By Ralph Roberts
RISMEDIA, July 10, 2007—Some of the best bargains in the foreclosure market are actually in the preforeclosure market—weeks or even months prior to the time when the property ends up on the auction block. The earlier you can locate a distressed property or homeowners facing foreclosure, the less competition you have and the better your chances of ultimately acquiring the property at a great price. In this article, I cover the basics of investing in preforeclosures.
Networking for leads
The earlier you can find out about a property in preforeclosure, the better. You may even be able to discover properties before the foreclosure notice is posted. Choose the area where you want to buy preforeclosures and then network heavily in that area. Create your own business cards and hand them out to everyone you meet, and then network with people who are likely to have early leads:
– Real estate agents
– Foreclosure attorneys
– Divorce attorneys
– Bankruptcy attorneys
– Title companies
– Loan officers
– Reading the foreclosure notices
Call or visit your county’s register of deeds office and find out where the foreclosure notices are published. Usually, they’re published in the county’s legal news or one or more local newspapers. Find out where they’re published, and then subscribe to that publication. Each week, you should be reviewing the notices, marking promising candidates, and tracking any properties you marked during the previous weeks. (The foreclosure notice can change from week to week).
Foreclosure notices contain an assortment of valuable information, including the case or reference number; the insertion date; the county; the legal lot, subdivision, and city (which you can use to obtain the property address); the name of the mortgagor (usually the homeowners); the name of the mortgagee (the lender who’s foreclosing); the amount owed on the mortgage; the interest rate of the loan; the name and contact information for the lender’s attorney; the sale (auction) date; the length of the property’s redemption period (if any); and the liber (book) and page number of the recorded mortgage.
Tracking promising properties
As soon as you find out about homeowners who are or may be facing foreclosure, start tracking the property. If your discovered the property prior to the posting of the foreclosure notice, then contact the homeowners and work with them to keep track of where they stand in the foreclosure process. If you discovered the property by reading the foreclosure notices in your county, then use the following schedule to track the property (you may need to adjust the schedule based on the process in your area):
Week 1: Find the first foreclosure notice or NOD (notice of default), do some preliminary research on the property (see the next section for details), send a letter to the homeowners introducing yourself and what you can do to be of assistance.
Week 2: Find the second foreclosure notice. If a notice does not appear, send a congratulations letter to the homeowners. If a notice does appear, review the title work, contact the homeowners by phone, knock on their door to attempt a face-to-face meeting, and send a second foreclosure letter. (Your second letter should convey a sense of growing urgency and let the homeowners know that the clock is ticking.)
Week 3: Find the third foreclosure notice. If a notice does not appear, send a congratulations letter to the homeowners. If a notice does appear, attempt to contact the homeowners by phone, do a little more research on the property, and send your third foreclosure letter, stressing the growing urgency. At this point, you should also contact the foreclosing lender’s attorney to find out if the property is still going to auction, what the opening bid amount is likely to be, whether they are considering adjournment, and if they have any additional background information about the property.
Week 4: Find the fourth (and probably final foreclosure notice). If a notice does not appear, send a congratulations letter to the homeowners. If the foreclosure notice does appear, drive by the house, take photos of it, and note whether the condition of the property has changed significantly; attempt to contact the homeowners by phone; send your fourth foreclosure letter, stating when the property is scheduled for sale; and organize your property dossier for the auction.
Building a property dossier
Part of the process of tracking a property consists of building a property dossier in which you organize all relevant information about the preforeclosure or foreclosure property you are interested in. Your property dossier should contain the following items:
8-by-10-inch photograph of the property taped to the front of the folder for quick reference.
The foreclosure notices:
– A foreclosure information sheet with all the details from the foreclosure notice and your research of the title, deed, and mortgage. (You can research these items at your county’s register of deeds office.)
– An exterior home inspection form. (You should always inspect all four sides of the property with your own two eyes and record your observations.)
– Neighborhood inspection, complete with photos.
– Information on any other properties that are listed for sale in the area, so you can track their sales prices and how long it took them to sell.
– A map showing the location of the property.
– The title commitment and 24-month history in the chain of title or the minimum last two recorded documents. (You can obtain this from a title company.)
– The last recorded first mortgage, so you know how much the homeowners currently owe on the property. (You can obtain this from the register of deeds office.)
– Records of other liens on the property, such as second mortgages, construction liens, and tax liens. Property tax liens are especially important, because if you buy the property, you’re responsible for paying any back property taxes. (This information should show up on the title commitment.)
– A copy of the deed with the current homeowners’ names. These names should match the names on the title. (You can obtain this from the register of deeds office.)
– The city worksheet on the property showing the history of the property. (Your city or town should have a worksheet on file for every property in the area.)
– The SEV (State equalized value). (You can obtain this from the register of deeds or the tax assessor’s office.)
– Estimating your maximum offer
Whether you plan on buying the property directly from the homeowners or at auction, you need to sit down and crunch the numbers. Your goal should be to earn 20% or more on your total investment. Begin with the estimated sales price of the home after repairs and renovations and work backward:
– Guesstimate how much you can sell the house for after repairs and renovations. (Base your guess on the recent sales prices of comparable homes in the same area. Guess low on price and high on costs.)
– Multiply the amount from step 1 by one of the following:
o .80 in a market where homes values are rising
o .70 to .75 in a market where home values are steady
o .65 to .75 in a market where home values are declining
o .50 to .65 depending on the percentage profit you want to make
– Subtract the amount of money required to pay off back taxes and other liens.
– Subtract the closing costs for purchasing the property.
– Subtract renovation expenses x 1.2 (to add 20% for unexpected cost overruns).
– Subtract monthly holding costs (interest, insurance, property taxes, utilities) times the number of months you plan on owning the house. Figure on at least 3 months.
– Subtract agent commissions and/or marketing and advertising costs.
– Subtract closing costs for selling the property.
For a calculator that can handle the calculations for you, visit http://www.getflipping.com.
Tip: If the numbers don’t work for you, you may be able to negotiate short sales with lenders, especially junior lien holders, who may lose everything if the property is sold. With a short sale, the lenders agree to accept less than the full amount they are owed.
This article provides a brief overview of what is a very complex process.
For more information about buying and selling preforeclosure and foreclosure properties, check out my book Foreclosure Investing For Dummies
Ralph R. Roberts, official spokesperson for Guthy-Renker Home and author of Flipping Houses For Dummies and Foreclosure Investing For Dummies (John Wiley & Sons), can be contacted at 586.751.0000, or by e-mail at RalphRoberts@RalphRoberts.com.
For more information, visit http://www.aboutralph.com.