Buying real estate at a discount to the fair market value is one of the important ingredients to making the most money in today's housing market. One of the best investing niches to buy at a discount is buying a pre-foreclosure home.
Why is buying a pre foreclosure such a good deal?
First of all, pre-foreclosure is the period of time between when the lender files a foreclosure lawsuit or notice of default against the property owner and the date the property is sold at a public auction or trustee's sale.
During this period of time the home owner still controls his property. He can bring his mortgage current and stop the foreclosure process or he can sell the property to save his credit profile from having a foreclosure notice attached to it. He can pay off the loan he can no longer afford to make payments on and perhaps have some equity left over in the property to put some cash in his pocket.
The pre-foreclosure period is the first and best stage in the foreclosure process to buy a property at a discount because you, the investor, can do three important tasks to maximize your profits:
You can evaluate the profitability of buying the pre-foreclosure.
You can inspect the property to determine what repairs need to be made and discount your offer price accordingly.
You can negotiate the price and terms with the home owner directly and perhaps get a discount as much as 50% off the current market value.This is ideal compared to the following stages in the foreclosure process, namely, the public auction and post-foreclosure stage.
The public auction stage can carry more risk to the investor as well as disappointment. There is more competition at the public auction and so the price may be bid up beyond your top bid price for the property. You also need to come with cash in hand in the form of cashier's checks to buy the property. Then there is the disappointment of being told the sale has been cancelled. This is typically due to some legal maneuvering by the home owner such as filing for bankruptcy protection to stall the sale.
The last stage of post-foreclosure occurs when there are no successful bids at the auction. The lender takes the property back and it becomes what is commonly known as 'real estate owned' or an REO. At this point many lenders will list the property with a local real estate broker at fair market value depending on the condition of the property. The lender may even choose to rehab the property to obtain a higher sales price. The likely type of buyer at this point is someone wanting a personal residence or an investor that will buy and hold.
What skills do you need to buy a pre-foreclosure property for the most profit?
With so much opportunity in pre-foreclosures you should be highly motivated to learn all you can about the skills needed to be successful in this real estate investing niche. There are a number of skills you need to develop to be successful.
One very important skill or method you must develop is the ability to locate the pre-foreclosure listings before the rest of the eager investor competition does.
Now you can find these properties for free if you go down to the county courthouse yourself and research the public records. This is time-consuming, however, and the information you'll gather is very basic. Highly successful investors use other methods and strategies they have developed to locate distressed home owners and pre-foreclosure lists. These include:
Foreclosure Subscription Services:
Foreclosure subscription services provide pre-foreclosure property listings. However, not all listing services are the same. There can be a vast range in two critical areas:
[1] How fast they notify you of new listings. The best services should have listing information to you in a matter of days, not weeks.
[2] How comprehensive the information is that they gather. You need more than an address, the loan the default has been recorded on and basic property information, to make informed investment decisions. The best services will also provide you with such information as any other loans against the property and local comparable sales.
Strategies of getting the distressed home owner to call YOU for help and ready to make a deal
There are successful methods of contacting the home owner of a pre-foreclosure that involve mailing them or calling them or leaving something on their doorstep. You need to develop the skill to write and deliver a message to the home owner that will get their attention and get them to call you instead of a competing investor.
Better yet, if you can get a home owner to call you before the notice of default is even filed, you'll be way ahead of the pack of competing investors. This is really a very special skill that the most successful investors have developed.
This is just one of the skills you need to develop. Others include property evaluation skills such as crunching the numbers to calculate potential profits and knowing how to inspect the property to determine the condition and what repairs need to be made and how much they will cost. You need good communication skills when talking to the home owner to build trust and make a connection so you can negotiate successfully with them. You also need skills in drafting the purchase contract with the proper clauses to protect your interest to avoid getting stuck with a property that turns out not to be a good deal upon further investigation.
How to learn the skills to be a successful investor
If you haven't developed these skills and don't know where to start, I recommend you find a real estate investor mentor. Find someone in your local area who is already successful in pre-foreclosure investing and ask if they will coach you. They will need an incentive, of course. Maybe they need someone to do some grunt work because of time constraints. Then be their grunt and keep your eyes and ears open at all times and be a sponge. In time you will develop the skills and strategies needed to be highly successful in the lucrative niche of buying pre-foreclosure homes.
What to do if you don't have a local real estate mentor to help you
If you don't have a local real estate mentor, the next best thing is working with a 'virtual' mentor. Many of the best and most successful investors in pre-foreclosures have written step-by-step guides to help someone just getting started or someone who wants to improve their skills to make even more money. So find yourself a mentor, either in your area or a 'virtual' mentor and start learning how to make money in pre-foreclosure homes.
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