How To Buy Reo Properties With No Money
Investors can purchase either pre-foreclosure or foreclosed homes. I prefer the former, as you can usually get better deals. Once you find a deal, hard money loans often let you buy a home with no money. If you need extra cash beyond the hard money loan, some great gap financing strategies exist.
Before discussing foreclosure purchases, I need to explain the foreclosure process, in general. Understanding this process provides insight into how investors can purchase these homes with no money.
While I prefer buying pre-foreclosure homes, opportunities still exist to buy homes once banks have foreclosed on them. More precisely, for banks, real estate auctions serve as a way to clear properties from the books. During the foreclosure process, banks seize homes from borrowers who default on their loans. With a mortgage, the associated home serves as collateral. That way, if the borrower stops repaying the loan (that is, defaults), the bank can seize the home and sell it to pay off the outstanding loan balance.
Due to this foreclosure process, banks often end up owning properties. But, holding these houses comes with significant costs, and it ties up capital that banks would prefer to A) lend and earn interest on, or B) use to meet required reserve ratios. Rather than continue holding these houses, banks choose to sell them. And, they frequently use auctions to make these sales.
Before bank-owned properties end up at a private auction, they go through a public one. Public auctions exist as an integral part of the foreclosure process. While I touched on it above, I need to cover this process in more detail here.
When borrowers stop making mortgage payments, banks send late notices. Each lender has a different policy, but they typically send these out until the 90-day late mark. At this point, lenders file a notice of default. This is a public declaration that a borrower has stopped making mortgage payments. Lenders typically publish them in a local newspaper while also filing them with the local courthouse.
If the acquisition/closing, rehab, holding, and transaction costs on this deal are $210,000 or less, the hard money loan will let you buy the foreclosed home with no money. But, it needs to be a really good deal for the hard money to cover 100% of your costs, which leads to the gap financing strategies in the next section.
To buy a foreclosed property with no money, investors must first understand the ins and outs of the foreclosure process. Once you understand how to buy pre-foreclosure and foreclosed homes, buying them with no money just becomes a matter of finding a hard money lender willing to work with you. And, the Do Hard Money team would love to help! If interested in buying foreclosed homes with no money down, drop us a note to get started!
No, not at all. Conventional mortgages, which are mortgages that can be sold in the secondary mortgage marketplace, are generally not assumable when they have fixed terms. Conventional loans with adjustable-rate mortgages are sometimes assumable if the fixed period is over. However, government-backed mortgages, such as FHA, VA, and USDA mortgages are typically assumable.
If they are not willing to give you the assumption, you probably are going to have to look at a government-owned property that is a part of a special housing program. You may also have to save up extra money for a down payment.
The homeowners are going to be the final major hurdle that you have to deal with. If they are open to it, you might be able to get information from them regarding major repairs you might have to save up for.
However, there can be other issues that you might have that make them say no. These can include how much money you have in your checking account, how much debt you have, and if you have enough money to cover a couple of months of payments.
If your offer is accepted, you will sign a contract with the bank and transfer ownership. You might also be required to pay an earnest money deposit upfront, which is typically 1% to 2% of the purchase price and held in an escrow account until the sale goes through.
Also, keep in mind that with REO properties, the seller will likely charge a penalty for every day closing is delayed past the deadline. Having inspections scheduled ASAP and securing your financing ahead of time can help avoid any delays.
Buying REO property might seem like a cheaper and faster way to buy a house, which it can be. However, these properties come with some risks, too. Consider these pros and cons before deciding whether an REO property is for you.
Experts say that investing in an REO property can be time consuming, especially when dealing with banks and their protocols, so you need to be patient. While investing in REO properties has its share of risks and frustrations, if you know your goals and have the financial means and the patience, it can be an exciting and creative way to build your personal wealth.
Robin Rothstein is a mortgage and housing writer at Forbes Advisor US. Prior to this, Robin was a contractor with SoFi, where she wrote mortgage content. Additionally, she has freelanced as a health and arts writer. Robin, located in New York City, is also a published playwright. Her writing has been produced internationally and she worked as an operations specialist in the Broadway touring industry.
Foreclosure properties can be a potential goldmine, even for a novice real estate investor. Since foreclosure properties are sold for well under market value, making a purchase and repairing and cleaning up the property can mean large profits on resale. While most individuals assume that purchasing property must be done with impeccable credit and a lot of investment capital, there are ways for real estate investors to make a foreclosure purchase with no money down and no credit.
Locate owners of distressed properties. Distressed properties are those posted for a foreclosure sale. Foreclosure sale notices are posted at the county clerk's office where the property is located, and are of public record. The best time to do this is after the first Tuesday of every month, which is when the last batch of foreclosure properties were sold at auction, and upcoming foreclosure sales are newly posted.
Contact the lender who is going to foreclose on the property. Propose a loan assumption of the property, without having to qualify. A loan assumption without qualification simply means that you are offering to take over the mortgage payments for the bank, but that you are proposing to do so without the bank qualifying you based on your credit. Many times, smaller banks will agree to this if you can prove that you have at least three months of reserve payments on the mortgage in the bank.
Contact the distressed property owners. The easiest way to contact these property owners in most cases is by making a visit to their property directly. Speak to them about taking over their loan payments using an assumption. Doing so will mean that you have the deed and own the property, but that the past due payments are wiped out and the property does not have to be sold at auction, and they will not have a foreclosure haunting them on their credit history. If the property owners agree, you can proceed with the purchase.
Write up the agreement to purchase with an addendum for a loan assumption. This agreement is a standard contract that must be completed on state-approved forms. Obtain signatures from the current resident of the property, and submit it to the bank that is taking them to foreclosure. Once the lender approves the assumption, you are able to open escrow and close on the property.
Close on the property in front of a notary. Have the sellers sign the final documentation conveying the property to you, as well as the bank owner of the property, so that you are the new owner of record on the deed. Once the closing appointment is completed, you will receive your keys and the bank will have transferred the property in your name. At this point, you have made a foreclosure purchase with no money down and no one checking credit. 59ce067264