Wealth Planning Using Foreclosure- The Melvin Feller Way
According to Melvin Feller MA buying foreclosures is not as easy as most people think, and there is absolutely no one better way” to buy foreclosures. Melvin Feller is President of Melvin Feller Business Group in Oklahoma and Texas and a thirty-year veteran investing in foreclosure properties. He loves Texas Real Estate and Thinks Texas is must have part of any one’s wealth strategy! He has spent his entire professional life in business and real estate.
The key to any “profitable purchase” is find a truly motivated seller. Someone who wants cash more than they want to keep their house or someone who wants to sell you their home more than you want to buy it. Once you have a motivated seller, you are more than half way to your goal of buying a house below market value.
So, I’ll illustrate three ways to buy foreclosures. Which of these is the best? Well, again, it’s up to you to decide. I’ll just lay the basic foundation and then you can determine which option is the best fit for you and your wealth plan.
The first one is Pre-foreclosure owners:
Once a Notice of Default, or Lis Pendens, has been filed, the owners are now in foreclosure and must do something or risk losing their property, all their equity, and their credit. Months before the auction (trustee or sheriff sale), contact the owners directly and offer to purchase their home by “paying them cash for their equity.”
Mention the benefits they will realize when they decide to sell, such as stopping the foreclosure; preventing further damage to their credit; and getting a fresh start. Be friendly and unintimidating. Do not insult or offend them with patronizing comments like, “How did you get in such a mess?” or “Why in the world did you do that? We are here to create a win/win scenario. We are here to help them out of a bad situation and at the same time turn that house in into a wealth plan profit center.
Remember that you are buying their home, and you need them to like you and want to sell you their home. You must show them how your offer is a win/win proposition. If they are not ready to sell now, discuss all their options with them. Keep the door open for future discussions. You never know when someone in foreclosure will decide it’s time to sell the home that has been a major frustration for them recently.
But when they do decide, you want them to talk to you and no one else. This relationship must be established early on, starting with your first contact and reinforced through your repeated follow-up visits. The number one reason investors do not succeed in buying pre-foreclosure houses is that they simply do not follow up with the motivated sellers! Do not make this mistake.
How much should I pay?
Once the homeowners agree to sell you their home, you will determine the most you can afford to pay for the property before you meet with the sellers. Make sure you have enough cash available to make up their back payments (and stop the foreclosure), plus give them some “walking money” to close the transaction and move them out.
The amount of cash you give the seller is totally based on your negotiation skills. Obviously less is better from your standpoint, but not too low. Getting rejected outright and NOT buying the property at all isn’t good either.
Make sure your offer is contingent upon and subject to all existing liens, loans, etc. as listed in your purchase agreement and that it is the entire list of all debts. Make certain that the terms for repayment are accurate and that you have the right to approve or disapprove the current status of all loans and of title.
Successful foreclosure purchases must conform to your state foreclosure laws. Make sure you read up and become familiar with these state laws in advance of writing your offer. Normal purchases include full title insurance provided by the seller, as well as the buyers’ complete inspection of the property’s physical condition.
The best part of buying directly from the owner is that you have an exclusive deal. Contrary to popular belief, there is rarely any competition when you buy a home in foreclosure directly from the owner. Once a motivated seller decides to sell his property, he just wants to get it over with quickly and easily.
The idea of the seller calling many investors to get the best offer just isn’t reality. Once you are in, chances are that you will be their primary contender! There won’t be the “pack of bidders” that you will encounter if you wait for the foreclosure auction.
The second way to purchase Foreclosures is at a Foreclosure auction.
A few weeks or in some areas a few months, prior to the auction, the lenders representative (Trustee or Attorney) files an Auction Notice (Trustee’s Sale or Sheriff’s Auction) of intent to sell the property to the highest bidder at a public sale.
The opening bid is set by the lender and is based on the full amount owed on the loan (including principal, interest, late charges, penalties, and foreclosure fees allowed by law) as of the date set for the auction.
Often the auction is delayed by mutual consent of the lender and the borrower, and a new auction date is scheduled. Make sure you check with the lender’s representative the morning of the auction to confirm that it is still scheduled and to confirm the amount of the minimum opening bid.
Before you attend any foreclosure auction, you’ll need to do a ton of research. Since these purchases are “as is” with no warranties given, no title insurance provided, and in most cases varies state by state you need all cash, in the form of certified funds, you really know very little about what you are about to bid on.
You must do a complete title search to examine the state of title and to determine what position you are bidding on at the auction. You can do this yourself but do not expect help from the county clerks, or you can hire someone to do it for you.
A reputable title officer charges $300 to $400 for each preliminary title report they complete (these are NOT the same as a “property profile,” which is free and usually done for Relators and not that important). This can get very costly, especially if you decide NOT to buy a few houses.
Most professional foreclosure auction bidders are also very good title researchers, and they have learned from another professional how to do this very tedious task.
If you are planning to bid at a foreclosure auction for a “first mortgage,” most junior liens will be wiped out at the auction, and you will not be responsible for them. This is great news if the owner in foreclosure had a ton of loans and, therefore, not enough equity for you to be able to purchase from him directly. Now you have a chance to buy the house for less money at the auction!
BUT some liens are NOT wiped out, such as Property Tax Liens and any Federal Tax Liens plus other exceptions that cannot be described here.
This is also important information for you as the bidder, isn’t it? What if you are planning to bid at a foreclosure auction, and you thought that opening bid of $75,000 sounded GREAT on a $400,000 house? You may be highly mistaken.
Your $75,000 winning bid, could be for the second mortgage. The winning bidder at this auction pays the $75,000 cash and automatically assumes the debt of all senior liens on the property. What if the first mortgage on this house was $400,000? OOPS! You just paid $475,000 for a house worth $400,000.
You will also need to inspect the property to determine the number of repairs needed and the cost of repairs. If you are buying from the owner directly, you are invited inside and can easily do your inspections. But if the owner losing his home at the auction is hostile and won’t talk to you, are you prepared to peek inside windows and hope for the best? What if the house is totally wrecked when you finally buy it?
Finally, you can expect competition at the foreclosure auctions. Anyone with money who is afraid of or not good at talking to owners in default will go to the auctions. Often a crowd of people may bid up the same property. In hot real estate markets, investors will pay more for houses at auctions than I would. As a point of reference my maximum is 70% of market value.
The third way to obtain foreclosure is REOs: Real Estate Owned by the lender.
These are properties that went to sale at foreclosure auctions but nobody wanted. Most likely the minimum bids exceeded what a savvy investor would pay. This is the way lenders take ownership of defaulted properties, and these properties are known as REOs. The lender no longer has a bad loan to collect on; they now have a non-performing asset that they must sell.
In hot real estate markets, REO lenders simply fix up the property, list it with a Realtor, and sell it to a home buyer for full market value. The REO lenders have essentially become our competition. But once they start getting more and more properties back and can’t keep up with the fix-up for resale process, they will start selling their properties “as is” for a discount again.
When will that happen? It’s hard to say. But I can say this: — it is not happening now, and I would recommend you NOT work REO leads at this time. REO lenders currently are NOT motivated sellers. They will not be motivated sellers until they have a ton of bad loans and a large REO inventory, which they don’t have at this time.
If you found an REO property in your area, and it is not in the MLS. Multiple Listing System of agents, contact the lender directly by phone. Ask for the head of the REO Department or request the name of the actual REO asset manager handling this property.
Ask the asset manager if the bank is selling the property “as is” and if they’ll discount for an “all cash” offer. If you get a yes, then that’s great! Continue to pursue the property and line up your money lender or equity partner. If you’ve structured the deal so you do not exceed 70% of the market value total of purchase price and all repairs, you’ll have no problem finding money partners.
Which way is the better way for you to buy a foreclosure? If you ask me, my preference in today’s market is buying from the pre-foreclosure owner. As the market changes, so will my preference. Which is best for you? That’s hard to say, but hopefully now you know why a “quick answer” just wouldn’t work. As a long time, investor, I firmly believe in wealth planning using foreclosures.
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