Tick, Tick, Tick… Boom!
Foreclosure.com Scholarship Program Winning Essay 2022, (Grand Prize)
By Zoë Broderick | Georgetown University
“Tips On Purchasing Distressed Properties in Today’s Real Estate Market”
“Tick, tick, tick… BOOM!” In recent years, the real estate housing market in the United States has exploded, at times it even mimics the suspenseful and thrilling plot of action movies, with characters racing against a ticking clock to follow clues on a map. Considering the beginning of 2022 boasted record high prices thanks to high demand and low-interest rates, timing and strategy are critical when purchasing a property. It is hard to predict what changes 2023 will bring. Although the stakes will likely remain steep in this industry, it is also ripe with opportunities when you explore the equally high number of properties in distress, such as those being foreclosed on, sold to satisfy bankruptcy filings, or houses that have tax liens against them.
Whether you are a professional who aspires to be a homeowner rather than pay rent or you would like to build wealth via real estate acquisitions, purchasing distressed properties is an option for you if you are cautious and take the right steps. Regardless of your motivation to purchase a home, educating yourself on the best practices and acting decisively are as crucial to fully capitalizing on a fantastic property deal as a director’s final cuts are to making a film into a blockbuster.
Luckily, there is no better time to maximize these opportunities but, first, it is worthwhile to understand the state of the market. The Covid-19 pandemic pushed the government to implement the CARES Act, which offered forbearance or foreclosure moratoriums to homeowners under financial duress. As time counted down to July 31, 2021, when this lifeline expired, homeowners found themselves shackled to higher and longer mortgage payments that were still unsustainable. Though laws differ from state to state, these homeowners faced a few consequences: traditional foreclosure, bankruptcy, or tax liens. Many surrendered their homes in bankruptcy, handing their keys back to their lender to extinguish their liability on the loan. Other homeowners faced foreclosure, in which the property itself is sold to pay off any outstanding debts. Homeowners in states that use tax lien foreclosure faced yet a different process in which their local government auctioned off the tax lien on their home instead of auctioning off their physical property.
During the Covid-19 pandemic, many individuals whose jobs transitioned to virtual found themselves no longer dependent upon their location. Consequently, they were eager to purchase homes elsewhere and ready to pay a pretty penny above the asking price for a property, including distressed ones. This emerging shift also aided homeowners exiting forbearance because it meant they could sell their homes for a profit instead of facing foreclosure or bankruptcy. Unfortunately, the downside of this model is that young adults with typically lower budgets face more barriers than ever before when trying to break into the housing market. As a resourceful solution, they turned to finding distressed, diamond in the rough, properties as their entrance into the market.
One of the best places to unearth these hidden gems is at auctions, where foreclosed properties are most often purchased. To walk away with a good deal, buyers are advised to discard a shotgun mindset and focus on practices that will mitigate risk. Thoroughly do your research on a property beforehand; familiarize yourself with the local real estate market, infrastructure projects, state and local government standards, and the strength of the business community, to ensure that the property has the potential to be profitable. Buyers need well-thought-out strategies that include their investment goals and how they will acquire, use, and potentially sell the property. This is even more critical when investing specifically in the foreclosure market. Before investing capital, you must determine if the foreclosure occurred simply as a result of some unfortunate circumstance related to the former owner or because of a broader trend that may affect the local market and, thus, your investment.
Implementing research on the front end will ensure that your new property will be both a house and also an investment, which is exactly what Jenna, a first-time home buyer, did when she set her mind to purchasing a foreclosed property. Despite knowing that auctions could be risky due to murky information surrounding the condition and past of the property, she was encouraged by the potentially small bidding pool and value proposition. She learned about ways the local and state government planned to support business issues and economic growth, such as roads, traffic, crime, schools, and taxes, and selected properties in locations poised for redevelopment that present an opportunity to grow in value.
Jenna utilized property auction websites and found a house that met all her non-negotiable needs: two baths, three bedrooms, an office to accommodate her love for archaeology, and a yard for her dog. Putting her newfound knowledge to the test, she limited her search only to auctions that allowed bidders to inspect the property before bidding. This strategy is beneficial if you prefer not to risk buying a house in poor condition. The real estate attorney she wisely hired to guide her through the process informed her that the lending institutions did not offer a seller disclosure with the property. Undaunted, Jenna persevered and obtained an inspection of the property to ensure that she could afford the cost of all of the necessary repairs in addition to the mortgage payment. She then hired a title search company to confirm that there were no outstanding liens against the property.
On the day of the auction, she submitted a refundable deposit of five to ten percent of the property’s total expected sale price to the bank running the auction. Jenna knew that it was standard practice for the minimum bid for a sale that occurs through an auction to consist of the amount of back taxes owed, plus interest, as well as the costs associated with selling the property. She kept this in mind when formulating her highest bid and, fortunately, won the auction! Next, as with a typical sale, Jenna went through the escrow and closing processes with no hiccups.
Five years later, Jenna’s entrepreneurial and savvy spirit has paid off. Her house, though a fixer-upper, has been a joy, and she avoided the bloated housing market. Careful not to improve her home too much and price it out of the market, her conscientious renovations have now made her home worth considerably more than she paid. Jenna is thrilled she will be able to sell her house for a sizable profit thanks to the deal she got on her foreclosed property, and is even considering retiring early. When asked about her foreclosure experience Jenna said, “We do not follow maps to buried treasure, and X never, ever marks the spot.” Although she, a self-proclaimed archaeology nerd, was quoting from Indiana Jones and The Last Crusade, this is a perfect metaphor to encourage buyers to do their homework on a property, follow proven strategies, set clear goals, and remain flexible throughout the journey. Investing in financially distressed properties can be a tricky and time-consuming process, but there is potential for a lucrative reward for those willing to put in the work.
Say your situation is a bit different from Jenna’s; you already have a primary residence but are looking to invest in another property without shouldering the full responsibility of ownership. Properties with tax liens are a great choice. The main difference between tax liens and foreclosure is that purchasing tax liens requires a much lower capital expense than buying an individual property, sometimes as low as a few hundred dollars. On the day of the auction, a bidder is required to set the interest rate they are willing to accept, which typically is between ten and twelve percent. If the individual wins, they must first pay the amount of the tax liens to the government before they start collecting payments from the homeowners (with interest, of course). Over time homeowners pay their debt to the investor, and, in turn, the investor benefits from the passive profit earned from the interest.
The current market is the perfect time to capitalize on tax liens because the nature of this investment protects investors from market risk and the responsibility of property ownership. If housing prices decline, the interest rate of a tax lien will still be fixed, which offers a buffer of security as other investors may be forced to sell off properties in their real estate portfolios. Fortunately, due to the low capital required upfront, tax lien properties are accessible to the average person trying to make some passive income.
However, tax liens investing is not for the faint of heart, as some properties can turn into an Achilles heel if you’re not careful. Fully assess the property the lien is against and learn about the local real estate laws in the county or city. As a rule, a motivated homeowner is the number one attribute to look for when considering whether to purchase a tax lien on a property. Investors should consider the worst-case scenario, too. If a homeowner defaults on their debt, ownership will transfer to the purchaser of the tax lien, and they will be responsible for executing the sale of the property. While some top-level investors thrive on challenges like this, for the average person, this may be way more than they bargained for.
The parallels between Hollywood movie themes and the home real estate industry are ironic. Do you remember the legendary movie The Goonies? In the film, a group of children spend a final weekend together after their homes in the Goon Docks area of Astoria, Oregon face foreclosure due to an expanding country club. The movie is a fun adventure story wrapped in a journey to find riches. Similarly, by investing your time, knowledge, and money to capitalize on the influx of distressed properties in the aftermath of the Covid-19 pandemic, you can embark upon a quest for a treasure of a property. Distressed properties offer premier benefits for buyers ranging from passive income generated by tax liens, which can help ensure financial prosperity during economic downturns and bursting housing bubbles, to those looking to pinch a penny on a mortgage instead of rent.
Purchasing properties in foreclosure, bankruptcy, or with tax liens requires focus, diligence, and careful research into local property, economic, and demographic trends. It also requires forming a strategy for acquiring properties and selling them. By educating yourself on the best practices and judiciously applying them, you will avoid missteps that can cost you time and money. Now that navigating distressed property investments, and risk-mitigation strategies, has been de-mystified, you can direct your next blockbuster real estate deal and live a real-life version of happily ever after, just like Jenna was able to.
The winning essay above was submitted to Foreclosure.com’s scholarship program. To submit an essay for the current Foreclosure.com scholarship, please click here.
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