Techniques in Pre-Forclosure Negotiation

There are a few strategies you can use to approach this deal. However, my personal opinion is to go with a Lease Option.

The key to pulling it off is to find a motivated Buyer.

Here are the basic steps:

1) Let the current home owner know that you will get them current, and take over their payments (Let them know that even after this process, the loan will still be in their name).

2) Get the property under contract (easiest way is to use a 5 year Option agreement, with payments to begin in 45 days).

3) Find a buyer within the next 30 days. You're looking for someone who wants to move into the area, has a good job, has money for a down payment, but can't qualify for a traditional mortgage.

4) The end buyer pays you a non refundable option agreement that gives them the Option to buy the property (at a pre-agreed upon price), but not the obligation. Then you make their monthly payments high enough to cover the current monthly payments plus a little extra. And, you make the agreed upon purchase price equal to the pay off amount plus a little extra.

So, pretend these are the numbers:

Back Payments: $10,000
Balance of Mortgage: $225,000
Monthly Mortgage Payments: $1,500

You charge the end buyer the following:

3 Year Option Agreement
Purchase price: $255,000
Non refundable Option Payment: $15,000
Monthly Payments: $1,750

Here is the Summary:

- You use the $15K to pay off the $10K and put $5K in your pocket immediately, and the end buyer's purchase price is reduced to $240K.

- Each month you collect $250 ($1,750/mo - $1,500/mo).

- When the end buyer purchases the property and get's a loan to pay you off, then you collect an additional $15K ($240K - $225K).

A few things to remember:

- This doesn't work very well if the current home owner has an ARM (adjustable rate mortgage) because the monthly payments could put you in the negative if the rate increases. Works best with a fixed rate mortgage.

- If in 3 years, the property values don't increase enough to warrant your asking price, then you can:
a) Ask for an extension from the current home owner, then give an extension to the person leasing the property (i.e. they keep on renting from you until the property goes up in value).
b) The person leasing from you chooses not to exercise their option, and they move out. Then you find a new person, and do a whole new Lease Option.

There are a few more minor details (i.e. rent credits, maintenance agreements, etc) that I would recommend that you get someone local to help you with your contracts. But, this is the basic concept.

Hope this helps,

You say the house is vacant. Is it still owned by the individual, or has the property gone through the foreclosure process and is now owned by the bank? Depending on where and when you found your information, sometimes foreclosure data services are not up to date on the status of a property. This will determine your course of action.

Hi Stephan Robert,

Thank you so much for this Great Info. I valued it.

Peter

It's own by the the original owner who owns 2 property. This was rented before but now it's vacant.

Can i use a Wholesale approach for a quick bucks?
What are other approach applicable for a beginner like me.

How much is the property worth in relation to how much is owed on it?

There is a key component missing here - the actual market value. Valuing a property based on the tax assessment is like buying clothing from a discount store that states the "Suggested Retail Value." It gives you an idea, but it never represents the actual sales price.

You need to find out the real market value to see if there is any profitability. Imagine what will happen when your end buyer realizes that the house is over priced by 10 or 15%? He walks and you are stuck with a payment on an underwater home.

Thanks to this info.
What if the Market Value is really profitable, Can i just assign it for a quick Bucks?

Peter

The owner has two property, and this one is now vacant. the Estimate value is $220,000.00

Peter, with your most recent information, it appears that either the seller is upside down with this property, meaning that they have negative equity. Even if they are not, and the current value of the property is about equal to the current loan plus delinquencies, if we wanted to make this a wholesale opportunity, we would have to offer a price that is well below what the current owner owes to the bank.
You can make a lower offer, but the seller cannot accept the offer without an approval from the lender to accept the lower payoff on the mortgage, and that is called a short sale.
Lenders are not obligated to accept lower payoffs, but they might if the condition of the property, sell-through rate on similar properties, current market inventory, etc., make it a better solution for them than foreclosing on the property.
From your standpoint with the property, you are at a standstill while the bank evaluates the lower offer, sends it to committee, and ultimately responds with a yes or a no.
We do not discourage people in the program from making short sale offers, but we do make sure you know this is a slower process, and there are generally easier deals to be created in your marketplace. So if you do choose to pursue this one, make it a side-burner project, and go find some speedier transactions out there to make you money sooner. Then if this one does come through, you get a bonus, if it doesn't, you weren't dependent upon the success of this deal for your livelihood.

If you do choose to make an offer on the property, and it is below the loan obligations of the seller, make sure that you include a clause in the offer that states: "Offer subject to approval by seller's lender(s)."

Hi Dallin!

Thanks again for this great info!
Just for clarification, Bank own or with mortgage properties just like this property can it be assign if my low offer will be accepted?

Thanks,

Peter

and it is a waiting game. I am still putting in offers as I work on other deals to make money while that one is cooking, so to speak. I have shied away from short sale, but this one came at a great price and have a buyer for it if it all goes through.

Peter, if the property is a foreclosure, meaning that it is owned by a bank, lending institution, or government agency, they have regulations that prevent the assignment of those contracts. Their expectation is that you will purchase the property, which would lead to a double closing/simultaneous closing situation.
Properties with mortgages are eligible for assignment. To solidify your right to assign the contract, make sure that you designate in the agreement, after your signature, "and/or assigns."

Ok, Thanks! Now i understand.