It seems like it’s not important knowing your exit strategy (what you’re going to do with your pre foreclosure house after you get your offer accepted) when you first sit down to share your pre foreclosure information to the seller and before they even sign the purchase contract. But that’s not so.
Important Pre Foreclosure information after the acceptance
What you’re going to do with that pre foreclosure real estate is as important now as it will be when you do get the offer accepted by the bank.
– 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 pay the interest back?
– Are you going to lease/rent or sell the property after the rehab?
– 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’re not?
– Where would you find people who would buy the house if you don’t?
All these are important questions and you need to be thinking about them the whole time you work on the pre foreclosure lead. Once the offer is accepted, you usually 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 a lot easier.
We’ll take them one at a time.
1. Yes, you’re going to buy the pre foreclosure home and do the repairs yourself. And you don’t have any money, but you do have experience in doing rehab.
Buying pre foreclosure homes is a great way to build your portfolio of properties and build your net worth. You could get the money from a private lender, a hard money lender or a mortgage company.
Using a Private Lender when Buying a Pre Foreclosure Short Sale
A private lender could be someone in your family or circle of friends who know you’ve done some rehab, are interested in increasing their own income and believes in you. They may loan you the money for 8% because they are currently only getting 4.5% in a money market account. Great Deal!
You’ll just show them their money will be safe via a first mortgage on the property and you are buying it less that 70% of the after repaired value (ARV) or after it’s fixed up value and fair market value for the neighborhood.
They can lend you the cash outright or from their self-directed IRA (more on that later) where the money becomes non-taxable.
Using a hard money Lender when buying a pre foreclosure
A hard money lender charges a higher interest rate and usually points upfront. (Each point is 1% (percent) of the amount of the loan). They may or may not look at your credit, but usually don’t want this to be your first deal. They want you to have experience in doing rehabs and buying property, making them feel more secure when they don’t know you. They normally don’t ask for a credit report. They are lending because there is equity in the property and they will foreclosure on the property if you don’t make your payments.
Another way to build confidence with your lender is by giving even more pre foreclosure information. Sign a deed up front with your private lender giving the property rights back to your lender if you do default. The deed can be kept I an attorney or Title Company’s escrow account it its needed.
Giving your lender options demonstrates you want to ensure his investment is safe is a great way to keep them wanting to lend you more money!