Tuesday, 12 January 2016

Foreclosures – An opportunity in distress

Foreclosure is a specific legal process through which a lender attempts to recover the balance amount of a defaulted loan by forcing the sale of the asset used as collateral against the loan. Large scale foreclosures signal an economy in distress and have significant implications to the real estate market.

Usually the lender is not into the real estate business and does not want to go on accumulating he foreclosed property.  The lender does not have the resources to manage real estate property. Moreover, accumulating bad debts does not reflect well on the lending institution. Therefore, the lender is eager to sell off the property at a discounted price so as to close the account by booking partial loss.

The Economic Recession
The occasional foreclosures are individual failures. These can occur because of a variety of reasons affecting a particular individual, such as divorce, relocation, arrest or plain inability of the borrower to repay the interest and the balance of the principal amount of the loan. Such incidents become the subject of common gossip.

However, when foreclosures occur on a wider scale, it signals an alarming recessionary trend in the economy.  It indicates slowing down of business and industry, a rise in unemployment and an economy in distress. During the recessionary period no one dares to borrow money and make new investments.  There are few t takers of loans and. consequently, the interest rates fall.

An Opportunity to Invest
Large scale foreclosures offer a great opportunity to buy properties at heavily discounted prices. Everyone shuns away from buying property at such times. Few have the daring to take risk. However, according to Jeff Adams, a seasoned advisor for investing in real estate, it is the right time to take a plunge.

Of course, an opportunity to make quick and huge profits attracts big sharks to the dark waters. The hedge funds, with their full access to technology and information, have already sniffed their meaty nourishment in the troubled waters and waste no time in getting there. They elbow out all small investors and, with their huge capital resources, leave no room to small players.

Hedge Funds
Hedge funds constitute a group of high net worth investors. Collectively, they have huge funds at their disposal. This gives them the great power to manipulate the markets to their advantage.  The hedge fund managers have a free hand in making investment decisions unlike other publicly accountable funds, such as mutual funds, pension funds etc.

The only concern of the hedge funds is not to keep the funds locked in idle investments for too long. Therefore, they have to reap quick profits and to move out well before the scenario changes.

The small investors, however, can exercise speed and daring to buy good properties in the adjoining area.  They can hold the property a little longer till the demand picks up.

Interest Rates
The interest rates play an important role in property investment decisions.  Apart from the ability to borrow money, they also indicate the demand for property.  The central monetary agency uses the leverage of interest rates to nurse the sick economy back to health. They use this leverage to regulate the flow of gross savings into developmental investments and also into real estate or the housing sector.

Foreclosure Terms and Explanations

·         Foreclosure: The buyers make fixed payments to the lender every year towards eventual ownership of the mortgaged property. In the event of defaults, the lenders exercise their right to take possession of the mortgaged property, which is technically known as foreclosure.
·         Pre-Foreclosure:  This stage precedes foreclosure, where the lending bank sends a notice to the owner giving a stipulated time to pay up the amount in default.  The failure to comply will follow foreclosure. The owner, however, has the right to sell the property during the notice period and pay the dues preventing foreclosure.

·         REO’s: Here the lending institution repossesses the foreclosed property put up for auction in case there are no bidders. Hence it is known as REO or the Real Estate Owned .

The foreclosures are of following two types:
·         Judiciary:  These are legal property transfer records which permit the owner to reclaim the property after paying the amount due within the stipulated period of time.
·          Non-Judiciary:  Here the auction process is handled by an independent third party. There are no redemption periods in such cases unless agreed upon by the owner and/or buyer.


 It is highly profitable to buy foreclosed property at auctions. Large scale foreclosures often throw up a gem of opportunities to buy properties at highly discounted prices.

A low interest rates regime has been prevailing in the market for quite some time. Borrowing money now at fixed rates of interest is very much advisable, as the current rates are unlikely to go further down.


No comments:

Post a Comment