Pre-Foreclosures
Working pre-foreclosures is one of the easiest ways to make good money in real estate investing. You can work as a middleman and never have to own a property, do rehab on a property, or qualify for a loan, but make $10K or more on each property you work with.
The first step in this process is to find lists of property owners, who have had their lending institution file a foreclosure against them because of non-payments, thereby, starting the foreclosure process. This filing takes place at the county courthouse making it public access in the records department. It is usually put in the newspaper as a legal notice and will tell of the specific parties involved and when a public auction will be held on this troubled property.
This list of defaulted properties can be obtained at the courthouse, title companies, or from the lawyers who do the filings. It is your job to obtain these ongoing lists.
Once you obtain a source for these lists, you should prescreen each filing to see how much equity is at risk for each property. You should not work with any that has less than $40K in equity. Equity is the difference between the fair market value and the remaining principal balance (each filing usually has this figure in it). You can get a peak of the fair market value by going to www.homeradar.com and put in the required information realizing that all sorts of properties will be included (i.e. Townhouses, condominiums, and single family houses.) and you should distinguish the different types and their respective prices and average same type ones only. When you see ones that have at least $40K in equity, then get your real estate agent to get 4 – 5 full page comparable sales from the Multiple Listing Service to verify what you estimated on homeradar.com.
Get two of these prescreened pre-foreclosures and go to the first one (dressed in nice casuals with a business card), knock on their door and tell the owner your name, that you are a real estate investor and give them your business card. Tell them you’re giving “no obligation” offers to homeowners in the area. This helps homeowners get a feel for the going value of their home if for no other purpose. Ask them, “Would you like me to give you an offer?” If they say no, tell them to keep your card in case something changes and thank them for their time.
If they say sure, yes, or ok, then you need to set up an appointment in two days or so to give them your offer. Also, tell them that their partner needs to be present or company policy will prevent you from leaving the offer (if they aren’t there when you go back just set one more appointment for a couple more days and if they both aren’t there again – forget them).
After setting the 2nd meeting you’ll need to put an offer together for their property. I like using the one page contract from the “E-Z Legal forms: Contract to purchase real estate” (found at most office supply companies) which is simple and to the point. Most contracts are multiple pages and will intimidate instead of enhance the process. The amount of your offer will be around the same number you’ll see on the notice of default as the remaining balance. Because if you let this house go into foreclosure like it was headed, anyway, that’s all it is worth as an investment. So I’ll fill out the one-page contract with my name as the buyer, the purchase price, and sign it. I won’t date it until or if I leave it with them.
Going to their home for the 2nd meeting I have the offer in a briefcase or professional binder and knock on their door at the appointed time. If they are both home I go in and sit down while explaining that there were some red flags that popped up as I researched for a fair offer. I tell them that because of privacy laws I don’t know the full details of these and I’m not here to embarrass anyone. As I’m saying this I look at the lady of the house and ask her if they have experienced some missed payments on their mortgage or anything like that as this might be why there are some red flags. Now she is going to do one of two things: she may tell you outright that they are in trouble with their payments since her husband was laid off and they have been struggling every since or she’ll look at her husband for a signal of how to answer. If she looks at her husband at this point, I’ll slowly look at my shoes because I don’t want to put any pressure on their decision (you have many more leads than just them) and remember you can’t effectively push a rope.
I slowly look up at her and she’ll tell me either that everything is ok (if she says this then I get out the offer and my business card, date the offer and leave it with them. And say that they should get with someone who can help get those red flags off their property information at the courthouse and thank them for their time and if anything changes call me and I’ll show my self out since I’ve got another appointment.) or she’ll say that they are having some payment challenges. Upon this response, I’ll say that this may be the reason for the red flags and ask if they know what default means? I want them to know that the filing of default means that it is the first legal step of foreclosure. Also, I’ll explain three main things that will happen if they loose their home in foreclosure:
- They’ll loose the roof over their heads and after the actual process is completed and they are not out of the house they will be physically removed out to the curb.
- They will loose any available credit as their credit history will be severely damaged for around 10 or more years (financial institutions look at a foreclosure as being far worse than bankruptcies) and even landlords may check credit before renting their properties. If they see the missed payments of a foreclosure they may choose not to rent to you because they’re not sure you’ll pay rent.
- They will loose any equity they’ve worked so hard to build up in the property (there can be tens of thousands of dollars which will be permanently lost. It would be much like piling the money in the street, dowsing it with gasoline and throwing a match at it).
Explaining this may bring them back to reality.
Now my strategy changes and the offer in not the main subject, getting their house sold becomes the most important point. I’ll say that we need to focus on getting their house sold so we can salvage their credit and some of their equity. They’ll still have to move. They have a few options at this point. One option is to talk to their family, parents or relatives and see if someone can help them out of their financial situation. 99% will tell me that this option won’t work as they wore this one out years ago. They can let the house go through the foreclosure process and learn first hand the 3 points listed above first hand. Or if they want to work with me as a final option I will tell them that I don’t work for free and what we need to do is create a 50/50 partnership in moving their property. This means if we can sell this property before the foreclosure auction we will split any money that is more than what the bank needs to clear their books. If they want to pursue this option, pull out a blank piece of paper and fill out a partnership agreement with them. Have them sign it and date it, you sign it and date it (make sure that the owners represent one-half of the partnership and you represent the other half) and promise to get them a copy as soon as possible. This will prevent them from stating at closing that they don’t know you and it shows a primary contract on this property.
My part of this partnership will be to aggressively market the house and I’ll spend my money to put ads in the papers and put signs on their property. Their responsibility is to keep the house in presentable condition and to look for a place to move to from their house.
Now, on one pre-foreclosure that was just processed the remaining balance was 65 thousand dollars and the fair market value was 120 thousand dollars. I don’t reveal my marketing strategy, specifically, but I’ll run ads saying, “Steal my house before the bank does! House’s FMV=120K - 1st 90K takes! Karl @ 801-123-4567.” Or “All vultures welcome! House’s FMV=120K - 1st 90K takes! Karl @ 801-123-4567.” Make sure you have a phone message to address these calls from these ads and remember that these callers will be potential buyers on future deals so keep their names and numbers. On these calls I will work with those who can close in one week! You’ll get lots of calls from these ads and you’ll ultimately have to go with those who can close in one week and called you first.
Call a title company (if one gave you this pre-foreclosure then work exclusively with them – if not tell them if they can get these names to you, you’ll continue to work with them) and set up a closing for the end of the week. I like to get the notice of default back to them so they can be on top of all information at closing. Then you close with the buyer bringing $90K+ and the Title Company will take the money and begin to disperse it to each recipient. The bank gets $65K and they’re out of the picture, the remaining $25K is split in half and the sellers get a check for $12,500 and you get a check for $12,500 and all walk out of closing with a smile on their face.