It seems that knowing your exit strategy (what you are going to do with your home before foreclosure after your offer is accepted) is not important when you first sit down to share your pre-foreclosure information with the seller. and before you sign the Purchase Agreement. But it is not like that.
Important Pre-Foreclosure Information After Acceptance
What you’re going to do with your pre-foreclosure real estate is just as important now as it will be when you get the offer accepted by the bank.
– If you buy the house, where do you get the money?
– If you borrow the money, how much cheaper do I have to get the house to pay back the interest?
– Will you lease / rent or sell the property after 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 not?
– Where would you find people who would buy the house if you did not?
These are all important questions and you should think about them the entire time you work 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 a lot easier.
We will take them one at a time.
1. Yes, you will buy the home before foreclosure and do the repairs yourself. And you don’t have money, but you have rehab experience.
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 Buying a Pre-Foreclosure Short Sale
A private lender could be someone in your family or circle of friends who knows you have done some rehab, 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% on a money market account. Great deal!
It will simply show them that your money will be safe through a first mortgage on the property and that you are buying it less than 70% of the value after repair (ARV) or after its fixed value and fair market value for the neighborhood.
They can lend you the cash directly or from your self-directed IRA (more on that later) where the money becomes tax-free.
Using a hard money lender when buying a previous foreclosure
A hard money lender charges a higher interest rate and usually targets up-front. (Each point is 1% (percentage) of the loan amount). They may or may not check your credit, but they usually don’t want this to be their first offer. They want you to have experience in rehabilitation and property buying, so they feel more secure when they don’t know you. They do not normally request a credit report. They are lending because there is equity in the property and will foreclose on the property if you don’t make your payments.
Another way to build trust with your lender is to provide even more pre-foreclosure information. Sign an advance deed with your private lender restoring property rights to your lender in the event of default. The deed can be retained with an attorney or the Title Company escrow account if necessary.
Giving your lender options shows that you want to make sure your investment is safe is a great way to keep them wanting to lend you more money!