Real Estate Investing: Foreclosures
Loan foreclosures on real estate property provide a multitude of opportunities and challenges to a real estate investor. When a homeowner faces default on their loan and the possibility of a foreclosure by the loan holder, an investor has an opportunity to help the homeowner out of their problem and to make a profit at the same time.
No foreclosure situations proceed identically, but let's talk about some of the typical problems, steps, and resolutions. Large books have been written that cover the wide range of problems and solutions, but for the sake of this short article everything will be kept simple.
Homeowners miss loan payments for a variety of reasons, and when a homeowner has been delinquent on their payment for a number of months the loan holder, most commonly a bank, will issue a Notice of Default. The Notice tells the homeowner how much they owe in missed payments plus how much they owe in attorney fees and other penalties. The Notice also gives the homeowner a time period to be able to pay all that is owed and bring the loan back to good standing. If the homeowner can't pay all that is owed, then the bank has the right to insist that the homeowner vacate the property and the bank can then put the property up for sale or auction.
During this period of time between the Notice and the foreclosure sale, often called the pre-foreclosure period, the homeowner has the option to sell the property and to use the proceeds to pay off the arrearage that is owed. This pre-foreclosure period is also a time when a resourceful real estate investor has the best opportunity to help the homeowner with their problem. However, the homeowner who is in default and the investor have to find each other.
Since the Notice of Default is a recorded document and is made public, the investor can often view the Notice shortly after it is recorded. In most states and counties the Recorder's office makes the Notice public by posting it at the local courthouse or by posting it on their internet website.
The investor will generally find the Notice on the Internet and then contact the homeowner. Through a combination of letters, post cards, phone calls, and home visits the investor introduces himself or herself to the homeowner and suggests some courses of action.
Often the investor can take over the property and the responsibility for the loan by offering a reduced sales price or by taking over the loan altogether. This allows the homeowner to leave the property and the problems behind while the investor deals with them. The advantage to the homeowner is that they can avoid having a property foreclosure on their record, which would damage their credit score and their chances to purchase property in the future. In exchange the homeowner will generally willingly give up a large part, even all, of the equity that they had in the property.
Now the investor has an opportunity to make a profit if sufficient equity has been left in the property for him to make arrangements. For example, the investor may be able to pay off the arrearage, fix up the property, and sell it for a profit. That takes a fair amount of time and resources. The investor could also pass the deal along to an investor who specializes in fixing up properties and take a small but quick profit. Or the investor could sell the property at an attractive discount before the property goes to the foreclosure sale and make a profit without putting much of his own money into the transaction.
If there is not sufficient equity in the property for the above solutions to work, then the investor could negotiate with the bank to reduce the outstanding loan balance in exchange for a quick sale. That would save the bank from having to foreclose on the property and having the property become part of the bank's non-producing inventory for an uncomfortable period of time. This solution gives the investor the necessary equity to be able to make a profit.
There are numerous other scenarios, complications, and solutions, but this article has highlighted several of the more typical and common situations. In the transactions discussed here the homeowner benefits by being able to escape a damaging foreclosure and the real estate investor benefits by being able to make a profit on their investment of time and resources.