As an active real estate investor you probably already know that the most important phase of your investment is when you buy the property. Most of us are getting the bargains in the foreclosure market. You will agree with me that the best time to buy is before the actual foreclosure. This is commonly known as pre-foreclosure.
If you ever found yourself in the heat of a foreclosure auction you would agree that this is not the situation you want to be in. To get into the pre-foreclosure market you need to have quick access to all kind of information. You can imagine that there's a huge competition in the pre-foreclosure market. Everybody wants a piece of the pie and the bigger the pie gets the more people want a piece.
We are looking at a tidal wave of new foreclosures within the next 1-3 years. I'm talking about all the interest only mortgages and special mortgages that enabled homebuyers to get more house than they actually can afford. These loans are converting into higher interest loans or fixed rate loans. Either way these folks will be looking at about a 40% higher mortgage payment each month. For most families this will be disastrous.
That's why I predict a tidal wave of foreclosures. As a real estate investor you might say "great", but in reality it will kill your business. Residential real estate is typically appraised through the recent sales comparison method. This means that the value of your home depends on how the market works in your area. As an example; you just bought a bargain foreclosure home in a nice sub division. There are a total of 50 homes in this development. You got the house for 30% under market value. Now your purchase price will be factored in into the comparison model for the next appraisal.
In itself this is not a big deal. A small percentage of under market deals will not spoil the market for the next regular sale. Imagine that instead of 1 or 2 foreclosure deals all a sudden 5 or 10 foreclosures happen. If you were the first to buy a foreclosure in this development you're looking at financial challenge. Your so called bargain buy represents the new lower market value. Actually you're lucky if you do not own an overpriced piece of investment real estate. So, watch out for the tidal wave.
There's a better way to deal with foreclosures. This requires a little bit of negotiation skills and a sincere motivation to help other people. This is called Forbearance. What does this mean? It means that you will be in the business to help people to avoid foreclosure and if you're successful you will charge a fee for your services. Forbearance is much more than just a form of charity. You will actually cash in on both sides of the foreclosure process.
You will earn a fee for helping distressed homeowners and if you fail to stop foreclosure you will have a first hand bid on buying the property. But your first and most important goal is always to help the homeowner to keep their property. If you don't set this as your primary business mission you will be out of business in no time. If you fail to build a circle of trust you will have no business.
Most real estate investors I know tell me that they are rather take the big checks once in a while than working in a regular base on a fee based business. If you're related to Donald Trump, go for it. If not, you will have a huge cash flow problem at hand. With a Forbearance business you will have control over your cash flow. By simply calculating how much money you need to pay your bills you can calculate how many deals you need to do to cover these expenses.
Let's say you need $8,000 a month to cover your living costs. At a fee rate of $1000 per Forbearance case, you need just 8 cases per month or 2 per week. The Forbearance business is a full time business. There's simply no way that you can negotiate with lenders after hours. Also you need to be flexible to talk to homeowners during evening hours and weekends. Although it doesn't take a lot of time to work on a single case it takes a lot of commitment to run this business. A homeowner trusts you to save his home and you don't want to disappoint him.
So why would you step into this business? Again it's all in the cash flow. Investing in real estate is fun, but these big checks are just not happening every day. You need to pay your bills and support your family. Forbearance allows you to do exactly that; generating cash flow. You will have enough time at hand to hunt for great real estate deals. So you get the steady income plus the big checks once in while.
I think this is a great real estate business model and worthwhile to spend more time researching. Some states regulate the Forbearance business and some actually have laws in place that don't allow you to charge for offering a service like this. Do your homework before you start and make sure that you have a good working relationship with a real estate attorney. You don't want to start this business without a real estate attorney.
Peter Dobler is a 20+ year veteran in the IT business. He is an active Real Estate Investor and a successful Internet business owner.
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