Homeowners in Default: Contact with Care

As home prices continue to escalate, more and more potential homebuyers find themselves on the outside looking in, unable to find a property in their price range that they’d be comfortable calling “home.” Partly because of this, interest in foreclosure properties — especially pre-foreclosure properties — is at an all-time high. These properties often represent an opportunity to purchase a property at significant savings.

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Pre-foreclosure properties can often be purchased for prices well below market value. These properties, which have entered the foreclosure process but have not yet been repossessed by the lender, fall into two general categories: notice of default and notice of sale. Property owners in default are usually in some type of financial distress and the closer it gets to the auction sale, the greater the risk the homeowner runs of being foreclosed on by the lender. (For a more detailed explanation of the Foreclosure Process, visit RealtyTrac’s Foreclosure Overview.) Timelines vary from state to state, but in most cases once a property owner has been put on notice, the house will be sold at an auction within 90 – 120 days unless the past due payments have been cleared up by the homeowner.

Since it involves dealing with someone who’s already under duress, communicating with owners in default can be mentally, physically and emotionally draining for many homebuyers and real estate investors. You endure the hassle of tracking down the owner’s contact information and then summoning the courage to actually make contact, only to have the door slammed in your face – figuratively and maybe literally.

The prospect of contacting owners in default is enough to turn some people off buying pre-foreclosure properties, despite the deep discounts that can be found in this hidden real estate market. That’s unfortunate because much of the discomfort involved can be mitigated with the right approach and the right communications strategy.

The right approach includes viewing the purchase of a pre-foreclosure property as a win-win situation. While it’s true that the homebuyer is hoping to purchase a home at a price below full market value, it’s also true that in the process, the distressed home owner will be able to avoid being foreclosed on, and will often walk away with a reasonable amount of cash.

To be sure, buying pre-foreclosures isn’t for everyone. It takes careful preparation, aggressive marketing and dogged persistence to negotiate a purchase agreement with an owner in default. But the rewards you can reap from a successful pre-foreclosure purchase make it worth it. You can potentially save tens of thousands of dollars – sometimes much more – and walk away with feelings of satisfaction and accomplishment rather than frustration and failure.

Real estate investor and trainer T.J. Marrs has reaped the rewards from several successful pre-foreclosure purchases. He provided a recent example in which he had negotiated a purchase price of $240,000 with the owner of a pre-foreclosure property with a market value of $310,000. He credited the successful purchase to persistent marketing that targeted the owner’s built-in motivation to sell.

“The reason they’re willing to sell is that they are very motivated sellers. And they’re going to lose the property if they don’t sell,” Marrs said.

The first step to contacting owners in default is to find pre-foreclosure properties with default notices filed against them. Those default notices are available at the local recorder’s office, or you can access the same information online with services like RealtyTrac, which maintains the nation’s largest database of pre-foreclosure properties, which are updated daily.

Once you find some pre-foreclosure properties that interest you, the following tips should help you effectively contact and communicate with owners in default.

Preparation is Paramount
Before you contact the owner, take some time to get your ducks in a row so that you’re prepared to communicate intelligently. First call the trustee or attorney listed on the default notice to make sure that the loan is still in default. You don’t want to waste time contacting owners who are no longer in foreclosure.

Research the property’s investment potential by subtracting all the debts encumbering the property from the estimated market value. Check the property for any outstanding tax liens, bankruptcy filings or other encumbrances. This research will become extremely important when negotiating a purchase agreement with the owner. If the outstanding debts add up to more than the property’s market value, it’s probably not worth contacting the owner in the first place. Similarly, if the owner has filed bankruptcy, there’s a good chance that the foreclosure process has been forestalled, and you may want to move on to another property. RealtyTrac provides information on all of these criteria on hundreds of thousands of properties, but it can also be found at the county recorder’s office or by contracting with a local real estate agent or title company.

Make sure you have financing in place and the proper real estate forms on hand if the owner agrees to sell the property. You can get financing options and contact a local real estate agent to help you with the necessary paperwork using RealtyTrac’s nationwide network of prescreened real estate professionals and lenders.

If you can show that you’ve done your research and have the pieces in place to buy quickly, owners in default will regard you as a competent buyer who is ready and able to help them out of a tough situation.

Marketing makes a difference
Your first communication with owners in default should be a letter or postcard focusing on what you can do for them. Let them know that you can help them benefit through a sale of the property and that you’re prepared to move quickly if needed. Include a phone number and e-mail where they can contact you.

“Marketing should be about what you can do for that motivated seller, not about you,” Marrs said.

Avoid any explicit mention of default or foreclosure because that could humiliate the owner if someone else reads your letter or postcard. Owners will already know if they’re in default and be motivated to get out of the situation. Your marketing should focus on how they will benefit from selling their property to you.

When owners contact you back, find out as much as you can about their situation so that you can work out a purchase agreement that will truly benefit them and still provide a good bargain for you. Owners will respond much more positively when they see that you truly care about their welfare and aren’t just taking advantage of their situation to make a quick buck.

A word of warning: your job as an investor or buyer is not to solve all the owner’s problems. Your focus should be to provide the owner with a good alternative to losing his or her property to foreclosure. Try to avoid getting caught up in the owner’s other financial and personal problems.

In an ideal transaction, you get a great deal on the property, and the owner walks away with cash to use for rent or for purchasing a less expensive property. In addition, the owner doesn’t have a foreclosure on his or her credit history that could hamper future efforts to purchase a home.

Persistence pays off
Most owners in default won’t respond to the first letter or postcard you send them, but you shouldn’t give up after just one attempt, according to Marrs.

“One letter is pretty much useless,” he said. “Three letters is about five times more effective than one letter to the same lead.”

Your letters will become increasingly effective the closer it gets to the date of the public foreclosure auction. If the property is sold at auction, a foreclosure is placed on the owner’s credit history, and the owner often doesn’t receive any of the auction proceeds. The auction occurs if the owner doesn’t sell the property or pay off the defaulted amount during the pre-foreclosure period, which can range from a month to more than a year depending on state foreclosure laws. View state foreclosure laws.

You could follow up your postcards with a phone call or personal visit to the house, but carefully consider these options as they are inherently more confrontational. Default notices don’t usually include the owner’s phone number, so you’ll need to track down the phone number by cross-referencing the name and address. If you knock on the door, be respectful and polite and realize that you may not always receive a friendly response.

Most buyers and investors contact several owners in default before they find one willing to work with them. Even while you’re sending out multiple postcards to owners of pre-foreclosure properties that you’ve already located, you should continue to search for new properties every day so you can expand your pool of pre-foreclosure leads.

With good marketing and persistence, some of those pre-foreclosure leads will turn into meetings with owners in default. And if you’ve done the proper preparation, some of those meetings will turn into great bargain-buying opportunities.

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