First and foremost, you will need to identify a number of properties to follow.
Many of them will fall out of the pool as borrowers work out their problems, file for bankruptcy, or simply refuse to talk to anyone. Pursuing one property at a time is very likely to result in you becoming discouraged and quitting.
Even if you learn about one particular opportunity with a very motivated owner, you should still investigate alternatives. Otherwise, you will become emotionally invested in trying to buy that one property, and you could make poor decisions.
Learn how to access your local real estate records in order to search for liens on property. You want to be able to easily and cheaply reject properties with too much debt or too many liens. Next, shop the local title insurance companies for the cheapest rates for title commitments. Some properties that make your first cut might still have title problems. You want to minimize how much you will have to spend in order to find out you cannot do a deal.
Know the details of your state’s consumer protection laws as they relate to preforeclosure purchases. Borrowers may be able to cancel contracts, or you might have certain disclosure requirements. Fail to follow the requirements, and you could face heavy penalties or even jail.
To find out if your state has such laws and to learn the details of them, call the office of the state attorney, or attorney general, for your state. There is usually a toll-free number. Ask for the consumer help desk for a question regarding preforeclosure purchases. The strategy sometimes goes by the derogatory term equity stripping because of the number of abuses in the area.
That being said, the most popular strategies are as follows. They are not all mutually exclusive.
• Assume the loan if possible. Ask for a waiver of the assumption fee and the closing costs. Ask for a deferral of the first payment so you will have a two or three-month breathing period during which you will not have to worry about making mortgage payments. If the property proceeds to foreclosure and the lender bids on it, he or she will have no income for at least two to six months, anyway.
• If you cannot assume the loan, you will have to obtain thirdparty financing, and you cannot reasonably expect the same concessions as with an assumption. Ask the foreclosing lender if there is a PMI company, and if the PMI company will add some cash into the deal to make your purchase workable. It will be cheaper than having to pay off an insurance claim after foreclosure.
• Pay the owner nothing for his or her equity, allowing the owner to escape the stigma of foreclosure or bankruptcy.
• Pay the owner a minor amount for his or her equity.
• Pay the owner a small amount in the future for his or her equity, according to a formula based on the profit you actually make on the house.
• Allow the owner to remain as a tenant for some period of time after the purchase.
• Require the owner to completely vacate the house before you will proceed to closing.
• Condition everything on a clean title report and the issuance of title insurance to you. Junior lienholders might be wiped out in a foreclosure, but they will still have claims against the property if you simply purchase the house from the borrower.
• Obtain releases from junior lienholders for little or no money. This depends on convincing them that there is no equity in the property, and that a borrower free of the worries of homeownership might be able to focus on earning money that can pay junior lienholders some or all of their claims.