Lesson
One
Buying Before
Foreclosure
The best time
to buy
Win-Win-Window
Both the lender and the property-owner lose in
any foreclosure action. The borrower loses their equity, their credit
rating and self esteem. Lenders are
driven by numbers and non-performing assets do not generate income, they
require reserves to be set aside in addition to the loan amount and large
numbers of non-performing assets do not look good on the bottom line;
which does not bode well for lender leaders.
Since neither lender or borrower will want
the foreclosure to happen, both parties should be motivated to
resolve the situation before it proceeds. Motivated
sellers and lenders are a key to
a real estate investor's success. As a result, buying
properties that are about to be foreclosured
will offer the greatest opportunities for high profits with relatively low
risk in the entire foreclosure process.
Working directly with both the
property-owner and
the lender will require both knowledge and skill. We are going to
help you gain enough knowledge to be comfortable. The skill can only come from
doing some deals.
An
impending foreclosure provides an investor with an opportunity to create a Win-Win-Win scenario.
- The
borrower in default wins. They sometimes salvage
some of their equity and protect their credit rating. A foreclosure, like
a bankruptcy, will stay on a credit report for seven years.
- The
lender wins. They do not have to spend the substantial time and money
to complete the foreclosure process.
- The buyer wins. Property
under foreclosure can usually be purchased at a substantial
discount. Many lenders will also offer favorable terms
to a credit worthy buyer who is helping to solve their problem.
The win-window
The window of
opportunity to create a winning scenario for all of the effected parties
opens the day the first demand letter is sent by the lender to the
borrower. However, no one but the principles will likely know about it until the Lis Pendens, the notice that a legal action is
pending, is filed and becomes public record.
The everybody wins window closes the day the property is sold at
the sheriff's sale or trustee's auction. The
substantial amount of time between
the letter and the sale enables an investor to contact the
property owner and the
lender, establish a relationship, and create a
winning
strategy to purchase the property from the
borrower before the sale date.
The amount of time
the win-window remains open depends on state and
local laws, as well as the attitude and behavior of
the property owner. Some states allow foreclosure of
properties within 90-120 days from the first notice of default. In New York,
the process can take a year or more. Michigan allows the
borrower a six month redemption period after foreclosure.
Don't waste time and effort on a
loser
There
are some property owners who will have given up on saving their credit and
will just want to remain in the property rent-free until the last possible
moment. You can often spot them by signs of little motivation and a lack of even basic
care and maintenance of the property.
However, you won't know if the property owner is
a real loser or just someone down on their luck until you invest a little time
and effort to find out. The moment you know that you are dealing with a user-abuser-loser, walk away and wait to deal with the lender after foreclosure.
Ten steps to accomplish a successful pre-foreclosure
purchase:
- Locate loans in default.
There are many ways to do this, from talking to people and
reading legal notices, to the use of the Internet and the other tools that
you learn here and on other RHOL pages.
- Start your research. Drive by to view the
properties and neighborhoods. Contact the local assessor and ask for a copy of the
assessor's work sheet for preliminary information on each property. Check
with the municipal building inspection department for any complaints or
other records. Verify the zoning and land-use
- Evaluation. Narrow
down which properties to pursue.
- Contact the property owner. Develop a letter
that explains who you are and that you buy
distressed property. Ask for an appointment to meet them.
- Assess the property
owner's motivation. Try to gain as much
information as you can about the property owner's wants and needs. Some may
want money, some may just want to walk away clean and some may need to stay
in the property if they can.
- Inspect the property
thoroughly. Paint, carpet and wall paper are not important here.
Location, roof, foundation, windows, doors and mechanicals are.
- Determine the profit
potential
of the property. You will need to ascertain acquisition and fix-up costs, potential rent and/or
future
sales price and profits.
- Sign agreement to purchase the
property.
Negotiate your best deal with the owner and the lender.
Double check all the pertinent facts, do another inspection and sign the
necessary agreements with all parties.
- Close on the property.
- Repair and resell
or rent it as quickly as
possible.
Tough stuff?
The most difficult step
is usually number four.
Contacting the property owner in a non-offensive manner is easier said then done.
A property owner
in financial trouble is probably being bombarded
with letters and calls from several attorneys and
bill collectors, and perhaps has creditors showing up
at their door. Chances are there are personal and
domestic problems as well. Since you will have a difficult
time getting in touch with them, you will have to use your
imagination and some initiative. For example: you may know someone who knows
someone who will introduce you. You might ask a middle man to
initiate the process so you
haven't ruined your future chances if the first contact goes badly.
Better a letter
If
you can't come up with anything better, start with a letter.
Sample First Letter
Your first letter should just iindicate
that you are a private investor looking for property in that part of town. If
you hear back - great. If not, follow up with another letter.
In your second letter you might let the property owner know that you
are able to help with
their financial problems. If you are able to
demonstrate an understanding of the property owner's
dilemma without getting too personal and offending them, it will certainly help
you get a relationship started.
Sample Second Letter
Make it clear that you may be able to stop the foreclosure, save
their credit rating and, depending on their equity, perhaps
provide some cash for use in paying bills and
relocating. Be careful here. Always be open and
honest about any claims or promises you make. Make sure you do not exceed
what is allowed in your state law.
I have had success
by agreeing to rent the
property back to the former owner after the purchase for an agreed upon term; giving them
ample time to get their life back on track.
Be professional
Always be
professional and and never personal in your
correspondence. Invite the property owner to call
you at their convenience. If you don't hear from
them in a reasonable amount of time, follow up with
another letter, perhaps worded a bit more urgently. As you get closer to the
auction date you may want to send a couple letters a month, but be sure you
are not harassing. Many people in
trouble go through a period of denial. You want them to remember you in a good
light when they finally face reality.
Call if you can
Follow up with phone calls if you can, but always be
courteous and never pushy. Try
not to get into any detail on the phone. The purpose
of the call is to make an appointment to determine whether or not you
can help them and that you will need to meet with
them at the property. Make sure they understand that
the meeting will be more productive if they can have
relevant mortgage documents available;
particularly the foreclosure notices.
You must follow the
law
When you locate a property
where money can be made, you do not want to run into legal issues because you
harassed a debtor or structured an illegal deal. The
Federal Fair Debt Collection Practices Act regulates the
treatment of debtors.
States have passed
laws against crooks
Homeowners in foreclosure
have been subjected to fraud, deception, harassment, and unfair dealing by
self-described "foreclosure consultants". The "consultants" falsely represent
that they can stop the foreclosure and save the home. These crooks charge high
fees and secure the payment with another mortgage on the residence to be
saved, and then perform no service or essentially a worthless service.
The homeowners who rely on the foreclosure
consultant's promises of help take no other action and are dissuaded from
working with legitimate professionals or investors who might honestly help
them. As a result many homeowners have lost everything - and sometimes to the
foreclosure consultants who purchase homes at a fraction of their value before
the sale.
Review:
CALIFORNIA CIVIL CODE SECTION
2945-2945.11
You are a good guy
Don't
ever be uncomfortable with contacting a property owner who is in trouble.
When you are able to reach an agreement with a borrower in default, you not
only help them, you usually rescue a bad loan for the lender and help to
maintain the value of the property throughout what is otherwise a months long
process. Foreclosures often cause a property to be vacant for extended periods
and that adversely effects the entire
neighborhood.
If there is enough equity in the property, there
is the potential to work out an arrangement that satisfies all of the effected
parties and still allows for a handsome profit. Pre-foreclosure investing is
the best possible result of a bad situation for everyone.
You must know how much
You must know the market value of the property
you are interested in within a few percent, or you cannot negotiate
intelligently with anyone. Experienced investors will usually be able to look
at a property once and come up with a WAG Appraisal (Wild Ass Guess)
that will be within 5% of market value. The pros will still use local MLS
(Multiple Listing Service) comps, title company comps, and experience to
verify their value before they buy, but they won't waste time on something
without seeing an adequate potential profit up front.
If you are not comfortably aware of what a
property will sell for in the market, you cannot make money buying real
estate. All decisions regarding a property are based on the price it will rent
or sell for.
We have a quote in the RHOL section on buying
income property from one of our real estate millionaires, Frank Lick of Santa
Barbara, California that says: "After you have looked at about a hundred
properties that are for sale, you will know a good deal when you see one."
There is now another way. Take our
Valuing Income Property e-course.
Most lenders will cooperate
The home loan and mortgage
business has changed dramatically with national banking deregulation, national
real estate broker franchises and the Internet. A large number of mortgages
are now written or placed by companies like Coldwell Banker, Century 21,
Ditech.Com,
Mortgage4u and the countless others that berate you on radio, TV and in
your email box.
Today's mortgage lender is likely to be in a
different city or state than the property's location. That has contributed to
making the foreclosure process much more costly and cumbersome for lenders. It
has also forced lenders to hire foreclosure specialists to handle the work for
them.
To help you understand the
steps a lender must take to complete a typical foreclosure, and why they would
be motivated to help you help them,
CLICK HERE
before you move on.
The good:
Purchasing a property prior to foreclosure is a great investing opportunity,
and if
done correctly, is one of the few win-win-win opportunities you will ever
encounter. All of the
techniques you learn as an RHOL member for low or no down payment real estate
investing, can be used
to purchase foreclosures too. You will usually
have plenty of time
time to research the property
and arrange financing. Unique and flexible sales agreements are
not only possible but likely.
There are foreclosures that are occasioned because of
health, divorce, jail or other personal problems. In such cases the property
owner may just want or need to walk away as quickly as possible. There are even instances where the seller will actually pay
the buyer something to help you purchase their property.
The bad:
You are not dealing with professional lenders or real estate brokers who know
values and the market to help reach a purchase price. Consequently, the
property owner may have an unrealistic number in mind. If it is a great looking property in a good
location you may have a lot of competition which will further inflate
the property owner's hopes for a high price.
The
necessary research to cover yourself on value can be difficult and cumbersome to someone new
to the process. You may need to negotiate
discounts with the lien holders to make the purchase
viable which is very daunting for even experienced investors until they have
done it a couple of times.
The ugly:
It is sometimes difficult to contact the
property owner and often unpleasant when you first speak with them. Some property owners are losers who will
string you along, wasting your time and some money, when they are not the
kind of people who ever get around to actually facing and solving their problems.
 
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