Sorry for the long hiatus (since May of this year) in our Front Line series of articles on investment angles you can use in buying Chicagoland foreclosure properties. In this issue, we’ll explore a method for acquiring properties at deep discounts that may not have occurred to you.
Let’s say you’re looking at a property that could be attractive, but is heavily over-encumbered with liens to the point of negative equity. You might think you’d have to wait to make an offer to the lender until after the auction at which the senior lender takes the property back and all the junior liens are wiped out. Well, as the song goes, that ain’t necessarily so.
Sometimes you can buy those liens and become the foreclosing lender yourself! Your profit opportunity lies in buying these liens at steep discounts from the balance owed.
If you buy the first lien at a discount and foreclose, all the junior lien holders essentially become defendants along with the homeowner and, at the sale, will be wiped out. You have the property with substantial equity to be realized at resale. If you own the discounted first note, file a lis pendens, and the junior lien holder (or owner in foreclosure) attempts to stop your foreclosure, they have to pay you 100% of the balance owed on the loan (not the amount you paid for the loan) and you still make a profit.
Another scenario would be to approach a second lien holder who is threatened with obliteration because he is not in a position to acquire the first lien or to cure its default, and offer him pennies on the dollar for his note. Then do your own foreclosure on your loan, after curing the default on the first lien of course.
The homeowner’s attitude is crucial to this strategy, and therein lies the risk. If he is hostile and won’t cooperate with you, he may well file bankruptcy and tie you up for months. If you can, make a deal with the homeowner to get him some money from your profit in exchange for his vacating the property in an orderly manner after foreclosure. Therefore, check out the homeowner before you invest any money. If he is angry and obdurate, it’s best to pass on the deal.
Also, bear in mind that in judicial foreclosure states like Illinois, the process is lengthy, and that, in Illinois, there is a three month redemption period after foreclosure before you can get title to the property. If you can’t get enough of a discount when buying the note or notes to protect your profit over the time required, go on to the next one.
To read more on this strategy, check out “Back Door Investment Strategies” by Alexis McGee in the November 2000 issue of Foreclosure Forecast.
Good luck, and happy investing!
