What Is Foreclosure in Real Estate?
I’m Ted Thomas, and today I’m going to answer your question, “What is foreclosure in real estate?” I’m also going to give you some inside tips on how to make money and show you a few things to avoid.
I can assure you there’s a lot of hype about foreclosure. There are times in the United States when there will be a million foreclosures going on in one year.
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Foreclosures Occur in Good and Bad Economies
I’ve been teaching tax lien certificates and tax defaulted property for 25 years, and for 5 years before that, I was just an investor and involved in the big business of foreclosure.
When the economy is good, there are foreclosures, and when the economy is bad, there are foreclosures. It’s always the same thing because people aren’t making their payments.
The Problem With Small Down Payments
What is a foreclosure? Well, the banks will lend on property, and in the past, they were happy to lend 80% of the value of the property. Prior to that, in the early part of the century, they didn’t even make that big a loan.
Now, they’ll make loans up to 90%, 95% and even 97%. If a lender lends 97% on the property, that means the property owner only put down 3%. It’s very easy for people to walk away from 3%.
Real Estate as Collateral
Foreclosures don’t go down; they continue to increase. Why is there a foreclosure? Because the bank wants the property as collateral.
When you ask for a loan, the bank says, “We’ll be happy to give you a loan.” However, when you get the loan, you sign the collateral over to the bank. Now, the bank will take the property if you don’t make the payments.
Why It’s Hard to Make Money on Foreclosures
This is a big business for brokers, and in a mortgage state, it’s a huge business for attorneys. A lot of people are involved in that business. That’s made it very expensive, so it’s hard to make money on foreclosures.
The number 1 reason it’s hard is because people don’t have any equity. They haven’t made a large enough down payment, and they haven’t paid long enough.
If they don’t pay their mortgage, the bank could foreclose. If the bank forecloses on a 97% loan, I can tell you right now, they’re going to lose 10% or 15%. That’s no place for you to be. How are you going to make money on that?
Who decides on the foreclosure? The bank does, and they’ll do everything they can to delay the process.
Foreclosure on a Mortgage
Foreclosure works differently in different parts of the country and that’s because there are different loans in different parts of the country.
Let’s start out with a mortgage. Everybody knows what a mortgage is, nothing more than a promissory note. A promissory note is signed by someone, and then they pledge the property if they can’t pay it. The property was the collateral, but if it’s a 97% loan, they haven’t lost anything.
Foreclosure in Real Estate is a Judicial Process
This might take months for the bank to get back. A foreclosure in a mortgage state is a judicial process which means there’s a judge and an attorney involved. That’s going to take months to get done, then finally they’re going to get the sheriff to come and issue all the notices to get the people out.
My point in telling you all of this is that it could take 3 months, 6 months, and some of the attorneys in Florida have perfected dragging it out for 2 years.
If you’re staying in the property and not paying for 2 years, you’re loving it because you’re defaulting and living for free in that house. That means you’re not paying property taxes or the mortgage payment. So, judicial foreclosure is a big problem.
Foreclosure on a Deed of Trust
States west of the Mississippi figured that out, and they don’t use a mortgage. They use what’s called a trustee or deed of trust.
Those deeds of trust can have the people out of the property anywhere from 100 days or less. In Texas, they give them 21 days from the time they issue it until the time the people have to be out and they’re selling the property on the courthouse steps.
Each one of these areas of the country still has foreclosures, but some of them act quickly. If they can act quickly, the bank or the lender can get the property back, sell it and maybe not take too much of a loss.
I’ve seen times in the country when a million foreclosures were taking place, and the banks were caving in because they couldn’t get the properties back quick enough to sell them.
Then if they got them back, they had to do short sales. In other words, they had to take their $100,000 mortgage and drop it to $50,000 just to get it sold.
The foreclosure business is not the place to look just to make a lot of money right now. Can you buy junker homes and difficult properties in the marketplace? I don’t recommend it.
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Tax Liens and Tax Deeds
I come from the foreclosure business. However, I got into the tax lien and deed business for a reason because I can buy properties legally, ethically and with good margins.
Why? Because tax defaulted properties are defaulted on property taxes, not on a mortgage.
Property tax is 1% or 2% of the property’s assessed value, while a mortgage could be 80% or 90%. Now, you get the difference.
If I can buy a property for 20 cents on the dollar, that means I’ve got 80 in margin left between what I paid for it and the value of the property. That’s where you want to be. That’s where the profit is.
Foreclosures vs Tax Defaulted Property
When you purchase foreclosure real estate, in addition to the mortgage or deed of trust loan, the back taxes will still have to be paid because taxes always have to be paid.
However, when you purchase a property at a tax defaulted auction, the mortgage or deed of trust loan is extinguished. You get the property mortgage-free.
What Is Foreclosure in
Real Estate: Conclusion
We hope you enjoyed Ted’s lesson, “What Is Foreclosure in Real Estate?”
At a foreclosure auction, a lender is attempting to recoup the amount owed on the defaulted mortgage or deed of trust loan.
The truth about buying a foreclosed home is that these days it’s difficult to make money on foreclosures due to low down payments leaving so little equity available in the property.
Conversely, at a tax defaulted property auction, the county is only trying to recoup the delinquent property taxes that are owed.
Since a mortgage could be as high as 97% of the property’s value and property taxes are only about 1% or 2% of the assessed value, it’s easy to do the math and see that tax defaulted property yields a superior profit margin.
If you’d like to know more about how to buy property with delinquent taxes, Ted Thomas provides full support and complete training with home study courses, Q&A webinars, live tutorials, workshops, web classes, and personal coaching with certified coaches.
You can learn how to reap the huge rewards from tax lien and tax defaulted property investing! Get started today by taking advantage of Ted’s Free Master Class! Act now, it costs you nothing and will give you a big head start!