In a pre-foreclosure situation, if you buy the house directly from the homeowner, there are typically two scenarios. The property either has equity or little to no equity. If the property has little to no equity or if more is owed on the property than it’s worth, a short sale would need to be negotiated. The property is put under contract with the homeowner. However, the amount to purchase the property will be negotiated with the lender. After all, they’re the one who is taking the loss. Often, the lender will require a lot of paperwork from the homeowner to consider the short sale.
Some items typically needed to include:
- Signed contract
- Financial statement from the homeowner
- Hardship letter explaining why the homeowner is in this situation
- Income tax records
- Bank statements
- Pay stubs, if applicable.
In some states, the lender may try to collect the difference in the amount the house sells for, and the amount owed from the homeowner. This amount is a deficiency. If they don’t collect, the homeowner may have to pay income tax on that amount. Homeowners should be advised to speak to an accountant to discuss.
Another option is to purchase the home from the homeowner. The homeowner will keep the difference between what is owed and what the house sells for less additional closing costs.
Houses that have been foreclosed on typically need some rehab. The homeowner may have deferred maintenance, especially if they knew they wouldn’t stay in the property. Also, if they can’t afford to make their mortgage payment, they likely can’t afford to maintain the property.
We, of course, work with foreclosures as an acquisition strategy. No matter what stage of foreclosure you purchase the house, nearly all major exit strategies apply. You may wholesale it, rehab and resell it, rehab and rent it or even do a lease option. Any of these options will usually make for a nice, profitable deal!