Foreclosure
Hidden Wealth In Foreclosures By Bruce Norris
By Bruce Norris
Jul 29, 2005, 19:04

Most people look at the foreclosure business and see only a fraction of the potential that lies under the surface. Sure, they have received the list of foreclosures from their local source, big deal! Hundreds if not thousands of investors must be looking at this list every day. What are the odds you'll end up with a great deal? Well, if you know how to manipulate the list, the potential is awesome!

Let's take a look at what the typical investor does. First, we have to know which homeowners are in foreclosure everyday. Foreclosure lists can be purchased in almost every state for every county. I live in Southern California and rely on a list produced by County Records Research. I have found their information consistently excellent. Without a doubt, every serious foreclosure investor needs this information. There is no way you would want to invest your own time doing the research that would produce this list on a daily basis.

My list comes in two different sections. One section shows the owners in default and the second section shows the notice of trustee sale. A typical list might have 50 names of new people per day, per county. Let's say you live in my area and follow San Bernardino and Riverside Counties. The foreclosure process takes about four months in California. Within four months you would have about 80 working days, thus you would be looking at about 4,000 new names per county!

If that number seems a bit overwhelming, you are correct. Most people subscribe to the foreclosure list for one month and give up. The problem was they didn't eliminate a huge portion of their list. Many of the properties would never produce an acceptable margin of profit. They should be eliminated from any further time consumption. Spend your time only on the properties with profit potential.

The next mistake people make is only seeing the obvious. Let's take one example of a foreclosure sale (trustee sale). The notice of sale means the property will be sold to the highest bidder within 21 days. You have a property now worth $100,000 and the foreclosing loan was taken out 22 years ago with a current balance of $22,000. Obviously, this property is a gem. Do you think you are the only one who thinks so? Not likely! The trustee sale will be so well attended the police might have to direct traffic! This property will get so much attention, the eventual sale price could be very high. Now, just for fun, let's say there was a second trust deed on the property. We notice the holder of this loan is a private party. The second loan was for $40,000 and has not started foreclosure. Quite obviously the lender of the second has not made the back payments on the first loan either. When the trustee sale is held in about 21 days, any other loan on the property will be wiped out, including the $40,000 second. Depending on the final sale price, the second trust deed holder could receive all or nothing of what was owed. What most investors won't do is take the next step.

First, Let's find out where the lender of the second trust deed is located. Could it be that they don't have the money or the inclination to make up the back payments and foreclose themselves, saving their equity? Perhaps they loaned that money a long time ago, when things were going well. What if circumstances have changed? Is it possible that these people might welcome an offer that would pay them $20,000 of their $40,000 debt? Odds are against it! Probably only 10% of private party note holders facing a trustee sale that could wipe out their interest will take a 50% discount. What most investors fail to do is get their share of the 10% who will! Who cares if 90% of the private lenders won't do what we want? That's the way it is in every facet of our business. Let's say you at least have the courage to call. "Heck no I won't take a 50% discount…but I will sell for a 20% discount." If this were the scenario, let's see what we have created that other investors have missed.

If you purchased a $40,000 trust deed for $32,000, you would be in an enviable position. We had said the property was worth $100,000. There is a first trust deed on the property of $22,000. You hold a $40,000 lien on the property, but have only $32,000 invested. That sounds like a sure payday to me!

You have three choices. First, you could negotiate with the owners of the property. To the rest of the world, the starting price would be $62,000, and that's if the owners didn't get a dime. However, because you bought the second, your cost is really $54,000. That's a big advantage. You might want to negotiate a purchase directly with the owner and have an $8,000 advantage over your competition. Second, you might bring the first loan current and begin foreclosure on the second trust deed that you just bought. The opening bid would be $40,000, plus interest, plus payments advanced on the first trust deed. When someone bids at the sale, they will be paying you off. Will someone bidding at a trustee sale be willing to pay approximately $62,000 for a $100,000 house. The answer in our area is yes! However, there is an even quicker way to profit.

Let's say we just let the first lender hold their trustee sale. Wait! Won't we be wiped out? Well, let's see. In California any bidder has to show up at a trustee sale with a cashiers check for their maximum bid. What would be the check amount we would want to bring? We would need $22,000 to cover the first plus $40,000 to cover what we want. At the trustee sale, you would bid up to $62,000 dollars and stop (unless you really wanted the property). When someone overbid your $62,000, here's what will happen. The trustee who holds the sale will take the winning bidders money and apply it to the trust deeds recorded on the property. The first trust deed holder will get $22,000 and you will get what? You'll get $40,000! But just a few days ago you paid only $32,000 for it? I know…isn't that better than competing with the crowd you knew would show up at the sale.

There is another way to make an offer on this property that is a well-kept secret. By law, you can have your offer presented to the lender by a third party. This process costs you nothing and could very well postpone the sale. Time does not permit me to share this technique now, but imagine if you could have such advantages as this and many others over your competition on a regular basis. Implement a system that takes the guesswork out of what to do as a foreclosure buyer and you will always be ahead of your competition.