Investing In Pre-foreclosures

How An Investor Can Help

A real estate investor can not only benefit financially from buying pre-foreclosures, s/he can also enjoy the good feeling that comes from helping someone out of a financial bind, enabling them to move on with their life. If it weren't for investors, there would be a plethora of foreclosed properties on the market with former owners divested of all equity in their homes and a foreclosure on their credit record. An investor has the ability to help a homeowner maintain a decent credit score, receive some equity from their house, and can help them begin the rebuilding process. The unfortunate thing is that a person in foreclosure seldom sees any of the good. However, after the fact, most are truly thankful that someone bailed them out of their problem.

Money Talks

An investor does not get involved in a purchase simply for altruistic reasons, although that would be ideal. They must be able to make some money on the deal or there is no value to them for investing. Investors will tell a seller at the begin of the process that making a profit is the bottom line and in order to do so, the investor must stop the foreclosure. Investors usually do not charge for their services, relying on the profit made from preventing a foreclosure. Trust and rapport can be developed early on by simply being honest about intent and expectations.

Buying At A Discount From The Seller

There are three ways to profit from a foreclosure, the first of which is buying the property at a discount from the seller. By recognizing that it is a good idea to cut their losses and move on, often a seller is willing to drop the price of the property to far below market value. If there is a good amount of equity in the property, the investor can create a purchase where the seller receives cash at closing with the balance paid over time, or a balloon payment which would be made at a later date. This is a great option for people with equity in their homes. However, today's market is comprised in large part of people who are in foreclosure and who owe most of the value of their property in costs and repairs. In cases like this, it is hard for an investor to make any money on the sale.

"Subject To" Purchases

The second way to make money is to take over the loan and bring the back payments current. This kind of purchase is advantageous for the seller because the foreclosure is stopped and the payments will be made by the investor. However, the loan remains in the name of the seller until it is paid off by the investor or another party. This may present a drawback for the seller because if the buyer defaults on the loan, the seller's credit may be affected.

This particular process, buying a home by taking over the loan payments and making the back payments, is called buying a property with a "subject to." Lenders generally don't like this type of sale and will usually put a "due on sale" clause into the contract. This means that the lender can call the loan monies due when the title is transferred. In actual practice, it is rare for a lender to call the loan. For a buyer, this type of situation works well because there is little money put out, loan and appraisal costs are avoided, and there is no credit risk to them. This is a very powerful tool for an investor and requires integrity and ethical behavior on the part of the investor. The proper documentation for protection of all concerned is extremely important.

The Short Sale

The third method of profiting from the purchase of pre-foreclosure sales is something called a "short sale." This is simply negotiating with the lenders to accept an amount that is less than the amount owed on the loan. Lenders may want to discount their loans because they don't want to be "property owners" and real estate is not their business. Lending ratios are affected when a lender is holding property that is not performing. They have to pay the taxes, insurance and other fees so it is in their interest to unload the property quickly. The other reason a lender will want to sell below the loan amount is because having cash in their hand today is better than hoping for it tomorrow. Lenders understand that accepting a discounted price at the present time can save them a loss in the future.