At this point, you might be asking yourself if this is such a great niche to go after, why isn't everyone doing it? Well from our informal surveys of many investors across the country, when people hear the word bankruptcy, their first reactions are intimidation and avoidance. The fact that it's a legal process involving the Federal government pretty much sums up why.
We believe these two reactions are largely due to a lack of knowledge and experience. It's really very normal and reasonable because we are all intimidated by things we do not yet understand. By the way, does your local Real Estate Investment Association offer an educational seminar or subgroup on bankruptcies? We'd be surprised if the answer is yes.
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However, there are so many incredible opportunities for real estate investors in the bankruptcy niche that we've made it our personal mission to remove the fear commonly associated with bankruptcies and, at the same time, pass on the unique pool of knowledge that you need to make bank-accounting bursting profits!
Let's start with the most common myths and misconceptions:
Myth #1: Bankruptcies are too legally complicated for the average real estate investor.
False: Do you need to be familiar with bankruptcy terminology and the general process of how a bankruptcy proceeds? Yes. Do you need to understand the basic differences between a Chapter 7 and a Chapter 13? Of course. Do you need to know the responsibilities of the Trustee? You bet. But you can easily learn all of these details and more by simply finding and understanding the right information.
Myth #2: You cannot buy a house in a bankruptcy.
False: Sure you can buy it. It might (but usually does NOT) require an extra step versus a house you find through other resources. It is more than worth your effort to get educated enough about the bankruptcy process so you can speak intelligently with sellers. The paperwork required for purchasing a home in a Chapter 7 or a Chapter 13 is also very basic. The magic piece of paper you need from the Trustee in a Chapter 7 is called a Notice of Abandonment. If it's a Chapter 13, you need to file a Motion for the Sale of Real Estate.
Myth #3: Only attorneys can deal with the Bankruptcy Court or a Bankruptcy Trustee.
False: The Court system is designed for the people. That's you and me. It also happens to be where many attorneys earn their living. If you're filing for bankruptcy, we certainly recommend that you do so through an attorney. But if you're just trying to purchase a home involved in bankruptcy, you can do it on your own! Further, the Trustee is an officer of the court whose responsibility is to protect both creditors and debtors. As a potential purchaser of a property under the control of a Trustee, you can certainly contact that Trustee and walk through the process.
Myth #4: If there's any equity in a house, the Court will not allow me to buy it.
False: Indeed, one of the Court's responsibilities is to evaluate the debtor's estate and see how as many creditors as possible can be paid. However, there's a big difference between a house having enough equity for the Court/Trustee to want to go to the trouble to sell it versus a house having enough equity for a real estate investor to find a good deal. For example: (a) The Court must factor in a Homestead Exemption payment to the debtor, a real estate investor does not have to do that. (b) The Court must factor in yellow pages prices for any necessary repairs, but most investors have much less expensive resources. (c) The Court will sell the house through a full-service realtor, who will be charging a 6% or 7% commission. Whereas, an investor may sell to a buyer's list, use a flat-fee listing service or want to keep the house as a rental. (d) The Court will not negotiate a short-sale with the lender(s), but we all know that investors can make TONS of money in the short-sale market!
Myth #5: There are no pretty houses in bankruptcy.
False: People with nice, expensive houses get in financial trouble just like folks with more modest or ugly houses. In fact, some of the most profitable deals we've done have been with VERY nice houses in VERY nice neighborhoods! In fact, we've each had the opportunity to do short-sale purchases on homes in the $300,000 - $400,000 range.
Myth #6: There are no investing opportunities for houses in bankruptcy because mortgage balances are too high.
False: We looked at this issue briefly in Myth #4, but there's more to know. In fact, due to the circumstances leading most debtors to file bankruptcy, there are more opportunities in bankruptcies than elsewhere. Four reasons for the many opportunities are: (a) Most investors are either afraid to deal with a bankruptcy or don't know how. So there is less competition and where there's less competition, there's more opportunity! (b) We've heard all sorts of figures, but most recently have been quoted that 86% of all Chapter 13 bankruptcies fail, which leads to extremely motivated sellers! (c) Many debtors were facing foreclosure when they filed bankruptcy so when they realize they are getting kicked out of their bankruptcy, they often realize they have run out of options and they MUST sell their house to avoid foreclosure. (d) Mortgage companies that loaned money to these debtors have really been drug through the legal system foreclosure, bankruptcy, back to foreclosure. So the mortgage companies are also motivated to negotiate a short-sale so that they don't end up owning another house via foreclosure. Yet another opportunity for the real estate investor!
These are just some of the many myths surrounding bankruptcies and the many hidden opportunities for real estate investors. A little knowledge can go a long way and make you amazing real-life, spend able cash via this niche market!
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