“The ballooning inventory of available foreclosure properties should be an area of concern among lending institutions. This situation is good news, however, for those who track and invest in the foreclosure market.” – Brad Geisen
Investing in foreclosures is one of the best ways to make money in real estate, even when the market is going south. And with the number of foreclosures continuing to rise, you should find plenty of opportunities for good deals.
But steer clear of one of the common mistakes new foreclosure investors make: failing to thoroughly analyze a foreclosure deal. In particular, it’s critical to know the selling or exit strategy you plan to use before you sign on the dotted line.
It’s easy get excited about a deal, especially if you’re getting a good bargain. But don’t forget that expenses begin as soon as you buy a property. That means you have to invest with the end in mind. In fact, how you plan to sell the property will often determine how you should buy it.
Here are the basic exit strategies available to you as a foreclosure investor. You can:
- Flip the property, either wholesale or retail, to a quick buyer or another investor.
- Reinstate the foreclosure (that is, pay off all the back payments, interest, and penalties, and resume the original terms of the loan) and sell the property at retail to a buyer who gets a bank loan.
- Reinstate and sell the property by acting as your own “bank,” using owner financing to cover expenses.
- Reinstate and keep the property, then rent it out.
My company uses these four strategies to generate about $1 million in profits each year. But you have to structure your deals carefully, because mistakes can be costly. It’s important to learn as much as you can about each of these strategies. Knowing the risks and benefits will help you determine which exit strategy to use – which, in turn, will impact the way you buy the property. For example, if you plan to reinstate and rent, you’ll look at the deal very differently than if you plan to flip the property wholesale to another investor.
There are five basic ways to construct a deal during the foreclosure process:
1. Acquire an Interest. You can take control of a property by acquiring an equitable interest using a Purchase Contract or Option Agreement. You don’t have to have the legal title to the property, and you can profit by selling your position in the contract. While this method gets you a controlling interest, it doesn’t buy you time. The property is still under threat of foreclosure, so you’ll need to make the deal profitable in a hurry.
2. Acquire Ownership by Bringing the Loans Current. You can buy a property simply by taking over its existing debt (also known as a “subject to” purchase) and stopping the foreclosure process by using cash to pay off any overdue payments, interest, and penalties. The seller signs a deed and you become the legal owner. The earlier you get involved in this process, the less cash you’ll need to reinstate the loan.
3. Acquire Ownership by Paying Off the Loan. You can get full ownership of the property by paying off the existing loan (similar to a conventional purchase). For example, you can get a new loan that includes enough funds to pay off the past-due expenses of the current loan, eliminating the threat and pressure of foreclosure.
4. Acquire Ownership Without Stopping the Foreclosure. This method requires very little cash, but you’ll need to be a strong negotiator. You get the deed and ownership of the property without paying off or reinstating the loan, which means the foreclosure threat is still looming. Then you need to either (a) find a buyer prior to the foreclosure sale, or (b) get the lender(s) to work with you and accept a lower payoff (known as a “short sale”), and give you some time to arrange financing
If you don’t succeed with one of these options, the seller will lose the house. It’s very important that the seller understands the risks of this option and agrees to it in writing.
5. Acquire Ownership via “Deed in Lieu.” Borrowers sometimes make an arrangement to voluntarily deed the property back to the lender who issued the loan. In effect, the borrower forfeits his investment, but he also avoids the nightmare of having a foreclosure on his credit record. This process is called “Deed in Lieu of Foreclosure.” It can be a great backdoor approach to property investing if you assume the role of the lender by purchasing junior liens. By doing so, you effectively step into the junior lender’s shoes and gain the right to start foreclosures yourself. Once you have initiated the foreclosure, you can approach the borrower with a “Deed in Lieu” proposal. If they accept, you reinstate the senior loan and get the property “subject to” its terms.
Knowing the pros and cons of each method I’ve described above will make it easy for you to match the right exit strategy to each deal. Choosing the right strategies will make you a lot of money, creating real wealth for you and your family – often in a very short time. That knowledge is power, so get armed.[Ed. Note: Marko Rubel is a multimillionaire real estate investor living and investing in the Phoenix, AZ area. Marko will reveal his secrets for finding motivated sellers and putting your real estate business on autopilot at an exclusive gathering of self-made millionaire investors to be held at one of Florida’s most luxurious resorts November 16-18.]