The upside is huge - you could buy valuable real estate for only pennies on the dollar. A lot of people own real estate free and clear without any mortgages. Even if the former owner has something called redemptory rights - the ability to reimburse your purchase price plus expenses and interest and reacquire his or her property - you still earn interest at above-market rates. Many, many, investors buy at creditor sales for just this reason. They do not really want the real estate, just the high interest rates earned on their money.
People who are good at researching titles and liens are good investors for these properties. They are able to rule out obvious problems before they spend too much time and money on a potential investment. No matter how good they are, though, such investors should always obtain a title commitment and then a title policy. The title commitment costs a minimal amount.
It says that a title insurance company will insure the title - guarantee the title is good - if the auction takes place in a manner required by law and if you are the successful bidder. That gives you some comfort that it is okay to bid. The title policy is issued afterward, has an additional charge, and is the actual guarantee. The commitment says only that they will guarantee title if certain things happen and if you pay the premium.
You also need to be very organized to invest in creditor auctions. A large number of the properties being sold will be unacceptable because of the size of other liens that stay on the property.
You will have to establish your own personal profit margin, just as you would for anything else. But with a creditor auction, you have to factor in some additional risks that might cause you to decrease your normal offering price. Assuming you have title insurance and have no fears in that regard, these are the additional risk factors:
The former owner could file for bankruptcy, and under some circumstances, prevent you from doing anything with the property until all bankruptcy issues have been resolved. You either eventually get your money back, or you eventually proceed with your plans. That "eventually" part, and how long it can take, are what adds the risk.
In some states, the former owner and any other of his or her creditors have up to one year after the foreclosure to reimburse you for the money you paid at the auction, plus interest at some legally defined rate, and take the property away from you. This could prevent you from doing anything with the property until the time period expires. While the positive side of this problem was discussed perviously, merely receiving a refund plus interest may not be compatible with your investment goals.
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Note: This article was sent to us by: Wayne G. Cadill at 06282010
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