In this article, we are continuing our series toward the discovery of The Beginners Best Investing Strategy For Success. In the past two articles, we have discussed the Subject-To and Retailing investing methods.
In this article, the discussion will center on the Foreclosure market. This strategy in particular, due to the current state of the economy has the attention of not only the investing community, but the general population as well.
Home foreclosures today are at an all time high. The stability of our economy is tied closely to the housing market. We have seen in recent years home prices falling from the strong appreciation enjoyed earlier in the past decade.
To make matters worse, a larger percentage of the population are currently out of work. Many of the unemployed are homeowners, who have much less income to pay their bills. As a result, a large number of these homeowners can not pay their mortgage and are forced the let their homes go into foreclosure.
Three Ways To Buy
In the foreclosure market, there are three ways the investor can purchase the property. He can buy the property before the notice of default is filed. He can purchase the property after the notice of default is filed, during the foreclosure process, or he can buy the property at the court house steps or foreclosure auction. Let’s examine these three buying opportunities individually.
There are a great many homeowners today who are struggling to make their mortgage payments. Whether it be because of a job loss, out of control medical expenses, living beyond their means, or some other family crisis the homeowner has gotten behind on his payments. If the homeowner misses to many payments, it will becomes very difficult to make them up.
The investor will usually find these homeowners through his marketing efforts. At this stage, the investor will not usually know the homeowners situation. The homeowner will probably receive a direct mail piece from the investor, with an offer to buy his house. This mailing piece could be from a targeted list of homes for sale or sent out in a mass mailing.
If the homeowner is in trouble by getting behind in his mortgage payments, the mailing may have come at the right time. The investor never knows what kind of pressure individual homeowners are under when the mailings go out. They is some awareness, however, that there will be homeowners who may be in trouble and want a quick sale. It really comes down to a numbers game. The more mailing pieces that are send out the more responses you will get.
Once the investor receives a call from the homeowner, he will try to determine the nature of the homeowner’s pain and what are his most pressing needs. From this conversation, he will determine if there is a deal there. Usually, this doesn’t happen immediately. With this initial conversation with the homeowner, the second contact has been made, however, it could be the third or forth contact depending on the number of mailings the homeowner has received.
If the conversation is favorable, the investor will continue the process and pursue the lead. This may be to either schedule a call back or go out and take a look at the house. If at all possible, It will be to the investor’s advantage to firm up the deal before a notice of default is filed against the homeowner. If this happens, the legal process of foreclosure has begun and the investor must deal with it. It will be much more difficult in most cases, to put a deal together with all the legal issues pending, but not impossible.
The Foreclosure Process
Once the notice of default is filed, the legal process of foreclosure on the property begins. This is a process that can be of a short or long duration, depending on the particular state you reside in. Some states offer the homeowner a time table of only a few weeks to cure the debt, while other states have legal proceedings the last many months.
During this stage of the process, the homeowner will try desperately in an attempt to make up his mortgage payments and save his house. He realizes that he has a fixed amount of time to get this done. The longer he goes without being able to make up the payments the more pressure is feels. Homeowners who are under this kind of pressure do strange things. Here is where you will best find the classic “motivated seller”.
The investor could have make the initial contact by his direct mail efforts or the homeowner may have seen an ad placed by the investor. Either way, contact is made. It is always better when the homeowner makes the initial contact. His level of motivation is much greater if he makes the initial call.
Many homeowners regardless of how many payments they are behind, will have the belief that can catch them up. Initially, they may show no interest in the investor’s offer, but time and a lack of money has a way of helping the homeowner face reality. If he cannot cure the debt and the home is foreclosed, he will not only lose his home, but any equity he has will be lost and his credit will be damaged severely.
It is important that the investor take the homeowners emotional state into consideration. The process of foreclosure is very stressful and can be an emotional roller coaster. It can be easy for the investor to take advantage of homeowners in this situation. Courts have taken a strong position against investors who take advantage of homeowners who are in foreclosure.. You must always be fair in your dealings. The homeowner needs help. Keep in mind what you would want someone to do for you if given the same situation.
If the homeowner could not make up the back payments along with any legal expenses that he would be required to pay, the house will be taken back by the lender and sold on the court house steps . When this happens, the homeowner looses the house. Some states have the provision of redemption rights, where the homeowner will have a certain amount of time to redeem the house by satisfying certain requirements.
Investors who are attending the auction are looking for great deals.There are many experienced buyers at the auction who know how to bid. Some investors team up to gain an advantage in the bidding. The auction is not the place for the inexperienced investor. This process involves an all cash sale, so not having any money or resources to obtain any will exclude many investors from bidding. However, it can still be a great education attending an auction. You can see how the process works and you can meet other investors who you may be able to partner up with in the future.
The lender will make the opening bid on the property, usually for the loan balance. The bidding will go up from there. If no one matches to opening bid, the lender becomes the successful bidder. He will put the property in his Real Estate Owned (REO) file and market it for sale through a Real Estate Brokerage firm.
I have purchased a couple of properties at the auction, however, this auction was somewhat different than what I have described above. An investor had several properties he had renovated and was auctioning them off through an auction company. Some of the homes were occupied. You could visit the homes, buy could not get any information from the owner or tenants about the properties. You bought the homes “as is, where is”, so “buyer beware”. All you could do is prepare by doing some research and set a bid limit and hope for the best.
Upon being the proud owner of two of the properties sold, I soon discovered some unexpected surprises. They were not positive either. All in all I made out okay. I kept one of the properties for a few years and sold it. I still have the other one.
The foreclosure market is lucrative and somewhat complicated. New investors will do best if they focus in the preforeclosure market. Here, they will deal with homeowners who have not as yet had the notice of default filed against them. With their marketing efforts, they may come across some homeowners in default. This will be more difficult and challenging for the new investor to deal with. If this happens, they can seek help from more experienced investors or through their local real estate association. Even with the preforeclosure market possibilities, there are better investing strategies for the new investor. So, please keep reading these articles to learn what these strategies are.
One very important point we have not discussed is the exit strategy. In other words, once you take possession of the property what do I do with it. You can’t wait until you are the owner to make that decision. You must decide at the beginning of the process what your plans for the property will be. We will talk about this topic in a future article in this series.
I hope you will stay with me. Thanks for your time and interest.
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