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ForeclosureHelping People Can Bring RewardWe are in a time right now where the Foreclosure rate has sky rocketed due to the abuse of sub-prime mortgage process. Because of this, many people owe more on their property than their house is worth. When you are a real estate investor, over the years, you will become accustomed to the different market cycles that develop from year to year. Learning to notice the cycles, and then determining if there are opportunities present for you in that market cycle that you may want to explore will be critical in your wealth building efforts. Depending on the area, now may or may not be a good time for investing in a Foreclosure, but this website is about presenting education, so you can ultimately decide. Understanding that other people's misfortune can be your profit is a strange reality of real estate investing. But if you always try to keep in mind the WIN-WIN-WIN (the homeowner, you, the lender) philosophy of negotiating, whether you are trying to buy a foreclosure, or any other type of Buying Method, then you should be able to sleep at night since helping people can be your first goal, and profiting your second. In no other Buying Method is this truer than with a foreclosure. The first thing to understand about this particular technique is that the homeowner facing losing their home has been down a very long and stressful road before you ever enter the picture. To illustrate this, you need to understand the Timeline of a foreclosure process: First 90 Days: During this time, no payments are being made on the mortgage. More than likely the homeowner has either had a life altering event (job loss or reduction of income, divorce, death in the family), or their adjustable rate mortgage has reset, and now their monthly payment is more than they can afford. Now someone never having been in this position might think that the logical thing to do would be to take some kind of action right away and call the lender to negotiate. But it may surprise you to learn that 3 out of 4 people in this situation never do that! Why? Because they are scared. Literally scared into inaction. Most people in this situation create a shield of denial so strong that they actually convince themselves the problem will disappear on its own. Obviously that doesn't happen. Second 90 Days: At this time, three months of mortgage payments have been missed, and the lender will now issue a 90 Day Notice of Default to the homeowner. This notice will also be publicly recorded at the County Office. Basically, the lender is saying either bring your mortgage current or lose your home! It's an extremely stressful situation, and one that most people don't know how to get out of, so again, they do nothing. Final 21 Days: This is the final stage. Foreclosure is imminent. If the mortgage and late fees are not paid and brought current, then the home will be sold at a public auction. And once the title is transferred, the sale is final - no Right of Redemption period exists for the homeowner. There is no more time for solutions, the home has been lost! It's a devastating blow to anyone. They have no where to live and their credit has been destroyed for years to come. So how can you, the investor, help someone save themselves from Foreclosure while at the same time adding to your real estate portfolio? Typically not in the first 90 days. That's because finding these homeowners at this stage is next to impossible, and mentally they are not ready to accept the loss they are potentially facing. The Second 90 Days is the absolute best time to find these homeowners, because remember, the 90 Day Notice of Default has been posted publicly. You can sign up for services, for a small monthly fee, that will send you a list of these Notices on a daily basis so you know who to contact. Also, the homeowner's situation is much more desperate in this phase. A percentage of them at this point may be looking for a way out and will be more receptive to talking to you (some never will, so don't be surprised). This Final 21 Days is more risky. At this point you are bidding on the Courthouse steps (literally). You are not allowed to inspect the home, so you will be buying it as is. Also, you must show up with all cash or a cashier's check to purchase the property, which many investors can not hope to do. If you buy the home and it is mold infested, you're stuck with it, because there's no one to turn to for recourse - Buyer Beware! In the Second 90 Day period it is a much different experience. Normally, you will be approaching the homeowners at the house in question, so you have an opportunity to let them show you around. You can ask them if there are any problems you should be aware of. They may not tell you the full truth, but you'll have a much better idea of condition than you would sight unseen. You will also have time during negotiations with the homeowner to run a preliminary title report, and possibly bring in a property inspector or your contractor. Most foreclosure deals work one of Two ways: Offer the seller "Cash to Walk". Simply ask the seller, "What do you need to walk away with?" You'd be surprised how little some people want just to be rid of the headache and heartache. They know they don't have a lot of equity anyway in some cases, so you would be doing them a favor, and at the same time saving their credit. The second way is an "Equity Split," and is the most common way these deals are structured. For example, the seller has a $260K mortgage that is $15K behind in payments and fees, so they owe the bank $275K. The home could be listed and sold for $415K. Realtor commission and closing costs would equal $30K. This is how it would work:
$415K Sale Price -275K Mortgage Balance/Late Fees - 30K Commission/Closing Costs $110K Net Equity - split 50/50 = $55K to seller and $55K to investor
The bank gets their money, the seller gets out of a horrible situation, and the investor gets a house with $55K instant equity. WIN-WIN-WIN Now you're probably asking if there's $110K in equity in the house, why wouldn't the homeowner just list and sell it themselves? First, because in order to make a deal of this type work, the homeowner deeds the property legally to the investor. The investor immediately brings the property current in its payments and stops the bleeding. Then the home is put up for sale, all the while the investor is paying for everything, something the homeowner could not do. If the property didn't sell quickly, the homeowner for sure would have had their house sold at auction. So getting out of trouble and walking away with $55K is a dream come true for most of these folks. Remember, in the first 90 days the homeowner normally does nothing. So by the time you find out about them, there is little time left for them to do anything to help themselves. The Foreclosure process is an extremely complex Buying Method, and one I definitely recommend you purchase a book on, or take a course for, or even better, find a mentor to help you with the first couple of deals, so you are confident you know how to do these transactions correctly. I can personally recommend Bob McManus' book, "Say Yes to Wealth: Build Wealth Through Foreclosures" because I have attended one of his speaking engagements, and read his book (see my Book Review), and he is the real deal. While this book may be more California focused, it certainly has information that can be applied in any state. It's a great starting point for anyone.
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