Posted by David Butler America’s Note Network on April 15, 2000 at 15:13:36:
Buying real estate in default is an excellent technique for making big profits… whether you hold or flip the property. But, depending on what state you are in, you have to stay up on the laws regulating properties in foreclosure. In California, mistakes (even honest ones), can cost you severe financial penalties, and even jail time!!!
What I like even better is purchasing mortgages in foreclosure. One of the best deals I ever did involved a SFR that was 13 days from Trustee sale. The first was $10,000 back, with an owner carryback 2nd that was $7,000 back.
When the homeowner in default responded to my mailer, I quickly determined that he had a property worth about $203,000 at FMV, but he owed $207,000 against it. So I started asking questions about the second mortgage. The owner carryback was a $100,000 purchase money mortgage behind an $85,000 first.
To make a long story short… I made a deal with the homeowner to obtain a deed in lieu of foreclosure: I would give him $2,000 cash, and $3,000 to do all the cosmetic repairs to the home. I agreed to give him up to six months free rent, or until the property resold. And I agreed to give him up to another $5,000 if I was able to sell the home for over $190,000.
My offer was contingent upon my ability to cut a deal with the holder of the 2nd mortgage on terms that were satisfactory to me. I was able to purchase the 2nd mortgage for $52,000 with $10,000 down, which was paid to the first mortgage lender to halt the foreclosure.
I gave another $5,000 in cash to the note seller at closing, with the balance of $37,000 due in six months, at no interest.
Once the 2nd was closed, I gave the homeowner his $2,000, plus $3,000 for the rehab. We FSBO’d the home, with the homeowner doing all the showing. We paid $4,900 in loan payments on the first during the holding period of four months.
We listed the home for $199,000 in a 200 home subdivision that hadn’t had any homes listed for under $203,000 in the previous two years. It was a slow market, so we rightly figured that would get some attention. A Realtor brought us an offer for $195,000, and we closed the thing, netting out a little over $38,000 after all costs.
Generally speaking, unless you are really an experienced “hands-on” investor, it usually isn’t prudent to purchase 2nd mortgages from mortgage brokers or lenders (or even owner carryback 2nds for that matter!). But it really depends on the situation. If you have a clearly defined purpose for doing it, and the numbers work, then by all means, why not?
If you are inexperienced, or lack the resources to protect the second from a default on the first, then it would be equivalent to throwing your money into poorly chosen margin accounts on Wall Street… as a lot of poor souls learned so dramatically in the expensive seminar that was given there over these past two weeks!
Hope this helps, and I know I’ll see you around!
David P. Butler, Vice President, Broker Relations