Investors love to go after the low hanging fruit, and right now its easy picking time.
The economy was hit hard in the past years since 2008, people are out of work and over-leveraged on their homes. As a result banks have foreclosed on millions of homes across the country.
Even though prices have stabilized there is still a big volume of distressed housing working its way through the machine. In fact according to Core Logic National Foreclosure Report there were still well over a Million homes foreclosed in 2015.
So with all these foreclosed properties what does an investor need to know about how to buy a foreclosure. Let’s take a look at the whole process…
Judicial vs. Non Judicial Foreclosure Process Overview
Every state foreclosure process is different.
Currently there are 22 states that abide by a judicial process regarding foreclosing a property. This means the bank must go through the court system in order to repossess the property once a borrower defaults. The remaining states follow a non -judicial process where the process moves along much faster and without the involvement of the court system.
In a judicial state the foreclosure process begins with a date of default from the borrower. From day 0-180 the bank or servicer will contact the homeowner relentlessly through mail and phone calls to try and get payments or make arrangements for payment.
Once a homeowner defaults this is considered a breach of contract and sometime after day 180 the bank will refer the file to a foreclosure attorney in the area to start the lawsuit against the borrower. The attorney files a Lis Pendens, which is a notification of complaint against the borrower seeking foreclosure as a remedy for the non-payment of the loan. Sometimes the process may involve the court authorizing a sheriff’s sale or an auction. Procedures will vary but the individual with the highest bid wins. In our experience here in CT as well as many other areas the servicer or bank will usually be the highest bidder and take the property back at which point the property becomes what is known as REO or Real Estate Owned.
Once the property transfers back to the bank, they still may have to evict the homeowner. (More on this fiasco later in the article, it gets ugly homeowners can be very vengeful)
In a non judicial state there is no intervention from the courts.
Once a homeowner defaults, they receive a letter and a notice of default (NOD) is filed. The owner is then given a period to make the debt current or they are next notified of a Notice of Sale.
The notice of sale is posted publicly, recorded at the town clerks office, and published in newspaper and legal publications. When the required notice period (which varies by state) is exhausted then a public auction will be held and the property will transfer to the highest bidder.
The homeowner can file a lawsuit to postpone the sale and also has a redemption period if and after the property sells at auction.
Almighty bank has foreclosed and taken title – now what?
With the millions of properties that get repossessed banks have to deal with a big continuous inventory. The department in charge is the REO division of the bank.
The main responsibility of this department is the disposition of the assets that the bank acquires so they can be liquidated and the bad loans can be written off the books. Typically the banks will work with asset management companies that put together very detailed plans that ensure the process is done in a very strategic manner.
Asset management companies have extensive networks of agents that go through trainings on how to handle REO sales. The asset management company will pair up their local agent with the REO property that needs to be sold.
Joe Barletta Tip Keep a close eye when looking at foreclosure listings in your area and make a note of the real estate agent. A select few REO agents will handle about 80% of the volume of foreclosures. You want to be their go to buyer/investor so they call you first when a deal arises.
Now the asset management company assigns the listing to an REO agent in their network.
The agents job is first to do an occupancy check. Yes after all the foreclosure proceedings and auctions people still will not leave their home. So now it becomes the job of the realtor to see if the property is occupied.
If the borrower has not vacated the residence the bank will offer cash for keys to the premises. The realtor is allowed to negotiate, on behalf of the bank, with the homeowner to vacate typically within 2-4 weeks. If the homeowner agrees to vacate the bank will PAY the homeowner as long as the property is turned over in current condition, broom clean.
Here is the crazy part because an eviction can take more time and more attorney fees so they pay homeowners thousands of dollars to hand over the keys instead of prolonging the process. I have personally done deals where a homeowner put $5000 in their pocket from a bank and heard upwards of $10-15,000 in some other cases.
Sometimes borrowers just get up and go and leave everything behind even dirty laundry, food, garbage, pets, its an UGLY seen.
Sometimes they will vandalize the property themselves remove all the cabinets, rip out plumbing, smash every wall and door, cement down the drains, anything they feel will get revenge on the bank and devalue the property.
As investors this is a good thing for us because that weeds out conventional buyers and conventional financing. There are times when a bank will do some repairs to get the property to qualify for financing or when it makes most sense financially to rehab, other times they will decide to market the property AS-IS and opt to sell to an investor just to liquidate the property.
Joe Barletta Tip REO Agents have 3 times the amount of work that a traditional agent encounters. They must be a property manager, handle occupants and oversee evictions negotiate cash for keys, deal with contractors for repairs and winterizations and be responsible for payments until reimbursed by the bank 60-90 days later, paperwork for REO is extensive, monthly marketing reports, valuations and property checks and of course sell the property to get paid. It’s not glamorous so the faster an REO agent can get a property sold the less work they will encounter over the life of the listing.
The easier and quicker you can make the process for the agent the more they will want to work with you.
5 Important Components to the Contract
When it comes time to actually making an offer the most important things consider to increase your chances of success:
- If possible let the listing agent get both sides of the commission. This is especially true for the licensed investors, don’t take a commission on a property that you are making an offer. You can come in as an unrepresented buyer or if you are working with a buyers agent, work out an agreement possibly where your agent will be compensated on the listing side when the time comes for you to sell the property.
- Proof of Funds – Typically a letter from your bank or recent bank statement verifying an amount available if paying in cash or a pre-approval letter from a hard money letter. You should already have funding at least secured before you start making offers. If not start developing relationships with local hard money lenders in your area and get their lending criteria
- Deposit – Typically banks will require 3% of purchase or minimum $1000 on lower priced property, you can increase this if you want to make the offer stronger and attractive
- Closing time – 30 days is typical but if you are paying strictly cash no reason why you cannot close the deal in 2 weeks. The quicker the deal sells the less work for the REO agent.
- Inspections – Experienced investors with a real good deal are comfortable writing contracts with no contingencies but as a beginner you should always do an inspection. Banks will typically allow inspection periods of 7- 10 days from contract acceptance
Your KEY to Success:
The key to success with buying foreclosures is your relationship with the REO agent.
Do all your preliminary due diligence on the front end before involving the listing agent, so when you make contact and submit the offer and deposit its almost a done deal.
Once you get an executed contract from the seller, have your attorney or title company do a title search, get your funding in place and close that deal.
If you demonstrate that you are a serious buyer looking to purchase multiple deals on a consistent basis and more importantly actually DO IT and make it happen, the deals will start to come to you and that is SWEET!
I have always said… “once you demonstrate you are capable you will attract capable people into your life”…in this case it could be the high volume REO agent with access to huge inventory in your market.
I hope you gained a little bit of insight into the REO world…to get more insider tips and reports enter your email at JoeBarletta.com for the latest trainings, videos, and blogs.
To Your Success, JB