(This is Part 1 of a three-part series. Read Part 2 and Part 3.)
PROFIT OPPORTUNITY #1 — BUY DIRECT FROM THE DEFAULTING BORROWER DURING THE PRE-FORECLOSURE REINSTATEMENT PERIOD.
Finding the defaulting borrower can be a major challenge because many don’t live in the property, which is in foreclosure. I used to send letters to these folks, but the response rate was very low. Then I learned why. One day I visited a house where the owner had phoned me about my offer to loan him funds to cure the default. As I sat down on the sofa and looked at his coffee table full of unopened letters, mostly from lenders wanting to refinance, or from bankruptcy attorneys, he explained he was too depressed to open them.
That’s why I switched to sending postcards instead of sealed letters. For just 24 cents your postcard is almost sure to be read. But DON’T say, “Sorry to hear you are in foreclosure. If you want to sell your home to avoid losing it, give me a call.” A postcard like that is sure to get an angry response from the defaulting borrower who doesn’t want the mail carrier, spouse and kids to know about the pending foreclosure.
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A far better postcard approach is sending a sincere, “I would like to buy a house in your neighborhood. Do you know of any owner who wants to sell direct and save the sales commission? Fast closing. Call Bob at 555-555-5555.” Be sure to include your area code and your return address (not your home address, but a post office box works fine).
It is very important to include the magic words under your return address on the front of the postcard “Address Service Requested.” Then, if the owner has moved but left a forwarding address with the local post office, your postcard will be forwarded and you will receive the forwarding address. The extra cost to you is only 70 cents, paid when you receive the forwarding address.
Although the exact reinstatement period varies by state, it is typically three to six months before the foreclosure auction will be held to sell the property. Remember, in Texas it can be as short as 21 days! So don’t waste time. Contact the defaulting owner as soon as possible after the lender recorded either a lis pendens to start the foreclosure lawsuit or a Notice of Default. However, because of the “do not call” telephone registry rules and penalties, you might want to avoid phoning the defaulting borrower if you operate a real estate brokerage or foreclosure business.
Please understand only about 5 percent of homes in default ever go all the way to a foreclosure auction. The other 95 percent are sold, refinanced or the owner borrows the money to cure the default. If the encumbrances on the home leave at least 25 percent equity, there is a good chance you can acquire that house before the foreclosure auction.
What is the least amount of cash you can take for your equity? During the pre-foreclosure reinstatement period, you should have two goals: (a) meet the defaulting borrower at the home so you can inspect it and (b) either buy the house before the sale or wait until the auction to buy (especially if the house has too many loans and not enough equity).
It took me a long time to learn to ask (presuming I want to buy the house), “What is the least amount of cash you can take for your equity?” I used to ask, “How much do you want for your house?” Wrong question! Also, never use the word “home.” When a defaulting borrower is selling, it has become a “house.”
EXAMPLE: I learned this technique from one of my College of San Mateo law students. The evening we discussed foreclosures, Hiram told us how he bought a house in foreclosure for just $500 cash. He said the house was worth about $150,000 and had a $72,000 first mortgage, which was in default. When he knocked on the front door, in his “uniform” of overalls and sloppy flannel shirt, he politely asked if the lady might be interested in selling her house. Then he asked her what was the least amount of cash she would take for her equity. She replied, “Oh, it will probably cost me about $500 to move back to Louisiana.” Hiram quickly agreed $500 was a fair price for her equity. He also agreed to pay the title insurance and other transfer costs. Hiram just happened to have the purchase forms in his car parked nearby. Six days later, Hiram and the seller met at a nearby title insurance office, exchanged the deed for the $500, and parted as friends. It was win-win for both, especially Hiram who made sure there were no undisclosed encumbrances on that house and obtained title insurance on his purchase.
Watch out for California’s Five-Day Right of Rescission Law. If you are buying an owner-occupied one- to four-unit residential property in California, be sure your purchase offer is on a form giving the seller a five-day written right of rescission and you do not pay the seller even $1 deposit money during those five days. Hiram told us how he uses this five-day period to his advantage to have his title insurer check for any undisclosed liens the seller might have forgotten to disclose. Then, on the sixth day after the sales agreement was signed, meet the seller to receive the deed and pay the agreed cash (which is usually a lot more than $500 by the way!). I’ve bought pre-foreclosure houses for $5,000 to more than $20,000 cash paid to the defaulting owners.
When buying during the pre-foreclosure reinstatement period, do not give the defaulting borrower an option to buy the house back. In several states, including California, that will be considered to be a loan, rather than a property sale. Personally, I’ve rented back to the defaulting borrower without any problems, but some of my colleagues say that is not a good policy.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
