Three Pre-foreclosure Opportunities

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Topics: Buying & Selling, Foreclosures

There are three opportunities with pre-foreclosures.  The worst people to deal with are dead beats who are going to ride out the foreclosure and refuse to move out after the property has been bought either before or at sale.    The best people to deal with are families with a large equity and otherwise good credit record who feel terrible about not being able to make payments. 

I’ve found that offering to divide their equity with them 50/50 and allowing them a pre-paid rental credit until their equity is consumed has had a high probability of success. 

For example, if a person had solid $50,000 in equity over a $100,000 loan with total payments of $1000, their half of the equity would allow them to remain in the house with no payments at all for 2 years.  That’s the good news.  It would also mean the buyer would have to foot a $1000 payment without any income.   It’s all well and good to toss off $1000 negative cash flow but it needs to be dealt with if you intend to buy a number of these types of opportunities.

That’s where the high equity in an appreciating market comes in.   If a $150,000 house appreciated a compound rate of about 10% over two years, then was sold at retail, there would be about $80,000 gross profit not counting loan amortization.  If an investor were willing to pay $1000 for half of this house with absolutely no management responsibilities or loan liability, his $24,000 in total payments would net him $40,000.  That’s more than 33% profit, which could be exchanged tax free, or at worst, would be taxed as long term capital gain.  In the meantime, he would get interest, tax, and depreciation deductions to boot.

Pre-foreclosure pursuers often overlook the third opportunity.   It’s the lender who doesn’t want to foreclose, but who isn’t receiving any payments.  There are a number of reasons for this; one of which is that very few people are buying houses at sale unless there’s a big discount in the lender’s minimum bid.  So the lender becomes the high bidder by default.  When an institutional or private lender takes a house back at foreclosure, his troubles are just starting.  He now must secure the premises, or rent it, or re-sell it, none of which he has the skills to do. 

As the owner, he must buy insurance and pay taxes.  And he must bear all the liability for anything that happens to the property.  If there are liens that weren’t foreclosed such as senior mortgages, HOA fees, or Mobile Home Park rents, he has to pay these or face foreclosure himself.   Last, but not least, institutional lenders are being watched by Government regulators, Boards of Directors, and shareholders.

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