Whether you're a relocating family or an investor looking to make money flipping homes, Central Florida foreclosures deserve your attention…especially the homes in Downtown Orlando. Buying a foreclosed home will afford you the freedom to make lovely interior adjustments, colorful landscaping upgrades, and a variety of other property embellishments.

What is a Foreclosure? A foreclosure occurs when a homeowner is unable to pay their mortgage. Because of this delinquency, the mortgage lender (bank) assumes full ownership of the home. This bank-owned home is referred to as a "foreclosed home".

If you are considering buying a foreclosed home in Central Florida, examine the following:

•    Understand the Advantages: Lenders want to recover the unpaid amount of the home's mortgage as soon as possible. As a result, many foreclosed homes are sold at significantly discounted prices. Sometimes, a foreclosed homes will sell for 30-40% of its market worth.

•    Inspect the Property: Some foreclosures are left in a state of disrepair. This is not necessarily a bad thing. Just make sure that the cost of the repairs will be be overshadowed by the value that they will add to the home.

•    Find an Experienced Agent: Buying a foreclosed home requires a specific body of knowledge and expertise. Find a real estate agent that is well-versed in the foreclosure market. Furthermore, some banks won't even sell to unrepresented buyers.

•    Know Your Credit Score: Examine your credit report. Make sure to correct any outdated information or previous defaults.

•    Understand Property Liens: Find out if the foreclosed property is attached to an liens; most notably, unpaid property taxes. If liens exist, find out who is responsible for them.

•    Paperwork: When purchasing a foreclosed home, expect more paperwork. Buying a home from a bank or government agency is a much more rigid process than buying from a real estate agency or directly from homeowner.

•    Compare: Compare the costs and advantages of a foreclosed home with other foreclosures and other new properties. Cross-analyze the cost of any estimated repairs with the discounted home price.

Once you've examined the pros and cons of purchasing a foreclosed home, then get ready for the thrilling sensation of owning a new home.

How Does a Foreclosure become an REO

A real estate owned (REO) property is one that returns to the lender after a wasted attempt to sell it at a foreclosure auction. Most foreclosure auctions do not end in the purchase of a home. The reason for this is simple. If there was sufficient equity in the home to satisfy the loan, the homeowner most likely would have sold it and paid off the bank, avoiding the foreclosure in the first place. A property generally only ends up in foreclosure when the owner owes more than the property is worth and is unable to keep up with the payments. Foreclosure is the final option.
Foreclosure auctions start with a minimum bid amount that covers the balance of the loan, accrued interest, legal fees, plus any costs associated with the foreclosure itself. To qualify as a potential bidder at a foreclosure auction, you’ll need to have a cashier’s check that will cover the entire bid amount. If you are the winning bidder, you agree to take the property ‘as is’, which may include current tenants or property liens.
Since the amount owed to the bank is usually more than what the property is actually worth, very few foreclosure auctions turn out successfully. The property then returns to the bank and becomes an REO or ‘real estate owned’ property.

REO Property

Once the property has reverted back to the bank the loan no longer exists. From this point, the bank must handle any necessary evictions and arrange for property repairs. The bank will negotiate for removal of any liens and pay off any other balances associated with the property.
As you can imagine, after all this takes place, a bank owned home might not be the ideal purchase for a potential investor. Do your homework before making an offer to a bank. Make sure you are not caught in a bidding war where you may end up paying more than current market value. Purchasing a foreclosure at pennies on the dollar is more of a myth than a reality. Banks are not interested in losing money.

How Do Banks Sell REOs

Every bank may do things a bit differently when selling REOs, but rest assured that their common goal is to make a profit or at least break even. If you decide to make an offer on an REO, be prepared for a series of counter offers. Remember, banks have shareholders, investors and auditors to answer to. They are not going to loosely dump properties at a fraction of their market value.

Another thing to take into consideration is that banks generally sell property in ‘as is’ condition. Be sure to obtain a home inspection and include any needed repairs in your reasons for counter offers. If the bank can see solid proof of the value of the home they are more likely to agree to your terms.
Now that you have a solid understanding of bank owned homes, you will be prepared to view them in their true light, not as the ‘steals’ that many infomercials portray them to be.

Who Benefits from the Deal?

Realistically, the seller, lender and the new investor can all benefit from taking part in a short sale. The seller avoids foreclosure while the buyer obtains the property at a reduced rate.

The lender also benefits because they look at the short sale as a way to avoid the burden and extra cost incurred when dealing with a foreclosure. With so many homes on the market right now, a short sale makes sense to the lender. The deal is wrapped up quickly and the home never sits vacant, becoming a monthly loss for the bank.

For a short sale to occur, the seller initiates the deal by contacting the lender who then agrees to accept a price that is lower than the amount owed on the property. If this occurs, the seller is typically forgiven the remainder of the loan and they don’t carry the blemish of a foreclosure on their credit record.  A short sale will affect the seller’s credit to some degree, but isn’t considered as serious as a foreclosure.

Getting it Right

In order to avoid any potential pitfalls, the buyer and seller should have a solid understanding of the short sale process. There are two scenarios in which a short sale is almost certain to fall through:
•    Bankruptcy- If the seller has already filed for bankruptcy, few lenders will negotiate a short sale. A short sale falls under the heading of a ‘collection activity’ which is prohibited during a bankruptcy.
•    No late payments- The seller must be in financial distress in order to qualify for a short sale arrangement. If the seller is not behind on mortgage payments, other options will be looked at by the lender first.
If the seller does qualify for a short sale arrangement, all bank negotiations and agreements should be made in writing. The seller has three main subjects to negotiate; selling price, forgiveness of outstanding balance of loan and how the bank will report the short sale to the credit bureaus. Once those three issues are settled the short sale process can begin.

Can a Short Sale Work for You?

As an investor, buying a property in a short sale has big benefits. You will be able to pick up the property at a substantial discount. Since the lending institution is eager to avoid any extra losses, they may be willing to offer favorable financing terms to you as well. Finally, since the seller is playing an active role in the entire process, you will have their cooperation, unlike a foreclosure where there is typically an eviction process to deal with.

When handled the right way and a thorough knowledge of the process, the short sale offers unique benefits to every party involved.

Although these homes typically don’t involve incredible savings, there are distinct advantages to purchasing a real estate owned property. Here is a list of REO benefits:
•    The property is free from tax or other property liens. Once the bank owns the property, it does all the proper negotiations to free the home from all claims against it.
•    REO homes are usually vacant. The bank has already gone through the eviction process, which takes that responsibility off of you.
•    Foreclosures may need extensive repairs. REOs have usually been through the fixing up stage as well which makes it ready to move into or resell.
•    If repairs do need to be made, the bank will make allowances for this by reflecting it in the selling price.
•    During times when the market is slow, an REO can often be picked up at a discounted price.
•    Lenders will generally accept less money down when you are purchasing an REO property. They will often pay the closing costs as well.

In order to save time and money, many banks try to offer REO properties to large investors in the form of real estate portfolios which include the purchase of a large number of properties at once. This is where the substantial savings to an investor come into play. If you are in the position to purchase several properties at once, this may be a viable option for you.

In today’s real estate market (while there are plenty of REOs available) you may be able to take advantage of a good deal…even when purchasing an REO as a single home purchase.

One thing to keep in mind is that REO properties are sold ‘as is.’ Never consider investing in a bank owned property without using a qualified home inspector. You’ll need to make a realistic assessment of all repair work involved, both major and minor. Obtaining a home inspection can sometimes help you to leverage a better price when going through the offer/counter-offer process with the bank.  Submit all repair estimates with your counter offer to increase the chances of your offer being accepted.

Also expect the entire process of purchasing a real estate owned property to take longer than buying from a homeowner. Each offer and counter offer that is made must be approved by several bank personnel before getting back to you. This process can take weeks or longer, depending on how many counter-offers are involved.
If you do your homework and take the time involved in purchasing a real estate owned property, you can come out on the winning end of the deal.