Lesson 1
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.

  1. 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.
  2. The lender wins. They do not have to spend the substantial time and money to complete the foreclosure process.
  3. 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:

  1. 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 LandlordAmerica pages.
     
  2. 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
     
  3. Evaluation. Narrow down which properties to pursue.
     
  4. 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.
     
  5. 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.
     
  6. Inspect the property thoroughly. Paint, carpet and wall paper are not important here. Location, roof, foundation, windows, doors and mechanicals are.
     
  7. 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.
     
  8. 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.
     
  9. Close on the property.
     
  10. 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 LandlordAmerica 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 LandlordAmerica 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.
 

Course Contents

Pre-course quiz Lesson 1 Lesson 2 Lesson 3 Lesson 4 Summary & Conclusions

Resources
Pretest Your Knowledge Glossary Class Discussion HUD & FHA Properties Escrow and Title Insurance Companies How to Avoid Foreclosure California Civil Code Section 2945-2945.11 Valuing Income Property e-course Evictions e-course Real Estate Basics