How to Invest in Foreclosures

Learn the steps to start investing in real estate foreclosures.

Difficulty: Moderate

Instructions

Things You'll Need:

• Basic understanding of real estate investment
• Some capital or know where/how to acquire capital
• Credit or partner with someone who has good credit
• Willing to step out of your comfort zone and take a calculated risk

1. Locate foreclosed properties. These properties can be found on www.preforeclosure.com or www.realtytrac.com, local newspapers that print public notices, by looking up Notices of Default (NOD) from your County Courthouse, or by advertising “Distressed Properties Wanted” or “We Buy Homes” around your territory. Visit www.reicircle.com for more resources on investment.

2. Locate the sellers. Once you have the list of properties in foreclosure, the next step is to locate the owner’s address and/or phone. The sources where you pulled the foreclosed information may already include contact info. If not, you may need to search the White Pages or Google.

3. Contact the sellers via phone, mail, or knock on the door. Tell him/her that you are an investor who would like an opportunity to make an offer to buy the house. Ask these question in your conversation – What is the balance on the mortgage? How many payments are behind and what is the amount owed to bring it current? Are tax payment current? Are there any other liens on the property? If you believe there is still potential for this property, then ask for an appointment to see the house.

4. Run the comps to understand the fair market value of similar properties in that neighborhood. Websites (www.zillow.com or www.ziprealty.com) can give you basic comps, real estate agents and appraisers may give you better comps.

5. Meet the seller. Use this opportunity to inspect the property. Note all necessary repairs and take pictures.

6. Seller to sign Authorization to Release Mortgage Information. This letter should be written as if the seller has written to the lender directly giving you permission to speak on his/her behalf regarding the referenced loan account. The letter should include the seller's legal full name, property address, social security number, name of lender, lender contact phone, loan number and the seller’s signature.

7. Submit the Offer to Purchase Contract. After seeing the property, speaking with the lender regarding the existing loan amount, and determining the offer price based on the lien amount (including all bank loans + back payments + any unpaid taxes) vs. market value (based on the comps) of property, you are ready to make the offer. You can get a blank Offer to Purchase Contract from a real estate agent.

8. Earnest deposit. When you submit the offer, you will need to put down an earnest deposit amount to make this offer official. The earnest amount can be $1 all the way up to 3% of your offer to purchase price. The less earnest amount you put in, the better.

9. Secure the financing. Once the offer is accepted by the seller, it’s time to secure the loan. Some methods for acquiring financing are getting a traditional loan (going to a bank and getting a home loan), private investors (borrowing from friends & family), hard money lenders (non-traditional lenders that charges 15% interest or more for short-term loans), assign this contract to another investor (selling this contract to another investor and they pay you for finding the deal), or bring in a partner for a joint venture (you put in the sweat equity and your partner puts up the money).

10. Get profession inspection reports. While you are securing the loan, conduct the home, roof, termite inspection, appraisal, and title report. A real estate agent will be able to recommend some contacts.

11. Get homeowner’s insurance. Before closing, you will need to get hazard insurance. Most car insurance companies will also offer home insurance.

12. Go to closing. Your agent or escrow should have docs (including loan papers, title transfers) ready for you to sign. This is also when you need to bring in a cashier’s check in the amount to cover your closing costs and/or down payment.

Tips & Warnings

• Visit www.reicircle.com for more tips & resources.
• Determine your source for financing before you locate the property. Get a general idea of where the money is coming from. Once you find a great property you will need to close on the deal quickly.
• Always undervalue the property to the seller. Point out every flaw possible to bring the offer price as low as possible. Tell the seller that you can save their credit, that you can close fast, take them out of their financial burden, the house has too many needed repairs & maintenance, etc.
• Always include the clause “And/Or Assigns” next to your name on the Offer to Purchase so that you can transfer this contract to another investor for an assignment fee.
• Always add contingent clauses as a way to exit or rescind an offer. Some contingents are “Contract is contingent upon loan approval, upon inspection of property, upon seller financing, upon finding a potential buyer”.
• Keep in mind the holding timeframe as that will cost you mortgage payments + interests + taxes, the repairs costs, closing costs of buying, closing cost of selling, commission fees, values of properties in neighborhood, the turnaround for the property to sell once it is listed for sale, etc. These factors will affect your bottom line profitability.
• Even if you have located the property, you should consider working with the professionals such as real estate agents, escrow, loan officers, and inspection specialists to help you through the process smoothly and timely.
• Be creative and sensitive when speaking to the sellers. Understand that they are in a financial situation.
• Much of this is common sense, but the devil is in the details. Real estate investing is not a get-rich-quick scheme and is not readily liquid. It takes dedication, time, and financial resources. Although real estate has always appreciated in the long run, if you can’t handle the monthly negative flow then don’t get in. This could drain you financially before or if you even see a return.