Finding Deals in Defailted Properties Pre-Foreclosure, Courthouse Auctions and Bank-Owned REOs
Finding Deals on properties with defaulting mortgages offers opportunities at three very different entry points. If you re early in the game, you re working with home owners whose lender has not yet placed the home up for auction. These are Pre-Foreclosures and they offer great buying opportunities and can also keep the owner from losing everything at a courthouse sale. The next step in the foreclosure process and another opportunity to buy defaulted property is at the Courthouse Auction. Things get competitive here since the property has had legal notices filed, the world is watching and people are bidding. 1
Then there are the properties that get no bids at the auction, initiating the next step in the foreclosure process a bank owned sale or REO. After the no-bid auction closes, the lender takes possession of the property and lists it for sale with a real estate broker on the MLS (multiple listing service). You can buy defaulted properties at ANY stage of the foreclosure process but it s a very different animal for each. Each buying opportunity offers pros and cons, so let s take a closer look at each. This can help you determine which method works best for you. 2
RESOURCES Let s start with the initial stage of a foreclosure the Pre-Foreclosure. When your goal is to purchase properties PRIOR to the bank taking further action, you ll need the following: A Pre-Foreclosure List These are available in some markets for purchase or you can pull courthouse notice of default records. Marketing Materials and Methods this could be business cards, fliers, or direct mail pieces like postcards or letters. You can also use craigslist to market more broadly. Phone, Internet and Connected Investors Website 3
HOW TO At the Pre-Foreclosure stage, you re working to purchase a property directly from a home owner with a defaulted mortgage. This has advantages and disadvantages. Working with sellers in default can emotionally charged and challenging. But, this can often pay off because you have less competition than properties that are openly advertised for auction or as an REO. Since you working directly with the owner, you also have more flexibility in negotiations, timelines and scheduling move outs. You are also afforded the opportunity to inspect the home and complete your due diligence something that s a bigger challenge when the property is on the auction block. Due diligence is important at any step of the process, but with Pre-Foreclosure you have even better opportunities for title searches and just as important -- clearing liens. It s not uncommon to find liens that you can then negotiate to pennies on the dollar to make a good deal even better. In some cases, the owner may have abandoned the home, and in those cases, you have to determine if the location and the equity make it worth the additional effort to locate the owner to negotiate a deal. 1
The Pre-foreclosure Stage Pre-Foreclosure marketing is an exercise in patience and diligence. Identifying good target properties varies depending on your location. Some areas have services that sell lists of defaulting properties you ll want to look for a local service rather than a national website whose listings may not be as accurate and up to date. If you re investing outside your local area, do your homework and find out the best source for Pre-Foreclosure listings in that area. Some investors conduct independent searches of their local courthouse records to identify good properties focusing on homes with equity or even those in great locations without equity these can make good short sale candidates. How you locate your target properties is really a question of the amount of time you have to devote to the process. 5
Once you have your list of defaulted properties, it s highly likely you will have to attempt to contact the owner multiple times. Remember, owners in Pre-Foreclosure are typically being hounded by bill collectors, so getting your message across to them takes time and repetition. Direct Mail marketing is a good way to market to Pre-Foreclosures but it can tap into your wallet and your time. But, it does pay off when you stick with it and you take the time to identify those good target properties. For more on using Direct Mail, check out the chapter we ve devoted to it. You can also market to Pre-Foreclosures using Craigslist more on that in our Craigslist chapter. And when you want to speed up the process of connecting with the owners, follow the steps we outline in the Door Knocking chapter. There are also some comprehensive books on Pre-Foreclosure Investing they are well worth taking studying to master closing deals in the Pre-Foreclosure market. 6
SUMMARY Develop a Pre-Foreclosure List of Target Properties Advertise on Craigslist for Distressed Properties Contact the Owners via Direct Mail or Door Knocking Pre-Foreclosure investing is lucrative and has many advantages over buying defaulted properties at the courthouse auction or as a bank owned REO. There s definitely less competition and flexibility in the buying process but finding and contacting the owners of Pre-Foreclosure properties requires patience, good marketing and a budget. 7
Foreclosure Stage When a home owner is unable to cure the default on their property either through bringing the loan current or selling the property, the lender then orders the house sold at a Courthouse Auction. Some auctions are smaller, local sales held by a foreclosure trustee while others are larger regional auctions held by private companies on behalf of lenders. In either case, bidding at auction requires that you ve done your homework you understand what you re buying, what you are willing to pay and you have the cash or cashier s check on hand as required by the auction. Good deals can be found at foreclosure auctions but it s definitely buyer beware. 8
In some cases, it s not easy and sometimes even impossible to inspect the property prior to bidding. At auction, there s no contingencies as there can be with Pre-Foreclosure and REO buying once you ve committed, you are committed or you can lose significant sums of money if you try to back out of the deal. Another pitfall to buying at the courthouse is the occupant s rights. Yes, even in foreclosure and after the bid closes, there may be occupants either the previous owner or tenants. Moving them out can be a laborious and costly process. Between this, the condition of the home and the underlying liens, there should be enough to convince you that thorough due diligence is critical! When buying at auction, there are great deals to be had the key is to mitigate your risk and not get caught up in a bidding war. What you need to know about bidding: Do your homework on title You can t inspect the property You must have cash ready and put down a deposit No contingencies Occupants have rights You might have to move people out There could be tax or other liens on the property Don t let emotion take over and pay to much. 9
RESOURCES If you ve determined that buying at auction is for you, then here s what you ll need: Auction listings Due Diligence assistance a Title Company or Closing Attorney Cash on hand to secure your Bid 10
HOW TO Finding properties up for bid can be as simple as searching the legal notices in your local newspaper. Look for either Notice of Sale or Sheriff Sale listings. You may also finding upcoming auctions posted at your local courthouse. Ask where you can find the public notices and depending on your area, you ll find upcoming sales posted in a conspicuous public area. In larger markets, it s likely that you can find sales posted by regional auction companies. In either case, once you ve identified target properties, you can begin the process of assessing the property and completing your due diligence. What are values in the neighborhood? What is the condition of the property and surrounding homes? Is the property occupied? What title issues need to be discovered? Are their liens that can be gotchas? What am I willing to pay given all of the above? How much cash is needed to secure my bid? 11
SUMMARY Locate local auction listings Identify target properties for bidding Complete due diligence to mitigate risk and assess profit potential Prepare for bidding set your max price and have cash on hand Bidding at the courthouse can net you good deals. But there s risk in that reward. You have to do your homework and you have to stick to your guns and avoid getting caught up in bidding wars. The key here is buyer beware. The Real Estate Owned Stage The last stop in the sale process of a defaulted home is the REO or real estate owned often called a bank owned property. When a property does not sell at the courthouse auction, the lender then takes possession and lists the property for sale through a local real estate broker. There are advantages and disadvantages to buying defaulted properties as REOs. The first and most obvious is competition. Not only will you compete with other investors, but you may compete with owner occupants as well who are typically willing to pay more for a house. 12
But not all REOs are attractive to the owner occupant. Many REOs need work, and some will not qualify for bank financing. So unless the owner occupant buyer has deep pockets, properties that don t meet lending guidelines aren t an option. Buying REOs versus bidding at the courthouse has some distinct advantages. First, you can do a complete inspection and if your offer is accepted, you can usually include a walk clause meaning you can walk from the deal if your due diligence uncovers a deal breaker for you. Next, when you buy REO, the property has been trashed out meaning the lender s asset management company has not only come in and removed all personal items left behind and done some basic yard care; they ve also evicted any straggler occupants. Plus, in most areas any junior liens are extinguished once the lender forecloses. But there s yin and yang to that as well if you buy defaulted property direct from the owner as a Pre-Foreclosure, you may still have to remove personal items and spiff up the yard but with the competition at bay, you are typically getting a much better buy and there aren t real estate agent commissions adding to the cost of the sale. Yet on the other hand, clearing liens on the property can negate that savings. PROS Retail buyers can t quality for homes that need repair You can inspect the property Walk Clauses Trashed removed No tenants No unexpected liens CONS Lots of competition Retail buyers bid up prices You will pay more 13
RESOURCES When buying REO properties, you ll need: Access to the MLS or even better, a great real estate broker who notifies you of new REO listings A title agent or closing attorney The resources to close the deal cash or access to capital (i.e. loans) HOW TO REO properties that are a great deal don t typically stay on the market very long. In fact, the best deals usually have multiple offers in just a day or two. When this happens you ll need to submit your highest and best offer to compete with other potential buyers. When buying REOs, you may have to make offers on many different properties to finally land a deal. Because of this, it s not uncommon for offers to be made sight unseen. Since the buyer typically has an inspection period and walk clause, the risk is less than bidding at the courthouse. The key to staying on top of new REO listings is to have an aggressive agent working on your behalf who can be ready to submit your offer quickly. A good real estate agent is huge asset to any real estate investor so when you find a good one, do everything you can to keep them on your side. You can also do your own footwork locating deals. There are a number of websites that list REOs on a national level including Fannie Mae, Freddie Mac and HUD in addition to your local MLS. 14
SUMMARY Locate potential REOs through a real estate broker or your own research Complete your due diligence Submit your offer with a deposit and proof of funds letter. REOS, while competitive can be a great source of deals. The well prepared investor has a good agent working on his or her behalf, has funds available for deposits and can prove to the seller that funds are available to close the deal. 15
CHAPTER SUMMARY Many investors have made their fortunes buying defaulted properties. Because there are three distinct entry points for purchasing defaulted property, it s simply of matter of determining which method suits your level of confidence, your capital resources and your exit strategies. Pre-Foreclosure and REOs may be considered the least risky buys because you can access the property for a full assessment and you have more control over the liens that may be clouding the title and transfer of ownership. Lenders are in the lending business, not in the housing business this provides great opportunities for investors at every level to purchase investment quality properties at good prices. 16
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