Archive for the ‘Preforeclosure Investing’ Category

Are you looking to buy a new home? If so and if you are on a limited budget, you may use the internet to research foreclosures. The sale of foreclosed properties is on the rise, and due to their affordable prices many people are looking into snatching them up either for a quick flip, or for their personal home. Somewhere in the mix you may find homes for sale that are in the pre-foreclosure stages, as you can gather from the name, these are properties that are headed for foreclosure, but not yet there.

As stated above, some pre-foreclosure properties are listed available for sale online. These may appear on foreclosure listing websites, but not always. There are two main ways in which pre-foreclosures are sold. A real estate agent is used or the current homeowners list the home as for sale by owner. As for who you should do business with, it depends on your own personal preference.

One of the many pros or plus sides to buying a pre-foreclosure that is listed through a real estate agent is communication. That real estate agent is whom you will have direct communication with. This may give you comfort and peace of mind. It is no secret that homeowners facing foreclosure are angry and upset. You can discuss the property and talk freely with the real estate agent in charge of the sale, but without having to worry about angering or offending them.

The biggest con or downside to buying a pre-closure through a real estate agent is the selling price. Real estate agents take a percentage of each sale. To ensure they get a decent paycheck, the price of the home increases. While pre-foreclosure homes, even in these types of cases, are still cheap, you may get a better deal when buying directly from the homeowner.

Speaking of buying directly from the homeowner, there are a number of benefits to doing so. One of those benefits is the deal that you may be able to walk away with. At the last minute, some homeowners will do just about anything to sell their homes before foreclosure starts. Selling a home allows a homeowner to keep their credit in goo standing. This means that you may be able to negotiate a better deal. All that really matters is that the mortgage lender gets their agreed upon share.

As it was previously stated, many homeowners are dealing with a wide array of emotions when faced with foreclosure. You may see this in the form of uncertainty. A homeowner may want to try and put-off the buying process as long as possible. Deep down, all homeowners wish for a last minute reprieve that will allow them to keep their properties. If you want to buy the property, make your intentions known, but do not be too pushy.

In addition to buying a “for sale by owner pre-foreclosure”, you may want to do a little bit of research. There are millions of homeowners facing foreclosure. Some of those homeowners do not know all of their options. You can approach a homeowner yourself and inquire about buying their home. You can research foreclosure records online or in local government offices. To get started, it is recommended that you send correspondence through the mail. This is considered less rude and invasive. It’s good if you hear back. If not, you may want to try again in another month.

With the foreclosure epidemic, more and more investors are understanding the importance and the advantage of doing preforeclosure and pre-preforeclosure deals.

Problem is that despite being the hottest ticket in the real estate market today, a lot of investors are still at a loss on what preforeclosure and pre-preforeclosure deals are, much less how to effectively profit from them.

So here’s an ultra-simplified discussion of preforeclosures and pre-preforeclosures and how you can turn them into one consistent cashflow machine for you – especially in the middle of this economic meltdown.

I. Determining the owners of houses in preforeclosure and/or pre-preforeclosure

These homeowners are usually anywhere between 3-6 months (sometimes even up to 9 months) late on their mortgage payments. Some of them may have been kicked out of bankruptcy for not being able to fulfill their obligations within their bankruptcy plan, thus prompting the judge to kick them out of bankruptcy.

These homeowners have properties that are probably around 1-3 months away from being foreclosed on.

One should not confuse preforeclosures and pre-preforeclosures and mix them up. An easy way to determine which is which is, pre-preforeclosures are properties wherein the owner is way behind on his mortgage payments and has little or no hope of ever catching up but has not received a notice of default yet or a lis pendens. Whereas, preforeclosures are properties where the homeowners are way behind on their mortgage payments and have been served a notice of default and a schedule for auction has already been set.

II. Finding out where these properties are

Normally, pre-preforeclosures are pretty difficult to find. These listings are not available to the general public and that’s the reason why not a lot of investors are able to take advantage of them. One option of finding these listings is from lenders. However, the easiest way to access a list of pre-preforeclosures is to get it from www.DoDeals.com .

On the other hand, preforeclosures are easier to access as these are usually available at the local court house. You just need to ask the clerk to give you a list of properties which have been served a notice of default or a notice of trustee sale or has a lis pendens filed against it. Furthermore, there are a number of online list sources which provide preforeclosure listings – some are free (but would probably have less good deals) and some can be had for a fee.

III. Getting in touch with the owners of these homes

When getting in touch with these homeowners, you can either call them up or send them a direct mail or a postcard.

Sites like www.whitepages.com and www.ZabaSearch.com are able to provide contact information for these owners so you can call them up immediately.

If you plan to just send them direct mail or a postcard sent through the United States Postal Service, make sure you use handwriting fonts (or better yet, depending on how many you’re sending out, handwrite them yourself. The reason for this is for your mail to look a lot more personal. Believe it or not, this actually improves response rates.

IV. Here’s what you tell them

When calling the homeowners, you can use this script (or something similar):

“Hi, my name is Tim. I work with a group of real estate investors… We buy 3-5 houses per month in your neighborhood… I’m just calling everyone in the neighborhood and I was wondering if you would consider getting a free cash offer on your house?”

Also, make sure that when you talk to them, you should ask them the following stuff (as detailed in the WOWWW video):

• What is the property worth?
• How much do you owe on the property?
• What repairs are needed on the property and how much?
• Will you sell for what you owe on the property?
• What’s the least you would accept if I can pay all cash and close quickly?

In this stage, it is important for you to hammer down on a price that you’re comfortable with or a price that you believe will be good enough for you to make money on.

Typically, the last bullet above works like a charm in upping the price a few thousand more.

V. Get it under contract

Once you have a price that you’re comfortable with, put the deal under contract.

When going through this stage and you’re not sure about the deal (ie: you feel as if the market value is too low and the asking price is too high, or the property needs more repairs than you expected etc) just go on and put the property under contract but in the special provisions, make sure you put “subject to final inspections” or “subject to partner’s approval” so you have a way out in case you need to back out of the deal.

VI. Exit Strategies

This refers to what you’re planning to do with the property afterwards in order to convert it into cash.

Wholesale – you get the property under contract for as low as you can get it and immediately flip it to another investor for a quick profit. This works in any economy and is considered the easiest way to making money in real estate.

Rehab and Retail or Rent out – purchase the property, fix it up and either sell it retail or hold it as a rental property. Although this exit strategy is usually more profitable, it is not recommended in the present economy.

Subject to – Lease Option – if you get the seller to agree to sell you the property for what is owed on it, you can take over the payments and sell the house using a ‘subject to’ agreement or simply lease it out with an option to buy. This strategy also works today however, it would take a bit more guidance and looking into before newbie investors close deals using this.

You should take note that you don’t simply decide on your exit strategy depending on your whim. You have to take into consideration the prevailing market situation, the profit margin that the property offers you, the capacity of the buyer, the kind of funds that the buyer is bringing to the table and so on.

For more information on how to close deals in the present economy, check out previous post on Investing In Real Estate During A Recession.

There are two main reasons why properties go into preforeclosure:

1. The homeowner lost employment, whether permanently or temporarily, and as such cannot afford to maintain his mortgage payments

2. The homeowner is faced with other urgent financial commitments (ie: medical bills etc.) causing the him to fall behind on his mortgage payments and not be able to catch up fast enough.

And with the present state of the economy, more and more homeowners are finding themselves under the dreaded spectre of having their homes fall into foreclosure.

I don’t need to tell you that there are more homes going into foreclosure nowadays than in any other period in history.

The moment a homeowner receives a notice of foreclosure, his options become clear cut:

1. Find a way to come up with enough cash to settle his accounts (like win the lottery or find hidden treasure or something similar); or;

2. Sell the house immediately

Given that, I think the choice is obvious.

He needs to sell his house immediately so he can settle his account with the bank or the mortgage company thereby preventing his credit from being ruined and affecting his purchasing ability for years.

Once the homeowner decides to sell his house, he has three options:

1. Sell the house himself (FSBO)

2. List the house with an agent and cross his fingers that someone buys soon

3. Sell the house to an investor who’s able to offer creative terms

Given the fact that the country is experiencing a recession, finding qualified buyers the is almost a guarantee that the homeowner will not be able to sell his house fast enough to end his trouble. Listing agents and realtors are faced with this problem (and that fact is actually the reason why there’s a prevalent opinion that investing in real estate in this economy is a bad idea), more so for homeowners who decide to sell their properties themselves. Needless to say, the first two options are not the best considering the urgency of the matter.

Option three then is the most likely choice and that is where you come in.

As an investor in the present economy, you should be able to present creative alternative options by which to approach preforeclosure deals.

One common thing is to do creative financing which allows even non-qualified buyers to purchase the property under terms thereby allowing the deal to be closed in a short time thereby spelling good news for the homeowner and yourself. There are a number of courses on this matter that discusses step-by-step procedures on how to go about this and how to structure the deals in such a way that guarantees optimum payout with minimum risk to all parties concerned.

It may be true that you don’t make as much profit investing in preforeclosures than you can doing wholesale deals and other real estate investing strategies, but considering the fact that the number of properties facing the prospect of being foreclosed on continues to rise steadily, you don’t have to worry about finding the next deal. It’s simply the difference between 1 big profit that comes only once in a while or 10 deals with a relatively smaller profit but come regularly for an extended period.

I believe the answer is obvious.

Doing this, you end up making some money for yourself and at the same time helping the homeowner avoid getting foreclosed on and destroying their financial status and also helping the buyer get a house despite the fact that they can’t qualify for a loan.

Foreclosures is an absolute nightmare for homeowners and is certainly not a matter to be taken lightly but it presents a very unique opportunity to investors to make a killing in the market and at the same time help these distressed homeowners.

If you look at the business sections of most papers in these past months, particularly on economic analysis, there’s probably one concept you’d come across several dozen times – foreclosures. Indeed, there is a “foreclosure epidemic” that has been plaguing the country for several months now and this spells a lot of bad news for most homeowners.

A foreclosure is a legal proceeding in which a bank or lender sells a repossessed piece of real estate due to the owner’s inability to make scheduled payments on the mortgage or deed of trust. Banks and other lenders typically consider a mortgage to be in default when several months have gone by without payments having been made.

Real bad news.

Despite this seemingly doom and gloom aura that radiates from the concept of foreclosures, though, this poses a great opportunity for real estate investors looking to buy an investment property or a house to live in at a discount. The sophisticated nature of the foreclosure process comprises of three stages, each offering a significant bargain buying opportunity. We’re going to discuss the first stage of the process which is considered by most investors to be the best time to buy a foreclosure property – Preforeclosures.

The preforeclosure period is the time between the bank/lender’s notice to the borrower (homeowner) of his default on the mortgage payments and the time when the property will be sold at a foreclosure auction. At this stage, the bank/lender has already informed the borrower/homeowner that he is in default and if such is not fixed within a specified period (as may be determined by sate law), the property involved will be sold at auction to the highest bidder. Within this specified grace period, the borrower/homeowner should reinstate the loan by paying off the default amount. The easiest remedy will be for the borrower in default to sell his house and use the proceeds to pay off the mortgage debt (even when these proceeds might sometimes be less than the amount owed). More often than not, the borrower ends up losing money or equity in this process, but most borrowers take this as a better alternative than having the property go into foreclosure. This is because failure to satisfy the loan obligation by letting the house go into foreclosure will pretty much result in the borrower totally losing all interest in the house; and more importantly, a foreclosure would almost completely ruin the borrower’s credit score. Finally, if the foreclosure auction does not fetch enough of a price, the bank may go after the borrower for a deficiency judgment. All this, while sad, provides weighty bargaining leverage that you can bring to bear on the homeowner in a negotiation to buy the property at a discount.

And, you guessed it right, this is where it starts to look good for you as the investor.

Buying a preforeclosure property is not a walk in the park, though. It requires determination and persistence and a lot of getting used to. Not to mention, these properties are a bit more challenging to find. One of the most effective options is to visit websites specializing in preforeclosure properties and similar listings. I would recommend GovernmentAuctions.org. You’d be blown away by their vast and comprehensive listings of proforeclosure properties. Another great thing about this site is that, when searching, you can narrow down your search by zip code radius and county.

Once you locate a preforeclosure prospect that fits your fancy, it’s time to initiate contact with the homeowner. The idea is to be able to communicate to the homeowner that you are interested in buying the property and you are willing to work out a purchase agreement that would be beneficial to everyone concerned – particularly to the homeowner by capitalizing on his potential to walk away with something to show for the property and ultimately avoid a bad mark on his credit history. This is real tricky as you wouldn’t want to appear all too forbearing and arrogant, instead, you would want to be seen as a friend willing to lend a hand.

The first step in buying a preforeclosure is to express your intent to purchase the property by mail. In most states, the grace period between the notification of impending foreclosure and the actual foreclosure can take several months. So don’t be surprised if most homeowners you would be contacting would not reply to your mail immediately. Typically, a homeowner’s first instinct when faced with a foreclosure notice is not to sell. He would first exhaust all options to remedy the possible foreclosure before even considering selling. That is why you, as the investor, should be patient – not to mention cautious. Dealing with homeowners in the preforeclosure stage may be like walking on thin ice.

Once contact has been made between both you and the homeowner facing foreclosure, proceed with the discussions and negotiations regarding the property. If all parties agree to push through with the sale, a Terms of Purchase need be negotiated. These negotiations will involve you, the homeowner and the bank/lender. A real estate agent can also be a valuable resource during the negotiating process as well as a real estate lawyer, especially if you’re not familiar with drawing up a purchase agreement (as most lay people are). Put everything in black and white and make mental notes (or physical notes if you prefer it that way) so you may familiarize yourself with details of preforeclosure closing procedures much quicker.

After all is said and done, buying preforeclosure properties truly is a challenging ordeal. But once you get the hang of it, it opens a whole new world of real estate profit opportunities for you.

In order to invest profitably in the pre-foreclosure market, it’s necessary to understand all aspects of the foreclosure process and how to operate in each of the stages within that process. It’s also necessary to understand what options are available to homeowners so you can see the process through their eyes and help them to make the best decision possible as well as the best one for yourself.

Let’s start by looking at the three stages of foreclosure—pre-foreclosure, foreclosure and real estate owned (REO or OREO). As an investor, you can operate in any three of these stages, but, as you’ll see, the pre-foreclosure stage offers the greatest profit opportunities and the least amount of hassles.

The Pre-Foreclosure Stage

As you learned in the introduction to this blog, a pre-foreclosure sale takes place between the time when the lender files suit and when the property is scheduled to be sold at a public foreclosure action or a trustee’s sale. Here’s an overview of the benefits of buying pre-foreclosure properties so you can contrast them with the disadvantages of the foreclosure and REO stages.

The Foreclosure Stage

When institutions (banks, lenders, etc.) lend money to individuals for the purchase of a home or other property, they naturally expect to be paid back. They’re in the business of lending money to make a profit. When borrowers (mortgagors) fail to meet their mortgage obligations, lenders want the property returned so they can re-sell it to others for a profit or at least reduce their losses. They regain the property through the foreclosure process.

Benefits of Pre-Foreclosure

• Deep discounts
• Greater profits
• Ability to research inspect property/more accurate value estimates
• Ability to avoid the potentially expensive bidding process
• Ability to structure sales agreements in a creative fashion
• Less hassle from third parties (lenders, etc.)

The potential for minimum cash outlay

Of course, both mortgagors and lenders will do their utmost to work out an agreement that will allow people to keep their homes and the lender to keep receiving payments. In addition, neither the mortgagors nor the lenders want the legal complications of the foreclosure process. Unfortunately for them—but fortunately for you!—they can’t always work out an agreement, and the lenders have to initiate foreclosure proceedings.

So, how is the foreclosure process begun and what’s involved in it? It’s important for you to be aware that every state and county has different rules and regulations that you’ll need to learn well. Otherwise, you may miss something or make a mistake than can cost you money. However, in general, every state within the U.S. uses one of two types of foreclosure—judicial and non-judicial.

In the real estate market, knowledge is definitely power—and the secret to profits! Since the subject of this blog is pre-foreclosures, it’s important for you to understand exactly what pre-foreclosures are and what opportunities are available to you. This blog is dedicated to helping you build and/or improve a career in real estate through my hard-earned experience and knowledge, so let’s get started!

What Are Foreclosures and Pre-Foreclosures?

A foreclosure is a legal process. It’s initiated by lenders when home owners (and others) fail to meet their mortgage obligations. In other words, home owners fail to meet their payments and, as a result, lenders want the property back. The foreclosure process starts when a lender files a law suit or a notice of default (more on this topic later) in the official public records. We’ll cover this process in more detail in the next chapter.

A pre-foreclosure sale takes place between the time when the lender files suit and when the property is scheduled to be sold at a public foreclosure action or a trustee’s sale. A pre-foreclosure is not a formal legal process; it’s an opportunity for you to assist stressed-out home owners and make a profit at the same time.

Why Do Foreclosures Occur?

Often, people tend to think that foreclosures occur because of poor financial management by home owners and others. While this certainly can be true, there are really many different reasons why foreclosures take place. It’s important for you to understand these reasons so you can deal effectively with home owners facing foreclosure and help them to make the best of a bad situation.

One reason can be a poor local or national economy. When jobs are lost due to cuts, outsourcing or other factors, homeowners lose their income and can no longer afford the mortgage payments.

A second reason can be personal problems. Most commonly, foreclosure is caused by divorce, death of the sole provider, or, increasingly, overwhelming medical bills due to the high cost of health care in the United States.

A third reason is the tendency of some first-time home buyers to over-extend themselves. They fall in love with the American dream of home ownership, but fail to have cash reserves to handle unexpected costs and emergency repairs that come with owning property. This means they fall behind and end up in a continual and losing game of “catch up.” Eventually, they can’t meet their payments, and foreclosure is the result.

A fourth reason is the availability of loans with high loan-to-value ratios. These days, loans are offered at 90 to 100% of the value of the property securing the loan. This means buyers can purchase a home with little or no down payment. Since they have little invested in the home, they may walk away at the first sign of financial trouble.

A fifth reason is the lenient terms offered by such governmental agencies as the Federal Housing Administration (FHA) or the Veteran’s Administration (VA). This means lenders can be tempted to offer loans to individuals with suspect credit and job histories. Unfortunately, the result can be foreclosure.

A sixth reason is the existence of predatory lenders. These unscrupulous individuals and institutions target borrowers with low income, low credit scores, bankruptcies, and excessive debt. Since these borrowers can’t tap into the conventional loan market, predator lenders offer them “subprime” loans with high interest rates and outrageously high late fees. Again, the result is often foreclosure.

A seventh reason is, oddly enough, low interest rates. Low rates can tempt buyers into purchasing more house than they can afford. Most families these days have two income earners; however when one of the earners loses his or her job, the family can often no longer afford the payments on an expensive home. They fall behind in those payments, and the lender starts the legal process of getting the property back.

As stated earlier, it’s important for you to understand all these reasons. It will help you empathize with your customers—the home owners—and, at the same time, avoid bad deals. Now, let’s look at the benefits of making a living in the pre-foreclosure market.

What Are the Benefits of Working in the Pre-Foreclosure Market?

There’s no doubt about it—the pre-foreclosure market offers many advantages to the careful investor.

First of all, you can buy properties at a deep discount. Discounts can range from 20% to over 40% of market value. This means you can buy a property, turn around and sell it at under-market value, and still make a great profit.

Second, you can structure deals that will cost you very little money or, in some cases, no money at all. This doesn’t mean you’ll be able to operate in the market without cash reserves. That’s just plain foolish. However, it does mean you can get creative and legally use other people’s money to finance your deals.

Third, you can buy properties quickly without all the rigamarole that goes on with conventional transactions. This not only means that you don’t get buried in paperwork, but you’re also able to turn relatively quick profits while moving on to the next deal.

Fourth, a great advantage of operating in the pre-foreclosure market is that you’re able to research and inspect properties. This isn’t possible during the later auction phase of foreclosure which means you could end up with a “pig in a poke” if you’re not very careful. Buying a pre-foreclosure avoids this potentially disastrous possibility.

Fifth, you’re able to structure sales agreements in a creative fashion. This means you can generate the best terms possible for you while, at the same time, helping a home owner out.

Sixth, you have the opportunity for financial and personal freedom. In effect, you’re an entrepreneur, and you can set your own hours, rules, and profit goals. You’re no longer slave to a boss and a rigid office routine. Best of all, once you become proficient at buying and selling pre-foreclosure properties, you can ensure a secure future for you and your family since you’re not limited to the amount of money you can make. Also, your knowledge of the pre-foreclosure market will transfer to other aspects of real estate, allowing you to expand your efforts into different markets.

Of course, every field has its disadvantages as well as advantages, and it pays to be aware of them so you’re prepared to deal with and overcome them. Let’s look at the disadvantages next.

What Are the Disadvantages of Working in the Pre-Foreclosure Market?

Let’s face it—foreclosure is not an easy process for the homeowners. That means you’re going to deal with people who may be angry, frustrated, and looking for someone to blame. In some cases, they can be very difficult to deal with, and you have to be prepared for these situations. Working with home owners in foreclosure situations calls for tact, patience, and empathy. In effect, you have to be a “people person.” We’ll discuss this at length later in this blog, but the best attitude to take is that you are a problem-solver; that is, you’re there to help the property owner out of a bad situation in the best way possible. This attitude will help you maintain your sense of perspective and humor in all your dealings.

Another “disadvantage” is that you’ll have to do a considerable amount of courthouse research to make sure your deals are profitable. This is hard work, requiring extensive attention to detail to make sure the property isn’t loaded down with unexpected liens and other items that can entangle you in legal procedures over a long period of time and end up reducing your profit—or even resulting in a loss. When dealing with pre-foreclosure properties, the devil is indeed in the details!

Finally, competition is tough in the pre-foreclosure market! After all, other buyers will be seeking the same profit opportunities that you’re looking for. This means you have to be up-to-date on local conditions and opportunities and stay on top of the market at all times!

What Does It Take to Become a Successful Player in the Pre-Foreclosure Market?

You don’t have to be a financial genius to operate successfully in the market, but there are definitely certain pre-requisites you must have. Most fundamentally, you need complete and detailed knowledge of not only the market, but the local, state, and national laws regarding foreclosures. This Blog will provide you with the basic information on that subject, but you’ll need to study real estate rules and regulations in detail so you can operate effectively and not inadvertently break one or more of those laws.

This means you’ll need to do your research and do it well. If you’re a person of action and don’t enjoy reading all that much, think of it this way: You wouldn’t go hunting with an empty gun. You’d just be setting yourself up for failure and wouldn’t bag any game at all! So, consider research your ammunition. Once you have a full load, you’ll be able to hunt down and bag the best and most profitable bargains possible!

No doubt you’ve heard the famous saying that there are only three things important in real estate—location, location, location. Well, in the pre-foreclosure market, there are three other things that are very important—persistence, persistence, persistence! Absolutely nothing beats persistence! You have to be willing to dig and dig (in terms of research) and to deal effectively with owners and your competitors. Remember, the race doesn’t always go to the smartest person around; it goes to the person who never, ever gives up!

Pre-foreclosure investing is one of those investing strategies that you do not require any money or credit for. Sellers will often deed you their house for free.

Okay, that’s the introduction to pre-foreclosures. Now, let’s get started on gaining the knowledge you need to become a successful investor in this lucrative niche of the real estate market!

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