Make Money With Foreclosures

Very simply, the foreclosure process sets in motion a ticking clock. Like minutes on a clock, the 120 days of the foreclosure process tick steadily toward the conclusion; the property going back to the bank unless someone with a title interest in it stops the process by paying the bank. Once the foreclosure clock starts ticking, whether you're an attorney, lender, mortgage broker, realtor, investor, rental investor or homeowner looking to move up into a bigger property, there are several points during the process where you might have the opportunity to make money.

Attorney: When a property owner fails to honor the obligation he agreed to when he signed the Deed of Trust and Promissory Note against the property, the owner of the debt can authorize an attorney to begin the process of foreclosure. In being hired to handle the foreclosure, the attorney gets paid for the legal work, and so he or she is among the first to make money on the foreclosure, even though the legal fees might not actually be paid at that time.

Mortgage broker and/or lender: As you'll see in reading The Foreclosure Process, a foreclosure in Colorado currently has a "pre-sale" period of at least 45 days during which the property owner may be allowed to pay the lender back payments, late charges, interest, and attorney's and other legal fees to bring the loan current. To accomplish this feat, he or she might take out an additional loan against the property. The loan might be a 2nd or 3rd mortgage, or it might be a total refinance of the debts against the property. In either case, a savvy mortgage broker or lender might find an opportunity to make money in the form of fees, loan origination points or interest, especially if they can navigate the murky waters of making a loan to someone who isn't making his or current payments.

Realtor: Or during the pre-sale period, the property owner might choose to sell the property and look for a realtor. If the owner has a relatively attractive, saleable house but little or no equity — i.e., he is "upside-down" on the house value versus the loan amount — he might seek the help of a realtor possessing the tenacity and skill to negotiate a "short-sale" from the bank, meaning that the bank would agree to take less money for the house than it is owed, thus allowing the property to be sold. If a realtor offering such specialized skills can close a sale on such a property before the ticking clock of the foreclosure process winds down, he or she can earn a nice commission.

If, on the other hand, the property owner does have equity, he might turn to a realtor who he believes can sell the property before the foreclosure ends, thus helping him avoid the total credit havoc of having the property go back to the bank. Then, pushed by the looming last moment of the foreclosure, he might be inclined to accept a lower offer than he would have accepted in better times. Again, the realtors involved in closing the successful transaction can receive a commission.

And finally, if the clock does tick down and the property does go back to the bank at the end of the foreclosure process, a realtor might be contracted to sell the bank-owned property on the market, and the realtors who handle the successful sale, can receive a commission.

Investor: Even without utilizing the services of a licensed realtor, the property owner might decide to sell his property to a friend, neighbor, private homeowner or investor at a discounted price. Once notice of the foreclosure appears in public records and publications, the property owner might receive a telephone call, letter, or even a knock on the door from someone wanting to buy the property outright. The investor might be offering to pay something less than a retail, or fair market, price for the property, but he might offer other attractive incentives. Among them: a guaranteed sale and quick close through a Quit Claim Deed (PDF, Word file) to beat the ticking foreclosure clock; a cash deposit up front to give the owner the money to move; a written agreement to buy the property "As Is" without the owner having to fix it up. See Sample Agreement (PDF, Word File) with Exhibit A (O&E PDF) and Exhibit B (PDF, Word file). The investor might offer to buy the property with just a quick walk through instead of an inspection, and for cash so the owner doesn't have the uncertainty of waiting for an appraisal and loan to go through.

If the property owner accepts the investor's offer, the investor has the potential to make money on the foreclosure depending on such factors as the property's fair market value minus the fix-up and other costs that might eat the profit. See Sample Net Sheet (PDF).

Note: an investor can still offer to purchase a foreclosure property even after it has gone to sale by the Public Trustee. After the sale, an investor can step into the owner's shoes and redeem on the property by filing an intent to redeem and paying the amount owed.

Yield investor: Another type of investor might choose to buy the property at the Public Trustee sale with the goal of making money from the interest owed if the owner or someone with title interest redeems the property. This "yield" investor receives a Certificate of Purchase from the Public Trustee at time of sale and earns the interest stated on the Promissory Note during the time between the date of the sale and the date the property is redeemed. Often the stated interest rate is well above the interest paid by financial institutions, especially if the Note contains a default rate of interest that kicks in once the property goes into foreclosure.

Or an investor might purchase the property at the Public Trustee sale in hopes of winding up with it if neither the owner nor anyone with a recorded interest in the property redeems. See Sample Owners and Encumbrances (PDF). In this case, after the last moments of the ticking foreclosure clock have passed into history, the investor receives a Public Trustee deed for the property, and then has the potential to make a windfall on the property depending on value minus costs. But this type of investing isn't for the faint of heart, since the investor rarely has the opportunity to get anything more than a glance at the house's exterior before buying it.

In any of the above scenarios, one thing is true: for the motivated person possessing both knowledge of the foreclosure process and essential information about the foreclosing property, the foreclosure process can provide an interesting opportunity to make money.