It may not be apparent at first, but there is a tremendous difference between these two types of real estate investing. While they are both methods of investing in real estate at a substantial discount to market value, the manner in which these properties are acquired varies greatly.
With foreclosure property investing, you have a mostly unwilling seller. These unfortunate folks are losing their homes due to financial distress in their lives. They don’t want to leave their homes for any reason. As you can imagine, in most cases, the homeowner is required to leave the property behind so that the foreclosure investor can help them most effectively. The homeowner is guided through losing their home in a way which will ease the impact to their credit. Sometimes the financial situation has deteriorated so badly by the time an investor reaches a homeowner in default, saving their credit is the best they can do. Foreclosure investing requires dealing with a very unwilling ‘seller’ and, potentially, a very emotional situation. This method of investing is not for the faint of heart.
With probate property investing, you have a very willing seller. In all cases, you are dealing with someone who inherited a free and clear property. The house represents free money to them. They did not work for 30 years struggling to pay the mortgage. The heir just wants whatever money they can get and FAST.
Often times, you are dealing with heirs who are struggling to come up with money to satisfy debts the previous homeowner left behind before the estate can be settled. The house represents an unnecessary obstacle in getting to the cash they need fast. In addition to paying off debts, the heirs are likely in a situation where they need to pay death taxes. These taxes can be devastating to estate that was improperly structured. At the time of this writing, it is not uncommon for estate taxes to work out to 55% of the estate’s total value. By this fact alone, you can understand the tremendous pressure facing the heirs to get things paid off and squared away.
Did I mention these taxes have to be paid in an extremely short period of time after someone dies or penalties start to pile up? So, if 55% tax looked daunting wait until those penalties and interest start mounting up. By comparison, this method of investing is far easier as you are dealing with motivated sellers in nearly all cases. They are willing to listen to any reasonable offer especially if you have the ability to settle very quickly and get them their cash.
As you can see, while the two methods seem quite the same on first look, they differ greatly due to the time and energy and investor must devote to acquiring the property. Foreclosure property investing will require you to do some hand holding and a whole lot of relationship building with a person who is about to lose their home. Probate property investing will require you sort out ready and willing heirs from the one’s who are not ready to sell just yet; that’s a whole lot easier.
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