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Offers on Pre-Foreclosures |
Before considering making an offer on a property, it's best to consider the owner's motivations and desires. If you contacted an owner in distress and offered to give them $10,000 that they would not need to pay back because you liked helping people, how many would accept? Certainly most, if not all of them.
Conversely, if you ask owners in distress to give you $10,000 because you'd like to have it, how many will consent? Very few, if any.
The solution lies in the middle ground, where you can solve the owners needs and problems, and in return you can realize equity the owner cannot. A perfect example is an owner who hasn't had the funds available to maintain their property to area average standards. If they choose to list their property for sale with a Realtor, they will have to deal with showings, the time (often months) to market the property, and ultimately receive a lower "as-is" type price due to property condition. If the foreclosure auction date is looming, they'll probably need to discount the price even further to get an accepted contract in place and hopefully have the sale postponed. Your goal is to solve their problem, and maximize the value of the property.
An equity buyout from the owner is one way to solve the owner's immediate problem and allow you to realize additional equity. The concept is fairly simple and is also sometimes referred to as a "subject to" purchase, which means the existing financing stays in place, with your purchase "subject to" that financing. One essential thing to keep in mind when evaluating any offer is that you need to base your offer on the owner's NET equity, not gross equity. Using an example of an owner who has a property worth $100,000 that needs about $5,000 in repairs to obtain that $100,000 value, and they have a loan with $75,000 due (including 2 past due payments). How much equity is there? Optimistically, there's really only about $10,400 in equity. Here's why.
$100,000 Market Value of property in fully repaired condition.
- $6,000 Sales Commission to sell the property using a Realtor charging 6%
- $1,500 Closing Costs upon resale- Title insurance, Escrow or Closing Fee
- $5,000 Repairs necessary to bring the property to market condition
- $2,100 Payments (3) on existing loan while owner moves, repairs are done and
property is marketed.
- $75,000 Existing loan balance
$10,400 Actual Equity
Knowing the requirements and costs to sell a property in your area is essential for preparing a realistic Net Proceeds sale sheet for an owner. It allows you to educate the homeowner to the costs of sale, and allows you to focus discussion on the purchase of the actual equity, rather than loan balances and possible home values. When considering the Net Proceeds, pay close attention to repair costs because underestimated repairs can alter your profit considerably and consider the possibility your carry costs may be higher than the three months used in the example. It can be done within a three month time-frame although four months is somewhat more realistic for many purchase and resales. Allowing five months is fairly safe.
So what's a fair offer? Consider using 50% of net equity as a fair offer to the homeowner. Although $5,200 might not seem like a whole lot to the homeowner, it's certainly better than not getting anything if the foreclosure proceeds, and it isn't realistic for you to pay more because you'll have to bring the loan current, pay for repairs, and pay for costs until the property re-sells. If you can't come to an agreement that works for everyone, and is truly "win-win", move on to your next prospect. You can't help everyone.
The last page in this series contains links where you can obtain more information, sample forms, books and courses on equity buyouts and subject to purchases. You can go there directly by clicking here, or go to the next section to find out how to create equity in a "no-equity" situation.
Owners of Pre-Foreclosures |
Foreclosure Books, Courses
and Training |
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Offers on Pre-Foreclosures |
