If you see any of the “get rich quick” real estate ads, most of them say that one of the best types of properties to go after are pre-foreclosures. However, this is rarely true and I’m about to tell you why.
You see, when a person is in pre-foreclosure it means they’re behind on payments. And if they’re behind on payments it means that you would have to bring these payments current in order to buy the property.
For example, if a person was behind three months on their mortgage payment of $1,500 a month, it means you would have to bring $4,500 to the table if you wanted to do the deal. (Plus any other fees). Obviously, not many investors have $4,500 or more they can use when they are first starting out in real estate.
Even if you do have $4,500, you can only do so many deals this way before you run out of cash.
That’s why I encourage people NOT to do pre-foreclosures like this because they will develop a bad “habit.” Plus, when you’re first starting out in this business you should have some safety cash in case an emergency arises. (Such as having a rental property that needs a major repair or a vacancy.)
Let me give you an example of a property I am working on right now. My partner and I got a lead from a very motivated seller who said he was going to lose his house in less than a week. This meant he was several months behind in his payment and it was over $8,000 to bring it current.
Now, this property was not a good enough of a deal to make it worth it.
However, like all things in life, there are certain times that it would definitely be worth it.
If you get a call from a motivated seller who is in pre-foreclosure and you will need to bring $5,000 to the table and there is $100,000 in equity, then you obviously do the deal. But if it requires $5,000 and there is only $5,000 in equity, then walk away quickly.
My point is, if you’re first starting out in this business be very, very careful with your cash. Don’t get greedy on a deal that doesn’t have a large enough profit to justify bringing cash to the table.
If you truly want to become a successful investor and stay in this business for a long time you will do the majority of your deals with no-money down (via subject-to, lease options). Then, when you do come across a fantastic deal with a lot of equity you will use your extra cash for a large payday.