Investing in foreclosures.
For many, the word foreclosure has a detrimental connotation. People think that the house is in bad condition and that the people who lived in it were bad people but more times than not, that’s not the case at all. Probably, the owners just fell on hard times and the houses actually are in decent shape. So get the negative out of your mind. Change your mindset because you’re about to learn why buying a foreclosure can be a real estate investor’s best decision.
The main perk of investing in foreclosures, especially for new investors, is that it’s {a practical way|a logical way} to get into investing if you have little or no capital to invest. As well, foreclosures are also great buys because they rank right up there with ugly houses when talking about finding bargain homes that can generate a significant profit. And just like ugly houses, foreclosures come with their share of challenges so a word of caution: to get the thrill of the profit, you will have to endure a unpredictable thrill ride. Prepare yourself.
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Foreclosure Basics
Before I get into the ins and outs of investing in home foreclosures, let’s make sure that you fully understand what they are. The textbook definition of a foreclosure is: A legal process by which a mortgagee’s right to redeem a mortgage is taken away, usually because of failing to make payments. Piece of cake, isn't it? Maybe. But the circumstances that lead up to foreclosures rarely are.
Now by definition, foreclosure occurs because of failure to pay. Sometimes it’s a failure to pay the mortgage—that’s called defaulting on a loan. Sometimes, a foreclosure is the result of a lien that can be put on the property by any creditor the homeowner may owe. In either situation, there are always multiple factors that play into the onset of the foreclosure. Maybe the homeowner never learned how to use credit responsibly and has gone mad, running up credit card bills they never intend to pay and living beyond their means thinking it’ll never catch up to them. It happens.
But it may surprise you to know that that scenario is more of an exception than the standard. Unexpected unemployment, hospitalization, a death in the family—any of these could put most homeowners at risk for foreclosure. Think over it. How strained would your finances be if faced with any of these situations? Regardless of how the homeowner got to be in the situation that’s leading them to foreclosure, they often make it worse by keeping their financial troubles under wraps. Pride? There’s no telling why, but many don’t seek out help to decrease their debt until it’s too late and foreclosure proceedings are underway.
Now, I know what you’re thinking. You're thinking, how could I go in and make money off of someone's misfortunes…? That's just not right. Am I right? Well don’t think of it that way. In actuality, you could be helping the homeowner out. Let me explain.
When a house goes into foreclosure, two pertinent things happen to the homeowner and their family: (1) The family loses the home and (2) the foreclosure goes on the homeowner’s credit report, damaging their credit rating for years to come. Investors who find pre-foreclosure homes can help homeowners to avoid these to some degree. For instance, the investor takes a purchased home and brings it current with the mortgage company, no blemish will appear on the homeowner's credit report. And in the rare case, some investors will allow the original homeowners to stay in the house for an additional month or two before selling it so the original owners can find adequate housing. Those possibilities make the idea of selling, pre-foreclosure, appealing to homeowners. I won’t go any further into how to progress with those types of foreclosure deals as they can be fairly complex but do keep them in mind as you become a more seasoned investor.
Upon beginning the traditional foreclosure, there’s really no stopping it. The homeowner, unless they can get their accounts to a current status, will lose their home. The mortgage company or bank will re-gain ownership and they will turn around and sell it to the highest bidder. Remember: Banks are only interesting in profits, not holding real estate so they’re going to want to get the home off their hands as soon as possible and re-coup the money they lost. So what does that mean for you? You’ve got an opportunity to make a great profit. Let me break it down for you:
Say the original property owner bought the home for $150,000. During the time they were living in the home, they paid $30,000 to the mortgage company and it appreciated $15,000. As far as the bank is concerned, they just want the $120,000 still outstanding on the home plus interest due. So though the house is now worth $165,000, all the bank is asking is $125,000. You can vie to negotiate for a lesser purchase price, and this is what you should do, but even if you paid the full $125,000 purchase price, you’d still stand to make a $40,000 profit when you sold the house. Sounds good doesn’t it? I can almost hear you grinning and I know it’s tempting but I don’t recommend you jump right into purchasing foreclosures. There's still more, so keep reading young paduan.
Do You Have the Strength Of Will?
College graduates to high school dropouts, teens to retirees. Anyone can be a real estate investor and buy into foreclosure homes but that doesn't mean that everyone should. Nope. To be a successful investor, particularly when working with foreclosures, you’ve got to have some fundamental skills. You must:
1. Be a Great Communicator
Communication skills are important because of all the people that are involved in real estate deals. As an investor, you’ll need to stay in contact you’re your lenders, the buyer, the buyer’s lender, creditors and probably real estate agents too.
2. Negotiation Tactics for the Ninja Investor
The importance of being a smart negotiator should be obvious. You’ve got to know how to put out the best deal for you that will also be enticing to the seller. Bad negotiation skills can make or break deals. Foreclosure sellers may be in a bad predicament when you find them but keep in mind that just as you know foreclosures are a good investment, so do other investors. So negotiate a fair deal. If you don't someone else will.
3. Have Access to Reliable Legal Advice
Foreclosures come with unpredictable event. Each one you attempt to purchase will differ slightly from the one before and you may have to be creative in the terms you create to make the deal work. Because of this, it’s important to have a basic knowledge of real estate law and to have a lawyer on stand-by just be sure you’re working within the boundaries of the law.
4. Seek Out Knowledge
By now, you know that I believe that educating yourself on anything you do is key to being a success. Foreclosures are no different. I’ve briefly described the process here but in the real world, there’s definitely more to it and if you don’t know what you’re doing, there are some pretty deep pitfalls into which you can fall. Prior to investing, do your homework. Make sure you understand the process and the rules for foreclosing on homes and then use that knowledge to your advantage.
Finding Foreclosures
Once you have those skills down pat, you’re ready to start hunting for foreclosures. You've been warned: These homes will be harder to find that ugly homes … but certainly not impossible to locate.
As with any real estate investment, I recommend that you do your homework. It probably means choosing a location in which you'd like to acquire foreclosures and then learning all you can about that area. As you’re thumbing though paperwork and trying to determine which properties to buy and the areas in which to buy them, remember your goal is to make money. Intelligent investing makes money. Remember war zones? Well keep remembering them. You may find some seemingly great bargains on foreclosures in those areas but you have to ask yourself, will you be able to find a buyer to sell the property to who’s willing to pay the full value of the home? When the answer is no, then it's time to move forward.
Okay, so now the research is done and you know were you want to buy. To find foreclosures, you’re going to have to network diligently. Keep business cards on you and make no secret of the fact that you’re interested in buying properties. You’d be surprised how much investors looking to buy foreclosures have to rely on referrals. In addition to passing out business cards, you can also use signage around the areas you’d like to purchase to solicit business.
Other tools you should have handy are a cell phone, a laptop computer and some sort of GPS system. The computer can be used to house any pertinent documents you may need access to while searching for properties. And with Wi-Fi technology, you can even stop at certain places to do Internet searches for properties or information on properties. Meanwhile, the GPS system is great for getting to more properties faster. Time is money and if you can't find the properties you're looking for, you're potentially losing money. As for the cell phone, well you always want sellers to have access to you. Like I’ve said before, there’s no shortage of investors looking for foreclosures out there.
So let's review. Overall that was quite a bit of info squished into a small area. First, foreclosures can make you a lot of money … and fast … but fast money does come with risks so be prepared. Secondly, foreclosures won’t just come to you, at least not right off. You’re going to have to network and put in some footwork to find prime properties. And just because the price is right doesn’t mean the property is a great deal. Money will not come from houses you cannot sell. And finally, research and think before you buy any property-foreclosure or otherwise. The more you know and the more you’ve planned out, the better you’ll be off when you get to the closing table.
For more information about Real Estate Investing and related services please visit www.KickAssRealEstate.Com
