The advantages to buying properties from
homeowners in default can only be measured by the individual investor. Some
do not see enough reward, some think it's too risky, while others are
plagued by moral issues. Are you helping the troubled homeowner or taking
advantage of his misfortune?
Both the lender and the homeowner lose in a
foreclosure action. Neither want it to happen. Both parties are motivated to
resolve the situation. Motivated parties are key to the process.
The investing window of opportunity opens the
day the Lis Pendens, the notice that a legal action is pending, is filed.
The window closes the day the property is sold at auction. The time between
these two events enables an investor to work with the homeowner and lender
to create a workout strategy or a purchase of the property from the
homeowner before the sale date.
The amount of time the window remains open
depends solely on state and local laws, as well as the behavior of the
property owner. Some states sell properties within 90-120 days from the
first notice of default. In New York, the process can take a year or more.
As for the moral question, keep in mind that
by dealing with a homeowner in default, you not only help him, you generally
rescue the loan and maintain the value of the property (and surrounding
properties) as well. If there is enough equity in the property, there is the
potential to work out an arrangement that satisfies all parties and allows
for a handsome profit. That's what pre-foreclosure investing is all about:
buying the equity in the property, working out an arrangement with the
lender and the homeowner, then selling the property for a profit.
Investors follow these basic guidelines to
ensure a successful purchase and sale:
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Locate loans in default
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Evaluate choices and narrow selections
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Contact homeowner
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Inspect property and loan documents
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Determine homeowner's needs
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Calculate your selling price and profits
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Negotiate with lender, owner and lien
holders
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Close the deal, repair as necessary and
sell
Locating Loans in Default
The Lis Pendens is the first public notice
(document) that announces a loan in default, so it makes sense to start
there. Access these notices at the county courthouse, newspapers that
routinely advertise these notices or through a reputable Foreclosure Service
Provider.
Evaluate Selections & Determine Potential
You know the default amount from the legal
notices or service provider's information. Now you must estimate the
property's market value. Subtract the default amount from the estimated
market value to determine the gross equity in the property. This figure also
reflects your gross profit potential. If there is little or no difference in
the amount of debt and the market value, move on to another property. If
there is a big difference, there may be enough equity in the property to
make a sizeable profit.
Contact the Homeowner
This is easier said then done. The homeowner
is probably being bombarded with letters and calls from attorneys and bill
collectors and has creditors showing up at his door. The only way to contact
the homeowner is by phone, mail or in person, and chances are you will have
a difficult time getting in touch with him.
Start with mailings. Indicate in your letter
that you are a private investor looking for property in that part of town.
Let the property owner know that you may be able to help him with his
financial problems.
Demonstrating an understanding the homeowner's
dilemma will help your efforts. Indicate in your letter that you may be able
to stop the foreclosure, save his credit rating and provide cash for use in
paying his bills and/or for relocating.
Be professional and gracious in your
correspondence. Invite the homeowner to call you at his convenience. If you
don't hear from him in a reasonable amount of time, say three or four weeks,
follow up with another letter, perhaps worded a bit more urgently. As you
get closer to the auction date you may want to send two or more letters per
month.
Follow up with phone calls if you can. Be
courteous, never pushy. Never interview the owner on the phone. Merely state
that in order to determine whether or not you can help him, you will need to
meet with him at the property. Make sure he understands that the meeting
will be more productive and less time consuming if he will have the loan,
mortgage and insurance documents available, as well as the foreclosure
notices.
If you are going to make an offer on the
property, you must have the loan, ownership, and debt or lien information.
You must also assess the condition of the property and the property owner.
Combined with the market value and the default amount, you have all the
ingredients necessary to formulate your offer.
If you feel comfortable with it, you can visit
the property in person. You may be confronted by an angry homeowner. Be
polite and leave if you are asked to. Never, under any circumstance, snoop
around, inspect or generally trespass unlawfully on somebody's property.
Meeting the Homeowner
Use common sense and dress appropriately,
something casual but not sloppy. Be sympathetic. Does the homeowner need
cash? Is he waiting for a bailout? Will he go bankrupt? Find out. Review the
loan and mortgage documents. Verify the loan amount, monthly payments,
interest rates, taxes, etc. Review the insurance policies as well. Get all
the pertinent information you can. Ask the owner if there are any other
liens or judgments he may be aware of.
Inspect the property with the homeowner. Never
comment on the owners lifestyle, just the physical condition of the
property. Point out the obvious defects or items in need of major repair.
Use an inspection checklist and record your information and estimated costs
of repair.
Make no promises at this point. Make no offer
or give the homeowner any money. Make an appointment to meet with him again
if you think you want the property.
Preparing Your Offer
Determine the net equity in the property. This
is the difference between the market value and the default amount plus liens
and repair amounts.
Negotiate with the lien holder. You may offer
to satisfy the lien for 20% of the amount. Chances are the lien holder will
lose everything when the property sells at auction. Buying out the lien puts
more equity in the property and more money in your pocket.
Remember to include closing costs in your
calculations for the purchase and sale if you intend to flip the property.
Also included the carrying costs, the mortgage payments and taxes and
insurances, while you hold, repair, and then resell. Also include a seller's
commission if you use a broker.
Calculate every legitimate expense associated
with buying, repairing, carrying and selling the property. If a large enough
figure remains, you may have a very nice deal. This bottom line figure has
to pay the homeowner for his property and produce a profit for you.
How much do you offer the homeowner? Some
investors itemize every expense, show their calculations to the owner and
offer to split the profits. Some itemize the expenses and pay the owner the
remainder on the bottom line. The investor then earns his profits by the
reduction in lien amounts as negotiated, savings in repairs by doing them
himself, negotiating a lower seller's commission, or selling the property
himself. Others still make offers based on the bottom line, and negotiate
from there.
The Purchase Contract
When the owner decides to sell, you will both
need to sign an Equity Purchase or Real Estate Purchase and Sale Agreement.
All parties recognized in the mortgage contract must sign.
Check with your attorney before signing any
contract and make sure he is knowledgeable in real estate equity purchases.
Investing experts agree that the terms of the
agreement must be clearly stated in the contract. Leave nothing to verbal
understandings. Your best defense against future problems is the manner in
which you present your evidence. Have everything documented properly.
Make sure to include the following in your
purchase agreement:
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A "Subject to" clause that allows you to
bow out of the deal if something is not as originally agreed upon. This
could be for unknown damages, general condition of the property or
loans, termite damage, etc.
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A statement that allows you to show the
property.
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A statement indicating that the property
has to appraise at a certain value.
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The property must be vacant, all tenants
and possessions out by the specified date.
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An agreement between buyer and seller that
the payments for the current loans equal "X."
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A statement indicating the sale is subject
to the condition of the loan and/or encumbrances against the title.
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A statement indicating the buyer shall pay
all closing costs.
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A statement indicating the seller shall:
Deed the property to the buyer... Authorize the buyer to record said
deed at the appropriate time... Be aware that the buyer may resell the
property... Be aware that the purchase price may be below market
value... Leave the premises in good condition and pay for damages
incurred after the contract has been signed and before the seller has
left... Agree to pay for any damages or repairs necessary as discovered
by termite and roof inspections... Vacate the premises on the date
specified.
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A statement indicating all net proceeds
paid to seller will be paid at closing.
Closing
Inform your attorney that you have a signed
contract and that you need representation at closing. Have him prepare a
Release of Lien, to be recorded at or just prior to closing, if you have
negotiated a settlement with a lien holder.
Arrange your financing. If you assume the loan
and have been in contact with the lender, make sure the foreclosure process
is stopped before the sale date.
Order your certified appraisals and
inspections as required before closing. Order the termite and roof
inspections as well. Verify from a title search that there are no other lien
holders against the property.
If all goes well, you probably just bought
real estate well below market value.
Distress Sales resulting from bank
foreclosures often represent a great way to get a fantastic deal on a
home. It's not easy for the average homeowner to find these deals,
because you have to keep scouring the paper to see when one comes up.
If you're the type of person who
recognizes what a great deal some of these properties could represent,
you will be interested to know about a new free computerized service
which automatically searches out and downloads a current list of all
such properties day in and day out. When you receive this free, no
obligation service, you're automatically plugged in to the most current
list of Foreclosure Properties on the market, in the price range and
area that interests you. This FREE service every week will save
you a lot of research and running around.
Here's how it works. Every week, you will
receive a FREE computerized report listing the current
Foreclosure properties in your desired price range and location. There
is no cost for this information, and absolutely no obligation. This
insider information, sent to you in an incredibly simple and efficient
format, will give you a huge advantage over other buyers in the
marketplace.
You can request this free service by
simply filling out the information on the Palm Beach County Foreclosure
Weekly form available
by clicking here and including the specific price range and area you
would like the "Foreclosure Weekly Report" on. When you have
completed the form
just click the "Submit" button at the bottom of the page.
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