Real Estate Investment Strategies: Foreclosure
Another popular method of investing in real estate is searching for foreclosures. As you may know, there are many steps in the foreclosure process and investors can be involved at any point. First and foremost, the owner needs to become delinquent in his/her payments. Once the owner is several months behind, he/she will receive a Notice of Default (NOD) from their mortgage company which effectively initiates the foreclosure process. After several more months (state to state regulations will vary), the property will be sold at auction if the debt is not satisfied.
Pre-Foreclosure
Pre-Foreclosure is the first opportunity investors have to get in. At this time, the owners are still in control of the situation and are only a few months behind in their payments. If the owners are able to catch up on their payments or satisfy the debt, the foreclosure process will stop. This is where investors will contact these owners to see if they would like assistance. This help usually means selling the property to the investor at a price well under market value. The advantage to the seller is to avoid foreclosure (which essentially destroys their credit), and get out with several thousand dollars to relocate. Once the investor has control of the property he/she can assign it to another investor, re sell it or rent it out.
Equity
The key to this strategy is equity. You will need access to the Notice of Default list from a title company, lender, or a Realtor. Using this list, you will need to determine the amount of equity involved in each property. To be safe, most of the time you will need at least 15% or more. If the owners have only been on title for a short period of time, they probably do not have much equity unless they put a significant amount down. In this type of situation, there is little reason to pursue this property and it is best to move on. Once you find a property with a reasonable amount of equity, you must research the property and determine if there are other liens that will subtract from your equity. Tax liens are the biggest and can usually be found by searching with the County Recorder's or County Assessors office.
Contacting the Owners
If you have a property that may work, you must now contact the owners. You can try by phone, but you will have more success with face-to-face. Remember, these people are surely receiving a lot of calls from other investors like yourself, so you will probably encounter some resistance. Another tip that will work is to type a brief letter describing your services, give it a live signature and handwrite the address on the outside, and leave it in their mailbox. Often times, owners will appreciate your soft approach to such a sensitive situation.
Offer
Your goal is to pay off the lender, handle any liens, pay the closing costs, and have the owner end up with some money ($5,000-$10,000). This offer will prevent the owner from being foreclosed upon, give him/her some money to restart their life, and provide you with a property well under market value. It is a win-win situation for all parties involved. However, the fact is that most of the time you offer will get rejected. Most people think that they can just put up a for-sale sign and get it under contract right away. In a hot market this may work, but most of the time they will not have enough time to avoid foreclosure. It helps to bring current sales data to combat this notion of a quick sale, but some people will just not listen. If you find a property that will work and a owner willing to hear you out, this can be a very profitable investment strategy.
Foreclosure
Once the foreclosure process has begun, things change considerably. Many investors do not realize that foreclosures are a cash transaction. This means that if you intend to purchase a property at auction, you will need to pay cash for the entire sales price. While the advantage of purchasing property at a considerable discount is appealing to investors, many can not participate because they are not able to use conventional financing methods.
Dealing in cash does not necessarily mean that you must have the money in the bank. There are many private hard money lenders who will loan you the cash to buy foreclosures. They will typically charge interest rates ranging from 15-18%. While these interest rates are unusually high, you will only be using this lender to have cash for the transaction. You will certainly want to refinance to a more reasonable interest rate once you have purchased the property.
Competition
As foreclosures have become increasingly popular with investors, so has the competition for these properties in most markets. In most areas, you will find that there are several individuals who essentially control the foreclosure market. These key players will attend every auction and actually make it difficult for new investors to find deals. They will likely employ tactics such as outbidding newcomers and even working in teams to overprice properties. In many markets there are even companies that will purchase these properties and then sell them to investors after a mark up.
Since breaking into the foreclosure market can be tricky, it helps to have the help and guidance of someone familiar with the process. Many investors find it helpful to employ the services of knowledgeable real estate agent who is familiar with foreclosures. In addition, there are many real estate coaches who specialize in foreclosures and can acquaint newcomers with the process.
Timeline
The foreclosure process can be very long and often lasts up to six or more months. First, they must become delinquent in their payments, usually for several months before the mortgage company takes action. It takes around 90 days from when the property was placed on the NOD list, before it can be auctioned as lenders give owners every opportunity to catch up. Eventually the property will be included on the auctioneers list and given a date for sale. This date is also frequently delayed or cancelled depending on the owner's ability to convince the bank to hold off on foreclosure proceedings. So if you are interested in pursuing these investment opportunities, be prepared to be patient.
Auction
Bidding on the property at auction can be intimidating, so it is advisable to first attend several auctions to familiarize yourself with the process before jumping in. You should learn how the auction proceedings play out and how the bidding works, watch the purchasing process, and most importantly identify who the regular competition is. It is important to make your presence known on the auction circuit before you start bidding on properties because the competition is less likely to bully you if they see you as a regular. Also, do not be afraid to ask questions as it is the only way to learn.
Depending on the state in which you are purchasing the property, you may be required to pay immediately following the bidding. The usual form of payment is the cashiers check, but you may want to see if they allow wire transfers or other forms of payment. In fact, some counties even require bidders to register prior to bidding so they can make sure they are qualified.
Caution
As with every investment strategy, there are several aspects of the process to be cautious of. First, you must realize that when purchasing a house at auction, you will usually not have access to the property prior to the bidding. This means that you typically will not be aware of what condition the property is in, what repairs are needed or what appliances are included.
Another consideration to keep in mind when pursuing foreclosures is the market, both real estate and investment. When the real estate market is good, homes do not sit long before they go under contract, so you will find less suitable properties and owners who would like assistance. Also if there are many competitors in the investment market, you will have a harder time finding property.
Watch interest rates too. When you have a hot market, buyers tend to purchase more house than they can afford and often times they will have adjustable rate mortgages that will cause payments to increase dramatically within next few years.
All in all, pursuing foreclosures can be a very profitable way to spend your investment dollar. If you are cautions and use the advice of professionals, you can succeed investing in foreclosure properties.