June 2017

Most Americans have seen ads on television for get-rich-quick seminars that teach novice investors the secrets of making money from housing foreclosure sales. In spite of all the hype, successfully buying and selling foreclosed real estate requires research, money, knowledge, experience and time. Furthermore, buying foreclosed real estate is not without risk. If you plan to try your hand at this type of investing, you need to be well-versed in foreclosure basics.

Foreclosure is the legal recourse lenders or governmental agencies have to recoup money owed them because a property owner failed to make payments. The lender/agency can take the house and sell it to satisfy the debt. Generally, the reasons for foreclosure include:

• Non-payment of a mortgage/home equity loan.
• Inability to meet a balloon payment.
• Failure to pay property taxes.
• Inadequate insurance coverage for the property.
• Inability/failure to maintain the property.

The foreclosure process involves three stages:

• Pre-foreclosure – This is the period between the time the homeowner stops making payments and when the land is put up for sale at auction. Investors typically deal with the homeowner during this time.
• Auction – This is when the property is taken from the homeowner and sold to the highest bidder. Either the county sheriff or a trustee handles this phase, depending on the state.
• Real estate owned (REO) – If no one buys the property at auction or if the lender is the highest bidder, the home becomes “real estate owned” by the bank. Banks usually sell REO properties on the open market through a real estate agent or third-party marketing company.

The most common method of buying a foreclosed property is during a sheriff’s auction or trustee’s sale. These auctions are held on a weekday morning. Investors cannot pay with credit cards, personal checks or IOUs, and they must make a sizable deposit or pay the entire sum for the property on the spot. Typically, potential buyers are not allowed inside the house before bidding begins. The only information prospective buyers have on which to base a purchase decision is what is available through public records searches and a curbside appraisal.

A second risk in sheriff’s auctions and trustee’s sales is that the homes are not guaranteed to come with a clear title. This makes the title search a critical, necessary part of your public records research. If a previous owner with a valid claim surfaces at a later date, you can lose everything you invested.

Also, homes sold at auction sometimes have liens that weren’t erased by foreclosure, such as an IRS debt, that could wipe out any profit you thought you would see from the resale of the property. Procedural errors and court rulings also could stop a foreclosure sale after you have invested time and money. Furthermore, some states have a statutory redemption period, during which time the original homeowner can repay what is owed, regain ownership and leave you with nothing.

Despite all of these potential drawbacks, buying an auctioned home isn’t always a perilous undertaking. Homes foreclosed by reputable lenders who are the first lien holders can be a fairly safe investment. If the deal is completed properly, and you have title insurance, there’s an excellent chance of getting a good title. Properties foreclosed by a government agency, such as the Department of Housing and Urban Development or the Veterans Administration, present less risk. These auctions are conducted online through a marketing company.

Buyers are permitted to examine the homes in advance, conduct inspections and obtain title insurance. The biggest drawback to government auctions is the limited availability of homes. Consequently, available properties attract a large number of interested buyers, which makes it a very competitive market with prices only slightly discounted off current market value.

If you are considering the idea of investing in real estate through buying foreclosed properties, prepare yourself by learning the ins and outs of the process and legal issues, and gathering whatever information you can on the property and parties involved. In doing so, you’ll help to minimize the risk that is inherent with this type of investment.

You rely on your homeowners’ insurance in the event of a theft, vandalism or damage. It might not cover your home and possessions during a natural disaster, though. Learn more about natural disasters and why you need extra coverage.

What is a Natural Disaster?

Several types of weather events are considered natural disasters. They include floods, hurricanes, tornados and earthquakes.

Does Homeowners’ Insurance Cover Natural Disasters?

Your standard homeowners’ insurance policy may cover natural disasters. This is especially true if you live in an area prone to a severe weather event. However, most standard homeowners’ insurance policies do not cover natural disasters.

Read your policy carefully to discover what coverage you have. In certain cases, your policy may cover flooding caused by a severe rain storm, for example, but not from tidal surges. You may also talk to your insurance agent for details.

Why You Need Extra Coverage for Natural Disasters

Natural disaster insurance supplements your homeowners’ insurance policy. It goes into effect if a natural disaster strikes. Not only does it give you peace of mind, but it can save you thousands of dollars.

How to Purchase Natural Disaster Coverage

Before you buy supplemental disaster coverage, check the policy and answer these four questions.

1. 1. Are you eligible?

      A natural disaster insurance policy may only be available to at-risk home owners who live in areas that are affected by natural disasters. For example, you might only be eligible for flood insurance if you live in a flood plain. Contact your state’s insurance commissioner, the Federal Emergency Management Administration (FEMA) or the National Flood Insurance Program (NFIP) for information on the most common natural disasters in your area. That information helps you determine if you’re eligible for natural disaster coverage.

1. 1. Is the timing right?

      The best time to buy natural disaster insurance is before a disaster strikes. Most policies have a waiting period, and they will not cover any damages, repairs or replacements if a disaster happens within that time frame.

1. 1. Does the premium fit your budget?

      The cost of a natural disaster policy varies based on your home, where you live and the disaster against which you insure your home. That policy could save you thousands of dollars if a natural disaster strikes, though. Evaluate your budget and your needs then compare several different policies to find the right one for your budget.

1. 1. Is the company reputable?

      When choosing extra coverage for natural disasters, evaluate the insurance company. A.M Best is one website that gives insurance companies a rating. A higher rating signals greater financial stability.

When you understand natural disasters and why you need extra coverage, you’re ready to start shopping. Contact your insurance agent to buy the policy that’s right for you.