Cashing out of Preforeclosures - Exit Strategies for Maximum Profit

One of the quickest ways to real estate profits is through preforeclosures. What is a preforeclosure, exactly? A preforeclosure takes place from the time the bank gives notice of default to the time the house sells at auction. Typically, this is around the time of 90 days into default, depending on state law.

The key to preforeclosure investing is equity – the difference between what a house will sell for and what is owed on the house. Preforeclosures allow you to buy a house for less than fair market value, creating immediate equity for yourself.

Preforeclosures are your opportunity to buy low and sell high, maximizing your profit quickly. How can you cash in on preforeclosures and exit with the maximum profit?

Here’s how to do it.

Step 1. Find and Secure the Preforeclosure

You must submit a written contract directly to the owners in order to buy a preforeclosure, since the property still belongs to them during this stage. Ads in newspapers and subscriptions to preforeclosure listings will help you locate the properties. (See more about this in article 1.) Once you’ve located a property, you’ll need to do the following to screen them and prequalify your homeowners:

• Find out all you can about the physical and financial details of the property. (Are there liens? Loan balances? Major repairs needed?)
• Gather correspondence from the lender(s) that will fill in the details the owners may not be fully aware of or may not full understand.
• Meet with the homeowner at their property and have them sign the documents that place you complete control of the house.* Make sure that you know who ALL the owners are, and that are serious about selling before you start negotiating a deal.

* Note: Do this quickly once you have decided you are interested in the property as a solid real estate investment. This will help you turn around your equity quickly!  

Once you establish that you are there to help the homeowners, you can make a reasonable offer that will that will help you achieve the profit you’re looking for.

Step 2: Begin Your Pre-Sale Marketing

One of the most important steps in securing your preforeclosure is to begin marketing as soon as you have your paperwork in order. It’s time to cash in on your equity.

Here’s how to get started:

Stake your claim – literally.

You’re going to need a heavy supply of signs. Once your paperwork is in order, take a picture of the front of the property. You’ll want to keep some “For Sale by Owner” signs in the back of your car and have them ready once you have finished your meeting with the owner. You may want to put out a “Rent to Own,” sign as well. Play real estate agent – put signs around the neighborhood with arrows leading to the property for sale.

Place your ads  -- begin prospecting.

Place ads similar to the signs in local newspapers. Expect a good influx of phone calls. When the phone rings, find out if the prospective buyer is an investor or a prospective occupant. Collect the caller’s email address, phone number, and fax number.

You’ll begin your own list of investors this way, and you can notify them of properties you’re selling in the future as well. Real estate agents will also call in based on your newspaper ads.

Step 3: Screen your buyers – and make the sale.

Be carefully when you screen potential buyers for your preforeclosure. Let them know that they’ll need to be flexible, patient, and, of course, financially qualified! Make certain they know the home is being sold as-is condition. Once the paperwork has been approved, they'll have to close quickly, usually within 30 days.

If you haven’t received an offer that meets your standards, it’s time to move forward with the auction.

Many preforeclosures reenter the market through auctions. You can hold the auction yourself or use a professional company to auction the property for you. It’s best when starting out to get the advice of two different auction companies. They’ll be happy to give you advice on whether the property would be a good property to auction off or not, based on the asking price. 

The main advantage of professional auctions is the fact that they will do all of the marketing and auction announcements. You can let them handle the auction details, including screening of the buyers. If you don’t get the reserve price you’re seeking, you simply pay a fee to them to help cover their cost.

If your property doesn’t sell on the first try, you can retry the auction again at a later time while you work on unloading other properties.

Just remember to keep your prospect list growing as you advertise other properties, and soon enough, you’ll have a healthy list of prospects vying for your investments. Once you’ve sold enough preforeclosures, investors will begin to contact you based on past sales and word of mouth. All of your hard work can help you increase your investments and quickly cash in on your newfound wealth – equity!