Each year in every community, hundreds (sometimes thousands) of property owners hit the financial skids. Divorce, job loss, accident, illness, business failure, and other setbacks render people unable to make their mortgage payments. Rather than effectively deal with their problems as soon as default is imminent, most owners hang on too long, hoping for a miracle to bail them out. Since miracles are rare, most of these people end up staring foreclosure in the face.
At that point, you may be able to help them salvage their credit record and part of their home equity and at the same time secure a bargain for yourself. Faced with pressures of time and money, distressed property owners may be willing to accept a quick, credit-rescuing sale at a price less than market value.
Approach Owners with Empathy
You cannot use some magic system to buy a property from owners facing foreclosure. These owners must contend with financial troubles, personal anguish, and indecisiveness brought on by mental depression.
In addition, they have probably already been attacked by innumerable foreclosure sharks, speculators, bank lawyers, and recent attendees of get-rich-quick foreclosure seminars. These owners are living with the public shame of failure. For all these reasons, and more, they are not easy people to deal with.
But when you develop a sensitive, empathetic, problem-solving approach with someone suffering through foreclosure, you may be able to come up with a win-win agreement. Just keep in mind that, more than likely, you will compete with foreclosure specialists. A "Here's my offer-take it or leave it" approach will probably antagonize the owners. It will not favorably distinguish you from a dozen other potential buyers (sharks). So develop your offer and negotiations to preserve what little may be left of the owner's dignity and self-esteem. Perhaps you can share personal information about setbacks you have lived through. Above all, emphasize win-win outcomes. Dire straits or not, no one wants his or her home (property) stolen away.
The Difficulties of Dealing Profitably with Owners in Default
The promoters of "get rich in foreclosures" seminars, tapes, and books greatly exaggerate the possibilities of profiting from property owners who face foreclosure. The enticing scenarios imagined by these promoters put you in the picture with high-equity sellers who hold a non-qualifying assumable mortgage. You offer the sellers a few thousand dollars in cash and agree to make up their past-due mortgage payments. The sellers deed you their property and move out. You then put a tenant in the property, collect rents, and pay the property expenses and scheduled mortgage payments. Or, alternatively, you fix up the property, put it on the market, and sell for a fat profit. Regardless of which strategy you choose, buying foreclosures can make you wealthy very fast-at least that's the pitch of the foreclosure gurus.
Admittedly, such simple deals are great when you can find them. Unfortunately, it's rarely that easy. When you talk with property owners in foreclosure, you're far more likely to uncover a minefield of problems that you must crisscross with skill and creativity. Here are some of them.
Mortgage Debt Exceeds Market Value. Many homeowners in foreclosure owe more than their properties are worth. To make a deal work, you must talk the lender into a "short sale"; that is, the lender voluntarily reduces the balance due on its loan so that you receive a "fair" profit for agreeing to make up past-due payments and take over the loan. It happens, but you face a tough sell.
Nonquals Are Tough to Find. Few mortgages today automatically permit assumptions. Finding a homeowner in foreclosure who actually has a non-qualifying assumable is like finding the proverbial needle in a haystack.
Qualifying Assumptions Are Limited. Today's FHA and VA mortgages do permit assumptions, but only by credit-qualifying owner-occupants. If your credit or income is shaky, or if you plan to "flip" the property without taking occupancy or putting tenants in it, neither FHA nor VA will let you assume the existing mortgage.
Multiple Creditors, Multiple Title Problems. Many homeowners who face foreclosure must contend with the claims of other creditors. Check to see if any of these creditors has filed a lis pendens or a tax lien (Internal Revenue Service or other taxing authority) or have secured a judgment against the homeowners. To gain clear title, you may have to clean up and settle with a variety of creditors-not just one mortgage lender.
(A lis pendens is a recorded legal document giving notice that an action affecting a property has been filed in court.)
Workout with Credit Counselors. Most lenders today (especially FHA, VA, Fannie Mae) encourage financially troubled homeowners to seek credit counseling and loan workout with nonprofit agencies such as CCCA (Credit Counseling Centers of America). Neither the homeowners nor the lenders may need a profit-minded workout specialist.
Save Equity through Bankruptcy. In many states, homeowners can file bankruptcy and save all or part of their home equity. True, 15 or 20 years ago, only the most bold or financially ruined Americans would consider bankruptcy. Now, bankruptcy serves as just another tool of financial planning. Approximately 1.5 million couples and individuals elect to file for bankruptcy each year. When someone can get rid of all those credit card balances and unpaid medical bills-and at the same time save their most valuable asset (their home equity)-why let a foreclosure shark come through the door?
Note: In 2005, Congress passed a new bankruptcy law that is intended to make debtors pay back more of the money they owe as well as to tighten the bankruptcy homestead exemption. Because bankruptcy combines both state and federal law, talk with an attorney in your area. My guess is that the new law will increase your opportunities for profitable pre-foreclosure workouts.
Bankruptcy Doesn't Ruin Credit. Generally, the threat of "ruined" credit doesn't instill the same fear in Americans today that it did two decades ago. Today it's not easy to actually ruin your credit. After a bankruptcy discharge, people with steady jobs can immediately obtain credit cards (albeit secured), car loans, and home loans (e.g., seller financing, subprime lenders). After a bankruptcy, with two years of clean credit, FHA, VA, and sometimes even Fannie Mae/Freddie Mac lenders will approve reestablished borrowers. Again, this fact reduces the probability that you can persuade homeowners to transfer a large chunk of their home equity to you so that they can "save their credit."
Estimating Repair and Renovation Costs. Before you finalize a pre-foreclosure purchase with a property owner, thoroughly inspect the property and accurately estimate the costs of necessary repairs, renovations, and perhaps environmental cleanup. Too often, in their eagerness to do a foreclosure deal, unsuspecting buyers gloss over the inspection and make only an eyeball guesstimate of expected costs. Much to their dismay, they soon learn that slick foreclosure sellers can put one over on naive buyers, just as slick foreclosure sharks may at times take advantage of distressed property owners.