Many Investors avoid working with Sellers in pre-foreclosure or making offers on short sales. They all say the same thing, it takes too long! I strongly disagree with this decision. I have been working on short sales for years now and even though it does take a few months, it has been the best deal spread in profit that I have ever received on any type of deal. Let me tell you why you should consider working with Sellers in pre-foreclosure and making offers on short sales.
The Pre-foreclosure market will continue to flourish due to the adjustable mortgages, loan modifications and reverse mortgages that they have provide to many Sellers. A lot of the Sellers in foreclosure will have second mortgages that can be discounted to pennies on the dollar. Sellers that are doing a HAFA short sale program requires the second lender to take a maximum of $8,500.00 on their second mortgage. The government bailed out the mortgages companies some time ago and also required them to assist Sellers who were in foreclosure. So, you would think that the lenders would contact Sellers who are attempting a loan modification and agree to reduce their principal to help them out so that their payment would be less. That is not the case. What they have been doing is forgiving the second mortgage on the property and getting paid full value or more on their loans. How does this help the Sellers? Well if the Sellers are the lucky individuals who were paying on time they were NOT the individuals picked to have their second mortgage paid off. The banks chose the Sellers who were in foreclosure. This way the second lender received full value or more for the loan versus nothing if the house went to foreclosure or pennies on the dollar if it was a short sale. Knowing this information as an investor will help you cash in big on your short sales.
Recently a partner and I started working with a Seller who needed the house probated and was in foreclosure. We paid for the attorneys to probate and for foreclosure defense during this time based on future rents. While my office was negotiating the short sale, we ordered title work and found out even though the second mortgage company was included in the foreclosure action, that their lien was paid off – discharged. After a couple of months of probating the property and transferring the ownership to our Seller as the rightful heir, instead of a short sale needed on this property, it was a full payoff. This has happened to me several times now wherein the second mortgage is discharged and there is enough equity in the home and profit for the investor to just payoff the loan.
During the time the house was probated, the Seller agreed to allow the property to be rented and use that money to pay towards the attorney fees of approximately $4,300.00 and repairs. The house wasn’t in bad shape but needed approximately $3,300.00 worth of work and materials to make it “rent ready”. Because we did not fix the house up completely, we asked for $300.00 less on rent making this property a very desirable rental to tenants. The lease that was signed was a month to month and they were informed that the house was in foreclosure, needed to be probated and once that was completed, they would have to move out as the house would be fixed up and sold. The tenants agreed to the terms and conditions and moved into the house and paid $900.00 a month for a total of $5,400.00 while this process was going on.
The property went through probate and the Seller was now the rightful heir and could sell the house once we settled the short sale. The first mortgage company was still pushing the foreclosure and a trial date was set for June. Like I said above, we found out that the second mortgage was paid off and that it would be a full payoff to the first. Because the trial was coming up, we decided to purchase the property as soon as possible to avoid additional attorney fees on the first mortgage. Now that we have it, we have two options. Sell it “as is” to a landlord with or without a tenant, remove the tenant, or rehab it and sell to an end buyer. Purchase price $130,000 with $30,000 in repairs with a value of $210,000. Either way, we shall profit a minimum of $30,000.00. The time frame on this property was 6 months due to the probate. A total of 40 hours invested of my time which equals $750.00 an hour. Are you thinking differently now???
Based on this article, I hope I have persuaded you to start going after pre-foreclosures with less competition and better profit on your deals.
Happy House Hunting!!!
Kimberlee Frank
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When making offers on properties as an Investor, you will need to have your exit strategies in place prior to purchasing the property. What I mean by that is, who is your buyer and what type of financing are you going allow the buyer to use when sell the property. Knowing this will allow you to maximum your profits.