Recently a spate of traveling pitch men have been extolling the virtues of the foreclosure market as a way to build an instant fortune. No doubt, many fortunes have been started at the court house steps, but there's many a slip betwixt the cup and the lip. As more and more people home in on this approach, the competition becomes ruinous. But there's still lots of opportunity for those who don't mind a lot more work and a lot less money.
Think with me a moment. Who's the first person to know a payment has not been made and that loss of the property is imminent? The person who skipped his payment! He knows before the lender, the lawyer, the paper, the competition. How do you locate him? Let me count the ways. I've bought more properties by walking or calling from door to door than by any other means! My first step is to identify the ideal investment neighborhoods by driving through attractive areas and checking county or city records to verify that they were originally financed with FHA or VA loans. I prefer tracts of homes which were sold with these loans because they are more or less standardized and the loans are assumable.
On a Friday I might walk several blocks in a chosen neighborhood and place a card in the door which says that I'm interested in buying each house. On Saturday and Sunday, I retrace my steps and try to speak to the owners to see if my solicitation card has met with any interest. If the weather is bad, I use the City Directory or Criss Cross Directory which lists telephone numbers in street number sequence. With these, I can let my finger do the walking as I call each owner in turn. I jot down all the information I can glean about the property and the owner's desires for future reference. Most owners are not in the market, but I engage them in conversation to see if they know of anyone else who might be. I follow up on all leads and keep a record. I try to get back into the street at least once each year. And I advise each person contacted to keep my card and to call me.
Over the years I've color coded my cards. Sometimes years pass between my calls and the owner contacting me. But I've found this door to door canvassing to give me an edge over all those people at the courthouse who passively await opportunity. Variations include delivering calendars with your solicitation message at the top. For years I used one which folded out to reveal a place to record telephone numbers. All year long my phone number and message were kept beside the owner's telephone to remind him. A couple of active entrepreneurs in my area fasten metal signs at eye level on telephone poles near highly traveled traffic routes. These signs offer quick cash for house sales. Others regularly offer to buy defaulted notes from small loan companies. You know the kind that advertise on TV to consolidate debts or to finance home improvements. These notes can be bought at deep discounts because the small lender doesn't want to foreclose and have to make payments on the underlying 1st loans. Once purchased at discount, the owners can be contacted to determine the reason for non-payment. Often the solution requires the purchase of their house. Or the payments on the notes can be restructured and be brought current through the process of negotiation. In any event, it can be a very lucrative enterprise.
Here again, a little arithmatic might illustrate my point. Suppose you were able to buy a $3500 note with a $125 payment at 18% which had been in default for 6 months. The loan company might sell it to you for as little at $350. They might ASSIGN it to you, or they might SATISFY it if they were willing to completely release the original borrower. In other cases, they might assign you the note but refrain from releasing the LIEN on the borrower. Now you'd go see the borrower and explain that you were going to foreclose if the payments weren't caught up. In lieu of foreclosure, you might buy the property under terms and at a price which would be acceptable to both parties. Or you might agree to just restructure the note in such a way that the face amount would offset lower payments. If the property were worth considerably more than the combined amounts of both loans, you could arrange a new first mortgage which would provide funds to pay off both loans and make the total payments within reach of the occupant.
All of these approaches are profitable. If you're able to buy the house at distress prices that's one way to proceed. But if you could restructure the loan so payment could be brought current, it would have a value in the discount market. You might be able to sell it by guaranteeing payments for as much as 75% of face value PLUS ACCRUED INTEREST. Remember, your purchase price included all back interest. By personally endorsing the note you add value to it beyond its ordinary market value. Here's what your note could earn: $3500 plus 18% for 6 months' back interest when you bought it would be $3827.05 and 75% of that would be $2870.29. If you paid $350 for it you'd be making a profit of over $2500.
Of course, if you could either sell the property or get the owner to refinance it to pay off the note, you'd be getting 100% of face value and a profit of about $3475. on an investment of $350. You can see how this return on your investment dwarfs those normally associated with precious metals, securities or other forms of real estate. And it shouldn't be too difficult to attract investor dollars from those who can see you earning these huge profits on small investments. There's a way to work with investors too in buying defaulted paper. In the above illustration, suppose instead of selling the note or refinancing the property, you agreed to allow the debtor to REPLACE the note with one carrying the same interest, but with a face value of $5000 and payments of only $75 per month. It might have a balloon payment due in 3 years. That 18% interest would be attractive in today's market especially if you guaranteed it to an investor. Suppose you offered him a ½ interest in it for $2000 cash. Over the next 36 months you'd each receive $37.50 or $1350. Since the $75 payment represents “interest only” there would still be $5000 due at the end of 3 years. Each of you would get $2500. Your investor would be receiving a total of $3850 for his $2000 investment. You'd be receiving a total of $5850 for your $350 investment. Not bad.
