There are several steps in the foreclosure process. First, the owner needs to get behind in their payments. Once they are too far behind, they are sent a Notice of Default, and this initiates the foreclosure process. After a few months (things vary widely from state to state) if the delinquency is not satisfied, the property will be sold at auction. If the property fails to sell at auction, the lending institution will still own the property, which is labeled Real Estate Owned (REO).

A White Knight
Pre-foreclosures focus on the first step, where the owners of the property are still in control of the situation. If the owners can satisfy the delinquency, the foreclosure process comes to a halt. What some savvy investors do is to contact these owners to see if they would like help. This help usually comes in the form of selling the property to the investor for a very low price, but it keeps them from being foreclosed upon and they can usually walk away with a few thousand to relocate to another residence.

This process is closely related to the Assignment of Contract process, as the objective of the Assignment vehicle is to find a property so low below market that you can immediately sell it to another investor who also needs to get it below market value. So they need the property to be well below market value, and the idea in the pre-foreclosure market is there may be a lot of equity that can be shared by the two investors.

Equity is the Key
Here is the main thrust of this investment vehicle. You get the Notice of Default (NOD) list from a title company, a lender, or a Realtor who has access to the list. The first step is to determine if there is any equity in a home. If they've owned the property for a short period of time, chances are there is little equity unless they put a large amount down. If there isn't a lot of equity, there isn't much reason to spend time working up this property as the equity is where you're making your money. Again, this is even more critical if you are using this process to assign the contract to another investor.

Once you narrow down the field to the properties with an acceptable amount of equity, you need to do a little research to determine if there are other liens on the property that will have to be subtracted from the equity. Tax liens are biggies and can usually be determined from a search on the County Recorder's website or County Assessor's site. (If you don't know these sites, Google in "County Assessor <name of county> <name of state>" and see what you get.)

Face Time
If you think you have a viable property, the next step is to contact the owners. Phones work, but face-to-face definitely goes a long way. Don't forget, there are a lot of people like you doing the exact same thing, so they are going to get a lot of calls. Stand out by being the one who shows up (wearing a flak jacket, preferably).

Here's the math you're working toward. Pay off the mortgage, catch up all back payments as well as any other lien that may be on the property, pay all the closing costs, and have the owner walk away with some amount of money ($2,000 to $10,000). Present this to the owner and tell them you will take care of everything, they can prevent a foreclosure on their property, and they have some cash to start again.

The sad fact of the matter is that even if you present the owners with this very reasonable solution, many if not most will reject your offer. Realize that most of these owners are in some state of denial. If they don't pay their mortgage, how long do they expect to stay in the house rent free? Most think they can just throw their house on the market, get it under contract right away, and walk away with the majority of their equity. In an incredibly hot market they may be able to get away with this, but most markets aren't fast enough to save them before they are foreclosed upon. This means they lose the house and get a foreclosure on their credit record.

If you do come across a property that has equity and an owner willing to work with you, you have several options. You can purchase the property and sell it right away, purchase it and rent it out, or find another investor and assign the contract to them. Because you've ensured you have equity at the beginning, you can safely assume that you'll walk away with at least $10,000, $25,000, or even more depending on if you assign it or if you finance it yourself.

From the different sources that encourage this investment vehicle, they typically say you're going to consider 100 homes before you're going to find one that will work out. It's not unreasonable to be able to investigate 100 homes a month, and if you're making only $10,000 per transaction, you're making $120,000 per year. If you adhere to their techniques, it is very possible to make this work. If interacting with people who put themselves in this very challenging position does not turn you off, this might be the investment vehicle for you.

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