When a home goes into foreclosure, the owner is often suffering from what Bill Mazur, a 21-year veteran of foreclose investing, calls "the three D's: death, divorce, or disease." Other reasons can include job loss, unexpected medical bills, taking on more house than you can afford in the long term, and ballooning payments on adjustable-rate mortgages. And just when a person struck by tragedy needs all the comforts of home, a failure to make mortgage payments can lead to endless phone calls and letters from bill collectors, a public auction of the house on the courthouse steps to the highest bidder, and an eviction. A total of 215,749 foreclosure filings were reported in December 2007, according to real-estate tracking website RealtyTrac, up 97 percent from December 2006. And economists predict that those numbers will increase as unemployment grows and more adjustable-rate mortgages reset to higher rates. "I think that next year we will see foreclosures rise 40 to 50 percent on a national basis," says Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California-Berkeley. But the misery, fear, anxiety, and anger experienced by someone about to lose a home is an opportunity for foreclosure investors, who are prepared and eager to swoop in and snap up the property at below-market rates, often with cash or a cashier's check in hand and sometimes well before the property is due for the courthouse steps.
Here's how successful foreclosure investors flip these precariously acquired houses and can still sleep at night.
Acknowledge the situation. People often have an emotional connection to their homes. "Sometimes the emotion will be upset, sometimes denial, sometimes relief because it's been a burden for a long time, especially if they have been over and above their means for a long time," says Alexis McGee, author of The Foreclosures.com Guide to Making Huge Profits Investing in Pre-Foreclosures Without Selling Your Soul and an 18-year foreclosure investor. "Dealing with emotion is what it's all about." McGee likes to begin a conversation with homeowners at the preforeclosure stage, when they've defaulted on several mortgage payments but the bank has not yet reclaimed the property. "You start by saying, 'I know you are having a tough time with your home, and I was wondering how I could help,' " she says.Peter Conti, a coauthor of Making Big Money Investing in Foreclosures Without Cash or Credit and a 17-year foreclosure investor, likes to sit down at the kitchen table with preforeclosure homeowners, find out what's going on in their lives, and come up with a way to help them as well. "The person in the house often has this expectation that the white knight in shining armor is going to show up and that they are going to be able to get a loan to make up their back payments," he says. "When someone is at an emotional low point, they really need to be handled with kid gloves and treated fairly."
Ease the transition. Many foreclosure investors see themselves as helping people who can no longer afford their house to transition into a situation that better fits their family's budget, such as an apartment, a smaller house, or a more affordable neighborhood. "If you handle it correctly, you are able to buy a property slightly below market and helping that person to be able to sell their home," says Mazur, a coauthor of Finding Foreclosures: An Insider's Guide to Cashing in on This Hidden Market, about buying homes in preforeclosure. Conti likes to get the homeowner to be part of his team. "The goal of the process is to get the seller to work with you to come up with how to sell the house rather than just telling them how we're going to buy it," he says. "If you go in listening to them with a caring heart, I think you have a much better chance of putting a deal together because you have time to connect with the person and put together something that works for you as an investor and works for them. If you go in to buy the house with dollar signs in your eyes, you're not going to be successful."Other investors prefer a short-sale approach to foreclosure buying. When property values have declined so that a homeowner owes more than a property is worth, a short sale can prevent foreclosure. This usually involves a real-estate agent's finding a buyer for the house before it is foreclosed upon and then negotiating with the bank to either take a loss on the remaining balance above the buyer's offer or working out an arrangement where the homeowner and bank share the loss. "I've got over 75 of these kinds of listings right now, and a year and a half ago, I had maybe five," says Randy Kutz, a co-owner of Phoenix Heritage Real Estate Group. "Because this is preforeclosure, the buyer gets a mortgage and the seller can contribute some of the closing costs." But sellers who have no equity in their home, which is often the case with subprime mortgages, leave the deal with nothing. "They get out from underneath the debt of the house, but they can't walk away with anything," says Kutz.
But don't get too close. "The No. 1 request of the person in foreclosure is, 'I want to save my house, and I want a place to live,' " says Conti, who typically makes between $20,000 and $50,000 per property. So some investors will buy the house and lease it back to the person in foreclosure, which is generally not a good investment. "If the person can't make their payments when they were in the house before, chances are they are not going to be able to make the payments when they are renting it from you." And then the investor (the new owner), and not the bank, is responsible for evicting a tenant who doesn't pay. So, you always need to be aware of your own bottom line, while still being sympathetic to the original homeowner. "The most important thing is to do your homework and find out what the true balances are on the property," says Mazur. And don't be afraid to walk away if the deal is not going to benefit both you and the homeowner. "There's always going to be foreclosures, and they're not always going to be good deals," says McGee. "You have to know what you are doing, or you are going to become a nonprofit very quick."
Be prepared for owners who don't want to leave. If a preforeclosure deal or short sale is not negotiated among the homeowner, bank, and foreclosure buyer, the house is auctioned off on the courthouse steps to the highest bidder. The opening bid is typically the unpaid balance on the mortgage plus any liens or fees. In many cases, the house can be purchased below the market rate, but the buyer is often not given a chance to inspect the property before buying and needs to have a considerable amount of cash on hand to secure the transaction. These public involuntary sales can produce violent reactions in the original homeowners. "I've had situations where they have had one last final party in the house and had holes beaten into the walls and wallboard kicked in," says Gary Thompson, a real-estate agent in Omaha who handles repossessed houses for banks. "I had a house about three years ago where they piled all their garbage for two or three weeks in the dining room and locked the house up in the middle of the summertime. It was lots of flies and stink." Now, when a bank repossesses a foreclosed house, Thompson typically offers a cash incentive of between $500 and $1,500 from the bank to encourage families to leave quietly. "In these cash-for-keys arrangements, they agree to take all their belongings, no damage occurs to the property while they are leaving—like parties and beating holes in the walls—and we define a move-out date so we know when the property is going to become vacant," he says. "They don't damage the property because they want the money." But foreclosure buyers become responsible for removing old tenants and repairing the property. If the tenants don't leave within a time frame that varies by state, the locks can be changed by the sheriff. "Typically, just the changing of the locks and a little police or private security and they will usually leave quite quickly," says Mazur.
It's just business—except when it's not. "On any transaction, whether it's the preforeclosure stage where you actually do get to speak with the current owners of the home or whether it's already a bank-owned property, it is a business transaction, but it does have a very emotional feel to it," says Mazur, whose first home purchase was a foreclosure property. "If you treat each other with respect and use an independent third party [for paperwork], it puts people a lot more at ease than trying to bring in your own people to try to shimmy through paperwork."
But if preforeclosure negotiations with disenfranchised homeowners and courthouse bidding wars don't appeal to you, there is another way to cash in on foreclosures. In a down market, you can wait for the bank to repossess the house, make the necessary repairs, and put it up for sale. "Nowadays, it's smarter for a lot of buyers to wait for the bank to repossess the house," says Rick Sharga, vice president of marketing for RealtyTrac. "They'll do some repairs and fix it up a little bit, and they'll discount it to get it off their books." That is, if another foreclosure investor doesn't beat you to the property line.
