Our overall rule of thumb is: “If it sounds too good to be true, it usually is unless I can personally confirm otherwise.” Aside from that general advice, here are a few of the more common foreclosure myths, and the truth of the situations:
• Myth: You can get rich buying and selling foreclosures.
Truth: Only a very few, very dedicated, and very lucky people get rich buying and selling foreclosures. Your odds are probably better in Las Vegas. The truth is, you can make some good investments, you can find a home at a discounted price, and you can supplement your income or even provide yourself with a comfortable living in foreclosures. Depending on how you define it, getting rich is only a reality for the tiniest minority.
• Myth: Only modest homes in poor condition are foreclosed.
Truth: Foreclosures respect no boundaries when it comes to income levels and values of homes. The upper class, lower class, and middle class all have members who live beyond their means, and many members who suffer economic setbacks in their jobs or have unexpected expenses that take all their money. The borrowers are generally not financially irresponsible, and their properties are usually in good condition. They have been good homeowners, they are willing to make sensible choices, and they will work with you if you can provide them with some solutions.
• Myth: Foreclosed homes can be purchased at deep discounts of 50% or more.
Truth: This is rarely true. Yes, in former days most home loans were 80% of the value of the home, and the borrower probably also made some principal reductions with his or her regular payments before the default. If you could buy the home for the payoff on the loan, you might get something at 75% to 80% of the market value. Today, many foreclosures are for loans of 100%, or more, of the value of the home. Some company such as the Federal Housing Administration (FHA) or Guaranty Mortgage Insurance Corporation will guarantee the loan so the borrower can obtain more than 80% of the value. That insurance company will take a loss if the property sells for less than fair market value. These companies are very creative, and very good at finding solutions that return the highest sale price possible.
• Myth: We are on the brink of seeing massive numbers of foreclosures, creating incredible opportunities for investors.
Truth: The subprime market meltdown is the most recent boogeyman feeding this myth. There have been many more over the years. First, economic downturns are rarely as bad as predicted, usually because of the large number and variety of brakes that can be applied to the system. Second, if everyone is being foreclosed, who are you going to sell your purchases to? Sure, you can rent them out to former homeowners who still need a place to live, but market rents will also decrease dramatically if things are that bad nationwide. Massive numbers of foreclosures will depress the entire real estate market, increasing your risks and decreasing your profits. What is best for you is a steady stream of moderate numbers of foreclosures.