Investing in Foreclosures
Foreclosure Investing 101
Oh, yes, I want to buy a foreclosure at 50% of Market Value, change the locks and put a real estate sign in the front yard and make a ton of money in 30 days. Oh yeah, I don't want to put a penny of my money into the deal either!
Well, everyone wants to do that, but I've never seen it happen! The reality of foreclosure investing is far different than what many people have seen either through infomercials or books that have been written. We don't sell books, so I'll tell you what I'm aware of in the foreclosure investment field. First, everyone I know who is an active investor works an awful lot more than people working 9-5 jobs. Second, serious players either have a significant amount of money of their own or have an investor backing them up. Third, houses that are going to sale almost always need a lot of work to bring them to Market Value. Fourth, finding a solid property to purchase isn't a matter of picking what you want, it's a matter of finding something that works economically, keeping track of it, finding out all you can about it, then beating out all the other investors who are interested in it. Sound discouraging? People treating this business seriously invest a lot of time and energy into finding and following properties.
So, is it possible to make money in the foreclosure business? Sure, the key is to know your strengths and weaknesses.
The first example is the major problem most beginning investors will have. What is the Market Value of a property you are interested in? Experienced investors will usually all have a property valued close to the same amount (3% variance). They will use local Multiple Listing Service comparable sales, Title Company comps and experience to come to that value. If you are not fully aware of what a property will sell for on the open market, you cannot do anything with a property. All decisions regarding a property are based on the price it will receive, Know The Value!!
The second issue of importance is the law. If you know of a property where money can be made, you do not want to run into legal issues because you structured a deal that is illegal in your state. Yes, states have laws regarding what you can and cannot do with owners who are defaulting on their home loans. Do your research, find out whether your state uses Mortgages or Trust Deeds and the legal timeframes and implications of each.
The third issue is money. It certainly helps if you've got a good amount to back your purchases, but if you don't, it is not impossible to do deals. You do need enough to be able to find properties, keep track of properties and cover on-going office type expenses. I was once told, "Money should never stop you from doing a deal". It's true. If you have a deal, someone to invest in it is easy to find. If investors don't want to invest, it's not a deal.
The fourth issue is knowledge. Federal tax liens, partial interests, leased land, property information wrong, unpaid property taxes and wrong common descriptions are all things that have hurt investors. If you are not aware as to how to check for these things, you shouldn't be investing in foreclosures. The things that will make a deal head south are the things that are not obvious.
Time to evaluate strengths and weaknesses. If you don't have a strong grasp of market values in your area, aren't sure about your state's legal requirements, don't have significant money to invest and don't know how to follow up on real property information, you need to spend some time learning the things you will need. Read, make contacts and talk to people involved in the business. They are easy to find, they will be at local Trustee or Sheriff's Sales. However, if you have a good knowledge of the requirements and think you can learn as you go along, you can probably pursue this market.
You've decided you have the knowledge and the resources to follow the foreclosure marketplace, so the next step is, what are you going to follow? Procedures are very different for following pre-foreclosure compared to properties already foreclosed by financial institutions.
Pre-Foreclosure Information is everything! If you don't know what properties are scheduled for sale, you are wasting your time. You need to know what properties, how much the loan amounts are and what timeframe you are dealing with. Local newspapers will publish the properties scheduled for sale, this will provide some information and all you have to pay for is the newspaper subscription. You can also go to the county recorder and research documents yourself, but the best way to follow these properties is to subscribe to a service that obtains records and sells the information. The best services give complete, accurate information and others provide the basic minimum, but it saves time spent looking them up for yourself. Once you know which properties are in default, you can approach owners directly to sell, arrange financing to save the property or whatever seems appropriate for all the parties involved. Door-knocking, mailing information or telephone contact, it's all based on knowing which properties fit your criteria. You can find some providers of information at Pre-Foreclosure Listings or you can go to the sale sites in your area and ask the investors who show up for the sale what local providers are available. If they don't want to tell you, ask someone else until you get the information you need.
Foreclosures Banks are driven by numbers. Their non-performing assets do not generate income, they require reserves to be set aside in addition to the loan amount and large numbers of non-performing assets do not look good on the bottom line. So, if the financial institution doesn't really want to be carrying these properties, why don't they sell it cheap? First, if a bank has a large portfolio of bad loans and they do not want to carry them on their books, they sell the loans as a portfolio at a discounted price to companies in that business. Second, if they have taken a property back and now own it, why wouldn't they want to get as much as they can for it? It's called cutting your losses. If you want to buy from a bank, find properties you might be interested in by either following the auction sales or using a service that gives you fresh REO information. Fresh information will allow you to put an offer into the bank before they will have any additional costs in the property and will be more likely to cut a deal. Your best opportunities are going to be properties that need a lot of work, have something wrong with them, or that are in a slower moving market. Banks seem to take forever to respond, place an offer with limited acceptance period, wait out that period, then go on to other things. Placing an offer at 60% of market value is something that probably won't fly. Be realistic about the property, your requirements and the bank's position and an offer just might be accepted. Another possibility is to look for the dogs. Properties that have been on the market for a long time either are overpriced, are ugly or have some other problem. If you feel these problems can be overcome, a bank just might be willing to sell at a reduced price.