Mortgage figures are in for January 2015 and although the overall U.S. economy is picking up, the number of mortgages in arrears and foreclosure is still remarkable. While this is certainly tragic for the homeowners facing foreclosure, it is also a wonderful opportunity for real estate investors.
The numbers do show us a few things. First, there are still many states where investors can pick up good deals. Second, as we’ve seen before, foreclosures exist in all markets and in all economies. There are always deals to be made.
There are two specific real estate investing strategies you can use when looking at homes in foreclosure. The first is buying a home that’s in foreclosure and reselling it for a profit.
Buying a Home in Foreclosure
Often, buying a home in foreclosure and then turning around and selling it for a profit is the kind of real estate investment you see on late night television where anyone can make buckets of money with this one simple strategy. But do not be fooled. There are several challenges associated with homes in foreclosure. For example, you first have to find a home and then you have to try to purchase it along with many other investors and speculators. Competition for some foreclosed homes can be fierce, so you need to be prepared to do a lot of homework.
Is there a way to avoid these types of foreclosure frenzies? What many investors do is to communicate regularly with their network of mortgage brokers to identify pre-foreclosure opportunities. When a homeowner is having trouble making their mortgage payments, they often go to a broker to refinance their homes or to find some other solution. If brokers know of an investor out there (you!) who may be willing to step in with a second mortgage or some other kind of financing, then chances are you can put together a pretty solid investment deal where everyone wins.
Ultimately, if your homeowners realize they simply cannot afford to live in their home anymore, then you can offer to purchase it from them for a reduced market price in exchange for a quick closing so they can move on with their lives. This is one of the best investment strategies going. You pick up a property at below market cost and without all the foreclosure sharks in the waters. In so doing, you also help a family out of a situation that is untenable.
The Lease Option Refinance Strategy
Another way to benefit from homes going into foreclosure is to offer to refinance their home for them through a lease option. In this strategy, you purchase the home from the homeowner and rent it back to them for a 3 year period. At the end of the 3 years, they have the first right to buy the property back from you. This is a strategy that can yield outstanding returns, but it’s imperative that you know how to do it properly because if you’re not careful, you could easily make mistakes. I have written extensively on the lease option refinancing strategy – as have others – so there is a fair amount of information on it available. Just be careful to make sure you've got the right information!
The bottom line for this strategy is to find the right homeowner clients. Ask yourself: if they cannot afford to pay their current mortgage, what makes you think they’re going to be able to pay you rent? You have to spend time on your due diligence with this strategy. Often, I have to look through dozens of potential deals before I find one that fits my criteria. The more time you spend looking for the right deal, the better off you’ll be.
The Second Mortgage
Finally, it may be possible to simply offer to place a second mortgage on the property. Again, you’ll need to work closely with mortgage brokers in order to identify the best homeowner clients for this, but the potential double digit rewards are worth it.
The important thing to note with a second mortgage is the increased risk of losing your investment. If something goes horribly wrong and the homeowner does go into foreclosure, then you’re the last person to get your money. The tax department gets first dibs on the proceeds of sale from foreclosure. Then the first mortgage holder. And then you. If the property does not sell at full market value, the chances are you will lose most or all of your second mortgage investment.
To avoid this scenario, you really do have to spend time on your due diligence and convince yourself that the homeowner will be able to make their payments. Usually this can work if, for example they use your second mortgage money to pay off outstanding credit card debts that have really high interest rates. But you should be working closely with a mortgage broker on this.