Posted by Rich[FL] on February 14, 2002 at 09:46:29:
Thu, I have posted some foreclosure and pre-foreclosure information over in the main forum. You might try to do a search there for more information.
Basically, foreclosures can be persued from two different angles: pre-foreclosure where you deal directly with the owner about to lose their house, and post-foreclosure where you deal with the financing institution who now owns the house. Houses at this point are REOs, or Real Estate Owned (by the bank).
Buying REOs are done by rather “conventional” means: deal with the seller (the bank, though most banks sell these properties through realtors now), negoatiate a price, sign contract, find financing and down payment, and go to closing. The thing that is different here from buying “traditional” homes from individuals is you should be able to negotiate a substantial discount from market value, which is how the investors make their money. This is not necessarily the most “creative” way to buy investment property, but it works and there’s nothing wrong with it. I bought my first investment property this way.
Pre-foreclosures are another matter. Here, you can use many or most of the creative techniques discussed/taught on this web site in actually acquiring the properties. Oftentimes you will find properties with substantial equity (sometimes no or negative equity) and the owners simply want to walk away, sell it for the mortgage balance. In cases like this, you can purchase the property subject-to and spend the money needed to clear up the back payments, penalties and interest. It’s also best to know about land trusts so the property can be placed into the trust to help sheild the actual transfer of the property to another party. As with all subject-to transactions, the bank may call the loan due so you should be able to quickly place a new loan on it if needed.
In the case of no- or negative-equity properties, it may be possible to negotiate with the banks directly to actually purchase the mortgage at a discount, then step into their shoes in the foreclosure process. This is where knowledge of notes and how paper works comes into play. Just a couple of weeks ago I ran across this exact same thing; the house was upside down ($104k owed, $95k max value) so I went to the bank and offered to buy their loan. I faxed them two offers: one at $60k cash and one at full note value. (NOTE TO STUDENT: Why in the world would I offer full face value for a note which is more than the value of the house? This is your exercise for today - I believe I posted the answer on the main web site when answering some other questions on pre-foreclosures.) In the end with this case, the bank never responded so there’s nothing I could do at this point.
Because of all the twists and turns a pre-foreclosure property can take, and the need (in general) for up-front cash, I don’t generally recommend persuing pre-foreclosures for new investors. There’s just too much one should know and understand to make a successful investment. However, that’s not to say it can’t be done; it’s just more risky. Heck, I didn’t really know what I was doing when I bought my first REO - I just knew it could be done. It turned out OK, but it could have been a disaster.
Congratulations on your pending graduation! It’s a worthy achievement. And I understand about those school loans! Here’s a suggestion - since real estate is a “get rich slow” activity (in general), why not look for a duplex to buy (there may even be one available as an REO!) so you could live in one side and rent the other? At best, you’ll live “rent-free” and may even make a few dollars; at worst, most of your housing expenses will be heavily subsidized by your tenant on the other side. The money you save on your housing expenses could go to either paying down the loans faster or saving for additional investments. This is a popular suggestion to many new, young investors and something that is easy to do.
Hope this helps answer some of your questions. Good luck in your career (investing and job-wise).