A Private Headache
There are many individuals who become involved in real estate repossessions unexpectedly and in an unwanted fashion. For example, Fred took back a second mortgage for $10,000 on his house 3 years ago. He thought he was through with the property.

But when it came time for the buyer to pay off the balloon on the second, the person defaulted. Fred was forced to start foreclosure proceedings and take back the property. Now Fred has a real headache.

During those 3 years, the former owner had rented the property out. The tenants didn’t take care of it. And now it’s a mess. The carpeting is ruined. There are holes in the walls. The toilet bowl is cracked. The house needs paint inside and out.

What’s worse, since Fred originally sold the property, he has moved and now lives 300 miles away. He can’t be there to do the work himself’ or even to supervise it. The final straw is that he’s now making payments on an empty house.

Fred doesn’t want to be a real estate landlord with the headaches involved. He doesn’t want to own property far from where he lives. So he’s thinking about how to get rid of it.

Fred’s Eventual Solution

His logical answer, as soon as he thinks it through, will probably be to list the property with a local agent. He will hope to sell the problem away.

However, there are going to be problems selling a distressed house. The agent will undoubtedly first inform him what the price would be if the property were in tiptop shape. But the price will have to be reduced. The price a house can get is in large part determined by how well it “shows” to prospective buyers. A distressed house shows badly; hence, the price has to be lowered to compensate for this act.

The Figures Speak for Themselves
Fred originally sold the property for $100,000 and got $15,000 down from the buyer. Since then, properties have gone up by perhaps $5000 in his area. Thus, he theoretically has a $20,000 equity after repossession.

However, there’s the deduction for the way the house shows and the cost of the agent’s commission (about $6300 if it’s 6 percent). Fred realizes that he’ll probably make a few bucks if he sells it right away. On the other hand, every month that drags by means he’s making payments on the first mortgage ($800 per month) plus payments for taxes, insurance, and utilities.

What Fred Would Really Like to Do

Fred would really like to junk the property. If someone would take it off his hands, he’d probably be willing to let it go for what he has in it (the $10,000 second mortgage plus his costs of repossession). Fred is a bargain opportunity for the asking.

Finding the Bargain

Fred’s house offers the bargain hunter an opportunity to do Fred a favor while at the same time picking up a substantial equity with little or no money down. The essence of making it work, however, is locating Fred before he lists the house.

Finding people like Fred is the same as finding REOs. It’s a matter of checking to see what properties are sold in foreclosure sales and then contacting the lenders who foreclosed. Most will be S&Ls, but among the bunch will be a few Freds.

Taking Advantage of the Bargain
There are several ways that a bargain hunter could structure a purchase of Fred’s property. Here are two.

Plan 1
Offer to pay Fred in cash for all his costs of foreclosure (probably a few thousand dollars) if he will give you title to the property and a new second trust deed for the original $10,000.

This isn’t a bad offer, although it doesn’t entirely get rid of the property for Fred. It pays back his out-of-pocket expenses. And he hasn’t lost a dime because the same second is back on the house. The only danger to him is that you won’t pay when the second comes due, and he’ll have to foreclose and go through die whole hassle again. But that possibility is sometime in the future, and you’re promising to remove his headache right now.

Plan 2
Offer to pay Fred in cash for all his costs of foreclosure and also give him $7000 in cash for his $10,000 second.

Not a bad offer. Fred gets his foreclosure costs back plus $7000 in cash. And he gets to walk away from the house. Considering the problems involved, it’s a quick solution that Fred might take.

How much does plan 2 cost you? Nothing!

You write the deal so that you can paint and fix up the house in escrow before the sale. Once you’ve fixed the house up, you refinance it as part of the transaction. Your new loan is 90 percent of the market value:

Market value (after cosmetic repairs) $105,000
loan percentage (90%) x 0.9
Loan amount you get $94,500

You get about $94,000 from the refinancing and spend it in this fashion:
Pay off original first (it’s gone down $2000
during the 3 years since Fred originally sold) $68,000

Pay off Fred ($7000 for second plus $3000
for foreclosure costs) 10,000
Cosmetic repairs to property 3,500
Costs of purchase (loan points, etc.) 1,500

===================

Total costs                   $83,000

In your pocket after deal closes! $ 11,000

Refinancing allows you to acquire the property with an equity of $ 11,000 and at the same time puts $ 11,000 in cash back in your pocket. Now that’s a bargain!

Can I Do It?
All it takes is finding someone with a problem like Fred’s. I can assure you that such people are everywhere around us. For Fred the property was the worst kind of headache. For you it can be one of the best bargains.

TRAP
Be sure you get title insurance on the property and handle the sale through an escrow. Don’t trust Fred. He might not be honest and could add a lien to the property without telling you.

Also, as always, check for problems of occupancy.

Finally, be sure you know what repair problems are required and that you can handle them.

The Bottom Line
Private REOs are great when you can find them. But I would be less than honest to say that they are easy to find or that you will run into them every day. These properties take hard work and lots of it. But there are bargains to be had.