If there is equity in the deal, you will probably want to contact the owner directly. If a short sale is involved, you might be better served finding a real estate agent with expertise in that area, since the process is very tedious and time consuming
Once the details are negotiated, it’s time to close the deal and take title and possession. There are some essential steps to reduce your risk.
Use a purchase agreement
Since you’re not working with a real estate agent, you are responsible for creating a purchase agreement. Verbal deals are a bad idea in any business, but especially in real estate. You need a written agreement that conforms to the laws in your state and protects you from risk in the event that something goes awry.
This is especially true in preforeclosure investing. In the typical real estate deal you have a willing seller and a willing buyer. In a deal with a distressed property, the seller may be distressed as well. And you may be overly eager to buy. A written agreement protects everyone, but especially you. For example, what if the seller gets cold feet or feels like you’re taking advantage of the situation? A solid written agreement goes a long way in clearing things up if a judge gets involved.
Sample purchase agreements are available on the internet, but make sure you use one for your state. Laws vary by state and a generic form will not be adequate, and in fact could be an illegal contract. When you’re purchasing a property worth hundreds of thousands of dollars, it’s not time to economize by saving a few hundred dollars on a budget purchase agreement. This is where the team you’ve been building comes in handy. An attorney experienced in real estate and foreclosures is an invaluable resource and can review the purchase agreement before you present it to the seller.
Use a title company
Many investors do their own title searches while finding and vetting properties. But when it comes time to close the deal, you want the research expertise and title insurance that comes from a full title search done by a professional. Remember that one of the advantages of preforeclosure investing over auction investing is the ability to reduce risk and this is one of the big ones. Sometimes errors in precedence are missed by a superficial investigation and the results can be costly. For a dramatic example, see Tales from the Trenches: A perfect valuation storm in Analyzing Opportunities.
Title insurance is important in all purchases, but in a short sale it is critical because sometimes the loan department of a lender continues with the foreclosure despite the fact that a short sale has closed escrow. See Tales from the Trenches: Never turn your back on the ocean in the Listing and Selling Foreclosures Guide for an example. Because of this possibility, while the new owner will show up in ForeclosureRadar, we don’t report the trustee deed and new grantee until it appears on the trustee site.
Like with title research, preforeclosure investing allows you to reduce risk by getting a professional property inspection. Don’t bypass that opportunity just to save a few hundred dollars. It could save you tens of thousands of dollars in expenses after closing. You need to build a relationship with an inspector you trust to catch everything that could affect the profitability of the deal. Inspectors have been known to miss things, some more than others, and you can’t afford an inspector’s mistake that sucks the entire margin out of your deal.
You have to get the property inspected for sale, so you might was well get it done before buying. In addition to reducing your risk, you can sometimes get a discount on the re-inspection when it comes time to sell.
At the bare minimum, get a pest inspection. If the roof is older, get a roof inspection. Have any chimneys inspected to assure they can be operated without the danger of fire. In rural areas, get a septic and well inspection, as these can be the source of big headaches.