June 17th, 2009 | 
Author: 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.
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