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The advantages to buying pre-foreclosures from homeowners in default can only be measured by the individual investor. Some buyers do not
see enough reward, some think it's too risky, while others are plagued by moral issues.
Ultimately, the bottom line for success and profit in a pre foreclosure purchase is research.
Pre Foreclosure Opportunity
The investing window of opportunity opens the day the Lis Pendens is filed (the notice that a legal action is pending).
The window closes the day the property is sold at auction. The time between these two events enables an investor to
work with the homeowner and lender to create a workout strategy and purchase the property from the homeowner
before the auction sale date. For more details, here's a course for buying pre-foreclosures.
Pre Foreclosure Starts With Loan Default
When a property owner defaults on a loan and faces foreclosure, both the owner and lender enter into a
situation where both parties will lose. The property owner will lose his property and may even face a lawsuit for a
deficiency. The lender will have a bad loan and has to incur expenses to maintain and sell the property.
This situation creates a window of opportunity for investors. Both the lender and the property owner are highly motivated to
resolve a problem. The property owner needs to be rescued and so does the lender who may be facing a loss at
the public auction sale.
If there is enough equity in the property, there is potential to work out an arrangement that satisfies all
parties and allows for a handsome profit. Pre-foreclosures are about buying equity in a property, working out an
arrangement with the lender and the homeowner, then selling the property for a profit. (see the below course info on selling preforeclosures for profit)
Steps to Profits with Pre-Foreclosures
The basic guidelines to ensure a successful pre-foreclosures purchase and subsequent profitable sale are:
- Locate loans in default (pre-foreclosures)
- Evaluate choices and narrow your selections
- Contact the homeowner
- Inspect a property and its loan documents
- Determine the homeowner's needs
- Calculate your selling price and profits
- Negotiate with lender, the owner and lien holders
- Close the deal, repair as necessary and sell
While profits can be excellent, outstanding loans and judgments are the biggest risk when buying pre-foreclosures
(before the Trustee’s/Sheriff’s Sale). Thorough research is necessary to determine whether a property's resale value,
minus any encumbrances (taxes, liens, etc.) and repair costs, warrant its negotiation and purchase.
Finding loans in default is easy enough (they're publicly available from the county recorder's office at the
courthouse, newspapers and foreclosure reporting services), however, contacting, then negotiating a deal with
the owner in default can be somewhat difficult.
Negotiating with the Homeowner
This is an emotional time for the homeowner. Foreclosure threatens to take away not only their home, its equity
and their credit standing, they could also be held liable for a deficiency judgement if an auction sale did not bring
enough proceeds to cover the debt.
Your job is to tactfully and compassionately resonate the homeowner's financial dilemma and offer a
viable solution to both their, and your own subsequent benefit. Only after evaluating the homeowner's position
and the property's equity should you complete your property research and further pursue purchase.
Again, profits in pre-foreclosures can be enormous, however, familiarize yourself with some of the realities
associated with buying them:
- Sometimes very difficult to contact the property owner in default
- Most always you face a lot of competition from other investors
- Frequent irrational behavior of the property owner in distress
- Property research can be cumbersome - it must be thorough
- Additional time & expenses incurred researching properties
- Possible hidden problems including additional liens, encumbrances
- Sometimes requires you to negotiate with lien holders & lenders
- Evaluation of properties must be completed quickly to eliminate those
which do not present a high income potential
Always be cautious when buying pre-foreclosures. And most importantly, aspire to perfect your property research
down to a science.
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