Can I make money by purchasing houses before they go into foreclosure?
Yes! Sometimes, snatching up a house before it goes into foreclosure will give you a better real estate investment than waiting until after the bank finishes foreclosure proceedings. The reason is control. After the bank forecloses on a property, they control it. The loss mitigation officer decides when to sell and for how much.
On the other hand, if you can catch the property before the bank foreclosures, the seller is still in control. They decide when to sell and for how much. And motivated sellers are much more likely to give you a good deal than the bank. There are multiple reasons, but here are the most persuasive two:
1) The Foreclosure Will Destroy Their Credit
From start to finish, the foreclosure process is awful for the seller’s credit. Each missed payment can knock off up to 100 points from their credit score. When the bank eventually forecloses on the property, it gets worse. Technically, the foreclosure is no different from any other negative mark on your credit, but lenders take it very seriously. If you couldn’t make your payments on the last loan they gave you, why should they give you another?
For example, few reputable lenders will give you anything beyond 65% LTV within 12 months of a foreclosure. After 12 months, some will increase your LTV to 90%. In order to qualify for 100% financing or a conforming mortgage, you’ll have to wait 3-4 years at a minimum. Record of the foreclosure will not disappear completely for seven years.
Most people facing foreclosure don’t know about these consequences, so make sure you to tell them. Unless they want to live in an apartment for the next 1-4 years, they should do everything in their power to work out a deal with you and the bank that will prevent foreclosure. In other words, they should have plenty of motivation to make their house a profitable real estate investment for you.
2) You Will Have Less Competition
Typically, sellers do not advertise that they are motivated. Like everyone else, they’re hoping to sell their property for full price, in record time. As real estate investors, we’ve learned how that rarely happens, but no one tells them. So, they often pretend like nothing bad is happening, all the way up to the day that they’re evicted.
It’s sad, but it can also give a smart investor an advantage. Because motivated sellers go to such a great lengths to disguise themselves, they are exceptionally difficult for investors to find. If you manage to find one, the chances are small that another investor will come to compete with you.
The implications are huge. Foreclosures are so popular that you’re usually pushed into submitting your "highest and best offer" and then hoping that you are the highest bidder. This rarely happens if you catch the seller before foreclosure. You’re not competing with other investors, so you can take your time pulling together the necessary information and negotiating with the bank.
Of course, you’ll want to move fast enough to keep them out of foreclosure, but it’s not nearly so hectic. The decreased competition also results in lower sales prices, meaning you can pick up a great deal without having to fight other investors for it.