Eight Pre-foreclosure Profit Strategies.

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Posted by John Behle on October 25, 2000 at 22:04:10:

I take a multi-solution approach to pre-foreclosures. I find one of the best approaches as coming in as a mortgage broker, so let's expand it a little.

I receive a good response coming in as a lender to help them and have many options. There is less resistance when they don't perceive we are trying to steal their property.

Option 1 - "Reinstatement Refinance" - we loan them the money in a second, third or even a fourth position to bring them out of foreclosure. The LTV ratio is crucial. We would only loan based on being happy if we had to take the property back. Once they are out of foreclosure, we can refinance them in 2-6 months.

Option 2 - "Hard money re-instatement" - Sometimes the existing loans are better kept in place or other circumstances make it so the owner would have a hard time refinancing. We'll just get a great rate of return for the loan (minimum 18%+). Many times this is best done through option 3.

Option 3 - "Distressed Lender Discount" - we always try to discount the lender out and usually get 50% plus. We can then assist the owner by restructuring the loan or waiting a while until they refinance. The best deals come from the junior lender, but we can get some good deals from the "foreclosing" lender. IMPORTANT - Sometimes we get the lender to finance the purchase of their own note. It can be a nothing down paper purchase. I'll show an example later.

Option 4 - "Paper Purchase" - we may also buy out the foreclosing lender's position just to control the situation. Even a small discount can create a great rate of return. We may restructure with the payor or just use our position to control the sale. Many times the property has to be run through a foreclosure to help clean the title. We can then re-sell. Sometimes that is to the original owner, tenant or a new party.

Option 5 - "Wrap Resale" - whether we have bought the loan or reinstated it, we may turn around and sell it back to the original owner or tenant on a wrap. The wrap is important for control. A lease option can work here too, but I like wraps. Usually the form of the wrap is an AITD.

Option 6 - "Paper Trade" - some lenders are very open to a trade of another "performing" note for their "non-performing" note. Example. Lender has a 50k defaulted note and I trade him a 50k (or less) note that I bought at a large discount. That may be one from a previous deal that was defaulted, but now has a good payment history. A "substitution of collateral" technique can also happen here if the lender might have an installment sale need. i.e. - if done properly, the lender (private - previous seller) can maintain their installment sale. I call that the "Installment Sandwich".

Option 7 - "Quit claim" - the only option most people consider. It's just nice to have other options to make money and great returns.

Option 8 - "REO hero" - work with the bank after the foreclosure and buy the property at a discount or trade them notes. There are many options here. Some actually can equal getting the property for free. That's another post.

Here's a "distressed lender discount" example. A motel was in foreclosure. It appraised at 2.3 million and had a first foreclosing of about 1.7 million. There was a second that didn't interest us other than to wipe it out.

We approached the insurance company that was the lender. We offered them a 50% purchase of their defaulted loan. $850,000 for their $1,700,000 "bad" loan. They took it without even blinking. They gulped when we asked them to loan us the $850,000 to buy their loan for $850,000 - but accepted.

A nothing down deal at 37% of value. $1,450,000 in free equity and a fabulous cash flow.


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