As of August 2020, one in every 13,791 housing units has a foreclosure filing against it. While national foreclosures and short sale numbers are down over last year, the numbers are steadily increasing over last month. The top three states in the US to have foreclosure filings are South Carolina, Florida and Iowa.
So, what does this mean for the overall real estate market? Given the pandemic and subsequent economic fallout, increasing foreclosures may become more prevalent as job losses continue and unemployment rates remain high.
The foreclosure process is both emotionally and logistically painful for the affected homeowner. The homeowner will face not only the loss of a home, but severe damage to his or her credit.
A real estate investor’s primary job is to find problems and identify creative, win-win solutions for all of the involved parties. Foreclosure investing is a perfect way to make these solutions. When a solution is found, then money is made!
If an investor specializes in pre foreclosure deals, he or she can help these distressed owners avoid a terrible situation while locating a great deal. When done correctly, this can truly be a happy situation for everyone!
Let’s dive into Wholesaling Pre Foreclosures! Use the beginner's guide menu below to learn more about this amazing wholesale opportunity:
When an owner borrows money from a lending institution to purchase a home, the owner signs a contract agreeing to pay back this money over time. This is called a mortgage. A typical mortgage contract includes the loan amount, any origination fees, interest, and the time period over which the loan will be paid back.
If a homeowner is unable to pay the mortgage payment for at least three months, the lending institution has the right to begin the foreclosure process. This is where the lending institution opens a court case and sues the property owner for the property possession.
The term "pre-foreclosure" refers to the time period before the official foreclosure court process begins. You can think of it as a warning period to the homeowner. This is when the lending institution notifies the homeowner that they will be pursuing legal action.
The lending institution will file a “notice of default” or “lis pendens” (depends on which state you are located in). This document is recorded with the county and officially becomes a public record.
In the pre foreclosure stage, when the mortgage company has issued a lis pendens, an auction date is typically scheduled. The timing and days out of that scheduling will vary state by state. Sometimes, these auction dates for the foreclosure sale can be pushed out.
A homeowner usually has an opportunity within this window of time to catch back up on payments or to renegotiate a repayment plan with the lender so that they do not ultimately lose the house.
A property owner may decide to do a short sale. A short sale is when the bank gives the property owner permission to sell the property for less than what is actually owed on the mortgage. While not as damaging as a full blown foreclosure, this is still a devastating option for the distressed homeowner.
The property can also be sold during the pre foreclosure phase. This potentially allows the homeowner to sell the property, pay back any past due amounts to the lender and preserve credit for the future.
Foreclosure is the actual legal process of a lender suing and taking back the property from the homeowner. A foreclosed home is turned back over to the lending institution, the homeowner must vacate the property and the institution must then sell the property in an attempt to recoup its initial investment.
To understand more about how the general foreclosure process works, check out this YouTube video:
Depending on the state and individual situation, the foreclosure process can take months to years to settle. Once the foreclosure is closed and settled, the property becomes known as an REO or “bank-owned” property. Most banks and lending institutions don’t actually want to own these properties.
Once they foreclose, the banks begin their own process of selling the homes. Therefore, helping a distressed owner prior to foreclosure really benefits all of the parties involved!
A property can still be sold in the foreclosure phase and in many states, it can be sold right up until the bank auction. This is state-dependent, and laws vary.
If a home is foreclosed on, the process can be financially devastating to the homeowner.
Remember, wholesaling a property is when a real estate investor locates a subject property, negotiates and secures the property under contract for sale, and then shops that contract to a third party investor or cash buyer.
The wholesaler then assigns the contract to the third party, and the third party investor actually purchases the property.
For pre foreclosure properties, the wholesaler will utilize the same process of locating the property and then finding a third party purchaser. The main difference will be in how the investor locates the property and who he or she works with the distressed homeowner.
In the pre foreclosure and foreclosure process, timing is paramount. It is critical for the real estate investor to be in touch with the homeowner and start working with them as early as possible.
Yes, real estate investors can wholesale pre foreclosure homes! Timing and open communication with the homeowner is critical.
The foreclosure process is long and will contain many complicated steps. Every state will have different laws around the foreclosure process.
As an investor, it will be easiest for you and potential foreclosure clients if you work together as early in their foreclosure process as possible. This means potentially contacting distressed owners once they have made 1 or 2 missed mortgage payments.
Successfully connecting with a distressed seller early in the process will help establish a relationship and prevent missed deadlines down the road.
Just like many other real estate investing strategies, you don’t necessarily need money to get started with pre foreclosure wholesaling! If you have funds to invest, you should consider investing in marketing options, whether that be direct mail, hiring bird dogs, or bandit signs.
If you are tight on cash, you can always start with driving for dollars or look at your local Multiple Listing Service (MLS). You can start by looking for homes that are showing signs of neglect or vacancy.
Vacant homes can signal an absentee owner situation. Signs of neglected maintenance may indicate a deeper issue and a distressed seller.
Because you are ultimately wholesaling the property and assigning the purchase contract to a third party purchaser, you will not need significant funds to get started. This makes this investing strategy a great starting point for new investors.
Pre foreclosure leads can be found through free and paid methods.
An investor can run a direct marketing campaign that canvasses a specific target area. Sending direct mail postcards, yellow letters or handwritten letters can yield all types of real estate investing leads.
Direct mail can be lucrative but it requires patience and a long stretch of time to build up reputation and name recognition in your target market.
Pre foreclosure leads can also be found by manually searching lis pendens records at a county courthouse. Once the mortgage company files the lis pendens, the pre foreclosure becomes public record and knowledge.
Investors should also leverage their own investor networks and utilize word of mouth for finding great deals. Leads from a title company or trusted realtor can add significant value and potential as well. Working with a real estate broker with access to the MLS can also be helpful.
A real estate agent can search for properties based on certain keywords and criteria. Notable search keywords can include “auction”, “motivated seller”, “distressed seller”, “property must sell/go”, or “willing to negotiate”.
Establishing relationships with real estate attorneys, bankruptcy lawyers or estate lawyers can also yield great leads. Many of these professionals work with distressed sellers and may be willing to make a referral for certain clients.
Investors can also search Zillow for pre foreclosure listings. Using the search function, Zillow has created a specific section exclusively for pre foreclosure, foreclosed, and “potential” foreclosure properties.
Real estate investors can also pay for pre foreclosure list services. This saves a significant amount of time and allows the investors to focus on more important aspects of their businesses!
Let’s review a few of the pre foreclosure paid list services available:
Locate distressed sellers with homes in the pre foreclosure stage using one of the strategies outlined above.
Reach out to the seller through phone calls or direct contact. Find out when the foreclosure auction is taking place. If possible, ask the seller for a full timeline of pending dates and deadlines they are aware of. These dates are critical for your own deal timeline.
Run a solid financial analysis with the seller and the pre foreclosure home.
In addition to knowing the payoff balance of the mortgage loan, you also need to know about any other interest or late fee charges, the total monthly payment on the property, potential reinstatement fees, other liens against the property, back taxes, or any other outstanding debts related to the property.
You will also include any holding costs, closing costs, and estimated rehab costs. You should know these in advance as you will need these to present to potential third-party buyers.
Ask for copies of the house payoff statement and all supporting paperwork. Insist on having everything in writing! Run comps in the neighborhood and understand what the property could ultimately sell for if completely fixed up and flipped back onto the market.
Flippers who may be interested will need to know the after repair value (ARV). Having an accurate market value is critical!
Running this analysis helps fend off potential roadblocks down the road, understand the actual equity in the property, and see if there is enough margin in the deal to actually profit.
Make an offer to the distressed seller for the property. Since you are wholesaling the property, make sure you include an assignability clause in the contract.
Once the property is under contract, start shopping the contract to your investor and cash buyer network. Your goal is to assign the purchase contract to a third party buyer and collect a wholesaling fee.
Locate a third party buyer, assign the purchase contract, and help the distressed seller and new buyer to get successfully to the closing table!
When having any conversation with a distressed homeowner, it is critical to have empathy and understanding. Homeowners facing foreclosure are often in denial, angry, scared, or embarrassed.
It is your job to bring empathy and professionalism as you help them walk through a deal that will ultimately help them.
Negotiations in a pre foreclosure wholesaling deal should be respectful and constructed in such a way that a win-win scenario is created. You want the homeowner to walk away with dignity and a great deal.
Are you new to negotiating or afraid to get started? Watch this video with 8 great psychological tips and tricks to help you start a successful negotiation:
If you plan to cold call pre foreclosure leads, it’s important to remember a few ground rules:
With these tips in mind, a great starter script for a cold call could go something like this:
“Hi XXX, my name is XXX. I found your property and your information on a pre foreclosure list/lis pendens list with the county/etc. I understand you are in the pre foreclosure process. Are you open to selling your property before this happens?”
Being upfront, polite and direct is the way to go. You may still get hung up on, or you may connect with an owner who appreciates your professional approach and is then open to hearing what you have to say.
From there, ask the owner questions about the property, the foreclosure timeline and details around how much is owed. Set an appointment to meet with the distressed owner in person.
Prior to the appointment, ask the owner to gather all financial documents. Bring a copy of a purchase contract to the appointment.
The pre foreclosure process can be a scary, intimidating and distressing process for homeowners in trouble. For savvy and empathetic real estate investors, wholesaling these properties can be an incredible strategy that not only creates a profitable deal, but saves a homeowner from financial ruin.
For real estate investors who are willing to understand their state’s foreclosure rules, work hard to create relationships with troubled sellers and run a critical analysis of the foreclosure numbers, this strategy can be a unique way to stand out in the investing market and expand your real estate portfolio.
Have you ever worked with distressed sellers in a pre foreclosure situation? Is this part of your wholesaling real estate strategy? Tell us about your experience in the comments below!
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