieting" any challenges or claims to the title.    

  2. Foreclosure by Power of Sale -  the sale of the mortgaged property by the mortgage holder not through the supervision of a court. In Oklahoma, most mortgage documents provide for this type of sale in event of foreclosure.  Again, proceeds from the sale go first to the mortgage holder, then to other lien holders, and finally to the debtor.  Many properties in this category are listed on the local MLS and may be shown to prospective purchasers by specially trained Realtors(r).

  3. Deed in Lieu of Foreclosure - where the debtor deeds (conveys all interests) the property to the lender to satisfy a loan that is in default to avoid foreclosure proceedings.  Both sides must enter into this transaction voluntarily and in good faith.   

Those wanting to purchase foreclosed properties as investments can participate in one of three ways:
  1. Participate in Sheriff Sales of properties Foreclosed by Judicial Sale.  These are typically properties that are being sold for taxes, or properties that with conventional mortgages that are in default.  
  2. Have a relationship with banks (or other financial institutions) that have received properties through Deed in Lieu of Foreclosure.  These are typically properties that banks have either made loans on and not resold in the secondary mortgage market, or loans that they guaranteed when sold to a third party.   
  3. Participate in on-line auctions of foreclosed properties with a government guarantee (ex. VA, FHA), through a company such as First Preston, described below.  

The VA, FHA and other government agencies focused in increasing home ownership typically do not loan money to homeowners.  Rather they provide insurance to the lender in the form of a guarantee if the debtor defaults on the loan.  

The US Department of Housing and Urban Development (HUD) oversees the Federal Housing Administration (FHA) which issues insurance against default on many residential mortgages.  When a lender's customer is in default on a loan and the lender files a claim for the unpaid mortgage balance, it conveys title in the property to HUD.  

First Preston is an organization that contracts with the government (as well as commercial lenders) to dispose of foreclosed properties.  Information concerning these properties can be found at www.firstpreston.com. You can register as an investor at First Preston's Bid Select website and look at available proper ties.  As a registered user, you will be able to take advantage of the Saved Searches and the My WatchList features. All Bank-owned properties on BidSelect are available to Investors. Government properties that available to Investors are identified with the Broker/Agency submit offer button.

Only qualified licensed real estate associates may submit offers on behalf of investors. Real estate associates may also help with property inspections and access to the property. 

Before making an offer, and investor must have a pre-qualifying letter from a mortgage lender for the loan amount needed. The pre-qualifying letter needs to state that the mortgage company has performed a credit check, reviewed the investor's financial situation and has been approved by the lender for the loan. Letters from mortgage brokers who do not fund the loan are not acceptable.    Buyers paying cash need to provide proof of available funds.  

New listings are posted on the website each Friday. Often, owner-occupants (etc.) will be able to bid during the first 10 days of the listing.  If no acceptable bids are received, from days 11-20 investors can bid, with bids reviewed on a daily basis.  Investor bids that are submitted during the first 10 days are reviewed on the 11th day. If the property has not sold at the end of 30 days, its price may be lowered and re-listed the following Wednesday

Earnest money required with the bid is $500 for properties under $50,000 and $1,000 for properties over $50,000.  For land, 1/2 of the price of the lot.  While there are exceptions, assume that the Earnest money is not refundable.  

HUD homes are sold on an "AS-IS" bases.  While HUD does not make any guarantees as to the condition of any house, they do provide a Property Condition Report which is downloadable from the website.  Properties are listed as:

  • Insurable (IN) -- properties that meet FHA 203(b) financing requirements; no obvious repairs necessary
  • Insurable with Repair Escrow (IE) -- properties that meet "minimum property standards) but need less than $5,000 in repairs and may be eligible for a FHA  203(b) load with repair escrow
  • Uninsurable (UI) -- Does not meet standards for FHA 203(b) loan; under some owner-occupied situations a FHA 203(k) guaranteed loan may be obtained

Purchaser has 15 days to make inspections.  There is a $75.00 fee for re-winterizing during the months of September through April.  Utilities will need to be temporarily turned on at purchaser's expense.  

Sales must close within:

  • 30 days for cash transactions
  • 45 days for mortgages
  • 60 days for FHA 203(k) loans

 

More information concerning the process of bidding for foreclosed properties can be found in the PDF document found in a PDF document at the First Preston website:  http://www.firstpreston.com/documents/guidebook_hud2.pdf

Foreclosed properties at other quasi-government agencies can be found at: 

 

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