Got a pre-foreclosure lead, now what?

Question

Hey guys.  I haven't done any pre-foreclosure deals before, and just landed a lead from a friend of mine.  His cousin is way behind on the bills and needs to get out of his house before it goes to foreclosure.

He is sending me the basic info, including note amounts, property value, address, possible repairs, etc.

Then what?

If it looks like a deal and I don't have the cash to buy this from the guy straight up, what should I do?  Should I get a real estate attorney, wholesale it and double close?

If you can help, give me some ideas.

Jon Holdman · Answer

For one, you're going to get the owner to give you an "authorization to release" form filled out and signed for each loan.  You may be able to use a generic form, or the lender may have their own form.  Try with a generic form.  That will at least get you in contact with the lender, and they'll let you know if another form or notarization is needed.

Once the form's in place, you find out directly from the lender the amount owed, terms, and any late fees, late payments or other charges.

You're also going to want to do a title check.  The safest thing to do is to have a title company do a preliminary title report.   They may charge you, if you're just starting out.  Once you've done some business with them, they may do preliminary checks for free.  You can also do the checking yourself, using the county's public records.  Some counties have these online.  With others, you'll have to go to the courthouse.  Its the "recorder" that deals with these records.  Search online or go to the courthouse and ask how to look it up.

With this set of checking, you're looking for any loans, leins or judgements recorded against the property.  All these will need to be dealt with in order to get a clear title.

Jon

N/A N/A · Answer

This may be a stupid question, so please forgive me, but, How do you verify the info?

Jon Holdman · Answer

Grinder,

Whole books have been written on this topic, so its impossible to cover all the possibilities in a short post.  So, just a few thoughts.

For one, you don't list a location.  Laws very widely on exactly what you can do in situations like this, and are very strict in some locations.  Knowing your local laws is essential.

You need to find out what the owner owes against the house.  This may be the loan that's being foreclosed, but also any other leins or judgements.  You need to know the total.

You need to figure out what its worth.  There are other posts on this topic.  Search for comps to find some.  You need to discount it for any repairs that are needed.

If the owner has some equity, and is willing to sell, you can just buy it.  Maybe you can get him to sell it for just enough to pay off the loans.  Maybe he actually wants some cash.

If the owner has little or no equity, you may want to negotiate a short sale with the lender(s).  The owner will get nothing out of the deal, but will get rid of the problem.

In any case, you have to figure out your exit strategy.  Wholesale, like Maccius describes?  Rehab it your self and sell? Keep as a rental?  All have somewhat different criteria for what makes it a "good deal".  For rehabbing, apply the (70% of ARV) less repairs formula.  For rentals, apply MikeOH's rent > 2% of purchase price.  For a wholesale, use one of these and deduct your cut.

If it is a short sale, the bank is unlikely to accept an "or assigns" contract.  They know you will wholesale it for a cut, and they want that cut.  So, if you want to go that route, you'll probably have to double close.  Doesn't hurt to try, but be prepared for plan B when they scratch that off.

Don't get into a situation where the owner wants to lease it back after you buy.  If you buy, the owner has to leave.

Jon

Shane Wilson · Answer

First you will need to meet with the sellers to see if they will work with you.

Second you need to verify all the information and then you need to run the numbers. Is it a deal yes or no?

If Yes and you have no cash to buy then do this. Get a purchase and sale agreement contract signed with the sellers. Put in the special stipulations section that "This contract is assignable"

Next find another investor. You can assign that contract to them for a fee. Assigning a contract is basically selling that contract to another investor.

Do you know any other investors in your area that you could assign a contract to? If not you need to be networking.

Thats the simplest way to do it. A double close has a lot of moving parts and if you do not have an attorney on your team yet I believe assigning the contract is easiest method.