There are many ways to profit from foreclosures if you know how to think “outside the box”. Most investors only know a few.
Here’s 7 ways to buy a foreclosure property and make a profit.
Foreclosure Property With Equity – Buy it for a Fair Price
Most investors hunt for properties in foreclosure that have a lot of equity so they can get a “steal” from the desperate homeowner facing losing his home. Don’t county on it; even sellers in foreclosure know they have options when the home has a boatload of equity. Instead, negotiate a fair price that lets you make a reasonable profit and the seller walk away with some cash in his pocket. This type of transaction isn’t particularly unique in the process, except that you have to be aware of state “Foreclosure Protection” laws that require specific disclosure language in the contract and a cooling off period (right of seller to rescind).
Foreclosure Property With Equity – JV With the Seller
If the seller wants to stay a while in his home, consider doing a joint venture arrangement with the seller. This might be a scenario where you make up the back payments and the seller gets to live in his home for a period of time (preferably less than a year), then the property is rehabbed and re-sold. You and the homeowner split the proceeds after you are reimbursed your expenses.
Who gets the make the payments in the meantime? Well, that depends on how the equity in the JV is split. Make darn sure you put this JV agreement in writing and DETAIL every step of the process, particularly what happens if the seller does not move out or is required to make monthly payments and fails to do so.
Property Without Much Equity – Cure & Take Sub2
If the seller hasn’t much equity, but has a really good interest rate on his loan, consider making up the back payments and taking title “subject to” the existing mortgage loan. You are not assuming the loan formally with the lender, but I doubt they will care if you make the loan current, particularly if there isn’t much equity. You might also give the seller a little walking money, depending on how much it costs you make up the back payments and late fees. You could then rent out the property, then rehab and resell it in the future when there’s more equity.
Property Without Equity or Upside Down – Short Sale
If the loan balance with late fees and penalties exceeds the value of the property, then a short sale is in order. Prepare a contract between you and the seller that is at a price much lower than the amount owed. The contract is contingent on the lender accepting a “short pay” or “short sale” on the amount they are owed. The amount owed could be a first mortgage lien and/or a second mortgage. You can even short judgment liens, IRS liens and HOA liens that have attached to the property.
Buy at the Auction
Bidding at the foreclosure auction is the next step in the process. If you have not seen the interior, you must assume it doesn’t have one and bid a price low enough to account for replacing everything inside the house. If someone is living there, you can probably assume the repairs are mostly cosmetic, but still assume the worst-case condition.
Don’t get into bidding wars with your competition or you will end up paying too much. Know your bottom line number before you go to the sale, and don’t bid a penny more than you planned. “Auction fever” can often to the best of us, so make sure you proceed with a level head.
Some states offer the ability of junior lienholders to “redeem” the property after the sale. For example, if a first mortgage is foreclosing and there’s a second mortgage or judgment lien behind it, the junior liens would have the right to pay up the bid price paid on the foreclosure of the first mortgage and get the property. You could buy these junior liens prior to (and in some states after) the auction and redeem it yourself. This is a tricky process, so make sure you become well versed in the redemption process or you could lose your shirt!
Once the auction redemption periods are over, the bank would become the owner of the property (assuming nobody outbid the bank’s offer). This is called “Real Estate Owned” or “REO” for short. Don’t bother calling the bank after the sale date to see if the property is available for sale, unless you are dealing with a small, local bank or credit union. It’s a colossal waste of your time. The bigger banks have long, drawn-out processes for handling the resale of an REO, which is generally involves sitting it on it for months and then handing it off to a local real estate broker to list it for sale. Do, however, become friendly with real estate brokers who often list bank REOs, as they may offer you the opportunity to preview the home before it gets listed on the MLS. Having insider knowledge will allow you to bid ten minutes after the house is listed for sale, beating other “suckers” to the punch!