Foreclosures Creative Real
Estate Financing
Technique #12...
Foreclosure
properties are a true diamond in the rough. This technique, illustrated by one of my friend's recent transactions, actually consists
of combining the following two techniques:
Buying foreclosure property from a bank at a substantial discount.
Banks call these properties Real Estate Owned (REO). various banking regulations require banks to dispose of
REO properties as soon as possible. You can offer to buy these properties from a bank for the
foreclosed mortgage amount, which is frequently less than the appraised value of the property.
Trading equity in a property you own for another property.
You can often use equity in a property, owned free and clear, as part of the purchase price of another property.
Let us look at specifics of the transaction. The buyer went to a bank and asked the loan
officer in charge of foreclosures, "What foreclosures property do you have that you that you would most like to sell?" the banker describes a piece of vacant land on which the bank had foreclosed. The bank had originally loaned $60,000 on the property, and very much wanted to get
it off the books.
The buyer knew that, by law, banks have to obtain an appraisal as part of the foreclosure process. Also, he knew that banks typically lend les than 50% of the appraised value on vacant land. The banker showed the buyer the property's appraisal, which indicated a fair market
value of $160,000. (A good lesson here is that property, especially vacant land, cannot always be quickly sold for its appraised value.)
The buyer then made several offers on properties that were in the Multiple Listing service (MLS) book. The buyer's broker was more than willing to help him locate properties through the information in the broker's MLS book for the purpose of making offers. In each of the
offers made, the buyer used this vacant land at its appraised value of $160,000 as part payment of the purchase price. Two of the offers were accepted. Since he made sure there was an escape clause in each offer, the buyer had a choice between either property to put together a transaction.
The property he selected was $260,000 apartment building with an assumable loan of $115,00 on it. The buyer arranged to both assume the $115,000 loan and give the seller the vacant land appraised at $160,000, for a total purchase price of $270,000. The $15,000 premium ($275,000 less
$260,000) simply made the offer more attractive.
The buyer had one remaining problem, which was finding $60,000 with which to purchase the vacant land. The buyer went back to the original bank and asked the loan officer for a second mortgage on the apartment building the buyer was trying to purchase. The banker said that
they would loan up to 80% of the building value, or $280,000. Because a first mortgage of $115,000 already existed on the apartment building, the bank would loan an additional $93,000 (the difference between 80% of the building's value, $208,000, and the first mortgage, $115,000). With
this $93,000 second mortgage, the buyer was able to pay for
the vacant land and still had $33,000 left over.
Lets take a look at how each party stood after this transaction.
Bank:
The bank's worst foreclosure property was sold for the full $60,000 the bank originally loaned for it. An additional $93,000 loan was made on the apartment building. Remember, bankers are in the business of loan making, not sitting on foreclosed properties.
Buyer:
The buyer now owns the apartment building without taking a penny out of his own pocket. What is more, he put $33,000 cash in his pocket at closing. Thus, by assuming a loan for $115,000 and obtaining a second mortgage for $93,000,for an actual total cost of $208,000, he bought an
apartment building worth $260,000 and received $33,000 cash! An additional $52,000of immediate profit was received in the form of equity in his building ($260,000 value less $208,000 in loans). In short, the buyer receives $33,000 in cash and $52,000 in equity which net the buyer a
whopping $85,000 profit at closing!
Seller:
The property was sold quickly, and as far as the seller is concerned, at more than the asking price. The existing loan of $115,000 was assumed by the buyer, and the seller now owns a piece of vacant land free and clear with an appraised value of $160,000 for a total package of
$275,000!
A creative mind has no limits when working with real estate. This transaction was completed less than six weeks after the buyer made his initial inquiry at the bank. You do not need to wait five to ten years to make money with real estate.
There is a service that we recommend and that we currently use
for some of our foreclosure & FSBO's listings. With over 31,000 foreclosure properties
nationwide, FFS is updated daily, with both residential and commercial foreclosure properties.
Their subscription service is used by a variety of customers including first time home buyers, investors and
Realtors, at a cost that is affordable. FFS is a solid service to utilize and Profit from Foreclosures!
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Example
Summary
Technique #12
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Foreclosure
Properties
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What
You Need To
Begin:
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Good
Credit
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Summary
Of Terms:
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Appraised
value of REO
property
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$160,000
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Original
bank loan
(foreclosed)
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$
60,000
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Procedures:
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- Ask the bank for a
list and
the
appraised
value of
REO
(foreclosed)
properties.
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- Make several offers on
other
properties
using the
REO as
part of
the
payment
for the
purchase
price
(make sure
each
contract
has an
escape
clause)
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- Select
which
transaction
to put
together.
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- Take
a second
mortgage
on the
property
you are
trying to
buy.
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- Pocket
any money
left over.
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Results:
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- The buyer owns an
apartment
building.
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- Extra
cash was
made and
pocketed.
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- The
buyer
actually
paid less
for the
apartment
building
than what
it was
worth.
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- The
buyer has
equity in
the
building.
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- Bank
unloads
the worst
REO
property
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- The
bank
received
the full
amount for
the REO
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- The
bank has a
good
second
mortgage
on an
apartment
building.
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- Seller
received
more than
asking
price for
the
property
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- Another
property
is owned
free and
clear.
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Specific
Situations to
Apply
Technique #12
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The
Property
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The
Buyer
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Good Credit
at banks or
Credit Union
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Lump
Sum Cash Due
Soon
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Large
Monthly Income
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You
Know people
with Cash to
Invest
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Equity
in Real or
Personal
Property
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Dead
Equity
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Skills
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Large
Amount of
Available Time
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The
Seller
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Foreclosure
Bargains to Brokers
Money
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