Many investors tend to get into the foreclosure auction process, since they feel uneasy to deal with troubled homeowners who are frequently in a state of self-denial and reluctant to talk with an investor to hash out their alternatives. At the foreclosure auction process, you purchase the property in a more relaxed atmosphere. In many cases, however, you still need to deal with the homeowners when the moment arrives to take the property possession. Now, don’t bolt out and start taking up properties at a foreclosure auction just yet. Ignorant investors frequently get burned by rash diving before they learn to do the dog paddle. Foreclosure auctions are jammed with invisible risks, often ensnaring beginner investors into making expensive mistakes, like these:
1. Purchasing a Property Without Studying the Title
A title record shows who really own the property, the sum of money presently owed on the property and the order of mortgage priority – tax lien (high priority), first mortgage (second priority), second mortgage, and so forth. Do your research carefully.
2. Purchasing a Junior Lien Believing It is a Senior Lien
When you purchase “properties” at a foreclosure sale, you are really buying the mortgages. The initial mortgage of a property is known as the senior lien, which grants the buyer many controls over the property. Supplemental claims against the property are known as junior liens, which frequently get canceled out during a foreclosure proceeding. If you buy a junior lien by mistake, you may have just bought yourself a useless piece of paper. Only an exhaustive research of the title, can keep you away from making this frequent and potentially very expensive failure.
3. Purchasing a Property Without Scrutinizing It
A house may seem precious on paper, but until you look at it personally, you do not know for certain. The house may sustain significant structural and fire damage or a host of other flaws.
4. Paying Too Much for a Property Than Its Real Value
In the heat of a foreclosure auction, your exuberance to outbid other bidders frequently leads beginner investors into paying too much for a property than its real value. This almost ensures that you will wind up taking financial loss on the property.
5. Unable to Meet Obligations During Redemption Period
Many states have a compulsory redemption period, in this period the homeowners maintain ownership of the property and may redeem the title by paying the mortgage in full plus any back taxes and penalties. You have to prepare enough cash reserves available to pay the property taxes and to cover the property during this period. If you do not pay the property taxes, other investor may be able to buy a tax lien or deed in a tax sale and claim control of the property. You are also required to cover the property, since you are not covered by the insurance policy for homeowners. Do not bid on a property at foreclosure auction until you have done your research.
Polish up on the foreclosure regulations and rules in your area, and always study a property exhaustively before bidding – examine the title and scrutinize the house in great detail.