Real Estate Investments That Make Sense

Our mission is to provide unbiased information and advice to residential real estate investors nationwide. Steve Setka, the owner and primary consultant at Nationwide, is available to provide you with information and insights that will position you to acquire income property investments with a high probability of yielding an exceptional return with a minimum amount of risk. Real estate investments are the key to an increasing level of wealth.

ACQUIRE FORCLOSED PROPERTIES

Properties can be acquired at various stages of the foreclosure process. There can be opportunities to buy homes at substantially below market value; however, purchasing a home during the foreclosure doesn’t guarantee that the price will be advantageous. Additionally, there are risks associated with buying homes in the foreclosure process, particularly during the time before the title is transferred from the owner to the lender by the court. To better understand the various stages and the opportunities and risks of each, following is a list of the stages and comments regarding the benefits and challenges of acquiring property in each time period:

Pre-Default Filing Period – The initial phase of the foreclosure process is the time between when the owner stops making the payments and the bank records a document with the county recorder expressing their intent to foreclose on the property if the missed payments and late fees are not paid; this document is called a “Notice of Default or NOD” in some states; other states use a different, but similar, term. Each state has a statutory delinquency period that has to pass before the lender can file the NOD. Some lenders file the document immediately after the statutory period has passed; others file at a later time. The biggest challenge of acquiring a home in this period is that there is no efficient way to identify these owners and properties before the NOD is filed. When the notice is filed, the information is part of the public record and can be obtained by anyone from the county recorder’s office or a title company. Before the NOD is recorded, the only way to identify these properties is by word of mouth from people you know, realtors, or someone at the bank.

Default Filing to Notice of Sale – There is about a four month periodbetween the filing of the default notice and the “Notice of Sale” filing. This period is intended to give the owner time to come up with the money, negotiate a new repayment schedule with the lender to get them caught up over time, or sell the home. During this period, the owner is approached via mail and phone by real estate agents and investors who identified the owner and property from the public records. Real estate agents make contact to determine if the value of the home is sufficient to cover the liens, missed payments, lender’s attorney’s fees, late charges, closing costs, and real estate agent’s commissions. If the owner has no hope of catching up with the lender and making the payment in the future and they can either break even or get a check by selling at the market value, they may decide to list the home for sale with the realtor. Investors will also contact these owners (with sufficient equity) and offer to buy their home directly, usually at a price lower than current market value.

If what is owed to the lender and projected closing costs is higher than the value of the property; then no investor will be interested in the home. Realtors may list the home if they feel there is a good chance the lender will accept less than what is owed if they can get an offer and the lender determines that they would be better off reducing the amount owed rather than what they will eventually get at the end of the foreclosure process. The term that describes a lender taking less than is owed in order to facilitate the sale to a new buyer is a “short sale”.

There are a number of risks and a lot of time involved with investors attempting to buy homes prior to the foreclosure sale. One downside for investors attempting to acquire homes prior to the foreclosure sale is that they have to go through a time consuming process of evaluating the homes in default to determine which can be acquired at or higher than what is owed to the lender, resulting in a price below the current value. The percentage of homes that are worth pursuing are typically less than 5-10% of the total. Of those, most owners will successfully negotiate a repayment deal with their lender, list the house with a realtor, or somehow come up with the funds to become current with their lender. It takes a lot of time and effort to find one home that is worth purchasing and where the seller does not exercise one of the options to stop the foreclosure or sell the home. Even if an investor identifies a property where the seller is willing to sell and property can be bought at an advantageous price, normally completing the transaction requires a cash purchase, which eliminates most potential investors. Additionally, in many cases title insurance is not available; this could leave the investor exposed to unrecorded liens or other unexpected title issues. Because of the amounts of money, expertise, time, and risk involved; acquiring properties prior to or at the foreclosure sale is limited to a small group of investors who offset the risks with superior research and spread out the risk by buying a number of properties.

Notice of Sale to Foreclosure Court Date – The Notice of Sale notifies the owner and the public of the court date to complete the foreclosure process. The same issues as described in the previous section as it relates to the owner, realtors, and investors apply except now there is only about a 30 day window for the owner to get an offer from a new buyer and close before the court date, negotiate a repayment schedule with the lender, sell to an investor, or submit an offer from a buyer with a request for the lender to accept a short sale. Some sophisticated investors have a business model that involves buying these homes at the foreclosure court sale. The starting bid is the total owed to the lender, including missed payments, accrued interest, attorney’s fees, and court costs. Most of the homes that get to this point are not worth the minimum bid, so no investors bid on them and the court deeds the property to the lender. The same title related risks as detailed in the previous section apply; additionally, in most cases the investor has not seen the interior of the property, which makes the cost required to repair the home unknown. The purchase price of homes bought at the court foreclosure has to be paid in cash.

Post Foreclosure Purchase – After the title is awarded to the lender at the court hearing, a new process starts; it ends when the lender sells the home to a new buyer for a price that will minimize their losses. The first step usually involves the lender requesting that a real estate agent in the area the property is located, who they have a pre-existing relationship, inspect the property to determine the value in its current condition and the projected value if it was repaired; the agent also prepares a list of what needs to be repaired for the property to be habitable and saleable to a typical home-buyer. The lender next gets bids from contractors to determine the cost of repairs. They then either make a decision to sell the home “as is” or contract to have the repairs completed and list the home for sale after the repairs are complete, in either case the property is listed with the local real estate agent that has the relationship with the lender.

Some large investors have relationship with banks to buy one or a group of recently foreclosed homes from the lender “as is” for a discounted price. This saves the lender from the time, resources, and additional lost interest associated with the normal process detailed in the previous paragraph. Small investors often try to buy a particular recently foreclosed home “as is” from the bank before their “normal process” begins, in most cases these investors are not successful because the person working at the bank who handles the process with the local real estate agents does not have a monetary incentive to “go outside of the box”. In fact, trying to work with this small investor would create inefficiencies and involve additional work for them.