July 22nd, 2009 | 
Author: 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.
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