How should you structure your offers to put together deals? You are about to learn the 12 best foreclosure buying strategies. Whether you are buying properties in foreclosure or in preforeclosure, these strategies will allow you to start making money investing in foreclosures right away.
If you read our book Making Big Money Investing in Real Estate, you'll be familiar with a few of these buying strategies. But you'll notice that we have completely left out any discussion of buying with a lease option. A lease option is when you lease out a property from a seller for a long period of time with an agreed-on option price at which you can buy the property at any point during the lease period. When buying foreclosures, a lease option is not the way you'll want to structure the deal. (It's still a great way to buy homes in nice areas with nothing own; it's just not the best strategy to use with foreclosure deals.) Rather, we want to share 12 other cutting-edge strategies that have four factors in common.
Four Factors That Make Purchase Option Strategies Work with Foreclosures
1. Little or No Money Down
You can make all these buying strategies work without putting a ton of your cash into the property deals. For the buying strategies that do require cash, you'll learn how to minimize the amount of your money in the deal by tapping into insider sources to fund your deals.
One of our students found an REO (Real Estate Owned) property that a lender had taken back in a foreclosure. Using VA financing, our student was able to buy this $170,000 five-bedroom house for just $117,100 (including $6,800 of closing costs). After talking with her local bank manager, this student was able to get all the closing costs rolled into the loan, so that she put nothing down. She then went out and sold the house for $159,000 in a quick sale. Not bad for a "zero-down" deal.
2. Find Funding, Even If Your Credit Is Bad
You can use all these buying strategies regardless of the condition of your credit. Some nontraditional funding sources for your deals could care less if your credit has holes in it the size of Texas. You'll learn how to tap into these specialized sources of financing that serious investors have been using for decades to make themselves millions of dollars. (The ideas you'll learn have been called the "best-kept secrets of millionaire investors.")
Over the past seven years, I've had my hand in more than a hundred deals and, with the exception of only two properties, my credit has never been an issue. By that I mean the seller or person I got the money from never ran a credit check. I know this sounds impossible, but when you use the ideas in this book, you'll realize that while good credit can help, it's not a requirement for making money investing in foreclosures.
3. Minimize Your Risk
Making money is important, but keeping the money you make is equally important. All these purchase option foreclosure strategies help you isolate and minimize your risk.
One of the properties I bought years ago when I started investing was a two-bedroom condo that I purchased with conventional bank financing with a healthy chunk of my own money as a down payment and a personal guarantee on the loan. One time, a tenant who had some unsavory friends was living in my unit. The police came and knocked on my tenant's door to talk with these "friends" who broke the back window and jumped out the second story window to run for it. Looking back, I still remember how much emotional stress that tenant caused me.
Fast-forward to a deal I did using the Purchase Option ideas you are learning. I have an investment property in Colorado Springs that was vacant for two months. Because I had none of my money into the deal and no personal guarantee on the financing, I didn't feel anywhere close to the same amount of stress as I felt in the past. I simply fired the property management company and got someone else to take over and fill the vacancy. It felt like a Monopoly game-as if I were losing a little money in a game rather than the highly personal feeling of having my hard-earned cash at risk on the condo. That's the way I like to do my investing now-to potentially risk some of my profit, but to never have my capital or credit at stake.
4. Help Sellers Win
You will be working with sellers who need your help. When you buy a foreclosure property the right way, you create a win-win transaction that helps sellers effectively deal with tough personal situations.
I purchased a three-bedroom house in San Diego on which the sellers had gotten five payments behind on their mortgage. The husband was fairly ill and I remember going back over to the house after we had signed the contract and talking with his wife. After a few minutes, she asked me to walk with her into the bedroom because her husband wanted to see me. As we walked in and I saw the husband stretched out in the bed, I felt awkward. But then he started to thank me for helping them make the best of a bad situation. He was having serious back problems and couldn't work. They were about to lose the house when I offered to help them with a better way out. I left that day knowing I'd made a difference as an investor.
Traditional Ways to Buy Foreclosures
Before explaining our Purchase Option buying strategies, let's describe how most people invest in foreclosures so you can see the benefits of using the Purchase Option foreclosure strategies described in this book.
Traditionally, most investors buying foreclosures sought houses they could get good prices on (either directly with the owner, through a real estate agent, at an auction, or directly from the bank) for an all-cash closing. This meant either the investors took the money out of their personal bank accounts or borrowed from a traditional lender. Truth be told, this was a good way to invest and these investors made lots of money. But the majority of people who wanted to get started investing found themselves excluded because they didn't have the cash or credit to do these deals the traditional way.
Also, while these traditional investors made money, in many cases they took on magnitudes of risk-risk they easily could have avoided by using the strategies you are about to learn.
Let's be clear, any way you structure a deal that allows you to purchase a foreclosure and make a profit in a win-win way is fine by us. Even if you just want to use our ideas to fine-tune your traditional foreclosure investing, this book gives you the tools and techniques to do this. If you're looking for more than that-if you want buying strategies that are simple yet powerful enough that they work regardless of the quality of your credit or the size of your bank account-you'll find these powerful ideas will supercharge your investing profits.
It surprises many beginning investors when I recommend that, even if they do have money or great credit, they get started investing without using their own cash or conventional bank loans. They find it hard to believe that sometimes having money can be detrimental to learning to be the best investor you can be. I've seen money used as a crutch to make a marginal deal go through. I admit I've been guilty of getting lazy and throwing money into a deal where a little more imagination and prudent negotiation would have served me better. But with an open mind and the right education, not having money can be a force to push you to be a faster, more creative, and more skilled investor.
What's more, you'd be surprised how fast you can pour your liquid cash reserves into real estate. I've watched traditional investors pour more than $1,000,000 into several deals in a matter of months and then have to wait until they sold those properties before they could free up enough of their money to go out and buy more properties. You'll never regret learning to buy without money. It will make you a much more savvy investor for those times you do decide to use your own money or conventional financing.
The Foundational Foreclosure Buying Strategy
If you are just getting started investing, structuring deals with sellers in foreclosure can seem overwhelming as you try to remember the various ways of conducting them. If you were locked into using only one buying strategy with sellers in foreclosure, however, the one we recommend is buying properties subject to the seller's loan. It's that powerful.
If you read Making Big Money Investing in Real Estate, you already know we often use a lease option as the foundational technique when buying investment properties from motivated sellers who aren't in foreclosure. This buying strategy is the foundational buying strategy for working with homeowners who are in foreclosure.
When beginning Mentorship students come through our workshops, they struggle with information overload. It can be compared to a new mechanic who is given a toolbox with an overwhelming number of unfamiliar and specialized tools. That's why we highly encourage you to master one or two tools first. Once you get comfortable using those tools, then layer in another tool, then another and another.
As you read through this chapter with all its buying strategies, you don't need to "get" them all on the first go-around. Lock onto one or two buying strategies that you can put to work making you money, then add in other layers of strategies later. If you have too many options at once, you run the risk of freezing up when meeting with a seller.
Imagine you were meeting with a motivated seller in the early stages of foreclosure and that seller owns a well-kept house in an area you like. You sit down with this owner and after you've spent time getting to know her situation thoroughly, she says, "I just want out. I don't care about the equity. I just want to walk away from the house. I'm at the end of my rope and if you don't want to buy it for what I owe, then I'll just let the bank come and take it."
You see the seller looking right at you and know all she wants is to stop this foreclosure that's draining all her energy. The house is worth $200,000. With $4,000 worth of paint and carpeting, it would probably be worth $225,000. She owes $190,000 as a first mortgage with monthly payments of principal, interest, real estate taxes, and insurance (PITI) totaling $1,350 (see Figure 3.1).
She's got two real problems. First, she's behind three months in her payments. With late fees, that comes to more than $4,000- money she simply doesn't have. Second, even if she could find a way to make up the back payments, she still has no way of scraping together $1,350 each month after that. More than anything, she just wants you to take the house for what she owes and she'll go find a place to rent for $800 a month, which is all she can really afford.
Many investors would look at this situation and calculate if it makes sense to take $200,000 cash to buy a house worth $225,000.
|FIGURE 3.1 Assessing the Costs|
|After-repair value of house
Current “as is” value of house
Needed repairs (paint, carpet, etc.)
Existing first mortgage
PITI payments on first mortgage
Back payments owed
(The $200,000 cash is the total cost for the property of paying off the $190,000 loan, plus the $4,050 of back payments, plus $4,000 of cosmetic work, plus $2,000 of closing costs.) But if you were a cash buyer, this deal wouldn't work for you because that $25,000 of equity would get eaten up quickly with holding costs, plus the closing costs of the second closing once you resold the house.
Some investors might go ahead and buy it anyway with the intention of holding the house as a long-term rental. Fair enough, but it really wasn't much of a bargain for a cash purchase.
Other investors would try to get that $200,000 (or a large chunk of it) by borrowing it from a conventional lender. While this would be a way to leverage your way into the deal, it comes with three main disadvantages.
1. The cost of the money. After adding up all the costs of getting that new loan, you would have eaten up around $5,000 of your equity. Here are some of those costs that make your banker, not you, rich:
- Loan origination fee
- Prepaid interest or "points"
- Credit check fee
- Property appraisal
- Document delivery fees
- Recording fees
2. Your lender will require that you sign personally on the loan. That means if anything goes wrong with the house or the housing market in your area, regardless of whose fault it is, your credit (and potentially other assets) are on the line.
3. You'll have to jump through the hoops of qualifying for traditional financing. That requires credit checks, long loan applications, bank statements, and tax returns the lender wants to review. And just when you thought it had everything, your lender almost always finds two or three more things. Does it tell you about all this up front? No! The lender waits until the week before you're supposed to close. So you spend the last week before closing scrambling to make the deal work. (Notice that we're just a bit jaded about this.)
Who needs all that stress? Wouldn't it be better to step in and take over making payments on the seller's loan? You can do this once you have the specialized knowledge you are about to learn.
Copyright © 2003 by Peter Conti and David Finkel
Read Chapter 1 of this Book:
Making Big Money Investing in Foreclosures without Cash or Credit
Buy It Now:
Making Big Money Investing in Foreclosures, without Cash or Credit
by Peter Conti and David Finkel