First thing I would suggest regarding foreclosures learn as much as you can on this subject. Foreclosures are considered to be very complex type of real estate investing. Second important thing for the real estate investor is – study the local market. Be sure and follow up to see what the properties sold for and how quickly. You need to be an expert on local property values if you want to be a successful real estate investor, in my opinion.
Where do I find foreclosure or pre-foreclosure deals? The best way is go to the court house and search the Notices of Default/NOD and the Trustee’s Sale/Foreclosure listings. Other things you might consider find an experienced agent that will show you foreclosure listings. They know which web sites offer up to date foreclosure listings. Start interviewing agents to find one that is an experienced investor as well, who has done what you plan to do. When you buy these properties the agent’s commission is paid by the clearing house. The advantage of going to the court house is you have a good chance to make a deal before anybody else knows about it. When it is on the internet, thousands know about it. If the foreclosure sale is an auction in your area, start your bid small and see what happens. Know how far you will go prior to starting the bidding as the biddings go fast. You might want to start the bid at $2,000, watch the bidding, keep bidding when needed, and stop your bidding when it goes over where you are OK at the amount.
Get a foreclosure attorney should you need a help (most likely you will if you are beginner). Another thing you want to take into account is the redemption period (if you are doing business in a redemption state). Some redemption states for example have 6 month right of redemption. Which means the original owner has 6 months to buy back his/her property. It can be even longer if the house was bought in a year when the redemption period was 12 months before they changed the law and made it 6months. Now the new buyer (you in our case) will be stuck with 12 month redemption. Which means you cannot sell during that period.
This in turn can make a huge difference in holding costs for you. To make it clearer, let’s say you bought a house at a foreclosure auction for $60K on the 2nd of January 200X, the amount owed to the bank was $30K which they received after the sale and the owner got his/her check for $30K (minus all expenses in most states the amount above what is owed goes to the owner). The former owner comes on the 29th of May year 200X and he/she can legally buy back the property for $60K (plus all other transaction costs). If the house was in bad shape and you put money to fix it, you might consider it gone as well. The important thing to keep in mind in redemption states is the redemption date and holding costs (buying right is always a rule number one in any real estate deal).
Now let me show you a general pre-foreclosure real life case scenario you most likely will encounter numbers may vary, but the concept is the same. A note holder (private party or a lender) wants out since the owners quit paying their mortgage. The balance on the note is $25,000 and the house is worth about $60,000. (We assume this is a properly executed and recorded first mortgage.) Offer the note holder $17,000 to $19,000 for the mortgage (cash, or paper if the circumstances allow). After you have purchased the mortgage you will have to get them (the original buyers) to deed to you in lieu of a foreclosure by offering them some money (offer them $15,000 or more in our case) to move and deed out or foreclose on them. Don’t forget to get TITLE INSURANCE. (To make sure you are not getting into some sort of mess, which could be quite troubling and costly if not noticed on time). Let’s say you paid $19,000 to the bank and $20,000 to the owner that makes
$39,000 + $3,000 closing cost (at the most) = $42,000. You got $18,000 in equity. You can either keep it as a rental or sell it and make a nice profit.
Sometimes the owners won’t move out. Here is very well working trick if you foreclose and the occupants (works with tenants too if you hold rentals and have the same issue) do not want to leave. Offer them moving allowance of $1,000 if they move within 10 days, $800 if they move within 14 days, $600 in 20 days. It won’t be long till they leave. The amount varies based on whatever the deal allows. When you find a property way below market never take more than 50% of its market value. Instead share it with the owner. There are some consumer protection laws and you cannot “unjustly” gain because of someone else’s misfortune. Some states (California for example) have tough rules, so if you want to play the foreclosure game, you have to learn and play by the rules. If foreclosures are too complex for you, there are other ways you can make money in Real Estate, but if you happen to come across a good pre-foreclosure or foreclosure deal consult a local attorney who does foreclosures to guide you through the process. If you want to invest in foreclosures learning your state’s foreclosure law backwards and forwards is very important.