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Real Estate Investing: How To Buy Distressed Real Estate in Preforeclosure

Aug 17, 2007
When folks find out that I buy houses from distressed homeowners during the preforeclosure stage, they always ask the same question: "How do you find them?"

My simplest answer is: "At the courthouse."

Distressed properties are always easiest to find when a mortgage lender begins the foreclosure process. (The process is triggered when the borrower fails to make a mortgage payment.) Technically speaking this is the "preforeclosure" stage. The borrower/homeowner has missed one or more payments, the sheriff's sale or public auction is looming on the horizon, and the homeowner realizes he may soon lose his home.

Depending on which state you live in, the lender either records a Notice of Default (NOD) or files a judicial foreclosure lawsuit against the borrower. As soon as the foreclosure is public information, it's relatively easy to find.

So, depending on which property I'm interested in, I either do a search at the county courthouse or I get the information from a legal newspaper that has done the searching for me.

The hardest part is finding a property that has any equity in it. What I'm looking for is a Loan To Value (LTV) of 80% or less. For example, if a property has a market value of $100,000, the homeowner can't owe more than $75,000 -$80,000 on the property.

Why? Because I can't spend more than $75,000 - $80,000 for the property and still make a decent profit. That includes what I pay for the property (principle, interest, taxes, and insurance), my repair costs, and my holding costs. I have been known to pass on a great deal, simply because it was November and I wasn't convinced that the property would sell before summer. I always factor in having to pay the holding costs on a property for at least six months while I remodel or market the house. If the numbers don't work, I walk away.

Sometimes it takes quite a bit of research to find a property that I can make a profit on, but the rewards are worth it.

Now, before you call me a mercenary just because I look for distressed properties to profit on, let me say this: Somebody profits from every foreclosure - and it might as well be you or me.

Some people think it is unethical to benefit from another person's misfortune of losing their home or investment property by buying it from them in the preforeclosure stage. But I disagree. I look at buying preforeclosures as opportunities to help the distressed owners save their credit. When I buy their property, their debt is paid off and they are free to move on with their lives.

Foreclosures and other property distress are caused by divorce, unemployment, death, medical emergency, economic downturn, and any number of personal problems.

Recently, many homeowners bought expensive homes or refinanced to take equity out of their homes when the interest rates dropped. Those that later lost their jobs or had a medical emergency suddenly lost their ability to make mortgage payments. Many of those houses are now coming on the market as foreclosures because their owners haven't been able to sell them.They think of me as their guardian angel when I am able to buy their property prior to the sheriff's sale, save their credit, and pay off their debt.

For the most part, homeowners understand that a real estate investor needs to make a profit to stay in business. If the homeowners are "upside down" in their house (meaning, they owe more than the property is worth), and there is no equity in the property, then it is very unlikely that they will be able to sell quickly -- to me or anyone else -- and get out from under their debt.
About the Author
Krista Goering is an attorney and real estate investor teaching real estate investing strategies online. Over a two year period, she bought and sold more than $4.5 million of real estate using these strategies. Discover how to profit from Foreclosures at http://www.foreclosures-now.info. You'll be glad you did.
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