FORECLOSURES - Posted by Sharonda

Posted by Bill K. (AZ) on December 20, 1999 at 20:30:09:


Your money is in the spread between the balance of the lien, plus what it costs you to reinstate it (bring it current), and what you could sell it for.

In your example, if the property was worth $45K, and the lien is for $40K, there’s no profit in there for you as you also have to bring the loan current. That could run you, say, $5K. So, you’d be into a $45K property for its full value.

However, if the property is worth, say, $70K, then your potential profit is the difference between selling at $70K and what it costs you to acquire it (reinstatement amount plus anything you might choose to pay the seller) and get out of it (closing costs and loan payoff). In this case, the numbers look like this:

FMV: $70,000
Costs to Acquire: $7,000 (reinstatement PLUS anything to the seller PLUS closing costs)
Lien: $40,000 (Yes, you would pay off the lien)
Potential Profit: $23,000 (minus exit closing costs)

I have simplied it somewhat, but that’s the general idea.

Joe Kaiser has an excellent course on this subject titled “How to Totally Dominate Your Foreclosure Marketplace”. It’s available right here are CRE On-line.

I hope this helps.

Bill K. (AZ)

FORECLOSURES - Posted by Sharonda

Posted by Sharonda on December 20, 1999 at 12:58:21:

I’m new so please forgive me if this question is simplistic. How do I make money from a house that is in foreclosure? I have read the other posts and I guess I am just missing the basic concept. If anyone could give me a brief rundown on the subject I would appreciate it. Thanking you in advance.


Buy Low – Sell High or Rent for Cash Flow - Posted by Dave T

Posted by Dave T on December 20, 1999 at 19:54:19:

Bill K described some of the mechanics of buying foreclosure property. Let me give you a real life example to illustrate a way to make money with foreclosures.

Last Wednesday I closed on a foreclosure property at a purchase price of $49000. My contractors’ estimates to pur the property in prime condition total $4409. If I decide to throw in a stack washer/dryer I will spend another $900, but I will only do that if I need to sweeten the deal (or hold the property as a rental).

The as-is appraisal came in at $63000, and comps in the area are $86000-$89900. I will list the property for $87500. If it sells at my price, after selling expenses, I expect to net between $25000 and $30000 in profit.

I hope that this simple example illustrates that one answer to your question is: Buy Low and Sell High.

By the way, if the property does not sell quickly at my price, I can rent it for a $200/month cash flow. My total investment at this point will be about $12000 (downpayment, closing costs, repair costs). A $2400 per year cash flow works out to a 20% return on investment before taxes.

Another answer to your question is: Buy Low, Rent for Cash Flow.

Re: FORECLOSURES - Posted by Bill K. (AZ)

Posted by Bill K. (AZ) on December 20, 1999 at 13:20:03:


The key to making money with ANY real estate purchase is knowing your marketplace (ie: a particular home’s value).

You make money in foreclosures in the same way that you make money with any other property. You buy at the right price, and know your exit strategy.

There are 2 basic ways to obtain these properties.

  1. Directly from the owner as a PRE-foreclosure, or
  2. At auction, or your state’s formal legal foreclosure proceeding.

When dealing with PRE-foreclosures, you will be trying to understand the needs of the seller. Most of the time, the seller will just want to keep a foreclosure off of his/her credit record. So, you might be able to pick up the home by simply bringing the loan current. Sometimes, they might need a little cash to move. So, if the deal allows, you might throw a couple of thousand their way to encourage them to accept your offer. If they are strapped for cash, the thought of getting their hands on a couple of thousand dollars within a week or two is quite motivating. Other times, they will be unrealistic in their needs, and, if no other investor solves their problem at this stage, you might be able to buy it at the foreclosure proceeding.

At the auction, you’ll need to perform a more thorough “due diligence” since the property is usually sold “as is” without warranty or guarantee. Also, depending on where you live, you may have stiff competition for these homes from other investors who buy these properties all day long. Hence, it becomes even more critical that you know exactly what you’re bidding on, set an upper limit for purchase, and STICK TO IT! Sometimes, these other investors will bid up a property when they see someone inexperienced bidding against them. They do this in order to discourage you. And, it certainly can be discouraging IF you pay more than you wanted to pay for a property.

Keep in mind that the condition of a property can change substantially during foreclosure. A property that looked good when you were planning to buy it PRIOR to the auction, could have been trashed by the owner as they left. Some owners become frustrated and devalue the home in this manner. So, without knowing this, a home that needed $2,000 in work a couple of weeks before the auction, may need $12,000 in work once you buy it at auction. This little surprise can turn a good deal into a bad deal.

If you decide to bid at auction, I’d suggest that you attend a few without bidding to see how they work.

I hope this helps.

Bill K. (AZ)

Re: FORECLOSURES - Posted by Sharonda

Posted by Sharonda on December 20, 1999 at 20:01:45:

Thanks for the advice Bill. One more thing though:how is it possible that you actually make money when dealing with a pre-foreclosure? If the bank has the lien on the property let’s say for 40K, but the sellers are willing to sell how and where in this do you make the money? Won’t you ultimately be responsible for the balance of the bank’s lien? Sorry if these questions seem redundant but I am trying to learn as much as possible so that I can start looking at other options outside of tax foreclosures and HUD homes. Also if you can recommend a book that I can read on the subject that might help. Thanking you (once again) in advance.


Re: FORECLOSURES - Posted by JohnBoy

Posted by JohnBoy on December 20, 1999 at 20:41:27:

You look for pre-foreclosures with equity in the property. If the seller is in foreclosure and can’t get refinanced they sometimes will just deed the property over to you to save their credit. You would take over their existing loan “subject to” by bringing the loan current and then maintaining the monthly payments on time.

If you have a buyers list built up you can put the deal under contract to purchase, take title in your name, and then sell to your buyer at retail value. You can offer to carry back a second to help your buyer get financed by keeping their loan to value down. Since the property has a lot of equity in it that shouldn’t be a problem leaving you with some cash up front at closing and an income stream coming off the second your carrying.

If the property doesn’t have enough equity in it you can see if the lender would agree to a short sale. That’s where the lender agrees to take discount on the balance of the loan to unload the mortgage in a hurry without waiting months to foreclose running up court costs, attorney fees, and having to pay a realtor to resell the property once they finally get it back.

We just did one a short while ago that made us $35k. The seller wanted to be able to stay in the house. He couldn’t get refinanced and was willing to do anything if we could make it so he could remain living in the house and wanted a chance to buy it back at a future date.

Since these type of deals can be tricky when letting the seller remain in the property with an option to buy it back at a future date we wanted to distance ourselves from the seller as much as possible. So we agreed to l/o the property to his son.

We checked title on the property to verify any liens against the property. Then we went to a lender we work with and got pre-approved to refinance as soon as we took title in our name. The seller “quit claimed” the property over to us and gave us a warranty deed that we recorded once we had our approval to refi.

The property had some tax liens that had been sold for back taxes owed, a lien from the city for unpaid water bill and the first mortgage that was in foreclosure. After we refinanced at 80% LTV, our new loan paid off the first, tax liens and water lien leaving us with $15k cash in our pocket and $20k equity. We lease optioned the property to the sellers son with an option to buy at market value within 12 months. His lease payment covers our new mortgage leaving a small cash flow each month.

Deals like this are out there. It’s just a matter of being able to solve the sellers problem that works for them and you. It could consist of getting them refinanced, taking over the property by bringing the loan current, creating the equity needed to make the deal work by getting the lender to agree to a short sale, putting the property under contract and flipping to a retail buyer and giving the seller some walking money and saving their credit, etc.