Foreclosure is an unfortunate circumstance for property owners, but as an investor you can help both the homeowner and yourself at just about any point along that path. You have to understand the steps of foreclosure and what you can do to intervene in each instance or you might let a great opportunity pass you by.
The Happy Homeowner
The lender makes a loan and the homeowner is happy to have a place to live. He can make his payments and he settles into a steady routine of paying his mortgage. Everything is going well, and this is one of the few times you will have a hard time turning the home into a good investment opportunity for you.
The homeowner has a change of circumstance. Perhaps he loses his job or a family member has devastating medical costs. He begins to get behind on his mortgage. The lender has not threatened foreclosure yet, but the homeowner knows it is the next step. At this point, if you are aware of the situation, you might be able to arrange a deal so that the homeowner can get out of his mortgage and downsize into a smaller or less expensive house.
In pre-foreclosure, the lender files a document with the county known as a Notice of Default. During this period, the bank considers the property a non-performing asset. It is anxious to get the property back into a performing status or to get it off the books.
A trustee will be appointed to contact the homeowner of the impending foreclosure. He will use many different means to let the homeowner know that foreclosure is imminent, including posting notices on his property, sending him letters, calling him, and putting notices in the newspaper. The bank may work with the homeowner at setting up a payment catch up plan, but if that is impossible the homeowner will be ready to find an alternative solution. This is a perfect time to introduce the possibility of a short sale.
In most places, the lender must go to court to acquire the property back from the homeowner after he defaults. This is a stress-filled process and many homeowners will be happy to know that there is an alternative. You can offer them to end the process by making a deal which you set up with the lender so that they can get out of their loans without waiting for a buyer who will pay the full mortgage price. You step in as that buyer or broker the deal. In that way, you help the borrower and make money at the same time.
If the foreclosure continues and goes through, the end result is usually a sheriff’s sale at the courthouse steps. At this point, the property will usually be sold at a fraction of its normal value. You can buy it and quickly turn a profit. Foreclosure is not pleasant by itself, but there is no reason you should not make lemonade out of lemons at every step of the way.