Buying a Foreclosure for Investment in New York City

At first, glance buying a foreclosure for investment can look like a great deal. You pick up a property for a rock-bottom price, fix it up, and then sell it for a huge profit. But like many things in real estate investing, a closer look reveals that things are not as simple as they appear. To succeed in foreclosure investing, you’ll need a good understanding of the market, the risks involved, and good business sense. It is not a market for beginners in real estate.

Conceptually, the foreclosure process is easy to understand. However, in practice, it is anything but simple. Buyers need to know there are pitfalls to purchasing a home in foreclosure. With the housing market slowing and concerns the economy will follow, it is useful not only for potential buyers but also for existing homeowners to understand how and why a bank forecloses a home.

What is a Foreclosure?

Many people think the bank owns the home until you pay off the mortgage, or refinance, which pays off the existing loan with a new one, possibly passing it to a new lender. The bank merely holds the deed to the house as collateral to secure the loan.

When a buyer falls behind on their mortgage payments, the bank will send notices. Eventually, it starts the foreclosure process.

New York

Each municipality has its laws and ways to deal with foreclosure. New York State’s Department of Financial Services (DFS) lays out a general timeline. Once you miss your payment, the lender quickly sends out a late charge notice. After one to two months, the bank may send you a pre-foreclosure notice. The law states it must do so within 90 days of starting the foreclosure. During this period, you have the opportunity to work with the lender to find alternative solutions. The notice has to state how much you need to pay to bring your loan up to date and provide a minimum of five non-profit housing counseling agencies.

Within that 90-day time frame, the lender will send you a letter stating you are in breach of the loan’s terms and provide you 30 days to repay what you owe along with any late charges and penalties.

After 90 days, the lender can bring legal action. Involving many steps, including filing a formal notice of foreclosure with the court and serving you notice. The buyer has to respond. Otherwise, the court can automatically rule against you and order a foreclosure sale. Within 60 days, there is a court-mandated settlement conference.

Patience required

The process is not quick, which is why lenders do not like foreclosing on a home. If the foreclosure proceeds, the court proceeding can take many months, and after a court rules against the buyers, a sale can take several more months.

In New York, foreclosure sales are conducted via public auction, where the court sells them to the highest bidder.

Can You Get a Bargain?

A homeowner in distress may look to sell quickly. If the loan balance is below the home’s equity, they may provide a discount to raise funds suddenly and pay off the loan. Not the typical scenario, however.

Alternatively, the owners may have worked out a deal with the lenders under a short sale arrangement. You could obtain a good deal under these circumstances, but it typically takes a long time to complete the transaction. You are negotiating with the sellers and lenders.

Since banks do not want to own real estate, you might obtain a bargain on foreclosed or even pre-foreclosed homes. However, it is essential to keep in mind that you are competing with savvy investors. You might also find the house is not in great shape, and you have to incur significant construction costs.

What is Foreclosure Investing

Banks generally want to get such a property off their hands as soon as possible. When a homeowner fails to meet their mortgage obligations, the lender, usually a bank, will confiscate the property to recuperate the losses. This can present a prime opportunity for an investor to scoop up a property well below the market value.

However, the process is rarely a smooth one. Most transactions like this are done; with no warranty and, if done at an auction, the buyer will not inspect the house first. Down payments of 10-20% are often required to secure a loan that tends to come with high interest.

If you’re willing to brave the risks, there are three different options for acquiring foreclosures, each with its pros and cons. The first step is to decide which stage of the process interests you. Then decide on a strategy to purchase at that stage successfully.

Pre-Foreclosure Stage

The beginning of the whole process begins. If a homeowner is late on a mortgage payment, they will receive phone calls and letters from the lender. If, after 120 days, no payment has been received, the lender can initiate foreclosure. You can find pre-foreclosure deals in the 30, 60, and 90 days’ lists on various listing resources.

Knowing why the owner failed to make their payments is critical when dealing with foreclosure investing. If it’s a short-term problem, the owner may hold out until they can arrange a loan modification with the lender. If it’s due to a broader problem with the market, it can affect your chance of reselling.

The main benefit of this is that you can inspect the property first before deciding to buy. A downside is that the owner could be desperate to sell and ‘forget’ to mention any liens on the property; large utility bills or unpaid property taxes will become the buyer’s responsibility on the purchase.

Auctions

If the pre-foreclosure stage does not reinstate the loan, the property is sold at a public sales auction. Acquiring at auction is the riskiest choice as an investor cannot inspect the property firsthand. You have no warranty on the property’s condition, no assurance that there are no other liens or loans on the property, and no idea about the condition of the utilities. However, the upside is that you can walk away with terrific bargains if you play your cards right.

Most auctions are all-cash sales, and in some states, you may only have a week to a month to come up with the full purchase price. If you fail to raise the money in time, you lose your deposit.

If you do get a good deal at auction, the former owner may even file a lawsuit to overturn the sale, so be prepared to hire an attorney if needed.

REO Properties

The safest option but the least profitable is acquiring an REO (real estate owned) property. In this case, the property failed to sell at auction and is now owned by the bank or mortgage company. Since they now own it, they must remove tax liens and eviction of occupants if necessary.

Be aware that some REO’s might be exempt from standard disclosure agreements, a document requiring sellers to disclose any defects. Ensure that you have such an agreement before finalizing anything. Most REO’s are listed on the market and sold through a local agency. Because of this, there is more competition so that the profits can be less than the other options.

Before buying an REO property, research comparable prices, taking into account the cost of repairs. This would be prudent before preparing for resale. Many mortgage companies have staff dedicated to REO properties and will usually advertise through a listing agent.

Buying a foreclosure as an investment property requires caution and understanding both the risks and state laws. You can scoop up a property for a bargain and sell for a tidy profit if done right. Make poor choices, though, and you could be stuck with a money-sucking property that you can’t rid of.