Foreclosure Investing

Currently, over 928,000 properties in the country are in some form of foreclosure, according to RealtyTrac, and there lie opportunities for the savvy investor.

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The fact that a property is a foreclosure doesn’t make it a good or bad deal. A foreclosure is just a legal process that transfers title from the owner back to the lender due to non-payment of the debt obligation. There are four main stages:

  1. The pre-foreclosure stage usually begins when the first payment is missed from the borrower to the lender. That official clock starts with the notice of default. During this stage, you would buy from the owner and not the bank.
  2. The foreclosure auction stage is also called the sheriff sale or trustee sale, depending on if you live in a mortgage state or a trust deed state. The process is usually four to six months along and the property goes tot he highest bidder at a public auction, usually for all cash.
  3. Many states have a redemption stage, where the borrower can pay off the balance on the mortgage (or an amount agreed to by the lender) and get the property back out of foreclosure. This stage requires you to buy from the owner and not the lender.
  4. The bank-owned stage is also known as “real-estate owned” or REO.  Nobody won the bid at the auction (usually nobody bid), so the property reverts back to the lender, which can sell it to a private owner; either as an owner occupant or an investor.

Each stage offers a chance to buy a bargain property—and a different strategy. Let’s assume you find an opportunity to buy a property that is worth $100,000 for $70,000. Here’s what you need to know:

  • There is always risk when you invest in anything, and the way to lessen the risk is to be educated. Many quality books and seminars are available. Unfortunately, there are also overpriced packages sold by some people who have never really done much foreclosure investing.
  • Verify the after-repaired value of the property. This is done with comparable sales from the multiple listing service, online services such as Zillow or a list of recent sold comparable sales from a broker or title company. One of my earliest mentors told me “until you know value, you know nothing.”
  • Have a good idea of the cost of your funds, closing costs, repair costs, maintenance, utilities and selling or leasing costs. If you don’t account for those, you are in for a poor investment decision.
  • Understand your exit strategy (a lease or sale) and rehabilitate accordingly. A home kept for rental should not be as heavily repaired as a flip house.
  • Understand that you will rehab for profit, not for a “flip this house” series.
  • Understand the timetable of your state foreclosure process.
  • Decide which stage of the foreclosure process you will focus on. Generally, to save time and leverage other people’s assets, that will be the real estate owned, or bank-owned stage. In this stage, you will almost always deal with the REO agent who is generally a real estate agent with a niche business in dealing with banks to sell their foreclosure inventory. Develop a great relationship with the REO agent because they can be a constant source of good deals for your investment portfolio.

There are also several important “Don’ts”

  • Don’t take any broker’s or seller’s word for the condition, comparable homes or clear title; get pro’s to help you. As Ronald Reagan famously said, “Trust, but verify.”
  • Don’t get emotionally attached to any real estate investment, even if it is a foreclosure. Investing successfully in real estate is about numbers and nothing more.
  • Don’t spend all your time on one prospect. Make several offers at once and word your agreements with an easy out clause if you get more than one accepted (or be prepared to buy more than one).
  • Don’t forget you must know more than the other professionals involved to be successful. I know how to finance a property dozens of ways, so many times I can see a deal where many others don’t because they only know one or two ways.

Real estate investing, and more specifically, foreclosure investing, is a unique opportunity to acquire hard assets for deep discounts picking up instant equity that has the chance to grow or you could choose to covert to cash as fast as possible.

Learn a valuable lesson from the last real estate crash and don’t over-leverage properties. If you get stuck in another market crash, you could be on the hook with over-leveraged properties sucking you dry. Cash is king, but right behind that in real estate is “equity position.”

With some good education, foreclosure investing might be a great add0on to your wealth building efforts. Not everyone is wired to be a real estate investor but if you thing you are, move forward with education and action.

*If you are interested in working with John or are a real estate investor; check out Perpetual Real Estate Machine.

**John has a special training for those interested in foreclosure investing. Check out his Foreclosure Course and take advantage of John’s many years of experience in real estate sales, investing, flipping and more…

 

BYOB – Become Your Own Bank

Life is not just about knowledge but requires action as well. Please complete this life changing exercise before you read any further. Add up all the payments you have ever made in your life to a bank or finance company on every debt you have ever had during your life. This is on cars, real estate, business loans, business equipment, student loans, boats; anything motorized, etc. Now whatever that figure is for you (it will be largely a figure of age and income) double that number. So if your figure is $1,000,000 in total payments your number would be $2,000,000. Why do we double that figure? By giving up control of all your money in the form of monthly payments for all those years you turned over the growing power of that money to the bank. Depending on your age, even if you had kept that money and received even a modest interest rate of 4% to 6% your money would have easily doubled once and for many of you doubled a couple of times. Now that we have your “money lost” figure you need to add up your “money kept and invested”. To get that figure simply add up all the money you have saved up in your IRA’s, 401k and other retirement accounts. Grab your most recent statements and add them up quickly.

Calculator

This entire exercise can be done in 10 minutes and I challenge you to do it before you read one more word or at least immediately after you’re done. How much have you saved and invested for retirement? Now which of those two totals is bigger, the money paid to the bank figure or the money for your retirement figure?   Now ask yourself who is getting rich with that personal finance model. The answer is very apparent and that is the banks and Wall Street who love this business model. You borrow money your whole life and don’t care as long as the interest is low. This keeps you in financial bondage to the banks. Then whatever money you are able to put away is put inside of qualified plans and then given to Wall Street. Wall Street is flat out drunk with money and has been for many decades.

When I do this exercise in front of a room it produces laughter from the crowd because they are realizing that the monthly payments have deprived us of most of the wealth in our lives. My average participant might tell me $2,000,000 given in payments and lost growth and $70,000 saved for retirement.   Which figure would you prefer to have for yourself? This is math that any fifth grader can do and makes sense to anyone who has an open mind.

Now to be fair very few people could afford to self finance their first car or house so the numbers get skewed because you most likely would not have the option of self financing those early items. However, that is not an excuse for not moving toward that goal of being self financed. Think of your life as a giant income wheel. Income comes into the wheel and most of it gets spit right back out the other side of the wheel. Your goal is to keep as much money as possible coming in on the wheel for your accounts and to stop the 4 massive wealth drains we all have during our lives. Yes, there are more than 4 wealth drains but these 4 are the biggest and must be stopped so you can grow wealth regardless of what happens to any market. We will be discussing these wealth drains in depth in future articles.

It’s important to understand that I am not advocating just paying cash for items like many gurus incessantly preach.   I am talking about using your capital just like a major bank would use their capital. If you took out a loan from the bank would they be alright with you borrowing the money and not paying it back? Would they be happy with no interest paid to them? (Don’t get fooled by those 0% loan pitches because there is always a cost of money but sometimes it is hidden in the actual price and not the finance charges) The answer to both of those is, of course it wouldn’t be acceptable to not pay them back or not give them interest. Then it stands to reason that if you are acting as your own bank, why would it be acceptable to not pay yourself back or without interest? It is never acceptable just to pay cash (especially for anything over $10,000) and not pay the bank back even if you own the bank.

be fearful or be greedy?

Warren Buffet is credited with quote of “when others are being greedy be fearful, when others are fearful..be greedy” In other words, find out what everyone else is doing and do the opposite! Most people are broke and will always be broke so why do you want to have the same thought process that they have? You want to think like rich people. You want to make decisions quickly and make them often. Show me someone who can’t make a decision and I will show you someone who can’t grow wealth. Successful people make more decisions than poor people. They make decisions and plenty of times the decisions are wrong so they will change later and try something different but they make the initial decision quickly. Get in the habbit of just deciding quickly and moving forward hard and fast.