Become An Expert In All Four Ways Of Purchasing Foreclosures.

-Every Foreclosure In Your Area Becomes A Potential Good Deal By Knowing When To Buy And How To Buy!

By Tony Youngs
Foreclosure,Bankruptcy,Loss Mitigation Specialist

We all know that buying Real Estate below market value insures profit for the Real Estate investor. One of the most common ways to find distressed properties to buy at a discount is in the foreclosure arena. There are numerous ways to make money with foreclosures during the foreclosure process and sometimes I feel that investors are missing the mark.

When a homeowner gets behind on their payments, a process begins called foreclosure. In some States it is a judicial process where the lender files a lawsuit and takes the borrower to court and the court sets an auction date to sell the property to the highest bidder over the loan balance. Other States are non-judicial and use a process called power of sale where the lender does not have to file a lawsuit but is required to send a series of demand letters and accelerates the loan and sets an auction date to auction the property at the courthouse steps.

While the homeowner is in default, this would be the best and most profitable way to purchase the foreclosure. You can contact the delinquent owner through several methods i.e., send them a letter, call them on the phone, or knock on the door. I have found that some homeowners don't even know they have the right to sell their home before the auction. (They don't tell you when you buy the home at the closing table, nor do they teach you in grade school.) Some homeowners actually pack up their belongings and move out leaving no forwarding address. Learning to track them down and offer to buy their home can also be lucrative.

A second way to profit during the foreclosure process is to go to the lender and buy the loan at a discount. Sometimes the lender will sell the loan on a short sale which means they will take less than the true balance of the loan. Why would they do this? One reason is the lenders are taking back property at a tremendous rate these days. The number of advertised foreclosures increased dramatically since 2001 and lenders are taking back too many homes with no equity. By the time they pay a realtor commission and, perhaps, fix-up costs, they seem to lose more money. If a lender takes a property back through foreclosure, they also risk vandalism and theft. Many lenders are willing to discount a mortgage before the auction on properties with little equity. On another note, short sales may not be an ideal solution for the borrower because the lender could possibly put a judgment against the borrower for the discount amount. There may also be tax consequences for the homeowner, as well.

A third way to buy during the foreclosure process is at the auction itself. A trustee or attorney representing the lender will cry out the property on the courthouse steps to the highest bidder over the defaulted loan amount. In most States, junior liens and mortgages are wiped out. In a judicial foreclosure State, these auctions occur daily or weekly. In a non-judicial foreclosure State, all properties in a county are auctioned on a certain day of the month.

There is an average of about twenty-five percent of the homes that actually get purchased by investors and the other seventy-five percent go back to the lenders as a repossessed property. No one bids on them at the auction because there was not enough equity to make it a good investment.

That brings me to the fourth way to buy a foreclosure: buying repossessed homes from the banks and lenders after the auction. The key to success is to make offers on these properties before the lender hires a contractor to fix it up. These properties are known in the industry as REO's (Real Estate Owned) by banks. You can still get some bargains if you're on top of the game.

The bottom line is this -- a savvy investor will become an expert in all four ways of purchasing these foreclosures. Start with the pre-foreclosure and track them all the way through the auction and to the lender. Try to buy at each stage of the process. By doing this, every foreclosure in your area becomes a potential good deal by knowing when to buy and how to buy. A simple rule is this, If a foreclosure has no equity, buy the loan at a discount or buy from the lender after the auction. If a foreclosure has equity, buy from the homeowner or at the auction. This will greatly increase the amount of properties you buy.

Loss Mitigation - another aspect of the foreclosure business.

Some of my students profit by contacting delinquent homeowners and negotiate with their lenders to get a loan modification. The lender will qualify the borrower by looking at their current situation and may lower the interest rate or spread out the delinquent payments over the life of the loan. Homeowners are willing to pay a fee for this service as an alternative to filing chapter 13. If you, the investor, negotiates with the lender for the borrower and the borrower does not qualify for the modification, then you can offer to buy the home from the owner. I have many students who find this a very rewarding and lucrative business.

In the foreclosure business, your competition is not other investors -- it's bankruptcy. Many homeowners today are choosing to file bankruptcy instead of choosing to sell their homes. This may only delay the foreclosure auction in some cases. Learn to make your offers in such a way and explain why the offer is better for the owner than bankruptcy. You, the investor, may be able to help the owner by preventing a foreclosure AND a bankruptcy being placed on their credit record. I personally have become very efficient in doing just that.

Remember, when buying foreclosures at any stage of the process, always do a Title Search.