Exit Strategies When Buying a Pre-Foreclosure Home Part I

It seems like it’s not important to know your exit strategy (what you’re going to do with your pre-foreclosure home after your offer is accepted) when you first sit down to share your pre-foreclosure information with the seller and before they even sign the Purchase Agreement. But it is not like that.

Important Pre-Foreclosure Information After Acceptance

What you are going to do with that property before foreclosure is just as important now as it will be when the bank accepts the offer.

– If you buy the house, where will you get the money?

– If you borrow the money, how much cheaper do I have to get the house to repay the interest?

– Are you going to lease/rent or sell the property after the rehabilitation?

– Are you going to do the repairs?

– If you don’t want to do the repairs, who will?

– Do you have a list of people who would be interested in buying the house if you are not?

– Where would you find people who would buy the house if you didn’t?

These are all important questions and you should think about them all the time you are working on the pre-foreclosure track. Once the offer is accepted, you generally have 30 days to close the deal. So time is of the essence.

If you have most of these questions answered and the pieces in place, it’s much easier.

We’ll take them one at a time.
1. Yes, you will buy the house before foreclosure and do the repairs yourself. And you don’t have money, but you have experience in rehab.

Buying homes before foreclosure is a great way to build your property portfolio and increase your net worth. You can get the money from a private lender, a hard money lender, or a mortgage company.

Using a Private Lender When Purchasing a Pre-Foreclosure Short Sale

A private lender can be someone in your family or circle of friends who knows you’ve done some rehabilitation, is interested in increasing their own income, and believes in you. They may lend you the money at 8% because they currently only get 4.5% in a money market account. Great deal!

It will simply show them that their money will be safe through a first mortgage on the property and that you will buy it for less than 70% of the after repair value (ARV) or after the value and fair market value are fixed for the neighborhood.

They can lend you the cash directly or from your self-directed IRA (more on that later) where the money is not taxed.

Using a hard money lender when buying a pre-foreclosure

A hard money lender charges a higher interest rate and usually targets up front. (Each point is 1% (percent) of the loan amount). They may or may not look at your credit, but they generally don’t want this to be their first deal. They want you to have experience rehabbing and buying property, making them feel more secure when they don’t know you. They usually don’t ask for a credit report. They are lending because there is equity in the property and they will foreclose on the property if you do not make your payments.

Another way to build trust with your lender is to provide them with even more pre-foreclosure information. Sign an advance deed with your private lender returning the property rights to your lender if you default on your payments. The deed can be held in an attorney’s or Title Company’s escrow account, if necessary.

Giving your lender options shows that you want to make sure your investment is safe and is a great way to keep them wanting to lend you more money!