the following sections, I describe these three entry points. For more advice on how to select the entry point that’s right for you, see Chapter 3.
Scooping other investors during the pre-auction stage
As soon as homeowners realize that they can’t make their payments, you can mediate between them and their lenders to work out a mutually acceptable solution. In a few cases, you can help the homeowners keep the property, such as by negotiating a forbearance with the lender that provides the homeowners extra time to catch up on their payments.
Did I just say “help the homeowners keep the property”? Yes. Your long-term interest is best served by doing what’s best for the homeowners. Sometimes, that means you receive no profit from your efforts. In a huge percentage of cases, however, the homeowners’ best option is to sell the property and find more affordable housing arrangements. By being sincerely concerned with their best interests, you place yourself in a position to acquire the property if the homeowners can’t or won’t take the action necessary to keep it.
Stepping into the foreclosure process during the pre-auction stage provides you some of the best opportunities to assist the homeowners and purchase a property at an attractive price. In Part 3, I show you exactly how to research and buy homes before homeowners lose them in foreclosure.
Bidding on properties at foreclosure auctions
Some investors prefer to step into the process at the auction stage, because they’re uncomfortable dealing with distressed homeowners, who are often in a state of denial and unwilling to sit down with an investor to discuss their options. At the auction stage, you buy the property in a less-emotional atmosphere. In most cases, however, you still have to deal with the homeowners when the time comes to take possession of the property.
Now, don’t run out and start scooping up properties at foreclosure auctions just yet. Uninformed investors often get burned by diving in before they learn to dog paddle. Foreclosure auctions are packed with peril, often trapping novice investors into making costly mistakes such as these:
Buying a property without researching the title: A title history reveals who really owns the property, the amount currently owed on the property, and the priority of the mortgages: tax lien (top priority), first mortgage (next in line), second mortgage, and so on. Do your research, as explained in “Performing Your Due Diligence” later in this chapter and in greater detail in Chapter 8.
Buying a junior lien thinking that it’s a senior lien: When you buy properties at a foreclosure sale, you’re really buying mortgages. The first mortgage on a property is called the senior lien, which gives the buyer the most control of the property. Additional claims against the property are called junior liens, which often get wiped out during foreclosure. Buy a junior lien by mistake and you may have just bought yourself a worthless piece of paper. Only thorough research of the title, as explained in Chapter 8, can steer you clear of making this common and potentially very costly mistake.
Buying a property without inspecting it: A house may look valuable on paper, but until you see it with your own eyes, you won’t know for sure. The house may have significant fire damage, toxic materials, foundation problems, or a host of other defects. Check out Chapter 8 for details. Your eyes or no buys. Never, ever buy a property without seeing it. Later, you may have a trusted member of your team check out properties for you, but when you’re getting started, do the checking yourself.
Paying more for a property than it’s worth: In the heat of an auction, your enthusiasm to outbid other investors can make you highly susceptible to paying more for a property than it’s worth. This approach almost guarantees that you’ll end up taking a loss on the property.A MORATORIUM ON FORECLOSURES?The COVID-19 pandemic gave foreclosure investors something new to think about: moratoriums on foreclosures and evictions. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, prohibited banks from foreclosing on government-backed loans. That prohibition expired on July 31, 2021.The CARES Act also gave homeowners with government-backed loans the right to ask for and receive forbearance, which enabled them to stop making payments for a specified period. Although, officially, the relief applied only to federally owned or federally backed loans, many private lenders followed suit. As a result, foreclosure investors had far fewer opportunities, and some were trapped in limbo; they owned the property but couldn’t evict the previous owners or move forward with repairs and renovations, and they were still responsible for paying property taxes and insurance.Although the COVID-19 foreclosure and eviction moratoriums may be over by the time you’re reading this book, keep in mind that they’re always a possibility, and they’re probably more likely to occur now that there’s a precedent for them. They can happen at the federal, state, and local levels. This warning shouldn’t discourage you from investing in foreclosures; it’s just another risk to keep in mind.
Failing to account for the redemption period: Most states have a mandatory redemption period, during which time the homeowners retain possession of the property and can redeem the title by paying off the mortgage in full, along with any penalties and back taxes. You need to have enough cash reserves on hand to pay the property taxes on the property and to insure the property during this time. If you don’t pay the property taxes, another investor may be able to purchase a tax lien or deed at a tax sale and take control of the property; tax liens have priority (even over first mortgages). You also need to insure the property, because you’re not covered by the homeowners’ insurance policy (if they have one).
Buying properties after the sale
If working with homeowners before auction and bidding against other investors at an auction don’t appeal to you, you can profit from investing in foreclosures after the foreclosure sale.
If nobody at the auction offers the minimum acceptable bid, the lender buys back the mortgage. If the state has a mandatory redemption period, the lender waits until the period expires and then passes the property to its REO department (sometimes referred to as the OREO [Other Real Estate Owned] department, not to be confused with the cookie), which prepares the property for resale and typically hires a mortgage broker to place it back on the market. By dealing with a lender’s REO department or its mortgage broker, you may be able to purchase the property at a price that’s discounted far enough below market value to turn a profit of 20 percent or more.