So you have decided to be a real estate investor and with the current nuclear activity going on in the real estate market it certainly appears that foreclosure is the place for the smart money to be.
A thing to remember before you start is that the mine you intend to trawl for gold is the home of some family down on their luck. Your loss is my gain kind of scenario and seeing as this is America and by default the dream is there for the dreaming then I guess this is one opportunity that is ripe for the picking. Just thread softly and you will find that perhaps it will run smoother for you.
So first things first, foreclosure being a multi stage process you need to decide where you want to begin.
In times past most distressed realty investors went to the auction and bid on the home. Some still operate in this fashion but it is far less profitable and a literal minefield to the unprepared.
If you must go to an auction and bid/buy a house then the golden rule is research, research, research. I could have as easily said prepare, prepare, prepare.
Basically know what you are getting into.
So you go to the auction with your certified check in hand. You’re the high bidder; you hand over your check and are told that you will have to have the balance to complete the transaction within 30 days.
So you’re the proud owner of someone’s problem but what do you do next. If you have prepared properly you will have at least been inside the house and talked to the person being foreclosed to ascertain (a) the condition of you investment and (b) the mental condition of your new tenant. Because you have built up a rapport with the owner who has just been foreclosed you can contact him/her with a view to them vacating your new home. And who knows you just might be lucky.
Conversely if you have not recently viewed the home you just bought and if you have never met the tenant you have just inherited then you most probably have some difficult and trying days ahead of you.
First until the deed in you name has been recorded in the local registry of deeds or whatever is the process in your state, you are not the owner. You can try approaching the old owner to introduce yourself as the person who now owns their home and is intent on throwing them and their loved ones on the street, but do you see the point I am trying to make. Buying at an auction, with all the value there is in approaching foreclosure from a different direction is for seasoned professionals with a wealth of assets and resources at their beck and call.
Unfortunately auction buyers stumble through the eviction process battered and bruised by the legal system and the find that their foreclosure gem has been wrecked by pissed off previous owners. And the fact that they never saw what they were buying means that they cannot prove malicious damage.
Leaving above all of the above, you have just handed over your certified check to the auctioneer. Now reality is that within 30 days you must pay the balance of the auction price or forfeit your deposit check. Now if you are lucky enough to have the cash to complete the sale lying about in a bank account, great. But if you don’t you are going to need access to hard money (private funds), because the reality is that no bank is going to loan without an appraisal. How do you think you are going to get that appraisal? Walk up to the house and knock on the door and introduce yourself as the guy who just bought their house at auction and then say “By the way when would be a good day for the appraiser to come around”. People have found easier ways to commit suicide.
Here’s a tip. Let the bank buy it at auction, let the bank deal with the owners. And when the bank lists it with a broker you can go and view it and if you still think it’s a good deal go ahead and make an offer. You will be buying a vacant house, you will be aware of all the problems, you will know what you are getting yourself into, and you will have not problems facilitation entry for the people providing you with your funding.
The market in most areas is clogged with bank owned property. Most are in dreadful condition. You have to remember that for the last year someone who knew they where losing their home resided there. And if it is an investment property you can bet that the tenants knew so they stopped paying rent and the landlord stopped maintaining. Then came eviction and pissed off people tend to take their anger out on the property.
Also in colder parts of the country burst pipes wreck havoc on bank owned stock. A new way of making a living in some areas is to go into vacant foreclosed property and strip out the copper piping.
So when you go to look at a bank owned home bring a contractor and get realistic conservative repair estimates. Then when you are mulling over your offer consider what similar free market sales are going for, multiply your repair estimates by at least two before subtracting and coming up with your maximum offer price. Start lower and come up grudgingly. Remember that you are giving up good money to take over the banks problems. Don’t listen to listing brokers or your own buyer’s broker all they are interested in is the commission check and they won’t be there with you if and when the shit hits the fan.
If you are not going to make a really decent profit then why bother. It might appear that you need to get in quick while it is still raining dollar bills, but don’t you think that this is exactly what the previous foreclosed owner was thinking.
A while back a real genius in my area came to look at a house that an office I was associated with had listed as a short sale. At the time the market was pretty healthy and no one made an offer and the bank foreclosed. This guy bought the house at auction for $50K more than he could have negotiated for with the bank in a short sale scenario. It was a 3 unit tenement that on the surface looked good with 3 sitting tenants. Trouble however lurked just under the surface. All three Section 8 rents were on stop payment for code violations, the heating systems were undersized. To cut a long story short the guy who bought at auction was in foreclosure himself within eighteen months.
It is worth noting that if there is a really great deal out there someone other than you has snapped it up.
All the money in foreclosure is in pre foreclosure. Repeat after me. All the money in foreclosure is in pre foreclosure.
Pre Foreclosure/Short Sale
This is the process of getting a troubled home owner to allow you to make money at their expense. Try to show a little decency here. Merely having someone who is distressed and has no idea of the process facing them sign an option to sell their home with no earnest money and registering it at the registry of deeds to prevent them from dealing with anyone else in their hour of need might seem like a great idea but as all long and winding roads know Karma is a Bitch.
However if you are intent on this road this is what you must do.
The art of pre foreclosure is locating properties at the initial filing of default by the lender. This gives you time to work with. There are numerous ways of finding pre foreclosures in your area. There are subscription web sites which provide all new listings. The place to look if you have time is the court where defaults are filed. You can go to the court and get a list of all new defaults.
Also if you have access to the MLS you will find countless listings clearly stating that they are subject to third party approval or even more bluntly subject to short sale.
If you or an associate are familiar with short sale negotiations then you can get the land court list and compete with your local realtors for the good will of the condemned. You could try offering a cash sum to the person in foreclosure at the completion of the sale. Please note that the bank will not approve a short sale if it in any way the person being foreclosed is profiting form the short sale. Any monies giving to the seller will have to be off the closing statement. You could perhaps pay them $5K for furniture for which you would receive a tax deductible receipt. Be creative, be generous, you are looking at making a lot of money.
From the investors point of view pre foreclosure and short sale are linked at the hip. You can’t have one without the other.
In baked beans form here is what you do.
- You find a person in pre foreclosure that is willing to cooperate with you.
- You have them give you an option to purchase the home. The option should be for 6 months to a year, preferably a year. The option should state that the purchase price will be negotiated with the bank.
- Record the option in your registry of deeds.
- List the property with a broker of your choice for a price at least equal to the liens recorded against the property.
- Prepare a limited power of attorney naming you or whoever is going to negotiate the short sale with the bank.
- Initiate contact with the bank, have them fax or email you their short sale package.
- Comply with the requirements of the banks package. Your offer amount should be sufficiently low to cover all your expenses, your profit requirements and still allow you to sell it through your broker within a six month period.
- Lastly schedule both closings for the same day.
If you follow the recipe the pie always turns out perfect. An old Greek friend of mine used to say and I quote: “The day you buy is the day you sell”.
So if you can’t flip the house within a six month period you obviously negotiated the short sale price way to high with the bank.
The more you screw the bank the more everyone else makes.
If you don’t feel like bottom feeding in the mud you can employ a knowledgeable local broker and tell him/her that you want to buy a discounted property at short sale.
They will be more than willing to show you numerous properties and the listing broker will do the negotiation with the banks loss mitigation department.
You will not have the control that you would if you were negotiation yourself, but if it is your first time this is a great place to start.
In the pre foreclosure scenario you will most likely have the good will of the seller, you will have complete access to the property for appraisals and BPO’s (broker price opinion a type of mini appraisal used in the foreclosure and short sale process).
It’s like having your cake and eating it.
Short Sale Documents
A brief layout of the short sale documentation required by the bank. Individual banks may require some documents to be in their own particular format. This will be self evident in the short sale package supplied to you by the bank.
- Fully completed offer and copy of earnest money check.
- Hardship letter from owner explaining current financial position.
- Income expense statement.
- Proposed HUD closing statement.
- Tax returns, pay stubs, W2
- Limited power of attorney signed by the borrower with the last four digits of their social stating relevant information and naming the person authorized to negotiate with the lender on their behalf.
You will also need copy of mortgage statement showing a/c number and name and address of borrower.
Everything sent to the bank should have the relevant account number printed on it il large format in a conspicuous place.
The bank is very busy, the loss mitigation agent is overworked, and nothing would make them happier than for you to go away.
Don’t repeat don’t wait for a return call, don’t wait for a promised document to arrive. As previously stated if you are prepared to wait then you will wait.
On a final note someone said you will get more with honey than vinegar.
Be polite and courteous in all your dealings, but remember polite and courteous isn’t an excuse to be laid back.
Let your motto be polite courteous but firm.
For all your real estate needs!