Bankruptcy

More than often once the property owner has filed bankruptcy, the lender has already on-sold the property – commonly referred to as a “note” [the property loan/mortgage].

A term used to describe an investment associated with a forced sale – due to pending bankruptcy – is “pre-foreclosure”.

The transaction takes place before “foreclosure” and often prevents the property owner from filing bankruptcy – resulting in a positive outcome for all parties, i.e. the owner, the lender, the buyer.

There are two basic methods for locating distressed property 1. contact lenders or 2. approach owners directly. Avoid third party channels if possible, i.e. brokers.

1. Lenders: Contact a bank, or mortgage lenders, in the area of interest and find out who manages foreclosures/distressed properties.

Take the representative out for lunch and provide an overview of your investment objectives – in turn they may advise of, and keep you updated on, pending foreclosures that suit your objectives.

In terms of working directly with lenders, in many cases they are willing to negotiate x cents on the dollar with the intent of covering as much of the outstanding loan as possible.

2. Owners: The same principle applies when the property owner is forced to sell. Although in this case, the owner is generally obligated to cover all of the outstanding loan – unless an arrangement has been worked out with their lender.

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Many people who become familiar this form of investment often secure property under contract below market value, then assign [“flip”] the property at a higher price to another buyer before closing [or simply retain the property and put the equity to work].

Although, in this instance, the investor must make sure the cost is covered in case the resale does not proceed.

With enough due diligence and the right contacts pre-foreclosures can be a lucrative investment strategy.

— Michael