Investing in preforeclosures -- Page 2

REO properties, which major lenders and even such government agencies as Veterans Affairs and the Federal Housing Administration now turn over to brokers such as Ocwen Financial Corp., which will almost certainly sell at fair market value. And as Lucier notes, "No one ever got rich buying foreclosures at fair-market value."

Bronchick says that while he has had limited luck buying REOs, it's not easy. "Dealing with banks is a little tougher because they're motivated solely by money," says Bronchick, "whereas individual homeowners are motivated by emotion. People don't believe that a homeowner will sell you their house that cheap, but it's the same reason people will get hosed trading in a car; it's convenient and they don't want to deal with it."

In preforeclosure, you can arrange to buy out the distressed owner's equity and perhaps even assume their loan at a rock-bottom price without the interference of government agencies or real estate brokers. That's why foreclosure investors agree that the biggest potential for profit exists by dealing directly with the motivated seller in preforeclosure.

Preforeclosure prospecting
Lists of foreclosures are abundant. The Internet offers listings through hundreds of services that mine the information from public records.

But how do you find preforeclosures?

Lucier says the key is to locate that person in your local county government who records all mortgage or deed of trust foreclosure actions; they might be called clerk, registrar, recorder or protonotary, and work in the circuit court, county court or bureau of conveyances. They'll be the first ones to place into public record a "lis pendens" (Latin for "pending lawsuit") or notice of default, the first step in a foreclosure action. Ideally, you want to ascertain if these public records are searchable online. Alternatively, you might study your local newspaper's Legal Notices section.

Lucier, who has bought more than 100 preforeclosures, searches by ZIP code to locate distressed properties in the $125,000 to $170,000 neighborhoods where he knows he's most likely to find ready buyers. He then contacts the homeowners by mail, explaining what is about to happen to them, noting that if the lender forecloses, they will receive nothing but an eviction notice. He offers to meet with them and buy their property with a cashier's check within five days, thereby preventing the foreclosure from appearing on their credit report. It is the first of four letters he will send as their foreclosure approaches. Lucier's letters are part of his book, "The Pre-Foreclosure Property Investor's Kit," and book purchasers can download the letters from his Web site, www.thomaslucier.com.

Whatever you do, he warns, don't initially contact the homeowner in person.

"People are in denial usually right up to the 11th hour, and you just don't know what their mental state is," he says. "(The letters) are a numbers game; follow-up is key to the whole thing. They're dealing on emotion, not logic, but when they finally decide they've got to do something and they've thrown all the other letters away and your fourth letter happens to arrive, that's when you'll hear from them."

Once the door opens to him, Lucier makes a quick, but thorough, inspection, both of the property and the owner's equity status, before making his offer.

"In a lot of cases, these people have sucked all the equity out of the property," through cash-out refinancing and home equity loans, he says. "It's called equity-stripping. But in high appreciation areas where you might be getting 10-percent appreciation per year, you still might do all right. They haven't sucked that out."

Next, he'll contact the lender to find out how much the homeowner is in arrears and what it will cost in payments, accrued interest and legal fees to reinstate the loan. Then he'll do a title search. If the numbers add up and the lender is willing, he'll try to get them to modify the terms of the loan to allow him to assume the mortgage.

Lucier plans to spend between $6,000 and $10,000 to pay the owner for their equity, reinstate the loan and make needed repairs to sell or rent the property. If he has a buyer ready to assume the contract, he might only be out $2,500 in earnest money.

What kind of return does he expect? "I like to make about $15,000 before taxes or it's not worth it to me," he says.

Though some may be put off by the predatory stereotype of the coldhearted foreclosure vulture, Lucier says the reality is far from heartless.

"Bad things happen to good people. A lot of times, things happen to people that are completely out of their control. I've seen it happen, especially with medical bills or companies like Enron that run off with their pension."

Bronchick stresses that to be successful in foreclosures, it's essential to have a solid Plan B.

"You always have to have a backup plan, so if you couldn't sell it -- you made a mistake and overfixed it or you misinterpreted the value -- your Plan B might be to refinance it and rent it out."

Jay MacDonald is a contributing editor based in Mississippi.