Before a house is foreclosed on, vacated and becomes a REO listing it is considered a pre-foreclosure. Pre-Foreclosures are historically bad investments for a number of different reasons:

Home Owners don't Normally Leave the House in Good Condition

Not all houses are voluntarily vacated by the occupant and this is not always an easy task. People who have lost everything are not generally amenable to the eviction process. They often blame the bank and take out their aggression on the home itself. Tearing up carpet, walls, stealing appliances and even copper piping is not uncommon in pre foreclosures.

If in fact you are forced as the new owner to perform the eviction process; in some parts of the country this can be performed in days and in others it can take months. Imagine evicting a single mother with children around Christmas? It is not easy when the woman shows up to court with the kids and its snowing outside. Meanwhile you are still paying their mortgage.

Pre Foreclosures are Difficult to Inspect

Because the home owner still lives in the house it usually cannot be inspected until after you take possession. This means the people who have been foreclosed on will look at you as the bad guy and are not very helpful in your pursuit of profits.

The House doesn't Go To Foreclosure

More often than not the house doesn't go all the way to foreclosure. The current owner can file bankruptcy and hold off the foreclosure process. This means that your efforts and information gathering are wasted.

Lender Normally Retains Ownership

If the house does eventually go to foreclosure the lender can retain ownership by bidding on the home. This insures that they don't sustain any more losses. This decision will nullify your bid and again you will have wasted a great deal of time in research and preparation for an auction that will not be on an even playing field.

Unpaid HOA Fees become Your Responsibility

Any unpaid homeowners association fees become the responsibility of you, the new owner. The same is true with condo fees and many times tax and mechanics liens. this means that you are bidding in the blind and your potential profits are reduced based upon information that you find out only after you own the house.

When the house is bought back by the bank, it is finally considered a REO listing and becomes part of the inventory of the bank/lender. This is when it is the most effective to spend your efforts on making a purchase of the property. Every once in a great while lightening will strike but it is rare and not a wise use of time in the long run.

HUD Foreclosures

HUD foreclosures and VA Foreclosures are some of the best homes to buy when price is part of the equation. As with most Americans, price is always a concern. If not buying the same house for less, why not buy more house for the same dollar invested? When looking for a good deal it is hard to do better than the VA or HUD foreclosures market. The simple truth is that there are just more VA and HUD homes on the market, as they represent such a large number of mortgages that are generated each year. This translates into more foreclosures just by the magnitude of difference between all others comparing to the two largest.

The two largest also being government owned and operated means that they have less time to wait to make money back on the home. The FHA is especially known for selling HUD homes for less than the average sales price in a given area. FHA foreclosures represent a fraction of HUD but they are still a significant number of homes and both should be considered.

VA (Veterans Administration) and HUD (Housing and Urban Development) have different and unique opportunities for the buyer. Both are often forgiven for the local taxes normally associated with the purchase of a home (this is on a county by county basis). Be sure to ask the local title company or escrow company to look into it for you before closing as this is often missed due to their are not used to dealing with the 2 to 3 percent of the market that VA and HUD foreclosures represent.

Foreclosure Listings Increasing

As the market settled after the mortgage meltdown foreclosure listings also settled and fewer homes were on the market with a placard reading “Bank Foreclosure” in big red lettering. This was a good thing for the entire real estate market. Having an abundance of foreclosures brings the entire market down and it makes it harder for home owners, who would like to move, to get the appropriate price for their home as a similar home down the same street was sold for substantially less and the appraiser is using the foreclosure as a comparable sale.

This is just one of the problems when there are too many foreclosure listings in any area. Another issue is the television set that sits in everyone’s living room harping about the price of homes based on the number of foreclosures and this constant barrage of negative information makes most people sit on the sidelines waiting for the market to either implode completely or to correct itself. Meanwhile while they wait, others are buying foreclosure listings and making great investments.

Whatever the reason, a market can only handle so many foreclosure listings at any given time. The more foreclosures, the lower the market gets and this is a lesson the banks that were foreclosing and selling off realized too late. The market and their investments would have been better off if there had not been a rush to divest themselves of the toxic assets made more toxic by their own actions.