In Part 1 we talked about what a homeowner faces when he or she is foreclosed on. Now let’s look at what we can offer homeowners to help them avoid all the negative circumstances caused by going through a foreclosure.
Offering to buy the property from the homeowner can resolve most of the negative effects of foreclosure.
- Depending on the amount of equity in the home and the condition of the property you may be able to offer enough money to put some extra cash in their pocket. This can help them get into another place.
- Now that they have more control of the situation they will better know the property’s timeline and when it will be sold. This will give them time to get their affairs in order and relocate.
- This will also help save their credit. Because they missed their mortgage payments, their credit will be negatively affected, but a foreclosure would basically be a death sentence. One can recover much faster from late payments. Late payments will make it more difficult for the next year, but if they can keep up with their credit payments for one year, their credit usually bounces back with in that time. It also does not make it as difficult to get into an apartment or to qualify for new credit. They may even be able to qualify for a new mortgage on a home after a year as well.
When talking to someone facing a foreclosure you can show them it makes a lot of sense to try to resolve the matter sooner rather than later, even if it means selling the property. It will help them get back on their feet much quicker and save them from a devastating effect on their future.
When door knocking on pre-foreclosure properties it is important to have an idea of what to say to the homeowner who is facing foreclosure. I like the approach of educating them on what they can expect in the coming months and the ramifications of having a foreclosure on their record.
The first thing I would to tell them is what they will experience as the foreclosure process moves forward. Once they receive a Notice of Default or a Lis Pendens from the bank, they will have a certain amount of time before the bank can foreclosure on their home. The state they live in will determine that amount of time they have. It can range from 30 days to 90 days before the bank can foreclosure on their home.
When the bank forecloses there will be an auction (usually on the court house steps) and the homeowner will be forced to leave the home if they haven’t already. The bank will send the homeowner notices to update them on the process and provide the auction dates. If the homeowner is not reading the notices, the sheriff may come knock on the door and give them a small amount of time to vacate the property.
The property will sell to the highest bidder at the auction. If the highest bidder is the bank, the property will then become a bank-owned property or an REO. Something else to express to the homeowner is that the bank cannot make a profit from a property. They can keep all money owed to them from the outstanding mortgage, interest and fees, but if the property sells for anything more, the bank cannot keep it. If the property sells for a higher amount than what was owed to the bank, the money belongs to the homeowner, but it rarely gets back to the homeowner, so any equity in the home is usually lost. (This is a talking point but not something we want to dive into deeper with the homeowner.)
The next issue the homeowner will run into is their credit will be ruined. It will be at least four years before they will be able to buy a car, get another home, or get any credit at all. It may also make it hard for them to rent anything as well.
These are the realities that a homeowner in a pre-foreclosure will face if they are not able to catch up on their mortgage. Most people do not understand the full scope of what they are facing with a property being foreclosed on. This is a great way to educate them on what is coming.
The Pros of Working With REOs
A class of property owned by an investor, such as the government, the bank or an agency, after an unfortunate sale at a foreclosure auction is known as Real Estate Owned. These properties are owned by a bank or financial institution.
Advantages of working with REOs include:
- The properties are free from liens/encumbrances. The banks completely remove unwanted records attached to the property; hence no reclaim can be done. The unwanted records attached may include taxes, second & third mortgages or mechanic’s liens.
- REOs/Bank owned properties are always vacant because once the bank owns the property, they evict the previous owners, which saves the buyer’s money, time and the hardships of the eviction process. The properties are well maintained; hence they are safe and good for new owners. Financiers can save an incredible amount of time and energy because the dislodgment process has been taken care of by the bank.
- Lower market prices and payments with low-interest rates is another advantage of working with bank owned properties. The banks usually don’t sell the properties at the market price since they have the need of selling to compensate their loss and removing property from their books.
There is a great deal of competition involved when buying bank owned properties. Working with REOs attracts more customers, but involves less risk because the properties are free from any liens; therefore, it’s easier for the investor to weigh their options and negotiate.
Unlike properties at foreclosure auctions, REOs can be inspected prior to making offers and are listed with real estate agents. While many foreclosures are often in deplorable condition, REOs are typically restored to at least a readily salable condition by the lending institution. The bank or lending institution that owns the property will often offer financing with better deals than they would offer on traditional properties.
REOs are an awesome win, win for everyone involved.