Even if you look to flip the property to another buyer, there can be challenges with that as well. This is especially true if you are attempting to flip a property to an end buyer who is financing the acquisition.
What if there was a way you could make money off foreclosures without buying the property at all?
There is a way that you can make money off foreclosures without ever having to purchase the property. It is known as foreclosure liens and understanding this process can create a substantial monthly income stream for you without ever having to own a piece of real estate.
What is a foreclosure lien?
When a property goes into foreclosure, the lending institution seeks to take possession of the property to recoup as much money as possible. The property is sold at a foreclosure auction and the proceeds of the sale from the auction go to paying off the outstanding mortgage balance against the property.
In addition to the mortgage, there is a potential for judgment liens to be recorded against the property as well. When a homeowner fails to pay a bill of any type, whether it is a credit card bill, medical bill, landscaping bill and so on, the company who the homeowner owes could file a judgment lien against the property.
A judgment lien is a court appointed order that requires any proceeds from the sale of a property to be paid to the lien holder prior to being paid to the actual seller of the property. This technique gives the lien holder an option to potentially make their money back.
When a house goes into foreclosure, there are many owners who simply refuse to take the necessary action to rectify the situation. Many homeowners in foreclosure seem to believe that money will fall out of the heavens at the last minute to pay for their outstanding mortgage balance and save their property from foreclosure.
As a result, even if they are offered options by investors and other real estate professionals, they fail to act upon them. They then eventually lose their home in the foreclosure process because they ignored the problem instead of addressing it.
When a property is successfully sold at a foreclosure auction, the proceeds raised from the sale are used to pay off any outstanding debt associated with the property. Outstanding taxes are paid first, followed by outstanding mortgage balances.
If there is any money left over after paying off the outstanding mortgage balance that money must first go towards paying off judgment lien holders on the property. Then, once all of the judgment lien holders have been paid off, if there is still money left over, that money goes to the homeowner who was foreclosed upon.
As an investor, there is a strategy that you can implement with little to no risk to you that allows you to be able to capitalize on this and position yourself to profit.
Suppose you encounter a property that is in foreclosure. You try to negotiate with the homeowner. However, the homeowner refuses to sell the property. Depending on what the outstanding amounts are on the property, it is possible for you to profit regardless of whether or not the homeowner decides to sell to you. In fact, with this strategy you can profit regardless of whether or not you are able to place a winning bid at a foreclosure auction.
When you encounter a property that is in foreclosure where you cannot get the homeowner to sell to you, the first step that you want to take is look and see what the outstanding balances are against the property.
In order for this strategy to work effectively, the ideal scenario is a scenario in which there is equity in the property. A property with equity gives you the best chance at securing the maximum amount of profit that you can generate from a judgment lien.
For example, suppose you find a property that is worth 0,000 on the market after repairs have been made? The mortgage balance is 0,000. The property requires ,000 in repairs. There is also a ,000 judgment against the property. This is a perfect example of a property that you will probably want to go after.
The total amount of outstanding debt obligations tied to the property is 5,000. That means if the property is repaired and all obligations are paid off, there is ,000 in equity available in the property.
So how do you make money?
What you will want to do in this case is contact the lien holder. Let him or her know that you would be interested in purchasing the lien from them. You should pay no more than 40% of the value of the lien. It is not uncommon to offer and have accepted as low as 5 to 15% of the value of the lien.
So let's say you paid ,000 for the judgment lien or 33% of the value. The great thing is you don't even have to come up with the ,000. You can secure the lien by tying it up with an option, which gives you the option, but not the requirement to buy the lien. There needs to be a dollar amount for an option to make it legal so you can offer for the option.
I recommend that you make your option period good for 120 days. This gives you enough time to find out if the judgment lien will get paid off at the foreclosure sale. If it does, you exercise your right to buy the lien and use the excess profit (because you will make ,000 plus interest) to pay the ,000 sale price you negotiated for the lien.
What happens if the judgment lien does not get paid off? You simply choose not to exercise the option and at most, you have lost a single dollar. That is the power behind using foreclosure liens to make money on foreclosures even if you don't buy the property.