Foreclosure. It’s an ugly word and one that many people would rather never
hear, or never hear again. But the fact is that a foreclosure situation could be
an excellent time for a negotiated payoff of an existing loan. To understand,
take a look at the dynamics surrounding a bank foreclosure.
The lender has granted a loan based on several factors – the belief that the
borrower would repay the loan and the fact that someone else would be willing to
buy the property if the borrower should default are at the top of the list,
right behind the interest they’ll earn from the transaction. And we all know
that the bulk of that interest is paid toward the front end of the loan. So a
bank foreclosure of a loan that’s already several years old has returned at
least a percentage of the profit the lender was expecting to make.
Then foreclosure proceedings begin.
The early stage of foreclosure is the point in which the lender and borrower
come to terms with the fact that the loan is (or isn’t) likely to be repaid in
full. At that point, the lender already knows where the profit margin stands and
how much they can afford to lose if they repossess and resell the foreclosure
property. They also already know the amount of work involved in taking physical
possession of the home, putting it back on the market and offering it up for
sale. Most lenders simply aren’t inclined to take the time and the foreclosure
auction is one way they might rid themselves of the property while trying to
minimize their losses.
But the lender may also be willing to negotiate a payoff at this point – a
fact that many people don’t recognize. It’s the same principle as used in the
credit card industry. The repossession is going to cost time and money, and
collecting something is better than collecting nothing.
Enter the foreclosure investor.
At this point, the foreclosure investor has several options. The less the
demand for the foreclosure property, the more options available. One very real
option is to offer a lesser payoff for the property. You may think that no
lender would take a loss, but remember that they’ve made some profit already
from the interest during the early period of the loan. Keep in mind that these
are probably people who deal with real estate all the time, so they’re not going
to give you the property at a fraction of the area market value. If there’s
enough money at stake, they’ll go to the trouble to repossess the property and
put it on the open market.
This practice may also benefit the current owner. Though a person in a
foreclosure situation isn’t likely to have a ready supply of cash or other
funding sources, keep in mind that you might be able to negotiate a payoff
arrangement. Don’t allow foreclosure to progress expecting that you can make
this happen, but it could be a way for you to retain your home.
