How To Buy Foreclosure Property Overseas
Handled correctly, buying overseas property in foreclosure can be exceptionally profitable. Prices are heavily discounted in foreclosures because people don’t have easy access to all the information they need and believe there’s extra risk involved. If you do your homework, however, you can get big discounts…
How It Works
The foreclosure process differs from country to country, but the basic rules are the same. A foreclosure is when a lender takes ownership of a property because the owner borrowed against it and failed to make repayments.
Most lenders then sell the property quickly to recoup some or all of their money. In theory, if the foreclosed property makes more than the lender is owed, the previous owner gets the remainder. In practice, lenders are often willing to sell the property for less than its worth because they only care about recouping their investment and don’t care if the previous owner gets any of their investment back.
There are two types of foreclosures to consider: pre-foreclosures or short sales, and foreclosed properties.
Pre-Foreclosures Or Short Sales
This is where the house is still owned by the previous owner, but they know they’re facing imminent foreclosure. A smart debtor will try to sell the house quickly to salvage some of their investment from the failing opportunity. They’ll want to get as much as they can for the property, but they aren’t operating from a position of strength.
If they don’t sell it soon, the bank will. And the bank will accept less for the property than the debtor could get by selling it themself. You can usually get really good deals by buying pre-foreclosures, but you won’t get the rock-bottom prices you can get from actual foreclosures.
Foreclosed Properties
These are properties that the bank has taken back. The banks then sell them to recoup their capital. The previous owner has lost the property and has usually vacated it at this stage.
These foreclosed properties can then be sold in one of two ways:
1. Real Estate Owned
This is where the bank advertises and sells the property themselves.
This type of foreclosure should give you time to get the property inspected. Because you can get an inspection, you’ll probably get a lesser discount than you might at auction because you’ll know more about the property.
2. Auction
Buying at auction typically means buying sight unseen or with only a visual inspection of the interior because you didn’t have the time or access to arrange an engineer’s report. When you don’t have a survey in hand, you need to keep a large contingency fund to cover any unforeseen repairs you find when you buy the property.
Foreclosures bought at auction can get you the biggest discount—sometimes 25%, 50%, or as much as 70% discounts on the market price… but they come with more risk. There is an element of gambling in buying second-hand foreclosed properties at auction.
In some countries, like Belize, foreclosed properties must be sold at auction to avoid bankers giving distressed properties away to their cronies for almost nothing.
How To Buy At Foreclosure Overseas
There are a few questions you need to ask yourself before you start looking at foreclosure properties…
Step 1: Assess Your Needs
Ask yourself…
- Is this property going to be your home or an investment property?
- How much are you willing to spend?
- How much renovation work are you willing to undertake?
You need to understand what types of properties rent well in that area if you’re buying for investment, and you need to know how much general renovations cost in your chosen country.
Step 2: Do Your Research
Research the local foreclosure laws and legal processes. Know your rights and obligations. Your lawyer should be able to help you here.
Step 3: Learn Your Market
Drive around, talk to realtors, and get an idea of comparable properties in the area. Don’t buy the most expensive house in the neighborhood. You should also review local foreclosure websites, print ads in local papers, multiple listing services, court records, realtors, and specialist foreclosure realtors.
Depending on what country you’re in, there may or may not be foreclosure websites you can use. Search the term online, and you’ll quickly find out. Print ads in local papers are still common ways of finding foreclosure auctions. In Belize, the local papers are full of foreclosure opportunities, and anything not in mint condition goes for pennies on the dollar.
Even if a multiple listing service exists in your chosen country, it probably doesn’t have a separate listing for foreclosures. Often it’s just listed in the description, so if there is a search bar on the website, search for “foreclosures.”
When it comes to realtors, some know their markets well, and others are just glorified phone answerers. A good realtor will be aware of distressed property and foreclosures in their area. If you find a good one, employ them as your buyer’s broker, paying them a commission to help you find and buy good-value property.
While common in the United States, searching court records for houses going to auction overseas may not be possible, or if it is an option, there may be language barriers. This is where your lawyer comes in.
Step 4: Check Local Requirements
Get a local tax ID number if you need one to own property in that country. Open a local bank account if it’s required to register property in your name.
This isn’t always necessary, but often when you buy a property at auction, the bank wants to close as fast as possible, meaning you need to be ready to move at their pace.
Step 5: Arrange Financing
If you require local financing, you must have this arranged before you make an offer. If you are buying directly from a bank, inquire as to how much financing they might offer you.
Get pre-approval for a mortgage if you need one. Overseas mortgages are more competitive now. Financing is generally only available for 50% to 75% of the purchase value.
Step 6: Do Your Due Diligence
Have your lawyer conduct due diligence on the property, ensuring the title is good and there are no outstanding debts, liens, or other impediments to the title.
Step 7: Appraisal
Appraise… inspect… peek through windows if you can.
If possible, you should get a full appraisal before bidding. If that isn’t an option, you should try to at least see the interior of the property before buying. This is often possible on the day of the auction. The last resort is to buy sight unseen. If this is the case, try to get a peek through a window to spot any obvious defects like missing flooring or ceilings.
Having your translator or adviser ask (or pay) the auctioneer for insight into the property’s condition is a good idea if it can be done without offending anyone.
Step 8: Bid
Make your bid at auction or at the bank. Keep enough cash in reserve for any repairs needed to get a loan.
Extra Steps For Auctions
Talk to a real estate lawyer beforehand. Bring an interpreter to the auction if you don’t speak the local language.
Have enough cash or a banker’s draft for the 5% to 10% deposit you’ll need to make on the day.
Be able to close on the property within the required timeframe.
Watch Out For…
1. Auction Fever:
Auctions are fun because of the action. Bidding against another buyer can be thrilling, but ego can take over. Know your price limit and stop bidding when you reach it.
2. Self-Destruction:
While pre-foreclosure or distressed sellers want the highest price they can get in the hope of getting some of their investment back, there is additional risk with buying from an auction sight unseen. Disgruntled former owners sometimes get angry that the bank is taking their property back, so they destroy the interior of the house out of spite or to try to sell the fixtures.
3. Squatters:
Squatters’ rights differ from country to country. You need to know there are no squatters living on or in your property. You also need to know if you can legally remove indigents or renters who have stopped paying rent. There could be long waiting periods before you can have squatters removed. The Dominican Republic has extraordinarily strong tenant’s rights, which you need to be aware of before buying property there.
4. Hidden Costs:
Back taxes and liens must be cleared by the seller before you take title. If they aren’t cleared, you’ll be liable to pay the previous owner’s debts. Ensure these outstanding debts are paid out of the money you buy the property with…
Sincerely,
Con Murphy
Editor, Overseas Property Alert