Foreclosure cycles come and go, but this one is different.
"This is the biggest foreclosure cycle we've ever seen since the Great Depression," says Rick Sharga, VP of marketing at RealtyTrac Inc., an online real estate marketplace that tracks foreclosures.
With so many foreclosure properties there for the taking -- 121% more in the second quarter of 2008 than in the same quarter of last year, according to
-- you might be tempted to take advantage of some bargain-basement real estate. But if you are new to the real estate market, or even just new to the foreclosure market, there are a few things you need to know before you open up your checkbook.
Know the Foreclosure Process
There are three stages of foreclosure, and each requires a different buying strategy.
The first stage, "notice of default," occurs when the mortgage is 90 days delinquent, but before foreclosure has been declared. This means the owner is a motivated seller, and you have the opportunity to make an offer that benefits everyone -- the lender gets some money, the owner avoids foreclosure and you get a deal on a good home. However, you'll probably have to convince the bank or lender that it is in their best interest to settle for a loss on what they are owed.
The second stage is the notice of sale, where the house is put up for auction (called a sheriff's sale in some parts of the country).
Many properties in this stage are sold without the opportunity for prospective buyers to make an inspection, so you won't know the condition of the house until you buy it. That's a potentially major risk. You must also determine whether there are any liens on the house or any other problems with the title; this information is generally available free (but with a lot of paper shuffling) from your county records office.
If the auction doesn't meet the minimum asking price set by the lender, then the lender takes ownership of the property. This sets the stage for the most popular option for buyers of foreclosed homes: Real estate owned (REO) property, in which you buy the property directly from the lender or trustee.
In this case, Sharga says, the best deals often come after the bank has held the property for at least 60 days and is facing rising carrying costs for utilities, insurance and property taxes. Still, Sharga says buying a REO "is more of an art than a science." Banks want to get the most they can from a property, so there is no guarantee that you'll get a steal.
Know the Property And the Market
The most common mistake made when buying a foreclosure property is underestimating the cost of rehabilitating it. As the previous owner struggled to keep up with the mortgage, it is unlikely that he or she spent much, if anything, on upkeep.
Another common mistake is overestimating the local market. If you plan to have tenants, know the going rate for rentals in the area.
Likewise, if you plan to flip the house, get a good grasp of what comparable properties are selling for.
You can conduct this market analysis yourself via local newspapers and county documents. However, you might also consider hiring a Realtor to get a professional take on the local market.
Finally, err on the conservative side when you determine how long it will take to find renters or to sell the property.
Know Your Limitations
It's possible to make an excellent living buying and selling foreclosure properties, but as in any other business, you have to know what you're doing.
Be selective as you assemble your team, which will likely include a contractor and a real estate broker. Their knowledge of the local market can provide valuable assistance as you learn the ropes.
In the end, whether or not the foreclosure business is for you depends on your resources -- and not just the financial ones.
"You have to ask yourself how much work am I willing to do, how much money am I willing to spend and how much time can I give," says John Anderson, a foreclosure specialist and a broker with Twin Oaks Realty in Minnesota.
Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.