Originally Posted on AICWEBLOG on October 10, 2006 by Jim Knox.
If you are looking to become a somewhat savvy real estate investor, look for a niche, build an abbreviated business plan and go forth. Once you make a decision of which niche you want to pursue, say for instance, PRE-FORCLOSURES, then educate yourself on the fundamentals and the verbiage used in that niche. Understanding the foreclosure process gives you some insight into locating foreclosures at their earliest stages.
A Pre-Foreclosure is a property where the owner has become delinquent on the mortgage payments (on the verge of formal foreclosure proceedings) and is ready to move on whether they formally go into foreclosure or they sell the property at a significant discount, usually giving the buyer all of their equity.
Finding Pre-Foreclosures can be a worthwhile investment yielding higher than average returns. Your primary goal is to find a person that is behind on their payments, before anyone else. Once located, you have two primary options, buy the house from the owner and cure the default or buy directly from the bank. If the value of the property is less than the mortgage balance(s) the lender(s) can allow the buyer to purchase the property for less than the exiting loan balance. Buying a Pre-Foreclosure from a bank is called a “short sale” or “short payoff sale”. This type of purchase can guarantee the purchaser equity on the day of closing.
Banks and financial institutions take back homes that they have loaned funds against. They refer to the properties they retrieve as REO’s or real estate owned. Larger banks have REO departments that are solely devoted to the resale of these properties.
Builders who build “spec” homes, homes not presold but built “speculatively”, finance the construction through banks. If a builder has more inventory than he can afford, these new homes can also appear on bank REO lists.
Once the home is in foreclosure and in the case of bank REO’s, become familiar with local contacts of REO departments at banks in your city. Create a report with these bank contacts and inform them of the type of home and the area you are interested in. Depending on the relationship you build with the bank, you may obtain information on homes prior to it being added to the public database.
Once you become seasoned in Pre-Foreclosure and REO purchases you should notice that many smaller banks do not include their REO listings on their books as purchasable assets. They may have too few foreclosures to have a REO department and therefore they simply contact a local real estate agency and market the properties as is. You can contact these institutions directly and talk to the person designated to dispose of these properties. Again, your effort may reap you information about properties that are not in any public database.
Loss Mitigation Department of the Bank
When a borrower misses payments the loan is sent to the bank’s loan loss mitigation department. “Loan Loss Mitigation” departments handle the “Pre-foreclosure Short Sales” not the REO departments of banks.
All lenders will approve a short sale as a last resort. The circumstances for a short sale for a property are directly related to the property’s value as it relates to the amount owed to the bank.
An example of a reason for a short sale would be; a property purchased in an inflated market that has experienced a severe downturn which creates circumstances where the home may have decreased in value and the loan may be “upside down” - more money is owed than the property is worth.
Another example would be if a property was refinanced at 100 percent or more, leaving the property without any equity.
And yet another example is in the case of a deteriorating property that would require extensive repairs to make it marketable.
To qualify for a short sale, lenders require borrowers to show hardship before they will approve a short sale. These can include financial hardship bought on by: death or divorce of a spouse, catastrophic illness, employment loss or incarceration of the borrower or borrower financial insolvency without any realistic chance of improving in the near future.
Cash Only
A short sale is always a “cash only” sale, which will keep many investors away. Also, it is an “arm’s length sale”, meaning you cannot purchase a home of a relative. If you do you are open to a lawsuit and the sale being reversed.
Buying a foreclosure or a pre-foreclosure from a motivated seller can be a good investment for you and in the case of pre-foreclosure a good solution for someone else. A “short sale” is one way to purchase a home with guaranteed equity to the investor.