Foreclosures occur when a property owner is unable to maintain the monthly payments, and the lender forecloses and takes the property back. The one big advantage a lender has regarding land foreclosures, as opposed to residential foreclosures, is that no renovation expenses are needed. A home can be damaged, requiring large expenditures to prepare it for resale, while very little can be done to raw land.
Knowledgeable real estate investors have a strong interest in foreclosures because of the potential for immediate equity gain. Foreclosures usually involve a situation whereby an owner bought the property with a down payment, made monthly payments on the note, and thereafter lost the property due to inability to continue making the payments.
Because foreclosures often are the result of the owners’ financial problems, and have nothing to do with the property itself, a meaningful equity might exist. In other words, the property could be worth far more than the balance of money owed. As an example, if an owner is unable to sustain payments on the lender’s note in the amount of $75,000, and the property is worth $150,000—then the equity is $75,000.
For investors dealing in foreclosures, the key is to acquire the property for the balance owed on the loan, not for the market value. Using the example above, if an investor acquired the property by assuming the $75,000 note, then the equity would be an immediate $75,000. Consequently, if the investor paid the lender the market value of $150,000, then there would be no immediate equity.
Obviously, for anyone dealing in land foreclosures, the price being paid is of critical importance. Acquiring foreclosures and receiving immediate equity is a good deal. Acquiringforeclosures and receiving no equity is not nearly as good a deal.
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