Tips to buy a foreclosure
Traditional ways to Buy Foreclosure
Before explaining our Purchase Option buying strategies, let’s describe how most people invest in foreclosure so you can see the benefits of using the Purchase Option foreclosure strategies.
Traditionally, most investors buying foreclosures sought houses they could get good prices on (either directly with the owner, through a real estate agent, at an auction, or directly from our foreclosure on line list. This means either the investors took the money out of their personal bank accounts or borrowed from a traditional lender. Truth be told, this was a good way to invest and these investors made lost on money. But the majority of people who wanted to get started invest found themselves excluded because they didn’t have the cash or credit to do these deals the traditional way.
Also, while these traditional investors made more, in many cases they took on magnitudes of risk-risk they easily could have avoided by using the strategies you are about to learn.
Let’s be clear any way structure a deal that allows you to purchase a foreclosure and make a profit in a win- win ways is fine by us. Even if you just want to use our ideas to fine-tune your traditional foreclosure investing, this book gives you the tolls and techniques to do this. If you’re looking for more than that- if you want buying strategies that are simple yet powerful enough that they work regardless of the quality of your credit or the size of your bank account- you’ll find these powerful ideas will supercharge your profits.
“It surprises many beginning investors when I recommend
that, even if they do have money or great credit, they get
started investing without using their own cash or conventional
bank loans.
They find it hard to believe that sometimes having money can
be detrimental to learning to be the best investor you can
be. I’ve seen money used as crutch to make a marginal
deal go through. I admit I’ve been guilty of getting
lazy and throwing money into a deal where a little more imagination
and prudent negotiation would have served me better. But with
an open mind and the right education, not having money can
be a force to push you to be a faster, more creative, and
more skilled investor.
What’s more, you’d be surprises how fast you can pour your liquid cash reserves into estate. I’ve watched traditional investors pour more than $1.000.000 into several deals in a matter of months and than have to wait until they sold those properties before they could free up enough of theirs money to go out and buy more properties. You’ll never regret learning to buy without money. It will make you a much more savvy investor for those times you do decide to use your own money or conventional finance.
THE FOUNDATIONAL FORECLOSURE BUYING STRATEGY
If you are just getting started investing, structuring deals with sellers in foreclosure can seem overwhelming as you try to remember various ways of conducting them. If you were locked into using only one buying strategy with sellers in foreclosure, however, the one we recommend is buying properties subject to the seller’s loan. It’s that powerful.
When beginning Mentorship students come trough our workshops, they struggle with information overload. It can be compared to a new mechanic who is given a toolbox with an overwhelming number of unfamiliar and specialized tools. That’s why we highly encourage you to master one or two tools first. Once you get comfortable using those tools. Then layer in another tool, then another and another.
Imagine you were meeting with a motivated seller in the early stages of foreclosure and that seller owns a well- kept house in an area you like. You sit down with this owner and after you’ve spent time getting to know her situation thoroughly, she says, “ I just want out. I don’t care about the equity. I just want to walk away from the house. I’m at the end of my rope and if you don’t want to buy it for what I owe, then I’ll just let the bank come and take it.”
You see the seller looking right at you and know all she wants is to stop this foreclosure that’s draining all her energy. The house is worth $200,000. With $4,000 worth to paint and carpeting, it would probably be worth $225,000 She owes $190,000 as a first mortgage with monthly payments of principal, interest, real estate taxes, and insurance (PITI) totaling $ 1,350.
She got two real problems. First, she’s behind three
months in her payments. With late fees, that comes to more
than $4,000- money she simply doesn’t have. Second,
even if she could find a way to make up the back payments,
she still has no way of scraping together $1,350 each month
after that. More than anything, she’ll go find a place
to rent for $800 a month, which is all she can really afford.
Many investors would look Many investors would look at this
situation and calculate if it makes sense to take $200,000
cash to buy a house worth $225,000. ( The 200,00 cash is the
total cost for the property of paying off the $190,000 loan,
plus the $4,050 of back payments, plus $4,000 of cosmetic
work , plus $2,000 of closing costs.) But if you were a cash
buyer, this deal wouldn’t work for you because that
$25,000 of equity would get eaten up quickly with holding
costs, plus the closing costs of the second closing once you
resold the house.
Some investors might go ahead and buy it anyway with the intention of holding the house as long- term rental. Fair enough, but it really wasn’t much of a bargain for a cash purchase.
Others investors would try to get that $200,000 9or a large chunk of it) by borrowing it from a conventional lender. While this would be a way to leverage your way into the deal, it comes with three main disadvantages.
1-The cost of the money:
After adding up all the costs of getting that new loan, you -would have eaten up around $5,000 of your equity. Here some of those costs that make your banker, not you rich:· Loan origination fee
· Prepaid interest or Points
· Credit check fee
· Property appraisal
· Document delivery fees
· Recording fees2- Your lender will require that you sign personally on the loan.
That means if anything goes wrong with the house or the housing market in your area, regardless of whose fault it is, your credit (and potentially other assets) are on the line.3- You’ll have to jump through the hoops of qualifying for traditional financing.
That requires credit checks, long loan applications, bank statements, and tax returns the lender wants to review. And just when you thought it had everything, your lender almost always finds two or three more things. Does it tell you about all this up front? No! The lender waits until the week before you’re supposed to close. So you spend the last week before closing scrambling to make the deal work. (Notice that we’re just a bit jaded about this)
Who needs all that stress? Wouldn’t it be better to step in and take over making payments on the seller’s loan? You can do this once you have the specialized knowledge you are about to learn.
· Locate loans in default
· Make friends with bankers
· Make friends with appraisers.
· Register for HUD foreclosure mailing list
· Register for the VA foreclosure list
· Watch out for get rich schemes
· Buy before the sale
· Never buy anything without an inspection
How does a home go into foreclosure?
Foreclosure proceedings usually begin after a borrower has skipped three mortgage payments. The lender will record a notice of default against the property. Unless the debt is satisfied, the lender will foreclose on the mortgage and proceed to set up a trustee sale.
Are foreclosures an option?
A foreclosure property is a home that has been repossessed
by the lender because the owners failed to pay the mortgage.
Thousands of homes end up in foreclosure every year. Economic
conditions affect the number of foreclosures, too. Many people
lose their homes due to job loss, credit problems or unexpected
expenses.
It is wise to be cautious when considering a foreclosure.
Many experts, in fact, advise inexperienced buyers to hire
an expert to take them through the process. It is important
to have the house thoroughly inspected and to be sure that
any liens, undisclosed mortgages or court judgments are cleared
or at least disclosed.
What are problems buying foreclosures?
Buying directly at a legal foreclosure sale is risky and
dangerous. It is strictly caveat emptor ("Let the buyer
beware").
The process has many disadvantages. There is no financing;
you need cash and lots of it. The title needs to be checked
before the purchase or the buyer could buy a seriously deficient
title. In addition, only estate (probate) and foreclosure
sales are exempt from some states’ disclosure laws.
In both cases, the law protects the seller (usually an heir
or financial institution) who has recently acquired the property
through adverse circumstances and may have little or no direct
information about it.
What types of foreclosure are there?
Judicial foreclosure action is a proceeding in which a mortgagee,
a trustee or another lienholder on property requests a court-supervised
sale of the property to cover the unpaid balance of a delinquent
debt.
Nonjudicial foreclosure is the process of selling real property
under a power of sale in a mortgage or deed of trust that
is in default. In such a foreclosure, however, the lender
is unable to obtain a deficiency judgment, which makes some
title insurance companies reluctant to issue a policy.
What happens at a trustee sale?
Trustee sales are advertised in advance and require an all-cash
bid. The sale is usually conducted by a sheriff, a constable
or lawyer acting as trustee. This kind of sale, which usually
attracts savvy investors, is not for the novice.
In a trustee sale, the lender who holds the first loan on
the property starts the bidding at the amount of the loan
being foreclosed. Successful bidders receive a trustee's deed.
How do you get financing for a foreclosure?
One reason there are few bidders at foreclosure sales is that it is next to impossible to get financing for such a property. You generally need to show up with cash and lots of it, or a line of credit with your bank upon which you can draw cashier's checks.
Where can you find foreclosures?
Here in our On line list!
In most states, a foreclosure notice must be published in
the legal notices section of a local newspaper where the property
is located or in the nearest city. Also, foreclosure notices
are usually posted on the property itself and somewhere in
the city where the sale is to take place.
When a homeowner is late on three payments, the bank will
record a notice of default against the property. When the
owner fails to pay up, a trustee sale is held, and the property
is sold to the highest bidder. The financial institution that
has initiated foreclosure proceedings usually will set the
bid price at the loan amount.
What about buying a foreclosure "as is"?
Buying a foreclosure property can be risky, especially for
the novice. Usually, you buy a foreclosure property as is,
which means there is no warranty implied for the condition
of the property (in other words, you can't go back to the
seller for repairs). The condition of foreclosure properties
is usually not known because an inspection of the interior
of the house is not possible before the sale.
In addition, there may be problems with the title, though
that is something you can check out before the purchase.