“A wise man will make more opportunities than he finds.” – Francis Bacon

Not long ago, I closed one of my best deals so far: a five-bedroom, five-bath, 6,500-square-foot home with a retail value of $1.9 million. It had been standing vacant for four years.

I was able to tie up the house for $1.2 million and wholesale it for $1.5 million. In just a few days, the seller was relieved of a crushing financial burden, the buyer was patting himself on the back for getting a great bargain, and I was on my way to the bank with a check for $219,797.58.

I don’t get homeruns like that every day, but I do two to three big deals each month from homeowners who find themselves in some kind of trouble.

Pre-foreclosure is often the most lucrative niche of real estate investing. In case you’re not familiar with it, it’s the period between the time a bank or other lien holder files a suit for foreclosure against a property and the time the issue is resolved or the property is forcibly sold “on the courthouse steps.”

This is when you’ll find properties selling at the biggest discounts. And that’s precisely why this is the most competitive area of real estate investing.

For your target market alone, you may find dozens of lists of properties that have just had foreclosure suits filed against them. And you’ll find hundreds, if not thousands, of pre-foreclosure investors. Yet a small percentage of these investors seem to regularly make huge profits despite all the competition. And if you’re an investor already, you may have wondered how they get pre-foreclosure deals that you never even saw listed.

The answer is actually quite simple. They don’t compete for the same houses everyone else is bidding on.

If you’d like to get in on the same deals the super-successful real estate investors find, read on.

Step 1: Pick a neighborhood. Choose a neighborhood that interests you, preferably one that’s in transition and being fixed up, but not in a “war zone.”

Step 2: Drive around your target neighborhood … slowly. Write down 20 to 30 addresses of vacant, neglected, or boarded-up houses. They often have signs on them: For Sale, For Sale By Owner, or For Rent.

Step 3: Find out who the owners are. You can start by running property profiles on FastWeb. You can also check the following resources on the Internet: Anywho.com, Reverseaddress.com, Phonenumber.com. If that doesn’t work, try one of the paid search services, including Merlindata.com and FindAnySeller.com. If you still can’t find the owner of a property, try asking the existing tenants (if the property is occupied) or the neighbors.

Remember, the harder the owner is to find, the better the deal is likely to be!

Step 4: Send the owner a letter offering to purchase the house. In your letter, explain the benefits of selling it to you. I’ve found some of my best deals by offering to close in 10 days or less, or by taking the property with the existing tenants.

If the owner responds to your letter, reply in a respectful manner, asking for the lowest amount he would consider taking for the property. Then give him a few different purchase scenarios.

The first scenario would be “all cash.” You offer $100,000. At closing, he’s going to receive $100,000 in cash (minus the normal closing costs).

The second scenario could be cash to an existing loan “subject to.” This is where you agree to pay him, say, $105,000. But you only give him $15,000 out of your pocket. For the rest, you take over his existing $90,000 loan.

The third scenario would be to put money down and have the seller carry back a second mortgage. Let’s say you agree to pay him $110,000. In this case, you give him maybe $10,000, and he agrees to lend the rest to you. So you pay the other $100,000 in regular installments with an agreed-upon interest rate. No bank and no bank hoops to jump through.

If the seller’s asking price is too high and you can’t negotiate the price any lower, provide him with some low comps for properties that have recently sold in the area. Explain how much it will cost to rehab the property and how much it will cost to sell the property through a realtor (paying six percent commission and the cost of a termite inspection, home warranty, FHA non-allowables, roof certification, etc.). Explain to him that you will buy the house in its present “as is” condition.

Your letter might list the following options:

(a) I will pay $80,000, ALL CASH, closing in as little as 10 days from contract acceptance.

(b) I will pay $90,000 with $5,000 down and assume the existing mortgage of $85,000 with payments of $650 per month “subject to.”

(c) I will purchase the house for $85,000 and get a first mortgage for $60,000. The seller carries back a second mortgage in the amount of $25,000 at six percent interest for 15 years.

If you want to make this a no-money-down deal, you would purchase the house for $85,000 and have the seller carry back a second mortgage for $25,000. So you’d get $60,000 from the third-party lender and $25,000 from the seller … for a combined total of 100 percent financing.

Your first mortgage in this case will likely have to come from a private-money lender. Most banks no longer allow the CLTV (combined loan to value) to total 100% on investor properties. However, some mortgage brokers can put together 100% CLTV deals through their private money network. Some hard money lenders will allow second mortgages as well. And if you’re in control of getting your own private lenders, that’s ideal because, if you present it to your lenders right and are buying at a big discount to market value, they shouldn’t mind the existence of a second mortgage… since they get paid first before the second (the owner) sees a dollar of his money.

If you have no luck contacting the seller with a letter, then go to the next step.

Step 5: Contact the seller by phone. This is often the most successful way to purchase a property from an “absentee” owner. Explain that you are looking for a house in that neighborhood and are interested in buying his. Try to find out the lowest price he will accept, and give him several options (as described above). Put your offers in writing, and send them by priority mail. Follow up with another phone call immediately.

If you are offered an absolute “steal” on a property over the phone, I recommend jumping into your car, driving to wherever the owner is, and having him sign your purchase contract. If the owner is out of state, jump on a plane! I’ve flown all over the United States to have absentee owners sign a purchase contract.

If the owner isn’t interested in selling, send him a cash offer anyhow. Offer to close in 10 days or less and take the property with the existing tenants. Continue to follow up with him on a weekly, monthly, or semi-monthly basis, whatever you feel comfortable with.

If you are unable to reach the owner by telephone, proceed to the next step.

Step 6: Make a cash offer. Sometimes, no matter how persistent you may be, you won’t be able to find the seller’s telephone number and you won’t get a response from him after sending several letters. But money talks. When all else fails, send a cash offer. Explain that you will take the property “as is” and that you can close in 10 days. You’ll be surprised how fast your phone will ring.

Here’s how I recommend making a cash offer. Go to an office supply store and purchase printable checks and window envelopes. Then you can send your offer in the form of an actual check (without your bank account number and bank routing number on it). Explain to the seller that this check could be his in 10 days or less if he accepts the offer.

If that doesn’t work, don’t give up. Continue to follow up with your prospect. With persistence it will pay off!

[Ed. Note: Jeff Adams is a self-made multi-millionaire who has bought and sold more than 350 properties over the last 12 years. Over the last eight years, he’s found and sold his deals using the Internet. In the Real Estate Wealth Builders Summit in November, you can learn exactly how he did it.

Correction: Jeff Adams’s article, originally published 10/9/2007, read: “Structuring this kind of deal correctly, though, is key. The second mortgage records after you purchase the property. You go to a different escrow company and have them draw up the paperwork for the second mortgage. You then have the first escrow company draw up an irrevocable amendment right before closing, designating the amount of the seller’s proceeds that will go to the other escrow company at closing to fund the second mortgage. You’ll have to put up your money for a couple of days until the second mortgage funds and records. Then you’ll be reimbursed from the seller by the “silent” second mortgage he is carrying.”

That section should have read:

“Your first mortgage in this case will likely have to come from a private-money lender.  Most banks no longer allow the CLTV (combined loan to value) to total 100% on investor properties. However, some mortgage brokers can put together 100% CLTV deals through their private money network. Some hard money lenders will allow second mortgages as well.  And if you’re in control of getting your own private lenders, that’s ideal because, if you present it to your lenders right and are buying at a big discount to market value, they shouldn’t mind the existence of a second mortgage… since they get paid first before the second (the owner) sees a dollar of his money.”]