Foreclosure Financing Technique

Foreclosure properties are a true diamond in the rough. This technique, illustrated by one of my friend’s recent transactions, actually consists of combining the following two techniques:

Buying foreclosure property from a bank at a substantial discount.  

Banks call these properties Real Estate Owned (REO). various banking regulations require banks to dispose of REO properties as soon as possible. You can offer to buy these properties from a bank for the foreclosed mortgage amount, which is frequently less than the appraised value of the property.

Trading equity in a property you own for another property. 

You can often use equity in a property, owned free and clear, as part of the purchase price of another property.

Let us look at specifics of the transaction. The buyer went to a bank and asked the loan officer in charge of foreclosures, “What foreclosures property do you have that you that you would most like to sell?” the banker describes a piece of vacant land on which the bank had foreclosed. The bank had originally loaned $60,000 on the property, and very much wanted to get it off the books.

The buyer knew that, by law, banks have to obtain an appraisal as part of the foreclosure process. Also, he knew that banks typically lend less than 50% of the appraised value on vacant land. The banker showed the buyer the property’s appraisal, which indicated a fair market value of  $160,000. (A good lesson here is that property, especially vacant land, cannot always be quickly sold for its appraised value.)

The buyer then made several offers on properties that were in the Multiple Listing service (MLS) book. The buyer’s broker was more than willing to help him locate properties through the information in the broker’s MLS book for the purpose of making offers. In each of the offers made, the buyer used this vacant land at its appraised value of $160,000 as part payment of the purchase price. Two of the offers were accepted. Since he made sure there was an escape clause in each offer, the buyer had a choice between either property to put together a transaction. The property he selected was $260,000 apartment building with an assumable loan of $115,00 on it. The buyer arranged to both assume the $115,000 loan and give the seller the vacant land appraised at $160,000, for a total purchase price of $270,000. The $15,000 premium ($275,000 less $260,000) simply made the offer more attractive.

The buyer had one remaining problem, which was finding $60,000 with which to purchase the vacant land. The buyer went back to the original bank and asked the loan officer for a second mortgage on the apartment building the buyer was trying to purchase. The banker said that they would loan up to 80% of the building value, or $280,000. Because a first mortgage of $115,000 already existed on the apartment building, the bank would loan an additional $93,000 (the difference between 80% of the building’s value, $208,000, and the first mortgage, $115,000). With this $93,000 second mortgage, the buyer was able to pay for 
the vacant land and still had $33,000 left over.

Lets take a look at how each party stood after this transaction.

The bank’s worst foreclosure property was sold for the full $60,000 the bank originally loaned for it. An additional $93,000 loan was made on the apartment building. Remember, bankers are in the business of loan making, not sitting on foreclosed properties.

The buyer now owns the apartment building without taking a penny out of his own pocket. What is more, he put $33,000 cash in his pocket at closing. Thus, by assuming a loan for $115,000 and obtaining a second mortgage for $93,000,for an actual total cost of $208,000, he bought an apartment building worth $260,000 and received $33,000 cash! An additional $52,000of immediate profit was received in the form of equity in his building ($260,000 value less $208,000 in loans). In short, the buyer receives $33,000 in cash and $52,000 in equity which net the buyer a whopping $85,000 profit at closing!

The property was sold quickly, and as far as the seller is concerned, at more than the asking price. The existing loan of $115,000 was assumed by the buyer, and the seller now owns a piece of vacant land free and clear with an appraised value of $160,000 for a total package of $275,000!

A creative mind has no limits when working with real estate. This transaction was completed less than six weeks after the buyer made his initial inquiry at the bank. You do not need to wait five to ten years to make money with real estate.

Example Summary Technique #12
Foreclosure Properties
What You Need To Begin:
Good Credit
Summary Of Terms:
Appraised value of REO property$160,000
Original bank loan (foreclosed)$  60,000
Ask the bank for a list and the appraised value of REO (foreclosed) properties. 
Make several offers on other properties using the REO as part of the payment for the purchase price (make sure each contract has an escape clause) 
Select which transaction to put together. 
Purchase the REO
Take a second mortgage on the property you are trying to buy.
Pay the REO
Pocket any money left over.
The buyer owns an apartment building.
Extra cash was made and pocketed.
The buyer actually paid less for the apartment building than what it was worth.
The buyer has equity in the building.
Bank unloads the worst REO property
The bank received the full amount for the REO
The bank has a good second mortgage on an apartment building.
Seller received more than asking price for the property
Another property is owned free and clear.
Specific Situations to Apply Technique #12
The Property
The Buyer
Good Credit at banks or Credit Union
Lump Sum Cash Due Soon
Large Monthly Income
You Know people with Cash to Invest
Equity in Real or Personal Property
Dead Equity
Large Amount of Available Time
The Seller

Foreclosure Bargains To Brokers Money