Buying Pre-Foreclosures

The Art of Buying Before the Sale
the Real Estate Library
The advantages to buying properties from homeowners in default can only be measured by the individual investor. Some do not see enough reward, some think it's too risky, while others are plagued by moral issues. Are you helping the troubled homeowner or taking advantage of his misfortune? Both the lender and the homeowner lose in a foreclosure action. Neither want it to happen. Both parties are motivated to resolve the situation. Motivated parties are key to the process.

The investing window of opportunity opens the day the Lis Pendens, the notice that a legal action is pending, is filed. 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 or a purchase of the property from the homeowner before the sale date.

The amount of time the window remains open depends solely on state and local laws, as well as the behavior of the property owner. Some states sell properties within 90-120 days from the first notice of default. In New York, the process can take a year or more.

As for the moral question, keep in mind that by dealing with a homeowner in default, you not only help him, you generally rescue the loan and maintain the value of the property (and surrounding properties) as well. If there is enough equity in the property, there is the potential to work out an arrangement that satisfies all parties and allows for a handsome profit. That's what pre-foreclosure investing is all about: buying the equity in the property, working out an arrangement with the lender and the homeowner, then selling the property for a profit.

Investors follow these basic guidelines to ensure a successful purchase and sale:
Locate loans in default
Evaluate choices and narrow selections
Contact homeowner
Inspect property and loan documents
Determine homeowner's needs
Calculate your selling price and profits
Negotiate with lender, owner and lien holders
Close the deal, repair as necessary and sell

Locating Loans in Default

The Lis Pendens is the first public notice (document) that announces a loan in default, so it makes sense to start there. Access these notices at the county courthouse, newspapers that routinely advertise these notices or through a reputable Foreclosure Service Provider.

Evaluate Selections & Determine Potential

You know the default amount from the legal notices or service provider's information. Now you must estimate the property's market value. Subtract the default amount from the estimated market value to determine the gross equity in the property. This figure also reflects your gross profit potential. If there is little or no difference in the amount of debt and the market value, move on to another property. If there is a big difference, there may be enough equity in the property to make a sizeable profit.

Contact the Homeowner

This is easier said then done. The homeowner is probably being bombarded with letters and calls from attorneys and bill collectors and has creditors showing up at his door. The only way to contact the homeowner is by phone, mail or in person, and chances are you will have a difficult time getting in touch with him.

Start with mailings. Indicate in your letter that you are a private investor looking for property in that part of town. Let the property owner know that you may be able to help him with his financial problems.

Demonstrating an understanding the homeowner's dilemma will help your efforts. Indicate in your letter that you may be able to stop the foreclosure, save his credit rating and provide cash for use in paying his bills and/or for relocating.

Be professional and gracious in your correspondence. Invite the homeowner to call you at his convenience. If you don't hear from him in a reasonable amount of time, say three or four weeks, follow up with another letter, perhaps worded a bit more urgently. As you get closer to the auction date you may want to send two or more letters per month.

Follow up with phone calls if you can. Be courteous, never pushy. Never interview the owner on the phone. Merely state that in order to determine whether or not you can help him, you will need to meet with him at the property. Make sure he understands that the meeting will be more productive and less time consuming if he will have the loan, mortgage and insurance documents available, as well as the foreclosure notices.

If you are going to make an offer on the property, you must have the loan, ownership, and debt or lien information. You must also assess the condition of the property and the property owner. Combined with the market value and the default amount, you have all the ingredients necessary to formulate your offer.

If you feel comfortable with it, you can visit the property in person. You may be confronted by an angry homeowner. Be polite and leave if you are asked to. Never, under any circumstance, snoop around, inspect or generally trespass unlawfully on somebody's property.

Meeting the Homeowner

Use common sense and dress appropriately, something casual but not sloppy. Be sympathetic. Does the homeowner need cash? Is he waiting for a bailout? Will he go bankrupt? Find out. Review the loan and mortgage documents. Verify the loan amount, monthly payments, interest rates, taxes, etc. Review the insurance policies as well. Get all the pertinent information you can. Ask the owner if there are any other liens or judgments he may be aware of.

Inspect the property with the homeowner. Never comment on the owners lifestyle, just the physical condition of the property. Point out the obvious defects or items in need of major repair. Use an inspection checklist and record your information and estimated costs of repair.

Make no promises at this point. Make no offer or give the homeowner any money. Make an appointment to meet with him again if you think you want the property.

Preparing Your Offer

Determine the net equity in the property. This is the difference between the market value and the default amount plus liens and repair amounts. Negotiate with the lien holder. You may offer to satisfy the lien for 20% of the amount. Chances are the lien holder will lose everything when the property sells at auction. Buying out the lien puts more equity in the property and more money in your pocket.

Remember to include closing costs in your calculations for the purchase and sale if you intend to flip the property. Also included the carrying costs, the mortgage payments and taxes and insurances, while you hold, repair, and then resell. Also include a seller's commission if you use a broker. Calculate every legitimate expense associated with buying, repairing, carrying and selling the property. If a large enough figure remains, you may have a very nice deal. This bottom line figure has to pay the homeowner for his property and produce a profit for you.

How much do you offer the homeowner? Some investors itemize every expense, show their calculations to the owner and offer to split the profits. Some itemize the expenses and pay the owner the remainder on the bottom line. The investor then earns his profits by the reduction in lien amounts as negotiated, savings in repairs by doing them himself, negotiating a lower seller's commission, or selling the property himself. Others still make offers based on the bottom line, and negotiate from there.

The Purchase Contract

When the owner decides to sell, you will both need to sign an Equity Purchase or Real Estate Purchase and Sale Agreement. All parties recognized in the mortgage contract must sign.

Check with your attorney before signing any contract and make sure he is knowledgeable in real estate equity purchases.

Investing experts agree that the terms of the agreement must be clearly stated in the contract. Leave nothing to verbal understandings. Your best defense against future problems is the manner in which you present your evidence. Have everything documented properly.

Make sure to include the following in your purchase agreement:

A '"'Subject to'"' clause that allows you to bow out of the deal if something is not as originally agreed upon. This could be for unknown damages, general condition of the property or loans, termite damage, etc.

A statement that allows you to show the property.

A statement indicating that the property has to appraise at a certain value.

The property must be vacant, all tenants and possessions out by the specified date.

An agreement between buyer and seller that the payments for the current loans equal '"'X.'"'

A statement indicating the sale is subject to the condition of the loan and/or encumbrances against the title.

A statement indicating the buyer shall pay all closing costs.

A statement indicating the seller shall: '"'Deed the property to the buyer... Authorize the buyer to record said deed at the appropriate time...
Be aware that the buyer may resell the property... Be aware that the purchase price may be below market value... Leave the premises in good condition and pay for damages incurred after the contract has been signed and before the seller has left... Agree to pay for any damages or repairs necessary as discovered by termite and roof inspections... Vacate the premises on the date specified.'"'

A statement indicating all net proceeds paid to seller will be paid at closing.

Closing

Inform your attorney that you have a signed contract and that you need representation at closing. Have him prepare a Release of Lien, to be recorded at or just prior to closing, if you have negotiated a settlement with a lien holder.

Arrange your financing. If you assume the loan and have been in contact with the lender, make sure the foreclosure process is stopped before the sale date.

Order your certified appraisals and inspections as required before closing. Order the termite and roof inspections as well. Verify from a title search that there are no other lien holders against the property.

If all goes well, you probably just bought real estate well below market value.

Article 2.

If the property is listed as a Notice of Default (NOD)or Lis Pendens (LIS), that means it is a pre-foreclosure. (You can find these in your Sunday paper. Although you should try to buy directly from the homeowner at this stage, it’s best to call the trustee first for any further information about the status of the property. In some cases, the trustee will not have much or any information on the property because it is very early in the foreclosure process.

Assuming the trustee confirms the property is still in foreclosure, you will want to contact the owner in default. The buyer typically pays the homeowner a portion of the difference between his equity and the home's market value. Even if the Notice of Trustee Sale has been filed, you can still make an offer to the homeowner prior to the scheduled auction date.

You can usually call the county property assessor or use the county property assessor's Web site to plug in the property address or parcel number to get the homeowner's information. For Broward County Property Appraisers Site Click Here.

Keep in mind that the property in a pre-foreclosure status of NOD or LIS is not necessarily for sale. The owner may be pursuing other options to cure the default; however, an offer from a pre-qualified cash buyer may be the best solution to get the owner out from under the impending foreclosure. You can also make an offer to the owner prior to the scheduled auction date even if the Notice of Trustee Sale (NTS, NFS) has already been filed.
How can I buy an auction or trustee sale property (NTS, NFS)?

If the property is listed as a NTS (Notice of Trustee Sale) or NFS (Notice of Foreclosure Sale) you can contact the trustee to confirm the status of the auction. The trustee is responsible for scheduling a trustee sale, which is a public auction where the opening bid will be the loan balance.

At the auction the property will be sold to the highest bidder, and the trustee usually requires the winning bidder to pay in cash. Typically, the lender who holds the first loan on the property starts the bidding at the amount of the loan being foreclosed. Successful bidders receive a trustee's deed conveying ownership of the property to them.

We recommend you do title search of the property or consult a local real estate attorney before bidding at the auction to check for any other outstanding liens. This is recommended because the winning bid may be subject to other liens (unpaid taxes for example) in some cases. We also recommend attending an auction in your area just to observe how the auction works before actually going to bid at an auction.

You can also contact the owner before the trustee sale occurs and see if they are willing to a last minute deal with you so they can avoid foreclosure.
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Contacting the lender
to buy an REO?

Sometimes contacting the lender can be the most frustrating step in the process because the main purpose of a lender is to lend money, not sell property, so even though they may have a an REO officer or an REO department that handles bank-owned property for sale, that department may be hard to track down.

Contact the local property assessor (either through the county or city government) and ask who is listed as the owner of the property and the assessor should also have the mailing address.

Enlist a local real estate agent help you track down the lender. Many real estate agents have access to additional resources that will help find the lender if you give them the address or parcel number of the property.

You or your agent should submit your purchase and sale offer to the lender directly or the listing agent who will forward it to the lender for consideration. Once it is received, they will accept it, reject it, or make a counter offer to you. If a meeting of the minds is reached, the purchase and sale agreement (or contract) will serve as the letter of closing. All terms and conditions in the purchase and sale agreement will be adhered to.

Instead of looking at REO properties, look at NTS (Notice of Trustee Sale) or NFS (Notice of Foreclosure Sale) properties to give yourself a jump. This could be more time consuming, but what you can do is attend the public auction (or call the trustee the day after) and if the lender takes back the property at the auction then you can immediately contact them (maybe even at the auction location) to let them know you are an interested buyer. This may save you a few days over waiting until the property is posted as an REO.
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