[Editor’s Note: This is the fourth installment in Marko’s six-part series on investing in real estate foreclosures]
As a foreclosure investor, you need to fully understand all the options and alternatives available to the homeowners and the consequences of each option. Then you can position yourself as their best bet to help them out.
Every owner facing foreclosure has the following (7) options available to them.
1. Reinstatement. This is when the buyer cures the default either through their own money or short-term borrowing. Keep in mind that curing the loan is more than the total of the missed payments. It will include attorney’s fees and other fees charged by the lender such as filing fees, etc.
2. Sell the property. The owner can sell the property any time prior to the foreclosure sale. This can be difficult and risky because deals fall through or the prospective buyers may not qualify for the loan. Often this requires us doing a short sale in order to create equity.
3. Refinance. The owner refinances the property with a new loan that pays off the loan in default. If the owner is behind in payments, this may be very difficult to do.
4. Deed in Lieu. The owner deeds the property directly to the lender, so the lender doesn’t have to go through the foreclosure process.
5. Bankruptcy. The owner can file bankruptcy, which will stop the foreclosure in its tracks, but only until the release is obtained from the court by the lender. Unless the owner can make up the back payments as part of a reorganization plan, bankruptcy only delays the inevitable. And this is important: Once the stay is lifted, the foreclosure process will continue where it stopped! It does not re-start the clock back to day one!
6. Let it go and get something when it sells. The owner in this case lets the foreclosure proceed, and receives anything above the opening bid after all the junior liens are paid off. In most cases, that is nothing.
7. Walk away. The owner lets the lender proceed with the foreclosure. This may be an economically valid alternative when the owner has very little or no equity, but the negative effect on the owners’ credit will live with them for 10 years or more.
Now that you know the alternatives to foreclosure, let’s look at some strategies I use to get the deal done.
How do I know that they work?
I learned early in my investing career is that there are certain things I can do or say that alter the outcome of negotiations with sellers. Rather than go through all my mistakes, let me tell you what I know works.
When I got started in the business, I could only close one out of every five deals I attempted. Now it’s closer to four out of five. This, as you can imagine, has done a great deal to increase my income, and it will for you, too.
Early moves set the stage for what happens later
- When I am fairly certain that all things are present to make a great deal, and
- I have reviewed all the numbers, and
- Have decided on my exit strategy
…then call the owner and ask to visit them at their home when all the people on the title are present. Remember, I am setting the stage here.
How it works
When I arrive, I introduce myself and ask the owner to give me a tour of the property. When I enter the home, I look for pictures of kids or anything I can talk to them about to break the ice.
I let them talk for as long as they like about how they got into their current predicament, and I actively listen. I express empathy with their situation and tell them that they are not to blame–bad things happen to good people.
Then we tour the house, and I may make some notes. At the end of the tour, I sit down with them and ask them to restate all the facts.
Then comes my first crucial question…
I ask them what they would like to do. What would be their best outcome of our meeting?
Once they realize that selling is the best option for them, I tell them about what I might be able to do to help them. In most cases, they have already seen my credibility-building website, and they have seen a dozen video testimonials from people I have helped.
I remind them that I have seen 7 other homeowners in the exact same situation this week, and I still have 2 more to see tomorrow.
I have a memorized script that continues to plant seeds that I am their best option. I show them how I will make up the back payments on their loan and immediately improve their credit rating.
Later, when we have agreed on all the terms of the sale, I introduce the idea of buying “subject to” their existing financing. I will continue making payments on their loan, further increasing their credit score. This minimizes any future objection to me taking over the loan still in their name.
Time to close the deal
Then it’s just a matter of agreeing on simple things, like moving date, closing date, etc.
I go over all the terms before taking out the purchase agreement once again, but I make one last comment that it looks like I will be helping them (and the people I’m supposed to see tomorrow are out of luck because I never take on more than four clients per month).
Saying this will help you handle any “we’ll think it over” objections, should they arise. After all the paperwork is signed, I congratulate them on taking action and doing the right thing. Be happy for them and show it!
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