What Is a Pre-foreclosure Investor Buyout?

By Brian Meara, InvestorEntourage.Com (reprinted here with permission) 

Talk of “Pre-foreclosure Investor Buyouts” has started cropping up more and more in real estate investing circles, on blogs, and in the news. Surprisingly though, some have attached a negative connotation to the term, which is odd given the fact that the process is quite straight forward, and is probably one of the best ways for the four key players (property owners, real estate agents, investors, and home buyers) to make the best of a bad market situation.

Read on for an explanation of how the pre-foreclosure investor buyout (PFIB) can be used effectively as a positive alternative to foreclosure for people and families in distress, and to generate profits for real estate agents and investors.

The Basics

A PFIB occurs when an investor purchases a property, pre-foreclosure, from an owner via a short sale and then resells the property to an end user buyer for a profit. The process involves four principal players: property owners facing foreclosure, real estate agents interested in helping families while improving their business in a down market, home buyers looking for a great deal, and investors interested in helping families while improving their businesses. Done right, the process is a win-win-win-win for all concerned.

PFIB’s From the Owner’s Perspective

A property owner facing foreclosure has likely exhausted all options prior to considering a short sale:

  • Tried to sell the property conventionally – either through a real estate agent, or “for sale by owner.”
    Tried to renegotiate the loan terms with their lenders (loan modification).
    Tried to refinance.

So there they sit, alternatives exhausted, waiting for what to them seems to be an inevitable foreclosure and all of the anguish, credit damage, and self-esteem issues that go along with it.
They realize that they owe more than the property is worth, so they understand that no matter what happens they will not be recouping any equity on the property. They just want to be able to walk away, without a foreclosure on their record, and with as few financial repercussions as possible.

PFIB’s From the Real Estate Agent’s Perspective

A conventional short sale, as opposed to a PFIB, can, and usually is, a nightmare transaction for most real estate agents (Notice that I said, “most,” not, “all” – a small percentage of conventional short sale transactions do go smoothly and quickly, so please don’t take offense if you’re one of the less than 10% of agents who has had great success doing short sales).
This is bad for the property owner and bad for the real estate agent who has undoubtedly spent months trying to hold things together, all to no avail!
Why do these deals fall apart? In a nutshell, because:

  • Most agents are either inexperienced in the nuances of short sale negotiations, or just don’t have the massive amounts of time necessary to nurse these deals through to closing.
  • Lenders often take an extraordinarily long time (try 4-8 weeks on average) to even respond to offers, let alone begin negotiations in earnest.
  • Distant lenders often have very unrealistic expectations of local property values, which can render meaningful negotiations impossible.
  • Lender short sale departments are often so overworked and under-staffed that documentation often goes missing, turnover is high, files are often reassigned – all of which means that a case that may have been ongoing for months, can suddenly be placed at the “end of the line” and start all over again from the beginning.

Is it any wonder that a great majority of conventional short sale buyers “walk” and most short sale deals fall apart?
The beauty of a properly executed PFIBs is that the real estate agent is part of a team of skilled specialists, each with a specific role, expertise, and incentive to see that the transaction gets done, and because an offer is presented to the lender at the exact same time the property is listed on the market, the timelines and response times are typically decreased dramatically over conventional short sale transactions.

PFIB’s From the Investor’s Perspective

A real estate investor want to make a profit on their deals. The only way they can do that is to ensure that there are ready, willing, and able buyers for the investment properties they purchase (we are not talking about landlords here, but resellers). The way to ensure a steady pool of ready, willing, and able buyers is to provide quality and value in the properties that are being sold, i.e.: a great price!

Here’s what an investor doing PFIB’s the “right way” does:

They have a team of specialized negotiators, valuation experts (called BPO Agents), and real estate agents that they work with consistently, each having a very specific and limited role in the transaction.
Through their real estate agent partners, they identify property owners at some stage in the foreclosure process and offer to purchase the property.

They fully explain that the property will be resold for a profit and that by law, because the property is worth less than is owed the lender, the property owner cannot receive any of the funds from an eventual sale, but can likely stop the foreclosure, and quite possibly avoid any deficiency judgment.
In conjunction with their negotiator and BPO Agent, simultaneously negotiate with the lenders to get a realistic wholesale price, while also marketing the property to the general public at a fair, low-retail price through their real estate agent.

In this scenario, professional valuation experts and negotiators are dealing with the lenders and the real estate agent is left to do what they do best – identifying prospective sellers and then marketing properties to ultimate buyers.
The property owner is assured that the best and most qualified people, those with the time and experience to deal with the almost daily lender follow-up that’s required, are working the case.

Since they fully understand that they owe more than the property’s current value, their primary concern is the avoidance of foreclosure and a deficiency judgment –they know that a foreclosure is the worst possible outcome, so they just want out.
The investor seeks to make a fair and honest spread between the negotiated price with the lender(s) and the ultimate sale price to the end-buyer.

Remember that out of the spread the negotiator, BPO Agent, and real estate agent must be paid, as well as the closing costs for two transactions (the purchase from the owner, and the resale to the ultimate end buyer) – only then can the investor see a profit.
Please do not confuse a properly executed PFIB with one of the many scam methods for doing what appears to be the same thing, but which are really quite different. Note that when done properly and ethically:
The investor NEVER charges any fees to the property owner, or asks for any money whatsoever – the transaction costs the property owner NOTHING!
The investor NEVER asks for a deed up front, locks the property up in a land trust, or in any other way does anything potentially detrimental to the property owner facing foreclosure.
In the end, an end buyer is found who gets the property for a great price, the original property owner avoids foreclosure and most possibly a deficiency judgment, and the investor (and team) makes a fair profit.

Done correctly, a PFIB is the smoothest, fastest and most ethical way to complete an inherently difficult process – it is a win-win-win-win for all parties concerned, which is just the way I like it.

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