An Introduction to the 4 Main Ways to Do It
Getting a foreclosure for a price that will result in a profitable transaction (be that transaction wholesaling or fixing and flipping) doesn’t have to be daunting or difficult. With a little leg work and some education, you can be on your way to purchasing a property for 60% or less of the ARV, allowing you room for profit no matter how you execute the selling of the property to the end buyer.
The following four ways to acquire foreclosure properties vary in strategy, but the end result is the same; a property for a fraction of the retail price with which you can profit. In general, there are four basic ways to acquire foreclosures at discounted prices.
All but one of these options permits the buyer to employ the assistance of qualified sources for information on the property (such as a title, escrow company, and inspections of the property’s condition). The most popular technique of buying properties at trustee’s sale or foreclosure auction does not allow this luxury, but rather requires each buyer to make his own thorough investigation of both title and debt on the chosen property within a limited time.
The first and simplest way to buy properties for less than their fair market value is through the delinquent (but not yet defaulted) owner. The delinquent borrower will not have made the recent loan or tax payments and/or may have decreased the property value through lack of proper maintenance. When the delinquent owner realizes that they will be unable to meet the commitments on their outstanding debts for an extended period of time, they may choose to sell the property at a discounted price, rather than proceed through the foreclosure process.
The wise buyer will point out to the delinquent (and potentially defaulted) owner how they will be harmed by proceeding through the foreclosure process to the trustee’s sale. At that point, the owner will lose their property, lose their equity, harm their credit rating as a result of the recorded foreclosure, and may have taxable income due the I.R.S. for the amount of the debt reduction (through elimination of the mortgage interest debt) resulting from the foreclosure sale (consult your professional tax consultant when dealing with matters of the I.R.S). Selling to an interested buyer at a discounted price may well be the most convenient solution for the troubled, delinquent owner.
The only drawback to finding these delinquent homeowners is that there are no public records to search for these potential sellers. They must be drawn to you through your marketing efforts. One way to identify these defaulted homeowners is to buy lists of 30-, 60-, and 90-day mortgage lates from one of the three credit bureaus: Equifax, TransUnion, or Experian. Certain rules apply and these lists may not be available to everyone.
Seller in Default
The property owner is considered “in default” when the trustee (depending upon state statutes and whether a deed of trust or mortgage secures the debt), at the request of the beneficiary (the lender), records a Notice of Default. Following the reinstatement or redemption period that commences with the recording of the notice (three months in most states), a Notice of Trustee’s Sale is published once a week for three consecutive weeks in a newspaper of general circulation, just prior to the trustee’s sale.
These periods of reinstatement or redemption and publication differ from state to state. You should research the requirements of your state to determine how much time you have to search out and negotiate the purchase of property from a seller in default. Any purchase negotiated with the homeowner in default must also be approved by the foreclosing lender. Failure to obtain approval from the foreclosing lender could result in the property proceeding to the foreclosure sale and the loss of your right to possession of the property and any funds paid to the former owner.
Trustee’s Sale or Foreclosure Auction
Most purchasers of foreclosure properties prefer to acquire their properties at a trustee’s sale or foreclosure auction. At this time, it is possible to purchase the property without being in contact with the defaulted owner or foreclosing lender. Anyone with available funds may bid on and purchase the property. A deposit in the form of certified funds is normally required at the time of the sale, with the balance of the bid due within a time limit specified by the trustee.
Again, the requirements for deposit and deadline for payment of the balance due will differ from state to state. Make it a point to become familiar with the rules for your state.
The verbal auction permits the successful bidder to purchase the property for the amount owing on the foreclosing debt, regardless of the property’s fair market value. If the lender does not wish to take title to the property, the opening bid may even be significantly less than what is owed to encourage 3rd party bidding. After completion of the sale, any liens recorded after the recording date of the foreclosing lien are eliminated.
The pitfalls involved with this type of purchase are unanticipated repairs, eviction, the payoff of superior liens, possible IRS redemption, and inadequate research. Anyone of these can present a formidable obstacle to the inexperienced buyer. Be sure you have a very firm grasp of buying property at a foreclosure sale. As you already know, anything that can make you fast money can also cost you fast money.
Being prepared is the easiest way to avoid losing on a bad deal.
Lender’s REO Department
When a foreclosure auction is held with no other bidders present, the property is said to be sold, or revert back, to the foreclosing lender. These properties are often referred to as REOs (Real Estate Owned). The lender’s REO department will usually sell the property rather than retain it as part of the lender’s non-performing assets. Finding the lender who will sell the property, newly acquired from the foreclosure sale, is not easy, although it is possible through a careful selection of lender sources for REO properties.
If you need to know more about property acquisitions (and what to do with those properties once you have them), there’s no better place to start than with us. Contact your Business Development Consultant today to see how you can turn your real estate dreams into reality, and how we’re going to help. You don’t have to be stuck watching the TV flipping shows and wishing you could make a difference in your community while making a profit.
Call your Business Development Consultant today at (800) 473-6051 to get on the path toward profit now.
To Your Success;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing
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