9 steps to getting started investing in pre-foreclosures

The process of foreclosure allows a lender to take ownership of a property that they gave a mortgage to. Most buyers do not have the cash to purchase a home on their own. That leaves a buyer to find a lender for a mortgage. There are many instances- job loss, reset interest rates, etc… that can cause a home owner to not be able to make the mortgage payments. When the owner misses 3 or more payments the lender will issue a notice of default. If the owner can not refinance, make the payments, or sell… the lender begins the pre- foreclosure process. In a trust deed state, the borrower either pays the back payments, fees, and interest or the deed trustee can sell the property at a bidding public auction. If the state uses judicial foreclosure, there is a court hearing before the public auction. The lender is usually the highest bidder, and takes ownership of the property. rnInvestors often look to the pre- foreclosure stage to get a good deal on a property. Here are the nine steps to buying in the pre-foreclosure stage: rnEXIT STRATEGYrnIn buying a foreclosure you should always work backwards. Plan what you are going to do with the property. There are a couple of options: flip, rent short term, or keep long term. Set up property goals and have an exit strategy. For example- if you flip the property, you will want to look at comp houses in the area to ensure other area homes are selling at a profit. Zillow.com can be used to determine the potential market value and comparables. Whereas, if you are making a long term investment, you will want to look at the homes appreciation potential. You may not be so concerned with current equity, and pay market value for the property. Whether renting long term or short term- you want to make sure area rentals have profitable rental rates, and modest vacancies. DETERMINE THE AREArnThere are millions of properties listed on national foreclosure websites. To search all of them is pointless. Pick an area, and focus on it. Try to find an area where there are few foreclosures. There is a lot of competition to not only find foreclosure properties, but then during the rental or flip stage as well. It is difficult to manage a rental property from a distance. The property should be no further than 30 min - 1 hr. from you. During your search just type in your zip code, and limit the search to “pre-foreclosures” in your area. You should familiarize yourself with the area. For example: look at local real estate office web sites and learn the area property values, quality of area schools, crime statistics, nearby shopping, traffic, nearby employment, public transportation, etc.. Sites like, Foreclosure.com and map quest, are great information portals. All of this info will influence how fast and how much your investment will yield. You should avoid high crime and bad school systems. The best investment is a foreclosure property below that areas median home price. rnPLAY THE NUMBERS rnA property may look good at first, but then be found to have deal breaking problems. Maintenance issues could mean you invest more than you profit; if the owner has grossly neglected the property. Again, there are a lot of investors looking for the same properties you are. So, identify three to five foreclosures that you are possibly interested in. Examine these properties. Some foreclosure websites provide a link to county appraisal records. Use this tool with caution; as some states only do appraisals when a property is sold, or an addition is constructed. FOCUSrnFocus only on profitable properties: Cheap homes- Use the bottom of the price range at first. Financing will be easier and investment money will be less. Cheaper homes are generally easier to sell Homes with equity- Not all pre-foreclosures are wise investments. If the owner doesn’t have equity in the home, you won’t either. If the owner is upside down in their loan, the negative equity is generally passed on. Bargain hunt- Do not settle for a good or fair deal. Look for the good deals. . PURCHASE PLAN rnThe internet allows for an equal playing field, but you need to contact the lender or owner of the pre-foreclosure. Start with a mailed letter in a friendly tone. Offer assistance, a way out of their “bad situation,” and what YOU can do for them. However, the owner/lender is probably going to get hundreds of these letters. Second, call the owner/lender. Be honest…you are for profit investor, but you are also trying to provide an “out” for the owner. Emphasis that both of you can profit from a transaction. Third, do a face to face using the same approach as above. Empathize and offer “hope.” IS IT WORTH ITrnIf there isn’t money to be made, move on to a better foreclosure. Foreclosure sites should list the general debt the owner owes. Subtract debt owed from market value to get an equity estimate. Then subtract your repair cost. This should give you a general idea of profit. PRESENT OPTIONS TO THE OWNER/BORROWERrnOffer the owner explanations, timelines, options, etc.. These are options that you can offer to the owner/borrower: Outright purchase - You buy the home and give the owner a percentage of the equity. This will keep the foreclosure off their credit. Second mortgage - You give the owner the money to make the first mortgage current. Charge at least the market interest rate. If you use a third party to finance, you may need a mortgage broker's or real estate license to do this. Share equity - Use a lawyer to make a contract where you will make the mortgage current, for half ownership in the property. Leaseback - The owner becomes the tenant and pays you rent GOOD PURCHASE AGREEMENT, HOME INSPECTION, DISCLOSURES, TITLE INSURANCE, ETC..rnPre-foreclosure deals are generally made between the you and the owner, omitting the real estate agent. However, the paperwork can be a problem for the novice investor. You can pay (or work out a resale commission agreement) for a real estate agent to handle the paperwork. An attorney can also do the paper work and advice you as to foreclosure rules for the state. The agreement should include contingencies for a home inspection, disclosures, title insurance, etc.. You will generally pay for all the mentioned costs. If the agreement involves the seller getting a percentage of the equity, just subtract the above cost from it. RESELL OR RENTrnFinally, your goal. A FSBO can avoid real estate commissions, but can be a mistake. As mentioned above, you may need a real estate agent for the paperwork. Many will do the foreclosure sell and the resell, for a full resell commission. If you are planning on making frequent property investments, try to use the same real estate agent…they may cut you a deal, for the business. Real estate agents have marketing tools that you (the investor) do not have- MLS, advertisement, ready buyers, etc..