How to Acquire a Property for Profit
A Pre-Foreclosure Method of Purchase
How to start
For years real estate investors have been declaring that you make your money in real estate when you acquire it. You might collect it later, but you earn it when you buy – especially if you buy it right.
Obviously you make money when you buy low and sell high, and you find it easier to buy low with tax-delinquent properties. Properties that you purchase at a tax auction can be available at pennies on the dollar: all you have to pay is the amount of taxes plus whatever fees and penalties the county may have imposed on the property. Here are a number hurdles to overcome when you buy a property at an auction:
To succeed in real estate investing, you must always purchase properties under market value. One of the best ways to do this is through the foreclosure market. Obviously, in the case of a foreclosure, the foreclosing entity just wants to get things done quickly to get its money out of the deal and move on. That makes foreclosures one of the very attractive market niches within the general real estate market. Tax sales represent an attractive market niche within foreclosures, allowing you to work with a government entity that only needs to recover the taxes owed, not the balance of an entire mortgage. The Free and Clear System is a market niche within the tax sales market.
With full implementation of the “Free and Clear System” to buying tax liens, your greatest competitive advantage is your ability to buy below market value and then market the properties you purchase quickly and inexpensively and profitably.
Fortunately, there are alternatives to auctions when we look at the entire foreclosure cycle. There are three fundamental stages of any foreclosure, whether it is a mortgage lender foreclosing because of a loan default, or a local government foreclosing because of a tax default. These are:
Why Purchase Pre-Foreclosure
As you start researching the many different local government entities across the country to gather information about their tax sales, you may experience frustration with the fact that they never seem to schedule their auctions within the next few weeks. It may appear that all the auctions are going to take place eight or ten months from now, with nothing in the near future.
It will help to keep in mind that there is only an 8% chance that a particular county’s auction is scheduled for next month. That is because there are twelve months in a year, and therefore a one in twelve chance that the auction is within the next calendar month. One in twelve is 8%.
As you continue your research, it will help you a lot to place these auction dates on a master calendar, and add an item two months prior to each scheduled auction to remind you to get ready. Soon enough, you will see your calendar filled throughout the year with opportunities to bid on tax deeds.
On the other hand, who wants to be prisoner to somebody else’s schedule? We want to look at ways to do this business without depending on the calendar imposed from outside. That is the foundation of this pre-foreclosure marketing campaign.
One of the strengths of this technique is that the factors that make it possible to acquire this property for pennies on the dollar make it difficult for the former owner to get rid of it. If you follow the Free and Clear system, however, you will be able to sell quickly and easily what the previous owner could not sell at all. The details of how to do that are there for you to read in the chapters of this book labeled “Selling." The selling is the foundation of the system, which is a three step process:
1. You buy a parcel of land substantially below its current value.
2. You immediately resell (or flip) that parcel at full market value for a profit.
3. You repeat the process again and again.
To implement this system, you simply buy tax-delinquent parcels that are so inexpensive that real estate agents won’t sell them (the commission is not worth the effort). These most often will be unimproved land, i.e., land with no structures built on it. You can find such parcels in city lots, retirement communities, recreational subdivisions, paper subdivisions (those platted but not developed yet) and rural lots and acreage. Because of the low market value of these types of parcels, the sales commissions are so low that agents don’t want to bother.
How does this provide you a marketing advantage? Often people own these parcels with no particular desire or plan to build on them. For example, Ed and Lucille may have purchased a lot at a recreational development on a lake or golf course with the plans of building a small weekend getaway house there. They may have bought directly from the builder in a controlled marketing situation with a video presentation then a one-on-one encounter with a trained sales person. Then after their purchase, life interferes with their plans: Ed gets downsized and the only employment he can find is 1000 miles away – too far for this to be a convenient weekend get-away any more. Or they divorce and have no desire to own this parcel jointly, or one of them dies, or they encounter financial problems and cannot afford to build.
If they don’t develop their lot relatively quickly, they will forget all the positive feelings they associated with it. Then the tax notices come from the county demanding $187 for this year’s property tax. They have already emotionally disengaged themselves from this land, and the tax notices are just an annoyance; they see no reason to pay the taxes, so now several years have passed and the taxes accumulate. Meanwhile, as much as they would love to get rid of the property, they don’t know how. They cannot reduplicate the marketing campaign that the seller put on to get them to buy in the first place. Real estate agents don’t want to help them. So they resign themselves to letting the property go to county auction.
Obviously, this sample scenario is only one example. Perhaps they inherited the building lot, or it was thrown in on some business deal. It could be a couple preparing for retirement, but when the husband dies unexpectedly, the wife no longer has interest in moving to a new home out of state where she knows nobody to live by herself. Regardless, if the owner no longer wants the property, as a low value parcel of unimproved land, they find it difficult if not impossible to sell.
What these people don’t know is that with the advent of Internet auction sites, unimproved land has become the easiest and least expensive kind of real estate to sell. Even in a flat market, it can be sold in just a few weeks. This is a market that in some ways resembles yard sales, another niche market created a few decades ago to allow people to sell unwanted junk. The difference is that eBay and Bid4Assets are superior market systems with more depth and breadth. This larger market offers you, the seller, more targeted buyers and the power of auction fever, where people will pay more just to get what they want. This revolutionizes the second step of the Free and Clear System, flipping the property quickly, because now you can do it online with a superior marketplace.
The Psychology of Tax Delinquent Property Owners
If your focus is on unimproved properties, i.e., parcels of land with no building on them, you will find a different mentality than what you find among home owners. After all, this unimproved land is not where they live, relax, and raise their children. It does not have the same emotional resonance as a home, or for a rental property, for that matter – at least the rental property is a revenue source. The land just sits there.
This is all the more real if they owe delinquent property taxes on this land. That indicates that they are not using it to build their dream home, or for anything else.
As a case in point, let’s look at Ed and Lucille. They have purchased a lot at a recreational development on a lake or golf course with the plans of building a small weekend getaway house there. They may have bought directly from the builder in a controlled marketing situation with a video presentation then a one-on-one encounter with a trained sales person. Unfortunately, after their purchase, life interferes with their plans: Ed gets downsized and the only employment he can find is 1000 miles away – too far for this to be a convenient weekend get-away any more. Or they divorce and have no desire to own this parcel jointly, or one of them dies, or they encounter financial problems and cannot afford to build.
If they don’t develop their lot relatively quickly, they will forget all the positive feelings they associated with it. Then the tax notices come from the county demanding $187 for this year’s property tax. They have already emotionally disengaged themselves from this land, and the tax notices are just an annoyance; they see no reason to pay the taxes, so now several years have passed and the taxes accumulate. Meanwhile, as much as they would love to get rid of the property, they don’t know how. They cannot reduplicate the marketing campaign that the seller put on to get them to buy in the first place. Real estate agents don’t want to help them. So they resign themselves to letting the property go to county auction.
Obviously, this sample scenario is only one example. Perhaps they inherited the building lot, or it was thrown in on some business deal. Maybe a couple bought it to build a retirement home, but the husband suddenly died and now the wife has no desire to move to a strange place out of state where she knows nobody in order to live by herself. Regardless, if the owner no longer wants the property, as a low value parcel of unimproved land, they find it difficult if not impossible to sell.
Contacting Reluctant Property Owners
These people are good to talk to. In an area that auctions off tax deeds, they are at least three years and as many as five years delinquent on the taxes before the auction is scheduled. In tax lien certificate venues you would contact the owner just prior to the end of the redemption period. You will find the occasional person who has just procrastinated paying and will eventually pay before the auction takes place, but many have just given up and have decided to let it go. With all the time that has elapsed since the owner stopped paying taxes, we can figure that many of these owners, if they haven’t yet gotten around to redeeming the property, or they haven’t been able to redeem the property, they probably are not going to redeem it. They don’t care about it, and their indifference provides your opportunity.
If you were to offer such a person two, three or four hundred dollars for this land with the understanding that you will take care of the taxes, that could be found money for them. Found money is like the $10 bill you see lying on the ground as you walk down the street. For $10, you will probably bother to bend over and pick up the piece of paper. You might not do that for a penny, but for $10, you will. It is worth the effort. Furthermore, you don’t walk away feeling badly because you deserve a $20 bill.
With this marketing campaign, we offer just enough to the property owner to make it worth the effort to sign the quit claim deed in front of a notary public and put it in the envelope we provide to mail it back to us.
Bear in mind, to make this work, you will want to contact the homeowner around six weeks prior to the scheduled auction. You may need all that time to get the paper work completed, deed recorded and taxes paid before it becomes too late.
We find this contacting works best if we first mail a letter to the property owner, followed by a phone call. The phone call introduces us to the owner and the concept that they could get some money for this white elephant they own. However, research indicates that we are much more persuasive in talking than in writing. In fact, 80% of our communication ability is non-verbal – the gestures, facial expressions, body language, posture, tone of voice, personality and the rapport we establish in having a conversation.
A Sample Letter
The following letter is just one example of what you can send. It refers to a recreational property located in a development called Falconhead in Love County, Oklahoma. It pre-supposes that the person sending the letter is working with his wife and already owns a couple of parcels there. Obviously, if you are working alone, or if the property is a stand-alone parcel or within a residential subdivision, you would adapt accordingly. It may or may not have HOA fees.
[The red text is merge material – data to be changed letter to letter; the text in red may or may not apply to a particular propertery]
For most people, the best way to produce these letters in bulk is to use the “Mail Merge” function within Microsoft Word. You find it in the “Tools” menu under “Letters and Mailings.” The program walks you, step-by-step, through the entire process of setting up the data to insert into the letter (i.e., names, addresses, name of the location and of the county, legal description) and printing multiple letters to multiple people with differing properties with a single key stroke.
How to Use These Letters
You would like to track the letters you send, so we recommend that you send approximately 30 letters each week. That way, you can obtain as many phone numbers as possible and call the people who receive your letters within a few days (before they completely forget). Below is a possible strategy – step by step – for mounting an effective marketing campaign.
An Alternative to a Letter
There are a number of investors who prefer to send postcards instead of letters. There are certain pros and cons of postcards vis-à-vis letters, which we will describe here:
The attraction of postcards:
- They cost much less than letters to send.
- They don’t have to be personalized.
- Even if the recipient sees it as junk mail, it is hard to resist reading it since there is no envelope to open.
The attraction of letters:
- They give a better first impression.
- Because the quit claim deed arrives with the letter, there are fewer steps in which something could go wrong.
- Because there is no need to send the quit claim deed separately, you save at least a week in the process.
Bear in mind that the argument about not having to open an envelope is powerful. To overcome the recipient’s aversion to junk mail, you want to make the envelope look as personalized as possible. The least you do is hand-address it. Think of your reaction when you received a piece of mail where the envelope has your name and address personally hand-written – maybe it’s a birthday or holiday card! Maybe it’s a check from your mother!
It doesn’t hurt to use a commemorative stamp, rather than what you get from a roll or book of stamps. These are bigger, sometimes have landscapes, art, cartoon characters or historical figures. They show that the mailing is from a real person, not some faceless corporation.
A postcard costs less to send than a letter; however, you cannot send the quit claim deed with it. Instead, after the property owner contacts you, you send the deed in a separate mailing. It requires an addition step in the process, but you don’t have to worry about the recipients opening an envelope. This is a possible message for a postcard:
All About Quit Claim Deeds
You may have some questions about the quit claim deed you send and what it should look for. The following is a sample based on fictitious people and a fictitious parcel. In all cases, the Grantor is the seller, the Grantee is the buyer; you name the county and state where the property is located and show a complete legal description of the property.
The legal description may be more or less complex than shown in the sample: if it is in an incorporated town or city, it may be a simple subdivision designation, such as: "Lot 8, Plat B of the North Meadows Estate Subdivision as recorded with the Utah County Assessor’s Office" (text in red is for you to change according to need).
