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Profiting from Foreclosure Properties

Foreclosure Properties

Profiting from Foreclosure Properties

In order to be able to approach foreclosures, you must first understand the foreclosure process. There are three main stages to the foreclosure process and there are several ways to profit from each stage. The three stages are:

  1. Pre-foreclosure
  2. Auction
  3. Bank Owned

During each stage, different things are happening and it is important to know the process so that you will know how to proceed with each stage.

Pre-foreclosure

During pre-foreclosure, the homeowner has stopped making payments on their mortgage. The lender will start sending letters telling them that they need to bring the loan current or they will start the foreclosure process. The time required for this process is different in each state and in each situation, but it usually takes 90 to 120 days for the lender to begin the foreclosure proceedings.

Pre-foreclosure is one of the better stages of foreclosure to get involved as an investor. First of all, you are still dealing directly with the homeowner. This is helpful because they will generally be more open to solutions and options than a bank would be. The other reason is that you are getting there earlier in the process. That also means that you have more options because it is not going to cost as much money to bring the loan current and provide a solution for the homeowner. Usually, the earlier you can get in the process, the better it will be.

When it comes to pre-foreclosures, there are a couple of different ways that you can approach the deal. It really boils down to the amount of equity that is in the deal. If there is enough equity in the deal, then you would usually make an offer that would make sense as an investor (just like any other deal). Their equity in the property in essence becomes your profit.

If the equity is not there, then you have to use a strategy that will allow you to create a profit. A strategy such as a lease option, or seller financing could potentially make the deal work. The concept is that you are going to buy the property because the price is right (there is enough equity in the deal for profit) or you are going to buy it because the terms of the deal are right (you can pay a higher price, but you make money because of the terms of the deal).

If there is not enough equity and you cannot make the deal work by structuring a terms deal, you only have one other choice, which is to negotiate a short sale with the lender. A short sale is where you ask the lender to accept an offer on the property for less than what is owed on the loan. So, the bank is going to take a loss on the property. This is why it is called a short sale as the bank is going to short off their books the money that they are losing on the deal.

Why would a bank accept a lower amount than what is owed on the mortgage? Foreclosure is a long and costly process for the bank. The whole idea is that you are going to create equity in the deal by getting the lender to discount the payoff on the mortgage.

In order to get the lender to approve the short sale, you must go through a process that is beyond the scope of this article. You can learn more about short sale packets and the process to get one approved through Rich Dad Education elite trainings.

To summarize, the determining factor on how you approach pre-foreclosures really is dependent on the amount of equity in the property. If the equity is there, you will usually offer to pay what is owed on the loan balance. If the equity is not there, then you will need to purchase the property using terms (lease option or seller financing) or create the equity using a short sale so that the lender will take a discount on the loan.

Auction

The auction is the next step in the foreclosure process. Let’s assume that the homeowner was not able to bring the loan current and was not able to sell the property. If that happens, then the county will hold an auction on behalf of the bank to try to sell the property. Some counties call this a trustee’s sale, sheriff’s auction, or courthouse auction. Regardless of what your county calls it, the process is very similar.

The opening bid is going to be what is owed on the loan, including the fees that the bank had when they foreclosed. So, if a bidder bids even a dollar higher than the opening bid, the bank is going to get their money back, the bidder gets the property and everyone is happy. If no one bids higher than the bank, then the bank will take the property back and sell it themselves on the market, but that is the next step in the process.

Is the auction a good time to get involved as an investor? It can be, but for most people the answer will be no. The problem with the auction is that it usually requires a cash purchase. Most auctions require a down payment just to be bidding on the property. It can be upwards of $5,000 depending on the county. For some investors, that is already a problem because they do not have that kind of money. If you are the highest bidder at the auction, the next problem is that they will require that you bring the remainder of the money in a short period of time. In many counties, you will be required to pay within 24 hours or even at the end of the day. That means that you will not have enough time to get financing to buy the property. You will need to have all cash, or a line of equity that you can tap very quickly. Many new investors do not have access to that kind of money in a short period of time. As a result, bidding on the property at the auction is not the best option. It isn’t a matter of being able to get a good deal or not, it is really a question of whether you can come up with the money that quickly or not.

Bank Owned (REO)

The final step of the foreclosure process is bank-owned properties. They are also called REOs, which stands for Real Estate Owned. If the bank is the highest bidder at the auction, they are going to take back the property and put it on the market with a real estate agent to sell the home. All of these properties will be listed on the multiple listing service (MLS). Usually, each bank has specific agents that they send all of their properties to.

As the bank is listing the property with the real estate agent, they are going to ask the agent to do market research and provide them with what they think the home will sell for. So, when the bank puts the home on the market, it is usually going to be listed at pretty close to full price. The bank is going to try and sell it for as high as they can since they have a lot of money and fees in the property at this point.

These REO properties are not going to be very different from other properties on the market. You would make an offer on these just like you would with any other property listed on the market. Either the deal is going to work out, or it will not.

The only thing you have going for you as an investor at this point is that the more of these properties the bank has on their books, the more penalties they have. So, if the bank has been foreclosing on a lot of properties, you will have some leverage in your offer. Otherwise, the bank has deep pockets and can afford to wait for a higher offer.

Banks are also well known for taking their time to respond to an offer. You will need some patience if you plan on working with REOs. If you can build a good relationship with the agents that handle the bank-owned properties, it will help to get your offers processed a little faster since they know you and trust that you will follow through on what you are offering.

There can be some decent deals here, but you are going to have to negotiate for them through your offers. Again, the majority of these deals are going to be listed for full price. You will have to make an offer that makes sense to you and see if you can come to terms with the bank. Either it will work out, or it will not.

Although there are opportunities at each stage of the process for you as an investor, pre-foreclosures are usually the best opportunity, especially for investors that are just starting out. If you are using foreclosures as one of your primary methods of finding deals, focus on the stage of foreclosure that best fits your investing strategy.

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14 responses to “Profiting from Foreclosure Properties

  1. Maureen Shaw August 14, 2013 at 2:08 pm

    According to the information copied below, am I to assume this applies to US forclosures and not Canadian provincial forclosures?
    “time required for this process is different in each state and in each situation”

    • Valerie Ewards August 14, 2013 at 4:20 pm

      It’s quite similar in Canada. When a Buyer’s agent writes an offer, they send it to the listing Realtor, who sends it to the lender’s lawyer, who sends it to the designated person at the lenders. That’s just to get the offer to the party who can do something. In my experience, banks do not follow the basic rule, “Time is of the essence” that Realtors do. They will ignore any date of response that is in the offer and come back to you when they are “ready”.
      Valerie Edwards
      Realtor
      Re/max Camosun
      Victoria, BC

  2. Pingback: Profiting from Foreclosure Properties

  3. Maureen August 22, 2013 at 1:57 pm

    How do you know when someone is in pre-foreclosure?

  4. Ellen Sweeney September 12, 2013 at 10:34 am

    There are tons of foreclosed homes where I live. What source of funding does one get? Do you get a loan for the entire cost and but for cash?

  5. Dean Carter September 13, 2013 at 8:26 am

    New investor looking for first rental unit. Any tips?

  6. vijendra September 14, 2013 at 1:15 am

    How do I know when someone is in pre forecloser?

  7. Matthew Stearns September 15, 2013 at 2:48 pm

    I’am every I interested in this process and I would like to learn more and receive more e-mails about learning more about this process.

  8. Elaine Taylor September 17, 2013 at 6:48 pm

    Thank you that was helpful and interesting. Elaine

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