Many agents may be getting inquiries by buyers, especially investors, who have an interest in bidding for properties that have been foreclosed on by the lender and are now in what is known as the “R.E.O. (Real Estate Owned)” inventory of the lender. While the market for these properties has been very active in the last two years with significantly lower inventories in some areas, many expect these inventories to spike in 2013 & 2014. Quite often, the best source of buyers for these properties are represented by real estate agents. Many lenders have turned substantial portions of these inventories to agents to market them exclusively. Below are the key points in buying, bidding, fixing, holding, and selling an R.E.O. property.

First, however, there are opportunities to purchase properties on a pre-foreclosure basis by offering a Deed In Lieu Of Foreclosure to a seller facing imminent foreclosure or by investing in a property on a short sale basis. There is no getting around the salient fact that when bidding at a foreclosure, the person bidding will have to possess a substantial amount of cash or have their financing completely lined up. The only asset that speaks at a foreclosure auction is cash. However, when buying pre-foreclosure, there are some strategies that don’t’ require all cash.

Financing Strategies for Buying a Pre-Foreclosure

• The investors own money: Some investors are able to line up groups of investors to form a limited partnership to invest in these properties.
• The seller: If the seller has some equity, they may be willing to carry back a deferred balance on the property. This would be somewhat of an exception in today’s market.
• The future buyer: With a future buyer in mind, some investors can tie up the property and arrange to close this future transaction immediately after their transaction closes.
• Private lenders: This can run from friends and relatives to clients of acquaintances and associates who may be looking to invest in these opportunities and can either loan your client this money or become an equity partner in the investments.
• Lines of credit: This would be preferably an unsecured line of credit (Not a home equity line of credit). To find this type of financing vehicle, the investor is better off looking to obtain this from a business bank rather than a consumer bank.
• Hard money lenders: These are often referred to as lenders of last resort. They often charge very high rates of interest.
• Partners: One very important truth to remember when bringing on partners with a client or for yourself is that they always will, at some point, come to an end. Make sure there are clear provisions for this in your partnership agreements.
• Another source of cash: This could come from a self-directed I.R.A. where a certain percentage of the funds can be used for real estate investment.

Foreclosure and Pre-foreclosure Investment Strategies to Consider 

• Sell before buying: Once you have negotiated a written agreement with the seller, it is possible to assign your right to a third-party purchaser who will close the purchase directly with the seller. However, you will most likely have to disclose this intent in a timely and meaningful manner.
• Sell wholesale: If you make a good buy there may be other investors who might want to purchase the property form you quickly but at a wholesale price. This would allow you to recover your investment and some profit without the expense and hassles of rehabilitation.
• Sell retail “As Is”: If you don’t have the time or expertise to rehab the property, this may be best strategy for you.
• Rehab and sell: If you have the time and expertise, this strategy will provide the highest return on your investment. However, be sure to make only improvements that will provide the highest return on your invested dollar.
• Rehab and rent: If you are ready, willing, and able to be a landlord, this strategy is the right one to build an extensive, long-term, property portfolio.
• Rehab and refinance: If you have good credit and you made a good buy, consider refinancing and taking out some cash.

In acquiring distressed properties, there are some steps and options that you will want to consider in implementing your investment strategies.

PRE-FORECLOSURE: Pre-foreclosure means contacting and negotiating with the owner either before the lender has actually declared the owner in default or after the foreclosure process has begun but before the trustee’s sale. Before the lender declares the borrower in default and before they receive their Notice of Default from the lender, the borrower is at least several months in arrears to the lender. They are also, no doubt, experiencing other financial difficulties as well. This is usually the best time to approach the owner on selling their property and for them to save as much equity (or financial loss) as possible. However, the challenge is that many owners think they can still turn things around at this stage.

LOCATING OWNERS IN OR ABOUT TO BE IN FORECLOSURE: Some effective ways to attract owners to contact you prior to or during foreclosure include:

• Newspaper ads
• Web sites
• Signs/Billboards
• Networking
• Neighborhood Farming
• Postcard/Mailing Campaigns
• Other Real Estate Agents
• Bird Dogs (Beware – paying finders fees to bird dogs is only legal if they have an active real estate license. Your database would probably be the best source of bird dogs.)

THE STEPS AND OPTIONS FOR BUYING FROM THE OWNER

1. First, always get your agreement in writing. The best document is your REALTOR® State Association mandated residential agreement form unless it is another type of property other than a single-family residence. In that event, when in doubt, it is still best to use the appropriate State REALTOR® form.
2. Buy the property and get new financing. This will work only if there is enough time before the foreclosure auction and the buyer’s credit is good.
3. Pay the owner some cash and take title “Subject To” the existing loan or loans. Beware that the loan or loans may have “Due On Sale” (Acceleration) clauses and the lender may choose to exercise them on the transfer of title. However, in today’s market, most won’t do this as they are happy to still be receiving payments and having a performing loan. You should still be prepared to refinance if necessary.
4. Trade one property for the owner’s property. Do a 1031 exchange.
5. Buy, rehab, & sell and share the profits with the seller.
6. Arrange a short sale with the lender.
7. Negotiate with the subordinate lien holders for a discounted payoff of the principal balance. There could be some difficulty if the loans are part of mortgage pools. This is easier with “portfolio” lenders.

STRATEGIES FOR DEALING WITH LIEN HOLDERS

1. Buy the lien that is in foreclosure at a discount and continue the foreclosure process on the property.
2. Buy the subordinate lien at a discount and cure the default on the lien that is in foreclosure and foreclose on the subordinate lien that you now own.

PROPERTY RESEARCH – SOURCES: Once the Foreclosure Notice has been recorded, much of the information about the property and the owners is public record. The ways to research these properties include:

• Recorder’s Office: Researching these records can be done at the County Recorder’s office free of charge. Access to these records can also be available on-line on a subscription basis.
• Legal Notices: Each county and most municipalities have local newspapers that publish these “N.O.D.’s”.
• Foreclosure Web Sites: If you go on “Google” and type in “foreclosures” you will find may web sites that provide access to information on foreclosure properties. Most charge a fee although there may be an offer of a “Free Trial”. Beware that the information on some these sites is not always current.
• Foreclosure Service Subscriptions: These services provide foreclosure information via e-mail on a periodic basis.

DOING THE ACTUAL RESEARCH: The basic research steps include the following:

1. Follow the “Foreclosure Notices” through the newspaper, foreclosure service, or Recorder’s Office. The information in the newspaper is often not as complete as it is with the foreclosure sources. If you do start with the newspaper, you will then need to research the property through the recorder’s office to obtain the additional information.
2. Research the property through the County Assessor’s Records to find out the owner’s mailing address, original purchase price, lot size, property location, square footage and more.
3. Research the property’s value. Access to a Multiple Listing Service is very valuable here. Other web sites may provide you with value information but be very careful as sometimes these other data sources may not be as accurate.
4. If you still are interested in pursuing the acquisition of the property, determine the lien position of the lien in foreclosure and if the property has other liens against it. The owner should have most of this information and this may be the time for you to go ahead and contact the owner. Property tax information can usually be obtained from the Treasurer’s Office. Information on other liens can be obtained at the Recorder’s Office or through a title insurance company. You can obtain a property profile from a title company.
5. Now that you estimated the value of the property and knowing the information on the other liens on the property, you can now ascertain how much equity, if any, the owner has in the property. If the owner has some equity, you can offer to buy the property and help them save some equity or follow through with it at the auction. If there is no equity or negative equity, you may decide to pass on the property, pursue other tactics with the lien holders or follow through with it at the auction.
6. Visit the property. While the exterior condition will give you some idea of the condition, it will still be advantageous to look, at it inside or perhaps to even have an inspector look at it.

BIDDING AT THE AUCTION:

• Attend some Trustee’s Sales at which you don’t intend to bid to get an idea of how the bidding process works.
• BE ON TIME!
• Register with the Trustee. The Trustee may require bidders to present a “Good Faith” deposit in order to be able to bid. Typically they can require a $10,000 cash or cashiers check deposit.
• Ask if the lender is present. If there are subordinate liens on the property, ask if the subordinate lender or lenders are present.
• KNOW YOUR LIMIT! Don’t get caught up in the passion of the action. You must have a pre-determined amount that YOU WILL NOT EXCEED.
• Successful bidders must be prepared to pay the full amount bid by the close of business on the next business day.

DETERMINING YOUR BIDDING PRICE: FORECLOSURE BID WORK SHEET

Market Value Of Property: $ ______________

Prior Liens: ________________

Rehab Costs: ________________

Interest during Holding period: ________________

Taxes & Ins. – Holding period: ________________

Costs Of Sale: ________________

Misc. Costs: ________________

Total Costs: $ _____________

Sale Proceeds: $ _____________

Desired Profit: $ _____________

Maximum Bid/Price $ _____________

As you can see, the foreclosure bid process is very intricate and involved and should be done very carefully whether you are representing a foreclosure investor or investing yourself. The process involves an enormous amount of due diligence in gathering the important facts and figures. Do not involve yourself in this process unless you are prepared to deal with the “devil of the details”.

David Compton will be speaking at ERA IBC 2013 in Austin, TX March 21-24, 2013. Register here.

photo credit: JefferyTurner via flickr cc