Understanding the Pre-foreclosure Market

The pre-foreclosure market has a phenomenal potential for profit. This can be particularly true for people with very limited funds. Yes, you will have to learn a lot and apply what you have learned. Not a lot of people understand the market, so most areas have a very limited number of skilled competitors. Just purchasing a pre-foreclosure property is not understanding the market. Understanding the market is knowing what to buy and how to buy it right.

The first and perhaps most important key is to find people who don’t want the home. Perhaps they are going through a divorce or a financial crisis. The second critical key is to learn how to focus on pre-foreclosures that have substantial equity. To make the big money you will want to purchase the property “subject to the existing mortgage.” Basically, either the property has equity, or it does not. mortgages that are more than the value of the property can be purchased via a “Short Sale.”

The strategy to close pre-foreclosure deals is quite different where there is positive equity than where there is negative equity:

If the home has negative equity…

You will need to get the banks permission to accept your offer. You will also need cooperation from the current owner of the property. In other words, both the current owner and the bank must agree “in writing” to sell this home to you at a price below what is owed on the mortgage. The current owner will need to sign paperwork agreeing that they still owe the difference to the bank. Obviously, this can be scary to the current owner. Historically, banks have just written these debts off. However, they could go after the current owner at some point throughout their lifetime.

Banks don’t enjoy losing money. Banks only agree to do so when other options appear to be worse. In recent years the banks have speeded up the process of what is called a “Sort Sale.” The name means selling a mortgage “Short” of what is owed on it. Someone in the bank needs to sign off on the deal. Generally, Bankers are reluctant to sign off on a money losing deal because they are looked on as the one who lost money for the bank. Even today closing a short sale doesn’t lend itself to an easily duplicatable process. Hence, every deal stands on its own.

Nonetheless, if you are dealing with a smaller Regional Bank where you have access to the decision maker and or you are dealing with a cooperative “current owner,” you will want to move forward with passion! One last positive point about many Short Sales. Because, the process often takes over three months banks are not that concerned with deposits. They often ask only for a small deposit or don’t really monitor deposits closely. Hence, you may only need to get the funds or a buyer with the funds when the deal closes. There is one way to increase your Short Sale Opportunities and we will cover that next.

If the home has positive equity…

Once you understand the pre-foreclosure market you will want to look for, market to, and or try to find these “cash cow” opportunities. Nonetheless, you are likely to run into deals where there is negative equity. A wonderful thing about purchasing pre-foreclosure direct from the current owner is that you don’t need the banks permission. You don’t want to offend them, but you can close these deals without getting banks to sign anything.

However, you will want the current owner to sign the appropriate paperwork and those things will want to be witnessed and notarized. But, that’s just paperwork. Finding a home with positive equity can allow you to fund your actions with the equity itself. Understanding the pre-foreclosure market means knowing where and how to find the money you will need to close these deals. We will cover these in copious detail in our next installment entitled “Conquering the Pre-foreclosure Market.”

If you market effectively for pre-foreclosure, you will also get some opportunities for Short Sales.

The most critical thing to understand about the pre-foreclosure market is how to know a good deal when you see one. Most of that is just a math problem once you get past the people part. Further, much of the people part is a math problem also. So, let’s start there. Even a modest marketing effort will have you working with people who have received a “NOD (Notice of Default) letter.” Of those 60% will resolve their issue without losing their home. Some of those could have resolved their issue with money they received from you or your sources. You can make a healthy profit right here while you build a compelling future kingdom.

You are looking for two kinds of people. Anyone who has equity, more equity is better, and wants to save their home but is getting turned down with every effort from the traditional lenders, is an ideal candidate to borrow money from you and your sources. Also, anyone who has equity but “doesn’t want” the home is a candidate for you to make money.

If you really understand the pre-foreclosure market, you will know that it is worth learning and understanding due to the large profits you can make. Further, you will be of service to those in need.