Beginners Guide to Finding Bargain Priced Foreclosure Properties

Real estate investors looking for a good investment opportunity in real estate should learn how to invest in bargain priced properties that are in some stage of foreclosure or have already been taken back by the bank via the foreclosure auction. If you have access to cash and are willing to understand how the foreclosure process works then you can find great deals in today’s real estate market. The biggest challenge for new investors is how to find bargain priced properties. One readily available source of properties is bank owned properties but it is important to understand that this is not the only source of discounted properties.

The foreclosure crisis has created an abundance of bank owned properties (especially in hard hit states like Florida, California, Nevada, Arizona etc.). These properties can be purchased at substantial discounts to their true market value. Bank owned properties are listed on the MLS (multiple listing service) and can be viewed on websites such as www.realtor.com, www.trulia.com and many other web sites that syndicate MLS listings on the web.

If you have tried searching for bank owned properties online then you may have already spent a considerable amount of time talking to real estate agents and making offers in an attempt to buy one of these properties in your area. If you have actually tried to purchase one of these properties then you have discovered that there is tremendous competition from other real estate investors who are often willing to bid up these properties to prices that don’t make sense. For example, I recently spoke to a real estate agent who had a listing for a 2 bedroom 1 bathroom house in Fort Lauderdale that was listed on the MLS for $46,900. When I spoke to the listing agent about making an offer to purchase this property I was told that there were 17 other offers and that the property would likely sell in the mid $70,000 range ($30,000 over the asking price)

There is so much competition especially with the lower priced homes that it seems like every house is either sold, contingent or pending sale. Properties that are still available are often short sales where the bank has not even approved the short sale (unapproved short sale). These short sales are often listed by real estate agents that do not have previous experience in submitting short sale offers to banks. As a cash buyer it can be very frustrating to actually try and buy a bank owned property only to find that all of the good properties are already gone.
As a real estate investor it is important for you to understand that bank owned properties listed on the market are not the only source of great deals. Homeowners that are currently in foreclosure but have not yet lost their homes are a great opportunity for real estate investors since these properties are not listed on the market and do not have investors making multiple offers to purchase them.

I want you to understand how as a real estate investor you can create your own advertising campaign to market to and to find these homeowners in foreclosure. If you market to these homeowners then you can buy their houses directly from them without competing with other investors.

You see, prior to a property going to the foreclosure auction and selling at the courthouse it is still possible to submit a short sale offer to the bank. And right now, with the abundance of foreclosures on the market the banks are taking short sale offers much more seriously than they did in previous years.

The reason for this is really quite simple. When a bank has a bad loan on their books where the homeowner is no longer making their payment then the bank has to pay a mortgage insurance premium. This premium that the bank pays can be as much as 15% of the value of the outstanding loan. The amount that the bank can loan out in new loans is also reduced each time a mortgage goes into default. For this reason banks don’t like defaulted loans and will often sell them at a discount to get rid of them.

Another problem for the bank is that there are many other costs associated with taking a property back via the foreclosure process. Legal fees to foreclose on a property can be substantial especially if the homeowner hires a foreclosure defense attorney. It can take a bank six months or more to finally get the deed to a property which means that while they are waiting to take possession of a property they are losing at least six months of interest payments. In some cases it can take as long as two or three years for a bank to get their property back if the foreclosure lawsuit was not filed or served correctly or if the homeowners file bankruptcy.

There are also many other costs for the bank including cleaning up the property, code enforcement violations, holding costs, utility costs and paying servicing companies. All of these costs add up to a huge expense for the bank which is why the bank is often willing to pay homeowners money to successfully complete a short sale instead of going through the entire foreclosure auction process. In some cases I have seen banks pay as much as $20,000 to homeowners in foreclosure that successfully complete a short sale.

At the foreclosure auction, typically only a small percentage of properties sell to real estate investors. The majority of the houses go back to the lender or bank. Since the bank is the mortgage holder with a first mortgage secured by the property, the bank receives the deed to the property once the foreclosure auction is completed. At this point the bank now owns the property and it is now called an REO which stands for “real estate owned” (by the bank).

Once the bank gets the deed to the property, the bank requests a BPO (broker price opinion) from a real estate agent in the area who visits the property and determines in their opinion the value of the property and what investors would pay for the property. The asset manager at the bank uses this BPO as a guideline in order to decide at what price the property should be listed on the MLS.

The property is then handed over to an REO listing agent who lists the property for the bank based on the instructions and pricing that the asset manager at the bank gives them. At this point the bank needs to clean up the property and prepare it for sale. The bank pays the real estate agent a real estate commission (5%) and pays closing costs to sell the house to a real estate investor. It is estimated that it costs banks on average approximately $30,000 per foreclosure case to get rid of a house in foreclosure. In some cases it costs a bank much more than that.
For this reason many banks are taking short sales offers from investors much more seriously and are even willing to pay money to the homeowner to accept a short sale and avoid the foreclosure auction. From the banks perspective putting more properties on the MLS will just flood the market with inventory which will further reduce prices and increase their losses. It makes much more sense for the bank to ensure that this inventory never hits the market. And there are only two ways for this to happen. Either the loan has to be modified or the loan has to be sold. In many cases it makes more sense for the bank to accept a short sale offer than to sell a bad loan in the secondary market for mortgage notes. For this reason, accepting a short sale offer makes a lot of sense for banks with defaulted mortgages where homeowners are facing foreclosure. As an astute real estate investor you can tap into this opportunity.

A short sale is where the bank agrees to take less than the full amount that is owed to them on the original note and mortgage. Savvy real estate investors can submit short sale offers to the bank to buy properties directly from homeowners in foreclosure and can bypass the foreclosure auction entirely.

Accepting a short sale offer makes sense for the bank as well as the homeowner. The bank receives as much as they can for the property without incurring the costs and legal expenses of pursuing a foreclosure lawsuit. The homeowner avoids having a foreclosure on their credit report (which lasts 10 years) and gets to walk away from the property without any consequences (other than the short sale on their credit report). In most short sales, the bank agrees to a non-deficiency judgment which means that they will not sue the homeowner for the difference between the original mortgage and the amount that the property finally sells for. Most short sale investors make this part of the short sale offer.

So if you are thinking about taking advantage of discounted foreclosure bargains in your area and you do not want to compete with all of the REO listings that are on the MLS then you simply need to find homeowners that are in foreclosure who are willing to sell their home via the short sale process. Any homeowner in foreclosure who is planning on walking away from their property would be happy to have a completed short sale instead of a foreclosure on their credit report.

So how do you find home owners in foreclosure?

An often overlooked approach by beginners is to utilize the classified ads both online and offline. The simplicity of this approach is so simple that many investors simply overlook it. I have even had beginning investors tell me that it is ridiculous to suggest that they can find bargain properties out of the classified ads in their local newspaper. However, if you think about it a little you will realize that if you were a homeowner in foreclosure and you were desperate to sell your home you would maybe consider placing a classified ad to see if you could find a buyer for your house. This is exactly what many homeowners in foreclosure do. You just need to be able to recognize the classified ads that say “desperate seller”.

Search for words like “short sale”, foreclosure, “must sell”, “make offer”, “any offer considered”, “handyman special”, “needs work”, “investor special” “desperate” “hurry” “must sell quick” etc. When I first started looking at the classifieds it took less than one month of reading the classified ads for me to find a bargain priced property. The first property that I found from a classified ad was not for one house but for three houses all for sale by the same investor.

These houses were all located in Port St Lucie, Florida, and two of them were on the same street. All of these houses were for sale by an investor that had signed a contract to purchase all three houses and now wanted to “assign” (flip) the contract. The houses were worth around $140,000 at the time but had sustained some roof damage from one of the hurricanes. We agreed to buy the houses for $95,000 a piece and after paying for the roof repair and some basic cleanup there was around $90,000 in equity in those three houses. My partners still own those houses as rental properties today. Believe it or not, you can get amazing bargains right out of the classified ads in your local newspaper. I tell all of my students that the classified ads are a gold mine of opportunity for all real estate investors.

You can also advertise your services to homeowners in foreclosure by placing a classified ad in the newspaper so that they can find you. Simply place an ad that says “We buy houses for cash” with your phone number. You will be surprised when the phone starts ringing and you might get as many as 3-5 calls per day. You can also get creative by targeting short sales specifically and saying something like “cash buyer looking to buy short sales”

This soft sell approach is a great way to find homeowners in distress. Most new real estate investors go after homeowners in foreclosure by phoning them or visiting them at their house. That is a hard sell approach that I have found rarely works well and I don’t recommend it. It is much better to have the homeowner contact you (if they want to).

The home owners will be calling you so psychologically you are in the drivers’ seat. They are calling you because they want your help and want to see if you would be willing to buy their house. They want you to buy their house. It is up to you to decide if you want to buy their house or if it is even feasible for you as an investor to do so. The only way you will know this is if you visit the house, look at the values and if favorable proceed to negotiate a short sale with the bank. You will need to meet with the homeowner and get all of the necessary documents from them in order to submit a short sale offer. I suggest that you consider using a short sale negotiator like we do to negotiate the short sale on your behalf (for a fee).

In addition to classified ads, I have found the following methods to be very useful in locating distressed homeowners in foreclosure:

Car Magnets “We Buy Houses For Cash” and your phone number

Bandit Signs “We Buy Houses For Cash” and your phone number

Postcards Mailed to your target area or zip code (see notices of default)

Letters Mailed to your target area or zip code (see notices of default)

Attorneys Contact foreclosure defense attorneys and network with them

Notices of Default Purchase a list of homeowners in foreclosure and market to them

Online Classified Craigslist, Backpage, Ebay Classifieds etc.

Bird dogs Hire other people to do all of the above and pay them per deal

When you have sellers coming to you, you have all the control. You decide which deals are worth pursuing and which are not. You won’t be dealing with hostile homeowners that don’t want to talk with you. You will be dealing with people that are turning to you for help. Be honest and sympathetic to their needs and let them know if you cannot help them. Don’t let them think that you will solve their problems if you cannot. Make sure you understand the foreclosure process and how it works in your state.

You also need to make sure that you are aware of local new laws such as CS/HB 643 and CS/SB 992 in Florida which are part of Florida law as of October 1st, 2008. Make sure you are aware of any laws in your state related to talking to homeowners in foreclosure. If you buy a house from a homeowner in foreclosure and they claim after the fact that they didn’t know that they would lose their home then you will have a big problem. Make sure that you have an attorney prepare or review any documents that you intend to use.

Taking some of the steps that I have mentioned above will mean spending some money on advertising and marketing. Distressed sellers will not find you if you don’t advertise. Most beginners don’t want to take this first step. That is the difference between finding a bargain property and not finding a bargain property. If you made $30,000 on one property then that would pay for a few years’ worth of all of the above advertising. If you are serious about being a real estate investor and finding bargain properties then you should be prepared to spend some money advertising yourself and your services to desperate sellers.

I wish you the best of luck in your real estate investing.