Foreclosure Investing – Through the Front or the Back Door?

In the past I would often teach my beginning investors there were three ways to invest in foreclosure properties:  Pre-Foreclosure via a short sale, at the actual Foreclosure Auction or after the Foreclosure as an REO Property.  And those are still the top three ways you could invest in a foreclosure.  Frank Pulley and Bill Bronchick have a great article on their legalwiz blog:  Risks and Rewards of Foreclosure Investing, I encourage you to read it for your own education.

foreclosure investing

With the Pre-Foreclosure the investor spends time and money locating people who are facing foreclosure, which is fairly easy in and of itself to find a list of names of people who are 30, 60 or 90 days late or to get a list from the county of appointments where the trustee from the loan is changed to a foreclosing attorney, then just mail those people.  But then you have to get those people to call you back and agree to sell to you and then you have to negotiate with the bank.  Excellent strategy if you have the time and patience, but it is a slow process and you really need to specialize.

By far the easiest is to go buy at the Foreclosure Auction.  Again it is fairly easy to get a list of houses that are going into foreclosure from a legal publication and sign up for different attorney websites or services.  Then the morning the day before the sale you review what addresses are going to sale and their prices.  Pick out the ones you like best, do your research on the property and the title and then go bid at the courthouse and you either get it and own it the next day (or after a redemption period in some states like KS).  However you do usually buy with out seeing the inside and you need all cash right then.  There are several shows on TV that depict this somewhat.

Most investors start with buying REO property.  These are houses that have gone to the foreclosure sale, and no one met opening bid, so the lender took it back.  Now the bank owns it and it is referred to as Real Estate Owned or REO.  Once the lender takes possession, the house is cleaned out, title is cleaned up and it is listed for sale on the MLS.  You can go to any realtor in your area and they can pull a list of REO Properties for sale for you to go look at and make offers on.  However you will find a few have deed restrictions, like Fannie Mae.  And you may find the competition for these houses is huge, so you may have to pay a bit more than you liked.

Now for the new fangled stuff . . . is fangled a word?  Anyway there is another way to buy houses in foreclosure and get in the back door so to speak.

You see everyone says there are no deals, and there are seriously fewer houses going to foreclosure auction and being sold or becoming REO property because the banks have figure out that for them it is much faster, more cost effective and creates less bad PR, to sell the loan that is in default at a huge discount.  Now usually they are not going to sell this defaulted note to you and I as the local real estate investor.  Instead they are going to package up a bunch of their defaulted loans and sell them in a huge bundle to a huge hedge fund.  They might be selling 500 loans at 50% of the property value – irrelevant of the loan amount.

The hedge funds have their criteria of loans they want to keep, generally the loans over $200k because they are more likely to start paying again or if they have to foreclose the house is in just better condition.  But that leave all the loans under than amount that they don’t want.  These get sold off to smaller hedge funds who in turn keep the ones they like and the sell the rest to people like you and I.  There are even smaller hedgefunds that buy these pools of loans with the sole purpose of selling them to individual investors.

This is where investing in foreclosures becomes new fangled . . say you bought one of these defaulted notes.  How do you get to the property.  Well first you make sure you do your homework before you buy the note to make sure all the numbers work.  Then you can approach the home owner to see what they want to do.  You can offer them the option of reinstating the loan and modifying it for them.  Or you could take a HUGE short payoff and still turn a profit.  They may not want the house and will just deed it to you.  Or you may need to foreclose and then take possession.  I contend if you are looking for quality working class rentals in great working class neighborhoods and are struggling to find the deals, investing in notes is a great back door way into the property.

If you want to learn more about investing in foreclosures via short sale, at the courthouse or via REO, then I highly recommend reading what they have to say on LegalWiz because it is really good information, if you want to learn the new fangled way, still read what they have to say on LegalWiz because you need to understand the process.  However if you want to learn more about investing in defaulted notes I want to share a link with you to a webinar with one of my mentors in notes Eddie Speed, he has an on demand webinar that explains the process and you can sign up for his next webinar by clicking here.

One way is not better than the other, they are just different.  I personally don’t like the short sale method, unless of course I own the note and can be the deciding factor on the short sale.  I like buying at the courthouse in states with out redemption period and you can’t beat a clean title and ease of buying an REO Property.  And like short sales, buying the note is a bit more specialized, but could be very well worth learning . . . or you can bypass all three and find people who own houses they don’t want, that they owe little to nothing on who are very motivated to sell, which is a whole other discussion.