Preforeclosures:
When a homeowner can’t afford to keep their mortgage current and falls behind a couple of months this is when the home moves into the preforeclosure stage. Banks post delinquent mortgage notices down at the courthouse and there are quite a few companies out there such as Roddy.com and Realtytrac.com that provide compiled lists of these notices to their clients for a fee. Why do they do this? Because they know there are savvy investors looking for homes with equity who know investing in these homes have the greatest reward. But with great reward comes great risk…
The process: After finding a preforeclosure you think may have some potential make sure you have done your homework and know about every issue with the title. This is the high risk part of this stage of real estate investment. You do not want to purchase a home that has a tax lien of $100,000 tacked on to it. It is essential to have a good title work team at your fingertips to give you the scoop on potential investments. So you are satisfied with the title. Ok. The next step is to get a contract with the homeowner in distress. The trick is to let the owner know from the get go you are in this for the money, not their benefit. This is a harsh reality but will save you many headaches later on. The truth of the mater is you will be their savior because it will keep the foreclosure text out of their credit. In the state of Texas their credit will be affected like this; 200 point instant deduction and short sale text on the report. Within 6 months they could have repaired their credit and could possibly purchase another home. If you would like to take it one step further to benefit the owner make sure the bank takes the clause making the current owner responsible for the remaining balance after the sale out of the short sale documents. The contract must be a specialized contract that will give you flexibility when moving on to the next step. Please contact me for more information. Negotiating with the bank and the dreaded loss mitigation department. At this point you have essentially moved into the short sale stage of foreclosure. The contract is not the only thing you need in order to speak with the bank about the owner’s loan on their behalf. You will also need an authorization to release information, a power of attorney, and some kind of hardship letter. When you get to this point it will be a slow boat to China to get any kind of response from the bank. This investment strategy is not for the feint of heart. You must have extreme patience and perseverance to go from start to closing on this kind of a deal. It may be months and months before you hear from the bank only to have them tell you “no” on your contract. If you can pull through and make it to the other side you will be looking at deals with an excess of $80,000 equity in some instances depending on the value of the home.
So what is the banks problem: Banks are not in the real estate business, they are in the banking business. As far as real estate is concerned they make their dollar from interest on mortgages. Well when the mortgage payment is not being made any longer they do not switch over their goal to hey, let’s sell this home for a profit. The bank just wants to get the home off of the books. Why is the preforeclosure investment important? Because you can provide that avenue for the bank to unload the home and keep it from going into the foreclosure process which will costs them more time and money in attorney’s fees and etc. This is a catch 22 though. All banks have a loss mitigation department that handles deficient payments. To give you an idea of a typical nationwide bank’s loss mitigation department imagine only 1 floor in a high rise with a staff of about 35 dealing with every late mortgage file for that bank! Also they won’t increase staffing because they are already losing millions of dollars through this department, why would they want to increase that any more by adding additional salaries.
Short Sales:
We touched on this subject in the last section but basically this is the stage of the foreclosure where the owners realize this is their only option at getting out from under the mortgage responsibility and minimizing the damage to their credit. They are willing to sign a contract for a substantially lesser than market value to sell quickly in hopes that the bank will accept and take a loss rather than going through the lengthy and fee ridden full blown foreclosure process. You can find these homes, with the help of a realtor, listed in the MLS databases but also on preforeclosure lists. The risk factor is the same as the preforeclosures because of the uncertainties about the title. Please read above if you have not already about the process of the short sale in the section titled Preforeclosure.
Courthouse Auctions:
In this stage of foreclosure the bank has authorized a trustee for the county to auction the home publicly with a start price set by the bank. If there are no bids then the bank will officially repossessed the property. The auctions are held on the courthouse steps the first Tuesday of every month, rain or shine. Again, same risk factor as the preforeclosures and short sales because the title has not been scrubbed clean. Many times you will not know the condition of the interior of the home either but every once in a while they will hold viewings before the auction takes place. You must also do your homework before placing any bids here, you do not want any surprise liens or defects. Don’t forget to bring cash because when you win a bid, the amount is due in full immediately. Once you have paid in full now you must figure out how to evict the previous owner still occupying the property in some cases.
REOs (real estate owned aka bank owned):
Once a bank repossesses a home they must now go through the process of selling it and getting it off of their books. As stated earlier they are not in the real estate business so they will hire asset managers and real estate brokers to help them with this process. It may take a couple of months before a repossessed home hits the market but once it does it usually sells very quickly. This is because in most instances the homes are marked down 10%-50% below market value. You can find these listed in the MLS databases, like the short sales. A realtor will have the most up to date access to these listings. The homes will be substantially reduced in price for a quick sale and will always be sold as is. No negotiating for repairs here. If you are looking at investments in this stage, your risk factor has mostly disappeared. The titles have been cleared by the bank and the transaction will be similar to a standard owner occupied type sale.
HUD Foreclosures:
So what happens to the government insured loans such as VA that go into default? The government repossess these and they become HUD foreclosures. You can find these by going to Southwestalliance.com, they are the asset managers for the government. You can also contact a realtor for the most current listings. The transaction process is slightly different than purchasing an REO type foreclosure. These will usually be marked about 20%-30% below market value for a quick sale. The process involves placing a bid through a realtor online by a certain deadline. The highest net offer will win the bid. You can be assured that if the home is in good condition it will sell for the full listed price or better. There is also a property conditions report for each and every HUD foreclosure. As with the REOs, the risk factor has disappeared because the government will clean up title making for a smooth transaction.
In conclusion, purchasing real estate from any of the stages listed above will provide you with the best opportunity at procuring a profit whether it be through rental income or resale, short term or long term. For novice investors, HUD Foreclosures and REOs are both a great way to get your feet wet in the business without much risk. Luckily being in the DFW area and the top market in the nation, this will provide the stability and confidence to know your hard earned dollars will be safe. And remember if you need a consultant to guide you through any of these purchase processes, please contact me.
Jon Sutton, SFR