The Big SECRET Of Buying A Foreclosure

With all of the information on the internet about buying a foreclosure, you wouldn't think there are any secrets left would you?  Now I have to ask, If there aren't any secrets, how come everybody isn't buying foreclosed houses at half price and getting rich?  There must be a secret to buying foreclosures.

Easy access to information online and a subtle change in the market have made for an interesting real estate market.  Right now many people are  getting information about foreclosures online without understanding what it means.  They look at NOD, REO and Foreclosure listings on sites like RealtyTrac.com and many consider them the same thing.  The first part of the secret to buying a foreclosure is understanding what these things are.

Last year the market was very different.  Stocks were up so investors were staying in the stock market.  One day, Warren Buffet says he would like to own thousands of single family homes and then investors started throwing money at real estate again.

At least once a week I get a call or a lead from a website that starts the conversation with "I want to buy one of those million dollar foreclosures for four hundred thousand that I saw on somecrazyforeclosuresite.com", when can I get one, and oh by the way it needs to be stunning, with a three car garage and ocean views."  Do those "foreclosure deals" exist is what they should be asking.

Under the right conditions, I can help you get one of those houses if you are ready to make a wholesale buy.  Otherwise, you might pay eight hundred thousand for a home that someone else paid over a million for.  The conversation then goes to NOD's and Pre-Foreclosures.  Everyone wants a deal and they think the deals are everywhere and they are for everyone.

Unlike most other markets, real estate presents a different level of risk.  Especially when it comes to speculation.   I usually start  with  "So, do you invest in stocks?" most of the time the answer is "Why?".  I then ask "Do you borrow money for investing in stocks on margin?"  That is usually followed by a puzzled look or silence on the phone.

When you buy a foreclosure site unseen and ask the bank to invest money, that is exactly what you are doing.  Right now, banks aren't really happy doing that kind of loan.  That is what "hard money" is for.

So what does all of this mean to you, and what is the Secret?

I said the first part of the Secret is understanding the terms.

1. NOD - Notice of Default - This is not a foreclosure.  All the filing of an NOD means is the banks told the homeowner that they aren't paying their mortgage and the bank would like their money.  They are also filing a copy at the county recorders office so they can eventually maybe someday start the actual foreclosure process.

Most of the NOD's filed are for people who are trying to get a better deal from their bank.  It is a tactic used to negotiate a reduction on the loan.

At this point about 1 out of 80 homes that get an NOD end up on the market, as a short sale, and at least a dozen agents will call in the first two weeks to get the listing.

2. Pre-Foreclosure.  This is where the home is easier to read.  By this point it is either for sale as a short sale and the owners are making an effort to get out, or they are running a gamble to see if the bank will go all the way to foreclosure.  The grey starts getting a little more black and white.  Picking up a house in this area that isn't already listed is highly unlikely.  I would put the odds in the 1000:1 range that you could convince an owner and a bank to sell you the house at a great price during this phase.

3. Foreclosure Auction Date Set - Well not really.  Even when the "auction date" is set a deal can be made and the home won't make it to auction or it can be delayed.

4. Foreclosure Auction - This is the cash only auction on the courthouse steps, not the auction at auction.com or Williamsauction.com.  Investors and banks bid for the house on that day.

At the auction there are two outcomes.  1. The bank bids to keep it or 2. An investors bids for it.

In the first case, this is where every agent that has a relationship with the bank scrambles to get the listing.  If the house is in good shape, the banks will clean it up to FHA standards and try to sell it at a "retail" price.  The home is good enough to get a loan on.

If the house is a dump, the bank then assigns a "wholesale" price, which is what investors are looking for. The house won't qualify for a "standard" or "FHMA compliant" bank loan.  You need cash or very expensive "hard money".  Unless you have a lot of time on your hands and are a good contractor, it is tough to get in as a wholesale buyer.

This is where the confusion is.  A lot of people think that they should be able to get a "normal" home loan and buy a house "as-is" and fix it up.   The reality right now is that banks are not allowed to, nor do they want to accept this risk.  The bank doesn't want to get the dump back and go through all of this again.  It is expensive.

This is where information without understanding is a problem.  People spend dozens of hours scouring sites to get a "deal",  and then they call an agent because they don't understand that buying wholesale houses is a business, not a hobby.  If you are going to borrow "hard money" at very high interest rates, you have to be dead on your budget and flip the house quick or get a good tenant in there fast.

Bursting The Bubble.

So now the big answer.  There isn't a secret.  When you see an investor make $5,000, $50,000 or even $500,000 on a deal, they didn't just work that deal.  They likely worked hundreds or even thousands of deals and offers to make some good money.  The more they practice, the better they get.  Like Art Williams says, they "Do It" a lot.

The big risk is that you might not make money for a while.  Day trading, you might make money in an hour, with home flipping or investing in can take weeks or years.  When you leverage with other peoples money. The upside percentages can be phenomenal and the downside can be devastating.

That isn't to say you shouldn't buy Real Estate.  There are always great deals once you learn the business, and with interest rates under 4% I feel strongly that it is time to buy.  Last year when I posted that the market had bottomed in Orange County along the coast, I dove in head first and bought the most expensive house I could afford at a short sale. 

So how can you put this market to work for you?

If you have the patience, the best way to come close to a wholesale deal is to buy a short sale.  A short sale means that you are going to buy the house for less than the bank is owed for it.  The average in Orange County CA is just under 300 days right now from open to close on a short sale.  Nationally it was 308 days last month.  That is why you need patience.  As a general rule, the closer you are to the amount owed, the faster the sale happens.

The bottom line is if you need to move anytime soon and are using the banks money, my advice is find the best house you can afford and be happy.  If you have some time and would like to trade that time for equity while hoping the loan rates don't jump up, take a shot at a short.  Finally if you have cash and aren't a professional investor, buy wholesale very carefully with an agent who has been an investor themselves.

Happy Hunting.