One thing you will see warnings about over and over again when researching what to do to stop foreclosure is working with a real estate investor. Does this mean all real estate investors are scammers? No, of course not! However, people facing foreclosure are heavily targeted by scammers, so it is important to use caution when considering a deal with a real estate investor.
How Can You Tell an Investor from a Scammer?
The first thing you should do before accepting an investor’s offer is to determine whether the person is legit. This can be difficult to do, but here are a few questions you can ask yourself that might help:
- Does it sound too good to be true? This is always your first tip-off. You should be suspicious if the offer seems unrealistic. Remember that an investor is out to make a profit. If it doesn’t look like there is room for profit, ask the investor how he plans to make money. This is not being nosy. If he can’t answer the question, either he is inexperienced and clueless or he is doing something that he doesn’t want to talk about for some reason. Either way, run!
- Will the real estate investor give you references? Chances are, if the investor you are negotiating with has helped other people, they’ll be more than willing to shout his praises to anyone who asks. Make sure you check these peoples’ claims out though, since it’s easy to recruit people to give false references. Take a look at the public records for the house to see if their story matches up, and make sure you are talking to the actual previous owner, not a shill set up to trick you into a scam.
- Do you have a bad feeling about it? Gut feelings are nature’s way of protecting us from harm. If you have a bad feeling about a deal, you should avoid it, even if you can’t quite figure out why it bothers you.
What Can a Legitimate Real Estate Investor Do for Me?
One thing he can’t do is let you keep your house. I hate to be the bearer of bad news, but there are only two ways for the investor to make money from your house: he can either rent it out or sell it. Either way, he has to buy it from you first. You are most likely to be offered one of the following deals:
A Cash Sale
If you have a lot of equity, a real estate investor may be willing to offer you cash for your house. The downside of this is that the price will be low. Most investors like to make at least $20,000 to $30,000 per house. The actual amount will vary from one investor to another, but the point is: if it isn’t a good deal for the investor, he won’t bother making an offer.
Why would you agree to sell your home for so much less than what it is worth? That’s easy—if you fail to sell the house before the date of the foreclosure auction, you’ll lose it anyhow, and maybe even end up owing the bank money. With a cash offer from an investor, you may or may not walk away with money in your hands, but you will definitely be able to avoid foreclosure as long as the offer is high enough.
When considering a cash offer from an investor, you should:
- Make sure that the offer amount is enough to cover the loan balance plus any legal fees that have been added, plus anything that must be paid at closing such as property taxes and title insurance.
- Insist on having the closing done at a lawyer’s office or title company. These professionals will make sure that all of the paperwork is in order so that there are no problems. If you have money coming to you from the sale of your house, you will leave the closing with a check.
A Short Sale
Short sales are difficult to pull off, especially when an investor is involved. Keep in mind that most banks do not want to accept less than what is owed them. This is even more true when they know that a real estate investor will be making money while they lose it.
You’ll be more likely to get a lender to agree to a short sale with an investor if the house is a mess. If there are major problems with your home that will cost a lot to fix, the investor will document them and prepare a hardship letter that emphasizes the poor condition of the home and the cost to repair it. He or she will obtain quotes from licensed contractors in the area and submit them with the short sale packet. Most investors have their own crews to do repairs, so their cost to fix up the house will be much less than the quotes they send to the lender.
Banks don’t like to put money into houses, and homes that need major repairs are hard to sell, so in these cases lenders will usually consider the short sale.
A Sale Subject to the Existing Mortgage
Sometimes investors will offer to take over your house “subject to” the existing mortgage. This is something you should not even consider unless you don’t care about your credit or you have completely run out of options and know that your credit is going to be screwed one way or another. This type of deal is very risky. Here’s why:
- The loan is still in your name. This means that the investor has no risk. If he can’t find someone to buy or rent your home, he can just stop paying your payments and let the house go into foreclosure. It’s not his credit that will be destroyed; it’s yours.
- It’s the classic no-money-down real estate scam. Yes, this type of deal can be done by an experienced investor with the resources to make it work. However, many wanna-be real estate investors are taught by the real estate “gurus” that this is an easy, no-risk way to make money. These inexperienced investors often do not have the skills and resources needed to find a buyer or renter for your house quickly so that they are not losing money on the house. Most of them do not have the money to pay your payments in the meantime either. That’s why the no-money-down real estate investment scheme appeals so strongly to them.
Selling your house to a real estate investor is one way to save your home from foreclosure, but it can be risky. Take time to ensure that you understand the offer completely and do your due diligence to protect yourself from scammers and well-meaning but inexperienced wanna-be real estate investors.