The Three Faces of Foreclosures

Authors of Buy Low, Rent Smart, Sell High

So you want to invest in residential real estate foreclosures? Not sure quite where to start? It is helpful to understand first that there are three faces to "foreclosures", each with very different looks. Part one of this article will cover the first face, pre-foreclosures. Part two covers the second face, the foreclosure sale and the final face, post-foreclosures is covered in part three.

Part One

The first face of foreclosure investing is the "pre-foreclosure". The pre-foreclosure period begins when a homeowner gets behind on his or her loan, and ends with the foreclosure sale. The pre-foreclosure phase itself is divided into two stages.

The first stage covers the period of time beginning when the homeowner misses their first mortgage payment, and ends in the final month preceding the impending foreclosure sale. During this time if a homeowner is not already marketing their home, it will be up to the investor to reach out to and find these distressed homeowners through ads ("We buy homes fast" and "We have CASH for homes") and networking.

The second stage occurs during the final month leading up to real estate foreclosure. The precise laws differ from state to state, but most states require some form of public notification of a pending foreclosure. Real estate investors can seek out these notifications, and many have ample contact information for the investors to approach the distressed homeowner. Many larger communities have a number of online and subscription services which compile the pending foreclosures in a specific geographic range. You can also network within your local real estate investors association and/or do an internet foreclosure search (e.g. foreclosure listings in order to find these publications and services).

The pre-foreclosure face offers wonderful wealth generating potential to real estate investors. They can approach distressed homeowners, and give them some quick cash when there is ample equity in the homes. There are also opportunities to work with some of the foreclosing lenders directly (with the distressed homeowner's approval of course), as it is in the lenders interest to avoid costly foreclosures.

Pre-foreclosures may be arguably the most written about method of finding discount property. It is amazing how many distressed homeowners wait to the last minute with their properties, always thinking they would be able to bail themselves out. It is then, with little time left on the clock, that some of these distressed homeowners realize that the only viable remaining option is an investor in a position to move quickly.

On the plus side pre-foreclosures can be very, very lucrative. A typical pre-foreclosure might have an real estate investor paying off a distressed homeowners $220,000 loan, giving the distressed homeowner $25,000 in cash to restart their lives, and taking over the $350,000 property. The primary negative associated with pre-foreclosures is the taxing emotional element associated with constantly dealing with homeowners involved in a downward spiral. Simply put, this will not be feasible for every real estate investor.

Almost twenty years ago we were one of those investors fresh out of one of those "get rich quick" seminars. Our model was to focus on pre-foreclosures, and we went to one and only one home. The family we visited was the most likeable family. The husband was a veteran, and both he and his wife lost their jobs within a short time of each other. When visiting the home their little girl took my hand and showed me the "doggie window", the hole in the kitchen door for their family dog to go in and out of the house. We both left this visit emotionally drained and with a sour feeling in our stomachs. This was the last pre-foreclosure we ever visited.

Andy Heller and Scott Frank are co-authors of the Fortune Magazine recommended book "Buy Low, Rent Smart, Sell High". Together they have purchased and sold approximately 100 residential properties (many of them foreclosed properties) on a part -time basis. Visit them at www.buylowrentsmart.com.