Pre-foreclosure strategy

Asked by Jon Olson, San Diego, CA Sun Feb 1, 2009

I have discussed with several real-estate savvy people recently the prospect of buying a home via quit-claiming deed's of pre-foreclosed homes for a cash offer on the home owner's equity in the house. If a home is in pre-foreclosure yet still has a reasonable amount of equity in the home, is it legal or even possible to approach these homeowner's to make a cash offer on their homes for the total debt on the home plus a negotiated amount?

What are the legal hurdles and the added paperwork needed to close a home like this, especially if I have cash or possibly a third lender with an already pre-approved amount?

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Damon Bottic…, Agent, Las Vegas, NV
Fri Jan 13, 2012
It would be extremely rare for a home to be in any stage of foreclosure and still have a "reasonable amount of equity". Commonly, a home is in foreclosure because there is no equity.
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fredeckert, Agent, San Diego, CA
Mon Feb 2, 2009
If you think of using your strategy with an owner occupied single family (1-4unit) , home and you will not occupy it as your personal residence, you need to be aware of Civil Code 1695, if the owner has a notice of default filed against the home. It has very precise steps that must be followed or you could find yourself in serious trouble. I have included a link to the law below. AITD's, Wraps, Subject to's are all similiar strategies and I agree with Jeffrey on the potential pitfalls.
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Jeffrey Doug…, , San Diego, CA
Mon Feb 2, 2009
Hi Jon,

This is what we call a AITD (Wrap Around Loan) which is a really bad idea for both the Buyer and Seller. Since most (99%) loans have a "due on sale" clause, the transfer by quite claim to title is a sale. The Seller is still responsible for the loan on the property even though they no longer have the deed or own the property, the Buyer can be faced with the lender finding out about the ownership change and call the loan. So lets say the new buyer has taken over a loan for 300,000 and suddenly has to pay it back or loose the home. There are other considerations including insurance issues and possible lender fraud.

I strongly urge you to consult a real estate attorney for advice on this situation before considering.

We used to see them done years ago and they are now back, but as you can see there are big pitfalls to them for all involved. Many escrow companies will not do them since they are so risky.
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