Loan foreclosures on real estate property have always been an opportunity and challenge for a smart real estate investor. As homeowners' face late payments, defaults and the possibility of a foreclosure they are increasingly in need of a helping hand. Real estate investors can earn a profit and still help the homeowner out of their problem.
While every foreclosure situation is different, there are some common problems, steps, and resolutions. Generally, the homeowner will miss loan payments for a variety of reasons, and once the homeowner has been delinquent for a number of months the financial institution that holds the loan will issue a "Notice of Default." These notices inform the homeowner the amount owed in missed payments, plus the amount owed for attorney fees and penalties and outline a time period and payment schedule to bring the loan back into good standing. If payments are not made and the criteria is not met to bring the loan back into good standing the bank will likely foreclose on the property, assert that the homeowner vacate the property, and then place the home up for sale or auction.
The opportunity for real estate investors to help out the homeowner and make themselves a profit exists during the time period after the Notice of Default and before the foreclosure. This time period is known as the pre-foreclosure. During pre-foreclosure the homeowner is faced with a major problem and is often in need of a resourceful investor. A homeowner unable to meet the criteria of repayment set forth in the Notice of Default has the option to either sell the property and use the proceeds to pay off the amount owed or face foreclosure. A smart and resource real estate investor will know to look for these homeowners in pre-foreclosure to help them out of this situation.
An investor looking for these pre-foreclosure homes should know the Notice of Default is a public document that can often be viewed shortly after being recorded. In most counties and states the Recorder's Office makes the Notice available by posting it online and at the local courthouse. And once an investor has the homeowners' information, they can be contacted through a variety of common real estate strategies, such as letters, postcards, phone calls, and home visits. Here is where the investor can suggest several courses of action.
First, an investor can take over both the property and the responsibility for the loan by offering a reduced sales price or by taking the loan over altogether. This allows the property owner to leave the property without severely wounding their credit score by entering foreclosure. To do this the property owner will often give up a large part, or even all, of their equity to escape the loan and foreclosure.
Once an investor has acquired the property they have the opportunity to turn it for a profit. Having acquired the property, usually below market value factoring in the homeowners equity, the investor may be able to pay the property off, fix up the property, and sell it for profit. However, this option may require a fair amount of capital, time and resources. Instead, smart investors looking to make a smaller but quicker and easier profit may pass the deal along to another investor who specializes in fixing up properties for sale. Additionally, yet another option an investor has is to quickly sell the property at an attractive discount. This makes a profit without tying up their money in the property and transaction for very long, which allows the investor to quickly take their capital to the next project and make another profit.
Now if the property does not have sufficient equity for the above solutions to work, an investor can negotiate with the bank to reduce the outstanding loan balance in exchange for a quick sale. This stops the bank from having to go through the foreclosure process, and since banks are not in the business of selling homes they may be partial to the idea of making a quick sale and get the home out of their non-producing housing stock. This solution gives added equity to the property to be applied to one of the solutions above.
Now of course there are many other solutions, options, and situations that may arise, but these more typical scenarios demonstrate how a smart investor can quickly generate a profit with only a little time and resources, all while helping a homeowner avoid the damaging credit effects of a foreclosure, and keeping the bank from having to foreclose.
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