Late night infomercials will tell you that buying foreclosures is a sure way to rapid wealth. That may or may not be true, depending on your skill sets and determination. Here’s the real deal about foreclosures. Most investors look at the foreclosure side of real estate and see only a tiny portion of the true potential. They’ve signed up with a service that provides them with a daily list of foreclosures, and routinely scour it for good deals. Will they find any? And, perhaps more importantly, will they be able to compete with the hundreds of other investors who are reading the same list?
Before I answer that, let’s examine what a typical investor does. Every day, some homeowner somewhere is going into foreclosure. There are services that provide lists of these homeowners to investors, bankers and anyone else who’s willing to pay the fee to obtain the list. Here’s a hint – pay the fee. Don’t bother trying to develop a list on your own – it’s too labor intensive and isn’t worth your time.
So your typical investor will receive the list every day. Say for example the daily list has about 50 names on it – every single day for the county you reside in. That’s about 2,000 names per month just for your county, let alone any neighboring counties you’re watching.
Most investors find that number alarming, and rightly so – because there is no way they can assess that many foreclosures in a month for investment potential. What they’re missing here is the necessity to eliminate all the properties that don’t have a decent profit potential. Let’s take a look at an example of a foreclosure sale (a trustee sale.) The notice of sale says the property will be sold to the highest bidder within 21 days. Say the property was originally purchased 25 years ago, and has a current first mortgage balance of $22,000, with a market value of $100,000. Are you the only investor in town that sees this property has enormous potential? Hardly. Every other investor who scans the foreclosure list will have the same thought. Do you want to try fighting your way through the hordes of other investors, or do you want to try using another approach?
Being a smart investor, you notice that this property also has a second deed of trust recorded, with a private lender, in the amount of $40,000. The second hasn’t started foreclosure proceedings yet, which means two things: 1) the holder of the second mortgage probably doesn’t have the cash to pick up the past due payments on the first mortgage and 2) because they haven’t started foreclosure proceedings yet, in 21 days when that trustee’s sale is held, their second mortgage is going to be wiped out, and they’ll lose their entire investment.
What’s your next step?
Contacting the second mortgage holder is where you want to go next. For whatever reason, they’ve elected not to start foreclosure proceedings. Maybe they’re resigned to the fact that they’ll lose their investment, maybe they just don’t have the money - there could be a thousand reasons. If you make a phone call and offer them $20,000 for their $40,000 note – who knows, they might take it. Probably only 10 percent of people in that situation would take a 50 percent discount, but so what? Even if 90 percent of the people in this situation reject your offer, that still leaves 10% who would accept it! If you get 10 percent of these kinds of deals, you’ve run circles around your competition. Now, maybe the owner of the second mortgage says “No, I won’t take a 50% discount, but I will take a 20% discount.” You’ve now purchased that $40,000 note for$32,000.
Now you’re in the game. You have a second deed of trust on a piece of property worth $100,000. The first mortgage is $22,000, and your lien is worth $40,000, with a $32,000 investment.
At this point, you have three avenues of action:
1) You can negotiate a sale with the owners of the property. Remember, you have an $8,000 advantage over the rest of the investors, because you own a $40,000 second that only cost you $32,000.
2) You can bring the first loan current and begin foreclosure proceedings on the second mortgage you just bought. By following that route, you ensure that you’ll be paid off at the trustee’s sale, including the amount you advanced for the first. Would most of the investors out there be willing to offer $62,000 (the first mortgage of $22,000, plus your second for $40,000) for a piece of property valued at $100,000? Hmmm, let me think about that for a moment. Yes!
3) Even if you don’t bring the first mortgage current, just begin foreclosure proceedings and allow the trustee’s sale to go forward, you’ll still come out ahead. Say you go to the trustee’s sale, and stand in the crowd and make sure the bidding exceeds the $62,000 necessary to pay off the first and second notes. At that point, you stop bidding, unless you really want the property.
When the bidding closes, you’ll get your full $40,000 on the second deed of trust, thereby making $8,000 for just a few days work. And isn’t that a lot easier than fighting with the hordes of other investors who are trying to make a quick profit by picking up cheap foreclosures?
If you make ten deals like that a year, you’d be sitting on top of the foreclosure world!
