Step by step guide to buying preforeclosures

Many people just starting out in real estate investing work at buying preforeclosures (meaning they contact people whose house has had a notice of foreclosure filed against it and attempt to buy the house and pay off the mortgage before it goes to foreclosure auction). This is mainly due to the fact that large amounts of capital are not needed - you just find a good deal, get it under contract, then sell your contract to an investor who does have the money to buy the place. People who do this are called birddogs, since they find the deals and bring them to the investor, who pays them for their work (usually a couple hundred to a couple thousand dollars, depending on the deal). Since the birddog never buys the house, he or she doesn't need any cash. Easy though it sounds, people still have questions about exactly what they need to do.

Some time ago, on the discussion boards at richdad.com, a poster named UtahInvestor gave instructions on how to do this. Unfortunately, his posts often contained lots of typos, grammar errors, and tended to jump around. Often, all the pieces needed were scattered over several different posts. I went through and gathered these posts and distilled them down to a series of steps the birddog needs to follow. I wrote out the steps for two scenarios: buying the preforeclosure yourself and selling your contract to an investor.

This information is powerful! This is all you need to take your first steps towards getting out of the rat race of your 9 to 5 job. You can thank me later :-)

For buying a preforeclosure and reselling it yourself

1. Check Recorder’s office for Notice of Trustee Sales filings. Find properties where first deed amount divided by the fair market value <= 75%. Don’t worry about second mortgages.
2. Send out postcards or call owners found in step 1.
3. For those people that are receptive, set up a face to face meeting.
4. Before the meeting, search court records for the owners – find out about divorces, criminal charges, etc. Anything that might create a need for them to sell. Use this information to stop you from offering too much.
5. Before the meeting, get a preliminary title report on the property from a title company to verify your findings of step 1.
6. At meeting, find out their pain – listen to them, determine what they need, and offer solution. Also check out condition of house and verify that your FMV appraisal in step 1 is appropriate.
7. Get quit claim signed by people on title. This should be notarized. Do not provide payment to owners at this time. They should move out immediately. Do not record the quit claim.
8. If there is a second mortgage, negotiate with mortgage holder to buy it.
9. When they have moved out, pay them. Meet them outside with their moving van. They give you the keys, you give them their money (or whatever they needed).
10. Get place cleaned, carpet shampooed, etc.
11. Place for sale ad in paper, post signs, get lockbox on door. (Or list with Realtor.)
12. Make sale. Fill out sale contract. Sign and notarize contract.
13. Take quit claim and sales contract to title company. Let them do their thing.

All above should take place in 30 days, more or less, to avoid getting more negative items on the owner’s credit report. If you need to do major repairs, you should insert step 5A where you find out the costs to bring the loan current, then make it current and keep it current until sold. In this case, you should not drag this out as the owners will not be able to get a new loan until their old one has been paid off.

For buying at preforeclosure and assigning contract to buyer

1. Same as steps 1-6 above.

7. Get sales contract with people on title. Buyer should be “your name or assigns”.
8. Notarize document.
9. Contact investor and negotiate price for contract.
10. Write assignment contract assigning your rights of the sale contract to the investor. Contract does not list amount you are being paid. Notarize.
11. Take both contracts to the title company.
12. Investor pays you either when the assignment contract is signed or when escrow closes.

This method assumes you trust the investor, as there is no document forcing him to pay you. If you do not get paid, you can file a Notice of Interest or Notice of Lien against property. If you do not trust the investor, you can have a non-circumvent agreement stating you get paid x dollars at the close of escrow. In this case, give that document to the title company as well and they will pay you directly. But keep in mind, there is usually no reason not to trust the investor - he's in it to make money and the more deals you bring him, the more he makes. Thus, it is in his best interest to treat you well.

The most important step is step 6!!!! You must establish a rapport with the home owner. Be a great listener. Find out their pain, what they need from you. These people are being deluged with offers from other people like you. Make them feel comfortable with you and you will beat out all the other people trying to get their home.