Introduction to Pre-Foreclosures
In the real estate market, knowledge is definitely power-and the secret to profits! Since the subject of this book is pre-foreclosures, it's important for you to understand exactly what pre-foreclosures are and what opportunities are available to you. This book is dedicated to helping you build and/or improve a career in real estate through my hard-earned experience and knowledge, so let's get started!
Why Do Foreclosures Occur?
Often, people tend to think that foreclosures occur because of poor financial management by home owners and others. While this certainly can be true, there are really many different reasons why foreclosures take place. It's important for you to understand these reasons so you can deal effectively with home owners facing foreclosure and help them to make the best of a bad situation.
One reason can be a poor local or national economy. When jobs are lost due to cuts, outsourcing or other factors, homeowners lose their income and can no longer afford the mortgage payments.
A second reason can be personal problems. Most commonly, foreclosure is caused by divorce, death of the sole provider, or, increasingly, overwhelming medical bills due to the high cost of health care in the United States.
A third reason is the tendency of some first-time home buyers to over-extend themselves. They fall in love with the American dream of home ownership, but fail to have cash reserves to handle unexpected costs and emergency repairs that come with owning property. This means they fall behind and end up in a continual and losing game of "catch up." Eventually, they can't meet their payments, and foreclosure is the result.
A fourth reason is the availability of loans with high loan-to-value ratios. These days, loans are offered at 90 to 100% of the value of the property securing the loan. This means buyers can purchase a home with little or no down payment. Since they have little invested in the home, they may walk away at the first sign of financial trouble.
A fifth reason is the lenient terms offered by such governmental agencies as the Federal Housing Administration (FHA) or the Veteran's Administration (VA). This means lenders can be tempted to offer loans to individuals with suspect credit and job histories. Unfortunately, the result can be foreclosure.
A sixth reason is the existence of predatory lenders. These unscrupulous individuals and institutions target borrowers with low income, low credit scores, bankruptcies, and excessive debt. Since these borrowers can't tap into the conventional loan market, predator lenders offer them "subprime" loans with high interest rates and outrageously high late fees. Again, the result is often foreclosure.
A seventh reason is, oddly enough, low interest rates. Low rates can tempt buyers into purchasing more house than they can afford. Most families these days have two income earners; however when one of the earners loses his or her job, the family can often no longer afford the payments on an expensive home. They fall behind in those payments, and the lender starts the legal process of getting the property back.
As estated earlier, it's important for you to understand all these reasons. It will help you empathize with your customers-the home owners-and, at the same time, avoid bad deals. Now, let's look at the benefits of making a living in the pre-foreclosure market.
