How To Invest In Pre-Foreclosure Real Estate

© Copyright www.InvestorMillionaire.com 2012 All Rights Reserved

4/4/2012

Investing in pre-foreclosures is a sound real estate investment technique when used properly. The availability of pre-foreclosure investment opportunities changes with market conditions. They tend to be abundant when real estate values are declining. Pre-foreclosures can be ideal investments at certain points in a real estate market recovery.

Property owners with mortgages struggle in difficult financial times. The same is true when property owners experience a loss of income, illness, divorce or other major life change. The result is an opportunity for investors to purchase property using the pre-foreclosure strategy.

The objective with pre-foreclosures is to purchase the property directly from the owner in the very early stages of their mortgage delinquency. Usually it is done before the foreclosure process has been initiated but there can be exceptions.

Many investors will attempt to use seller financing with pre-foreclosures. They do this by “taking over” the homeowner’s monthly mortgage payment. Usually the down payment will be the past-due mortgage payments if any exist. This eliminates traditional bank financing restrictions and offers the investor additional leverage with each transaction.

Investors with limited funds for a down payment and those that need to avoid traditional bank financing challenges may find pre-foreclosures to be one of the better real estate investment options available for their particular situation.

Caution should be used with pre-foreclosures in a declining market. When real estate markets are not performing well investors may obtain better prices by purchasing foreclosures directly from banks and mortgage companies. Banks and mortgage companies heavily discount the selling price when foreclosure properties become bank-owned.

Pre-foreclosures tend to work very well in markets that are appreciating in value. When values are increasing investors benefit by arranging a better price than they would have received if the property was listed with a Realtor. Investors also eliminate many fees and costs associated with a traditional real estate purchase transaction.

Pre-foreclosures also work well in a market that is recovering from recent price declines. When our current real estate market begins to improve investors may benefit by using the pre-foreclosure investment strategy.

A variety of methods can be used to contact property owners in a pre-foreclosure situation. Some of the more effective options include:

1. Placing advertisements in local websites and newspapers. Most investors state something to the effect of “we buy houses...all situations, all conditions, close fast, cash paid” or some mix thereof with their phone, email and website information. This will lead to direct contact with motivated owners that are usually eager to sell their property. The investor can then negotiate a purchase if the property meets their criteria.

2. Creating a strong website and internet presence in the targeted investment area(s). This will also lead to direct contact with motivated property owners that are eager to sell. This method is often less expensive than using local printed media such as newspapers.

3. Create a network with local real estate professionals (Realtors, Brokers, Property Managers, Mortgage Brokers and others). These professionals are usually the first to be in contact with distressed and potentially motivated property owners. By developing a strong network of professionals investors will receive direct referrals to motivated sellers.

4. Searching public records to locate properties in the early stage of foreclosure. Most property records are now online and can be easily searched from the comfort of your home or office. Many investors choose to search through these records in order to create a database of property owners that may be motivated to sell. Usually these records will reveal if the property owner is experiencing financial difficulties like a delinquent mortgage. Investors will then contact these property owners by mail to purchase their property.

There are additional options available depending on your budget, preferred investment areas and market conditions. The effectiveness of these methods can vary so it is usually best to test each method before making a large commitment to one or another.

Investors have 3 primary challenges when dealing with pre-foreclosures:

1. Finding qualified deals that make good financial sense. This includes locating motivated property owners before they are too far along in the foreclosure process. It also includes finding the types of properties and locations desired.

Locating motivated property owners early in the delinquency process is a function of timing and numbers. The key is to build the total number of motivated property owner leads that are generated from the techniques we have presented here. Only a fraction of the total leads received will be ‘good’ deals. As more motivated property owners are contacted more qualified deals should be located.

2. Communicating with the property owner and collecting all information required to make an informed decision.

Many investors get confused about communicating with motivated property owners once they are in contact with them. It is important to stick to the basics. Start by asking about their property and situation. Before asking any routine questions about the property the investor should start with a simple technique:

“How can I help you?” or “Tell me about your situation and what I can do to help”

This highly effective question will usually get the property owner to relax and tell you about their property and specific situation. Listening is key. Pay attention to their unique issues and try to craft a solution that will eliminate their real estate and financial problems.

Once you have gotten the property owner to tell you about their situation you should ask some standard questions to get a feel for the specific property. Here are some examples to consider asking:

• Where is the property located?
• What type of property is it?
• When was the property built?
• Is the property vacant or occupied?
• How big is the lot?
• How big is the property (total square footage, etc)?
• What is the property condition (does it need repairs)?
• Is there an existing loan against the property?
• If there is a loan what is the balance?
• If there is a loan what is the monthly payment?
• If there is a loan what is the interest rate? Is the interest rate fixed or variable?

Additional questions will be necessary once these basic details have been obtained from the property owner. Collecting these basic facts will allow investors to make a calculated decision about each property. Investors should consider the process of communicating with motivated property owners a normal part of their business. Making these questions a routine part of your communications with property owners will streamline and simplify this step in the pre-foreclosure investment method.

3. Preparing the necessary paperwork required to complete the pre-foreclosure transaction.

This is another area that can cause some confusion for investors that are working with pre-foreclosures. The documents required will depend on exactly how the property is being purchased. Some or all of the following documents will be required:

• Purchase Offer or Purchase Contract
• Mortgage Agreement or Deed of Trust
• Promissory Note
• Land Contract or Contract for Deed
• Warranty Deed, Special Warranty Deed or Quit Claim Deed

The transaction may only require 1-2 of these documents depending on how it is structured. Most of these documents can be found by performing a general internet search with the most popular search engines. There are also legal form websites that offer fill-in type forms for a regular monthly fee. A more expensive alternative is to enlist the services of a trusted attorney or legal advisor to assist with completing these forms.

This table shows the documents required for each type of pre-foreclosure transaction.

*Usually a mortgage agreement or deed of trust is used in combination with a promissory note. This is only used when the buyer/investor IS NOT taking over an existing mortgage. It can also be used if the buyer/investor is making a 2nd payment directly to the property owner/seller for any purchase amount above and beyond the balance of the existing mortgage(s).
**A land contract or contract for deed can be used in all types of situations. It is simply an installment agreement for paying the total purchase price and all interest charges. It works just like a mortgage agreement but it does not invalidate the existing mortgage(s). It is an excellent tool for defining the transaction terms without disturbing the existing financing/loan on the property. A land contract eliminates the need for a mortgage agreement/deed of trust and promissory note.
***A warranty, special warranty or quit claim deed is not used with a contract for deed or land contract agreement until all payments have been received. If using a mortgage agreement or trust deed and promissory note a warranty, special warranty or quit claim deed should be prepared at the time of purchase.

Regardless of the method used to prepare these forms it is important that investors do not get caught up on this step of the pre-foreclosure strategy. Preparing legal forms and agreements is one of the last steps in the process of purchasing a pre-foreclosure. It should only be done when the investor is certain they want to proceed with purchasing the property and they are confident all necessary terms have been defined and agreed upon by the property owner.

The final step in the pre-foreclosure purchase process is to sign all documents and exchange any agreed upon funds for the down payment. This can be done by mail, fax, email or in person depending on the buyer’s and seller’s preferences. The transaction is final and completed at this point.

Investors and property owners should exercise caution when taking over the loan payments on existing properties. Most loans have a ‘Due on Sale’ clause which can be activated if the lender becomes aware of the property sale. It is rare for lenders to utilize this clause but it does happen. Investors and property owners should avoid notifying the lender of the actual sale if they intend to keep the existing loan on the property in place.

Pre-foreclosures are a strong investment option for all investors. They are particularly valuable for newer investors, investors with less capital and investors with credit issues that may prevent lower interest financing. If you are just starting or rebuilding after the recent market adjustments pre-foreclosure real estate investments may be exactly what you have been searching for.

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