Pre-Foreclosures

Hi all,

I am sure we all have learned enough to know that you make your money on the buy, not on the sell. You can make great profits through appreciation, but there is an element of speculation and luck. Based on past statistics and historical growth, the odds are greatly in our favor either way, but if we can buy below market value, we reduce our risk of loss and, in turn, greatly enhance the magnitude of our returns.

The first strategy we are going to discuss to find bargain properties is pre-foreclosures. For those of you unfamiliar with what a pre-foreclosure is; it is buying from sellers whose mortgages are in default, but the properties have not gone to auction yet. So essentially, you are going to contact these individuals and try to help them get out of their pending financial disaster, while purchasing at a discount so you can turn it over for a profit.

It is a win for the seller because he/she can save their credit and a win for the buyer if you can buy below market value and use your expertise to turn a profit. John T. Reed recommends buying for at least 20% below market to leave a cushion for a quick sale. A quick sale would be flipping the property to another investor at 5-10% below market and taking you profit quick. This strategy eliminates the long-term risks associated with buying and holding, but you forfeit the chance for great appreciation. Either way when we can buy for 20% or more below market value we are in a much better position.

So how does this strategy work?

First you need to know where to go to find this information. Impending foreclosures must be released to the public in the form of a "Notice of Default". The way they are usually released is through newspapers of "general circulation". This information is also recorded at the county recorders office. There are also private services offered where they take all of this information and send it to you in return for a monthly fee.

Once you have your source of leads down, you need to implement a system to contact these individuals. The most successful "first contact method" seems to be direct mail. A series of 5-7 letters (or post cards) sent out over the 90-day pre-foreclosure period should be sufficient. The letter should inform the prospective seller of the services you offer. It should state that you help people avoid foreclosure and will guarantee an offer to buy their home. State that you are NOT an agent or a broker looking for a listing, but you are an investor looking to purchase the property yourself, so there will be no commission paid.

Some people even write a little booklet on different ways to avoid going to foreclosure and avoid losing all of their equity. When you first get the lead you should get every piece of mail together and the dates you are going to send each spread over the 90 days.

You should have an 800 number with a 24 hour recorded message that your potential sellers can listen to if they liked you message they received in the mail. This service should trap the name and number even if they do not leave a message so you can call them back and see if they may still be interested. These services can cost about $2 a month for an 800 number with voice mail and a number trapping feature.

In the letters try to focus on words that will sound very appealing to the situation of the seller. Use words like "cash for your equity" or "save you credit". Try to get the emotions a little involved wherever possible to get through the sellers denial stage.

Alright, so you got the call and now you have to screen the potential seller to see if there is an opportunity to turn a profit here. Basically you want to eliminate the ride to the house if know there is no may to make the deal work. It is not unusual to find the seller in denial and still looking to get top dollar for his home. If this is the case you let him go for now and contact him a little later in the process and see if reality began to sink in yet.

In the screening process it helps to know the market in the area of the house. This way you are able to do a little pre-appraisal of the homes value just by number of bed/baths and square footage. Also find out what the sellers owes on the property over the phone and what type of mortgage the seller has. This way you can do an equity calculation and see if there is opportunity to profit.

Ask the seller what he thinks the home is worth to get a feel of what you are working with here. Get the grounds he/she based the value on (recent appraisal, neighborhood sales, etc�) In addition to this get a feel of what may be wrong with the place (Age of roof, pest problem, etc�)

Finally ask what they would take for the place. If it seems you may be able to negotiate a bargain, then get directions and set up an appointment. This is the time you need to run your comps and use your previous knowledge of the area. You need to produce your own appraisal of what you think the property is actually worth and then try to negotiate to purchase the property about 20% below that. Let the seller know you are an investor and you need to be able to make a conservative profit or you will not be able to help out.

Now here is how you are going to acquire the property; you are going to pay CASH for the seller's equity and you are going to buy subject to the existing financing. Now it is key here to not mislead the lender into thinking you did not buy the property. This is unethical as well as pushing legal limits. See the following link: John T. Reed's Opinion

Also make sure to include a clause stating that the purchase price will be reduced by the amount of any "hidden liens". Investors have found in close to half of the cases people have some sort of hidden liens involved; so don't forget this one.

What you are going to do is bring the mortgage current and try and work a deal with the lender. The lender has every incentive to call the loan due, so they can get you to pay fees to formally assume the loan or get a new loan. But maybe not, maybe you can tell them you are going REFI or do a quick sale to another investor and then you are going to pay off the mortgage. Either way, don't be deceitful and try to hide your actions, there are ways to stay ethical and still make great profits.

So where do you get the cash for the equity?

You can pay in cash if you have that kind of cash sitting around. There usually will not be too much equity, but you never know. Another great source is a secured or unsecured line of credit. You can also go to a close friend or family member and either split the profit or offer them 15% or so on their money investing. I don't care where you get it, but just be able to get it quick.

So you pay them their equity, you bring the existing mortgage current, and you either look to sell the house, REFI, or convince the lender let you informally assume the mortgage. If you choose the third option, make sure you get a written agreement with the lender so if rates go up in the future they don't go back on their word.

This pretty much sums up what I have learned about pre-foreclosures. Please feel free to bring any questions you may have to the table. Also any experiences are not only welcomed but also encouraged.

In addition to what was discussed here, this practice takes some study of your local state law, so schedule some time at your local library and with a good real estate attorney. The beauty of this strategy is you can have a constant flow of leads coming your way. Some successful full time investors have 1000 or more leads coming in every week and make about a purchase a week. In my opinion the abundance of leads is the biggest plus to pre-foreclosure investing.