One of the unfortunate realities of real estate investing is that many of the people you’ll buy houses from are facing some sort of financial distress, and selling their home is their only option.
To become a profitable real estate investor, you’ll need to understand what drives motivated sellers and how you can profit from helping them out of these difficult situations.
Here are the financial distress factors most likely to motivate a property owner to sell.
What is pre foreclosure?
The most common type of financial distress factor you’ll encounter is pre foreclosure. A home enters pre foreclosure when the owner fails to make mortgage payments for 3 months. At this point, the lending institution will send the homeowner a notice of default.
This notice informs the homeowner that they have defaulted on their loan and that the home will enter foreclosure if the homeowner can’t catch up on their monthly payments. Then the bank will inform the county of the home’s pre foreclosure status.
The notice of default technically starts the foreclosure process, but federal law prohibits lenders from pursuing legal action before 120 days of missed payments. In between the notice of default and the official beginning of foreclosure, the lending institution will give the homeowner the opportunity to catch up on their payments and maintain ownership of the pre foreclosured home.
Unfortunately, most homeowners enter pre foreclosure because they can’t make their mortgage payments in the first place. As a result, they often have only two options.
The first is to sell their home and pay off the mortgage. The second is to accept a deed-in-lieu of foreclosure, which means that they surrender their home to the lending institution to avoid the foreclosure process. While this may save their credit score, it means they walk away with no money from their equity, so most homeowners choose to sell instead.
When you work with someone in pre foreclosure or foreclosure, keep in mind that their number one priority is to pay off their mortgage by selling the house. To make an effective offer, you should know what their mortgage balance is and how much equity they have before approaching them. This way, you’ll know exactly what to offer them.
Understanding the types of bankruptcy
Bankruptcy and foreclosure often go together, because they both involve someone who is no longer able to pay their debts. However, bankruptcy differs from foreclosure in a few key ways.
Bankruptcy is a court procedure that occurs when someone is unable to pay their debts. It gives the individual a chance to set up a debt repayment plan or pay their debts by liquidating their assets.
There are two kinds of bankruptcy you should know about as a real estate investor. The first kind is Chapter 7. In this scenario, the property owner will sell off assets to repay as much of the debt as possible.
Once someone has liquidated all of their assets to pay back as much debt as possible, the debts are cleared. Chapter 7 is often called straight bankruptcy, and it’s the most common kind of bankruptcy you will encounter when working with motivated sellers.
The other kind of bankruptcy you should know about is Chapter 13. In this scenario, the property owner’s lawyer and the court will work together to form a repayment plan. Unlike Chapter 7, Chapter 13 may allow the debtor to keep their home because it involves the repayment of all or most of the debt.
When working with motivated sellers who are declaring bankruptcy, it’s important to understand which type of bankruptcy they are declaring and how you are allowed to operate. In cases of straight bankruptcy, the court will appoint someone to oversee the sale of assets, so you should use a lead generation platform like BatchLeads to research how much debt the owner needs to pay off before you start a conversation with the motivated seller.
What is a tired landlord?
One of the final financial distress factors you’ll commonly encounter is a long-time rental property owner known as a tired landlord. We define tired landlords as property owners who possess a property that was built before 1990 and have owned it for more than 10 years.
This financial distress factor differs from the others because the landlord isn’t required to liquidate their portfolio. Instead, the pressures of being a landlord have turned them into a motivated seller for a few reasons:
- They are tired of fixing damage to their rental properties
- Their properties are older and require repairs the landlord can’t or doesn’t want to do
- Renters have damaged the property and the landlord can’t afford to fix the damage
Working with a tired landlord is often easy and very rewarding. If they are indeed tired of holding property and renting it, then their frustrations with the process may be obvious, and they won’t need much convincing to sell. The hardest part will be negotiating a purchase price that you both can agree on, since they’re real estate investors and understand how the process works.
The impact of financial distress on property
Each of these financial distress factors pressures owners to sell their homes. However, it’s often more challenging for a motivated seller to liquidate a property than it may seem. Financial distress often leads to property distress, which can make property owned by motivated sellers less attractive to home buyers.
These signs of distress include unkept yards, siding damage, roofing issues, broken windows, drywall damage, non-functional home appliances, and other general disrepair. Most people who are looking to buy a home for personal use aren’t interested in a fixer-upper. They want something move-in ready.
This puts motivated sellers in a difficult position. If they can’t sell the property, they face consequences including significant damage to their credit. But they usually can’t list the property because they don’t have the money to repair it. Thankfully, as a real estate investor, you give them another option!
Unlike home buyers, real estate investors have a reason to buy from motivated sellers: they can buy their properties well below their after repair value because the property owner can’t afford to fix and list them. Investors can then fix and flip, wholesale, or renovate and rent these properties for a significant profit.
Finding motivated sellers in financial distress
Finding motivated sellers is usually very easy. You can search public records and public notices to find pre foreclosure homes and people who have declared bankruptcy. You can also find tired landlords by talking to real estate agents and local real estate investors to learn who might be ready to sell.
However the most efficient option is to use real estate lead generation software to find motivated sellers. With software like BatchLeads, you can access detailed information on properties that match your investment strategy and find properties without having to rely on a real estate agent or more time consuming lead generation strategies.
Buying homes from motivated sellers is a lucrative investment strategy. Whether you plan to wholesale real estate, fix and flip, or renovate and rent houses, working with motivated sellers gives you the chance to find great deals on real estate investments.
Some of the most common types of financial distress you’ll encounter are pre foreclosures, foreclosures, bankruptcies, and tired landlords. While each of these has its own unique characteristics, they all share one thing in common: owners need to close quickly, so they usually sell for below market value.
Whether you’re new to real estate investing or you’re an experienced veteran, motivated sellers should play a significant role in your investment strategy. But if you’re interested in working with these property owners, you need to find them before anyone else. As we discussed, motivated sellers are facing time-bound financial consequences so they need to close quickly. That means they will often accept one of the first offers they receive.
By understanding how each financial distress factor works, you set yourself apart from your competition and give yourself an advantage when it comes to closing deals. If you’re sensitive to what motivated sellers are experiencing and look for ways to help them, you’ll find great real estate deals.