By investing in properties "pre-foreclosure," you get ahead of the crowd and possibly get a great price. The downside? You may have to walk a fine line between helping an owner and taking advantage of him.

Pre-foreclosure is simply that time between when the home owner gets the notice that he is in default on the mortgage loan, and when he finally loses the home. This may be where the most money is made on "foreclosures". By going straight to the owner before the home is lost, you are a step ahead of investors who wait for foreclosure sale or wait until the bank owns the property.

Are you taking advantage of an owner when you make a profit off of his financial troubles? Maybe. You might also be helping him make the best out of a bad situation. You really can do the latter and still make a good profit. Let's look at some examples of how.

Example of Pre-Foreclosure Deals

There are essentially two ways to help an owner who is in default on his mortgage loan. The first is to find a way to help him stay in his home. The second is to help him salvage his credit and get something out of the home he is losing.

Most owners who are seriously in default will simply lose the home. They will also wreck their credit, and lose most or all of their equity - unless an investor steps in to help. This is why you can feel good about making a profit from a home owner in distress.

Suppose you put an ad in the paper, something to the effect of "Losing your home? Let's talk." You get a call from a woman who is several months behind in her mortgage payments, and is about to lose her home. With back payments, her loan balance or payoff amount is about $95,000. The home is probably worth $130,000.

You ask her about her financial situation, to determine if she has the income to eventually get caught up and make the payments on time. You ask her if she mainly wants to stay in the home or if she just doesn't want a foreclosure on her credit report. She says that she is ready to move. She could try to sell the home to pay off the loan and have a bit of cash left over, but there isn't time. She doesn't want the bad credit, but she also doesn't want to lose all of her $35,000 in equity.

You agree with her assessment of the situation. You explain that if she did try to list the property with a broker, she would have a sales commission and other costs, which together could be $10,000. She also would likely have to sell it for $120,000 to get it sold fast. In this best case scenario, she might get to keep $15,000 of her equity. But it is risky, because if it doesn't sell and close in a few weeks she loses everything.

You tell her that you can buy the home for $107,000 and pay all the closing costs. This will leave her with $12,000 and no foreclosure on her credit report, so she may be able to borrow again for a home when she is ready. She says no. You explain that after the costs of buying and selling the home, you will make $10,000, and though you understand she is losing some equity, you just don't do deals for less than $10,000 profit. You wish her the best.

Soon she calls back and accepts your offer rather than lose her home and equity and credit rating. You have to have a line of credit ready or cash in the bank for deals like this, because time is of the essence. You also have to treat people well. In the example above, you might even offer another $500 cash if the house is left clean and ready to sell.

Look at the numbers, paying particular attention to the expenses you'll have in buying and selling a property. You can see that there has to be a fair amount of equity in a property to be able to help the owner and help yourself. Verify exactly what the payoff amount on the loan is before you sign any contract. Owners are often underestimating.

Other Pre-Foreclosure Examples

A friend of mine liked to help people stay in their homes when the were in default on their loan. He felt this was easier and more profitable. There are several ways to do this.
One obvious way, if there is a lot of equity in a property, is to put a second mortgage on it in exchange for making up the back payments. Sometimes a family has trouble that really is temporary, and once caught up on their mortgage payments, they will be able to pay them on time again, along with a payment to you.

Suppose the home is worth $185,000, and they owe $115,000 on it. They need $4,000 to catch up back payments and no longer be in default. A loan fee of $1,000 and interest at 5% higher than current mortgage rates might make for a decent return on your investment. A second mortgage on a property with so much equity makes it a safe investment.

Another way to help owners stay in their homes is to buy the home and rent it back to them. They get to avoid having a foreclosure on their credit report, maybe get a little cash, and they don't have to move. You should of course, have positive cash flow and a good profit if you should need to evict them and sell the home.

You could also make it a lease-option deal. In this way, if the previous owner gets into a better financial situation, he can buy his home back. Of course the purchase price will be high enough to give you a good profit.

If you have a lot of cash to invest, you can buy the home and sell it back to the owner on payments. Of course you will have to sell it for at least $10,000 more than you bought it for, and you will have to have charge high interest. If this is likely to cause some bad feelings for the person who will be living in your investment, you may want to consider another way.

You could provide the cash for him to refinance and so keep the home. Since you may have to foreclose on the loan, so you want to do this only when there is a lot of equity. Charge high interest and high loans fees (perhaps rolled into the loan), and make it a balloon loan, with the balance due in three or five years. Explain that you do this for the profit, but it at least gives the owner a chance to keep his home, and he can refinance at better rates when he is doing better financially.

A Little Pre-Foreclosure Trick

Here is a a little trick used by an investor I met in Arizona. A holder of second mortgage in default has the right to foreclose and take the property. But in Arizona at that time (and possibly in other states - but ask an attorney), the law also said that if the holder of a second mortgage foreclosed on a property, he had the right to assume the first mortgage loan - without qualifying, and regardless of whether it was normally an assumable loan.

This investor "helped" people facing foreclosure, using this little known law. For example, suppose there is house that would make a nice little rental property. The owners owe $60,000, and it might be worth $80,000, but they are about to lose it. The payments and interest rate on the loan are lower than what is currently available.

This investor would convince the owners that rather than them losing everything, he would give them the $2,500 necessary to make up the back payments, and also $10,000 cash to walk away. Actually he loaned them the total of $12,500, and put a second mortgage on the property. But they were instructed to never pay on the loan. He made the terms outrageous enough that they weren't inclined to anyhow.

In this way after they missed their first payment, he could start the foreclosure process. Once he had foreclosed, under the law he could assume that first mortgage with its excellent terms. Now he had a nice rental that would cash flow, and with some built-in equity from the start. The previous owners got their cash, and perhaps a big black mark on their credit report from the foreclosure.

Pre-foreclosure investing can get very creative. These few examples are just a sampling of ways it has been done.

Residential real estate investors can be some of the worst marketers for getting new deals. I should know – I used to be one of them.

Most real estate investors spend much of their time learning the technical aspects of the business such as how to purchase, what forms to use, how to analyze deals, financing strategies, exit strategies, etc.

Yes, this education is critically important, and I don't recommend skipping it but don't forget that your "real" business is generated from your front-end lead generation work that results in getting new deals.

Without effective front-end marketing, many real estate investors can suffer from a shortage of incoming deals. This is especially true for part-time real estate investors, who have a limited amount of time to spend finding new deals.

But I've learned from direct interaction with many real estate investors that they often find prospecting to be frustrating and time consuming.

So how is your particular "lead generating" machine running? Is it consistently producing new deals for you? You can quickly find this out by asking yourself the following questions:

- Am I consistently getting the amount of new deals that I want?


- Is my return-on-investment for my time & effort high?


- Is this valuable time that I'd rather spend somewhere else?


- Do I really know how to get new deals?

I've noticed that using "We Buy Houses" signs, placing newspaper ads, and making lots of lowball offers is the standard advice that's out there for generating new deals. These strategies can work well, but in general they aren't targeted to any specific area AND unfortunately most of your peer investors are using these same strategies.

For example, take my investment areas in and around Philadelphia. I consulted with the List Service Company I use by asking them for the number of active real estate investors in my four county investing areas (within approximately 40 miles of Philadelphia).

They forwarded me the following numeric list "counts" of folks who indicated that their lifestyle included real estate investing:

-13,750 real estate investors in Philadelphia County


-11,568 real estate investors in Montgomery County


-9,739 real estate investors in Bucks County


-7,280 real estate investors in Delaware County





Total = 42,337

Yikes! Granted these folks aren't exactly lining up to steal my particular deals but there are a heck of a lot of investors near me. Quite a "Herd", isn't it?

My advice to you is to do the same as I have done - get out of your area's real estate investor Herd now. Here's why it's important to do it, and do it NOW:

Reason #1: Your peer investors (in my case 42,337) are all using the same general strategies to get the deals. Make yourself different from them and watch your business increase.

Reason #2: 2007 & 2008 will be great Investing years:

- The current "selling" market is slow


- The current property inventory is high


- Home sellers are getting more motivated to sell


- Mortgage defaults are increasing (pre-foreclosures)

Reason #3: This is your big chance to "stand out" from the rest of your peer investors. Compare "apples to oranges". Give folks value, as compared to the standard "low-balling" investor. Offer them a plasma TV, a leather couch, or ??

Personally, I'm a big fan of targeted Emotional Direct Response Marketing in order to make myself different than the Herd and to get those leads to contact me. Using Emotional Direct Response Marketing is an excellent way to address a home seller's "wants" and then giving them a solution that fits their particular "wants".

Get inside the heads of your target market to understand their "wants" no matter who they may be. Get this right and you'll be very successful in your business.

My favorite way to get my Emotional Direct Response Marketing message to my particular market is by using Direct Mail. As far as the actual mail pieces go, I've found that using "Lumpy Mail" is a great way to differentiate myself from all the rest of the investors who may be farming that very same prospect or area.

For example - which mail piece do you think would get the attention out of a pile of direct mail pieces sitting in some "pre-foreclosure" prospect's mail pile? Will it be the plain envelope containing the standard letter stating "sell me your house now before it gets sold on the Courthouse steps" or the neon green card sized envelope that's stamped "Do-Not-Bend: Gift Enclosed" on it's outside, and that contains an obvious "lump" in it's center from some unknown "thing" inside?

I don't know about you, but those Lumpy Mail pieces are really interesting to me and to most people. It's kind of like getting a present in the mail. Once you get the prospect to actually open that envelope, why not make that "lump" be a piece of chocolate, a folded up dollar bill, or some other neat present to make yourself really stand out?

Believe me, if you do this you'll be remembered and you'll stand out from your competition. Also, don't forget to give people things of value for free inside your Lumpy Mail pieces. This is very important as well.

Something of value could be a Free Report that you wrote, or an offer for a "Free Home Audit" (you decide what that will be), or you could just entice them to call you and tell you their story. Once again, you'll be remembered and that's 80% of your goal with Direct Mail.

Using Lumpy Mail is just one example of how you can differentiate yourself from the real estate investors around you. Lumpy Mail should also be a definite component of your marketing system.

That leads me to one final point – your marketing system. If you're a real estate investor and you don't have a marketing system that's helping to separate you from the real estate investor Herd around you, you're wasting precious time and money.

Integrating Lumpy Mail into your marketing system will result in a definite increase in people wanting your services, and that's crucial. As a result you'll be able to save time, beat out your competition, and get more great deals. Lumpy Mail works. Be creative and go for it!

If you want to make money in real estate like a professional investor then there is one secret that you really need to know. This is the secret that will be the difference between you earning a nice little bit of profit or equity from your investment strategy and you making a killing from your investment property assets.

This secret is little known outside of the professional property investor circle – this secret is hardly ever divulged, revealed or explained - and yet it is the absolute, number one essential factor that every single professional investor applies to every single real estate investment purchase decision that they ever make.

And the secret is – professional property investors secure their future profit when they purchase…

What?

That makes no sense, does it?

Actually, it makes a wealth of sense, let me explain…

Depending on the investment approach that you take, you can work a property's purchase price right down and in so doing you immediately create greater room for eventual profit.

For example, if you have a large lump sum to put down as a deposit for an investment property why not split the deposit in two, three or four and use the power of OPM (other people's money) in the form of multiple mortgages to acquire multiple properties?

This will allow you to negotiate the purchase price down if buying from a single vendor on a new development for example - it's called leveraging and here's how it works in basic terms: -

If you have USD 100,000 to invest, instead of buying a single home for USD 100,000 you can buy four for USD 100,000 by putting a USD 25,000 deposit down and mortgaging the other USD 75,000 on each one. Chances are if you're such a strong buyer you can hit the vendor hard with an aggressive purchase offer – say, 'I'm going to take four properties off your hands today and I want a 5% discount on each and I want all white goods, air conditioning, carpets and curtains thrown in.'

At the end of the process you will have paid out USD 100,000 for four properties that you have bought for USD 380,000 and which are actually worth over and above the original asking price of USD 400,000 because of the extras you got thrown in. At this point you can simply resell immediately and have turned the original USD 100,000 into at least USD 120,000 without doing much work for it at all!

Alternatively – you can buy a property at auction, you can buy a repossessed home or you can buy the worst house on a decent street all well below market value. You can then work the real estate into an attractive home and resell via a realtor at top market value and turn an undervalued property into a capital returning asset.

Another approach is to target a housing development coming to the end of the development phase. Any properties remaining for sale where the original sales have fallen through or any pieces or real estate remaining unsold as a result of being on an odd shaped plot of land or having less than perfect views can be snatched from a desperate developer keen to get onto their next project for well below market value if you're in a strong position to make them an offer and buy immediately.

Even if you are not in the position to act so aggressively and quickly, never ever offer what a vendor is asking, bargain hard, negotiate down, get extras included and try and increase the value of a property in relation to what you're paying for it before you buy…this will put you in the professional property investor league and ensure you make a killing from your real estate assets rather than an mediocre return.

Rv parks can have good cash flow, without most of the traditional headaches of being a landlord. The downside? (Every investment has one.) The income can be variable and unpredictable.

We used to travel in a conversion van that we sometimes camped in. When staying at RV parks, I noticed that the managers always seemed relatively relaxed and cheerful. I think this may be because the job is not that stressful. It certainly isn't like being a landlord.

First, as an owner/operator of an RV park, you don't own any housing or vehicles that need to be repaired. Every tenant is responsible for their own Recreational Vehicle. You need only maintain the common areas, and can do that how you want.

Second, even if they stay for months, you can collect in advance and ask them to leave on a day's notice if they cause trouble or don't pay. Regular tenant/landlord law does not apply. These are very mobile residences, unlike regular "mobile homes."

Finally, you have visitors, not tenants. They are vacationing or escaping winter, and are generally in a good mood more often than apartment or house renters would be.

On the other hand, these are visitors, who have no lease. They can leave at any time. In other words, your income can be very unpredictable from month to month. It also can vary a lot seasonally, so you have to budget well. Some RV parks are just closed for half of each year - and this may be the time when taxes and insurance need to be paid.

In buying an RV park, you have to see the actual income from the previous several years. One year is not enough. You want to see that the income has been steady or is growing. You don't want to buy a dying business.

Look at the tax returns to get the truest - or at least the safest - record of income and expenses. Determine the net income before debt service. Decide what you can invest, and what kind of return you want for your trouble. Subtract that "profit" from the net before debt service. What remains is how much you can pay on whatever loans you need to buy the property.

The amount you can borrow - with payments that fit into that number - plus the amount you have for a down payment, determines the most you can pay for the property. Don't forget to account for any additional costs you will have that the current owners don't have, such as higher insurance rates or property taxes. Also, base your calculations on existing income, even if you have a plan to increase it - that is the safest way.

How much do RV parks sell for? I have seen them as low $85,000 for a really small one. Others are priced in the millions. As you look in a given area, you will notice that they are often selling for a similar amount per space. In some parts of Arizona, for example, parks sell for as cheap as $8,000 per space, because of a limited season. In other parts of the country, they sell for as much as $30,000 per space.

You can use this as a rough guide to see if a park is priced in line with others in the area, but in the end it can be very misleading. Good management can make a nice park worth $20,000 per space, while one a mile away may be in a bad location and worth only $14,000 per space. You have to see the actual income and expenses before investing in RV parks.