Foreclosure is an unfortunate and scary process for homeowners, but as a real estate investor, you can help people that are facing foreclosure, while also making a good profit. As a wholesaler of pre-foreclosure homes, you put distressed homeowners together with a buyer/investor and get an assignment fee for doing so.
Sounds pretty good right?!
There is an advantage to reaching homeowners that are going through foreclosure quickly before they are inundated with letters, emails and phone calls from collectors or competitors. After being chased by too many collectors, there is a big chance the homeowner goes into hibernation and hides from the outside world. You should try approaching them before this happens.
You have to take into consideration that many people are in denial about the foreclosure process and will tell you they DO NOT need any help. “I don’t have a problem!”, is a common reply when calling them.
People in these situations are often embarrassed and do not want to admit they have a pending problem. You have to gain their trust and try educating them about what will happen if their home goes into foreclosure.
What Does Foreclosure Mean?
First, let me explain the foreclosure process and what foreclosure really means so you understand what you are dealing with and when it, in fact, is too late to help the homeowner.
Foreclosure is a legal process, where a creditor (i.e. a lender or mortgage holder) can repossess or sell a property for the purpose of repaying the debt owed on the property. Mortgage holders can foreclose on a property at any time after the borrower starts missing making payments unless otherwise is set out in the mortgage or in the state where the property is located.
This blog post will relate to the foreclosure process in Texas and how to work pre-foreclosure leads in the state of Texas. However, the process is more or less the same for other states. The slight difference is
In Texas, lenders/banks may foreclose on deeds of trusts or mortgages in default, using either a judicial or non-judicial foreclosure process. The judicial process of foreclosure which involves filing a lawsuit to obtain a court order to foreclose is used when no power of sale is present in the mortgage or deed of trust.
When Does Foreclosure Begin?
The foreclosure process begins when homeowners get behind on their mortgage payments (illustrated as 1 PM on the foreclosure clock). If the homeowner has not been able to pay the mortgage for a couple of months, in some cases just a single month, the lender/bank will start sending letters and make phone calls.
When this happens, the homeowner has an option to try to work out payment plans with the lender/bank or modify the loan. The homeowner needs to get up to date with his/her mortgage payments to stop the foreclosure process.
How Long Do Homeowners Have Before The Lender/Bank Takes Their Home?
According to the federal law which regulates the banking, the homeowner must be delinquent for 120 days before a lender can serve a notice of foreclosure. However, there are some independent lenders that do not fall under this law’s jurisdiction and can begin foreclosure at any time after the loan goes into default.
At this point, pre-foreclosure starts (3 PM on the foreclosure clock). During the pre-foreclosure period (illustrated from 3 PM to 6 PM on the foreclosure clock), the homeowner will get a demand letter and later a complaint which is when we need to start reaching out to offer them our solution (more about this below).
Notice Of Default And Acceleration Clauses
If the lender/bank chooses to proceed with foreclosure after the minimum delinquency period has passed, they will send the homeowner a “Notice of Default” (7PM on the foreclosure clock). This means that the homeowner has a specified time period to pay back what he/she owes, usually a legally mandated period of 20 days (occasionally up to 30 days).
Texas mortgage agreements often include acceleration clauses. The clauses give the bank the right to demand immediate payment of the entire balance if the homeowner violated the terms of the loan.
How Long Do Homeowners Have Before
The Foreclosure Auction?
If the homeowner has not yet managed to pay the amount due or modified the loan/s, the bank will send a “Notice of Sale”. This means a written notice stating that the bank will sell the home at auction.
The foreclosure rules in Texas require a written notice of a minimum of 21 days before the bank/lender can sell the home. The bank/lender must also post the “Notice of Sale” at the door of your county courthouse and file it with the clerk of that respective county. The notice of sale must include; the location, date and time of the planned auction/sale.
What Happens At The Foreclosure Sale/Auction?
In Texas, foreclosure auctions (9 PM on the foreclosure clock) take place at the courthouse of the county in which the property is located. The proceedings are held on the first Tuesday of every month and might be scheduled any time between 10 AM and 4 PM.
A representative of the lending entity/bank must be present at the auction. State law permits the lender/bank to purchase the home as the highest bidder at auction. In bidding, the lender/bank receives as credit the value of any outstanding debt on the mortgage.
What Are The Consequences
There are many uncomfortable consequences for the homeowner after foreclosure is a fact:
- First of all, the homeowner’s credit will be completely damaged for 7 to 10 years – impacting his/her ability to get new housing, credit and maybe even potential employment. Only on-time payments of three years or more will restore the credit score.
- A foreclosure on the credit report can make it difficult to rent a new home. A landlord’s opinion: “Why would you pay rent if you did not pay your mortgage payments?” A bank loan is rarely even a question.
- There may be a deficiency balance after the foreclosure sale that you still owe.
- The homeowner will lose any relocation assistance or leasing opportunities that may be available with other options.
- Forfeit ability to get a Fannie Mae mortgage to purchase another home for at least 7 years.
- Most homeowners do not realize that by losing their home to foreclosure, there are likely going to be tax implications.
- Many years of expensive and limited credit are the long term consequences of foreclosure, making financial recovery very difficult, if not nearly impossible. The components of a FICO score consist of payment history, amounts owed, length of credit history, new credit and types of credit used.
How To Help Homeowners In
Pre-foreclosure For A Good Profit
Like mentioned earlier, the homeowner needs to still be in the pre-foreclosure process for us, as real estate investors, to be able to help them for a profit. When the home goes into the foreclosure auction, it is already too late.
At least, when using creative real estate investing with no money up-front.
If you have a cash capital, you can go to the foreclosure auction and purchase the home for hopefully less than market value.
What To Do If You Do Not Have Any Cash Capital?
This is when creative real estate investing comes into the picture and you have to use more creative options/strategies to help the pre-foreclosure homeowners. This option, or real estate investing strategy, is called wholesaling.
The basic idea with wholesaling is to get in, get out and get paid. The turnaround time is often quick which is good. I am presenting this strategy a bit closer here:
How To Wholesale Pre-foreclosure Homes
When wholesaling pre-foreclosure homes, you present a solution to the homeowner where you can offer him/her a cash offer for the property or catch-up the back-payments on the mortgage and stop the foreclosure process. This in turn, will save the homeowner’s credit and make it possible for him/her to move on with his/her life.
But How To Do This Without Money?
It is not you, personally, who are catching-up the back-payments or making the cash offer. You do not need to put in any capital – except for $10 in earnest money when signing the purchase agreement with the homeowner. It is the buyer/cash investor you are assigning the contract to that will get the mortgage current and stop foreclosure.
You are only putting the homeowner and buyer/investor together and are making an assignment fee for doing so.
Pretty amazing, right?!
A pre-foreclosure sale is a little bit different than a regular sale of a distressed property. In most cases, you and the buyer/investor will use seller financing to acquire the home. With seller financing means the buyer/investor takes over the mortgage payments in exchange for the deed to the house, also called: “Subject To”.
The same process is applied for pre-foreclsoure homes but the buyer/investor also has to catch-up the back-payments and get the loan current to stop the foreclosure process.
A cash investor will most probably rehab the home and then sell it for retail value and make an even bigger profit. For this to be possible, there has to be enough equity in the home (20 percent or higher, at least).
It is up to you, as a real estate investor/wholesaler, to ensure there is equity in the home before reaching out to the homeowner. There may also be liens or encumbrances against the property so it is important to run a good title check with an investor-friendly Title Company before purchasing the home.
Always do your due diligence before acquiring pre-foreclosures.
If you get a homeowner to agree to selling their home to you, it is critical to get the previous owner to sign a Quit Claim Deed. This deed should be recorded with the county or parish once the bank has accepted the catch-up payment.
You Are Not Only Helping The Homeowner
When wholesaling pre-foreclosures, you help the homeowner to avoid foreclosure and to ruin his/her credit. You also help the buyer/investor to purchase a house without needing to make a huge cash investment. Because the buyer/cash investor does not need a large cash capital to purchase the home, the buyer/cash investor does not need to get a loan to purchase the property which means the transaction will not show up on the buyer/investor’s credit report.
Also, if the back-payments are not too far gone (too costly) you can offer people who cannot get a traditional bank loan the opportunity to own a home. Instead of the normal 10 percent down-payment when acquiring a traditional bank loan, they can make up the back-payments of the foreclosure home in exchange for the deed.
Seller financing of pre-foreclosure properties works because the lender/bank never cares who is making the mortgage payments. They only care about receiving their payments on time, no matter the name of the payer.
The lender/bank does not necessarily want to foreclose on a home. First of all, it is costly. Second, lenders/banks are not in the real estate business.
The lender/bank will have to list the property on the MLS and pay a realtor to sell it. Maybe even rehab the property to make it competitive on the market. Costly efforts the lender/bank rather avoid. The bank just wants to lend people money and get interest.
Things To Think About When
There are a few things you have to pay extra attention to in regards to
#1. You ALWAYS have to double-check the monthly mortgage payments with the lender/bank. Do not just trust what the homeowner tells you. You need to check with the actual bank.
To do this, you should get the current owner to write, witness and notarize a Durable Power of Attorney allowing communication with the mortgage holder. This needs to be written to enable full communication with the mortgage holder and his/her assigns for the entire term of the mortgage.
#2. ALWAYS use an attorney to go over all contracts. Doing this yourself can be very risky and can cost you tons of money if something would go wrong.
#3. ALWAYS research the neighborhood of the pre-foreclosure home. Keep in mind that what is attractive in regards to a neighborhood may be different for a fix and flipper, a buyer who wants to live in the home or a tenant.
If you, for example, would hold and rent the property as either a vacation rental or a long term rental – a quiet street might be more desirable for a long term renter – but an Airbnb guest might want a busy street closer to restaurants and night clubs.
I hope this blog post gave you something to think about and that you found it interesting. Feel free to show me some love and leave a comment in the comment section below. It will help this blog post to rank better on search engines and make it possible for more people to find out about creative real estate investing.
I would really appreciate it if you also shared the article with someone who would benefit from this information. It is all about paying it forward!
Best of luck helping distressed homeowners for an emotional, as well as
About The Author
Stina Pettersson is originally from Sweden but has resided in the U.S. for the past 6 years. She started her American journey in Miami, Florida, and recently moved to Austin, Texas.
Stina was active as a professional dancer for 21 years but she was forced to slow down a bit after ACL surgery in both knees and is now enjoying dancing as a hobby. Stina also loves her daily nature walks with her two adorable dogs, Max and Abigail.
Stina has the gift of being able to receive communication from the spirit and extraterrestrial world which she also loves sharing with her readers.
“My main goal is to maintain a flexible lifestyle, where I set my own schedule. Even that I work hard, I love what I do every day. I also have the opportunity to help other people which is a huge gift.”
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