HOW TO FIND AND PROFIT
FROM FORECLOSURES
IN ANY MARKET
How to Buy Foreclosures - Full...
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HOW TO BUY FORECLOSURES:
HOW TO FIND AND PROFIT FROM FORECLOSURES IN ANY MARKET.
A FEW WORDS ABOUT THIS BOOK...
PLEASE NOTE: We've really tried our best to 'over-deliver' with this book for you. We think you'll
find it to be one of the best values in foreclosure investment property education that you'll find for
the price. (See similar texts selling for $100-500 from the more hard selling 'guru's' and get rich
quicksters.)
Please send your positive or negative feedback and comments to Federal Homes and be sure to
visit FederalHomes.com for foreclosure listings in your area!
Copyright © 2004 Federal Homes
Portions used with permission:
Copyright © The Real Estate Library 1994-2004
ALL RIGHTS RESERVED
No part of this three part publication may be reproduced or distributed in any form or by any means, or stored in a data base or
retrieval system, or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior
written permission of the publisher and the copyright holder.
Reproduction or translation of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States
Copyright Act without the permission of the copyright holder is unlawful. Requests for permission or information should be
addressed to Federal Homes.
This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is sold with
the understanding that the publisher and author are not engaged in rendering legal, accounting or other professional services to
any person. If legal advice and/or other expert assistance is required, the service of a competent professional should be sought.
--- Adapted from a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of
Publishers.
The publication contains the author’s opinion on the subject matter covered herein. Neither the author or the publisher are engaged
in rendering legal, accounting or investment services. Laws vary from state to state. Some of the information contained in this
publication may be affected by changes, modifications or interpretations of the laws. Because of this, no guarantee is offered as to
the completeness or accuracy of the information. The strategies and suggestions contained in this publication will not be suitable
for everyone. The author hereby disclaims any liabilities for losses incurred as a result of the materials contained in this publication.
Contents
Copyright © Federal Homes 2004
All Rights Reserved
Copyright (C) 2004, Federal Ho...
3/12/2005
How to Buy Foreclosures - Full...
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z Introduction
z Foreword
z About Federal Homes
z Chapter 1:
Describing The Foreclosure Process
Basic Process Explained
About Mortgages
Trust Deeds
Judicial vs. Non-Judicial Methods of Foreclosure
Deficiency Judgments
Deed in Lieu of Foreclosure
Rights of Redemption
Acquiring Foreclosures
Summary
z Chapter 2:
How Foreclosures Occur
The Most Common Reasons
Divorce
Job Loss
Health Matters
The Economy
Other Common Reasons
z Chapter 3:
Opportunities in Foreclosures
What is Distressed Property?
Why Buy Distressed Real Estate?
Advantages of Buying Foreclosures
Lower Purchase Price
Lower Down Payments
More for Less
Motivated Seller
Less Competition for Properties
Motivated Lender
Liens, Judgments and Encumbrances
Better Terms
Someone’s Loss Can be Anyone’s Gain
Ownership or Investment?
Disadvantages
Foreclosure Investing: An Overview
z Chapter 4:
How Many Foreclosed Properties?
Numbers of Foreclosures
z Chapter 5:
Understanding The Bank’s Position
The Bank’s Legal Obligations
Other Influences
The Bank’s Exposure
What It Costs The Bank
The Bank’s Motivation
z Chapter 6:
How To Locate Bank Foreclosures
Where to Look for Properties
Where to Find Bank Foreclosures
The Banks
Realtors
Newspapers
Legal Notices
Real Estate Publications
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Foreclosure Reporting Services and Listing Publications
The Courthouse
On-line Services
z Chapter 7:
Doing Your Homework… Researching Properties
Putting It All Together The Big Picture
Your Motivation
The Seller’s Motivation
The Team Concept
Researching… Being A Good Detective
z Chapter 8:
Understanding The Basics Of Buying
Introduction to Buying
The Three Basic Methods
The Judicial Foreclosure Explained
The Non-Judicial Foreclosure Explained
Comparing the Processes
z Chapter 9:
Buying Pre-Foreclosures
Investing Overview
Proven Step-by-Step Methods
Locating Properties In Default
Evaluating Selections
Contacting the Homeowner
Meeting the Homeowner
Preparing Your Offer
Presenting Your Offer
The Purchase Contract
Terms of the Agreement
Ready, Set, Close!
z Chapter 10:
Buying At The Auction
Investing Overview
Disadvantages in Auction Buying
Locating Sales and Auctions
Evaluating Properties and Determine Profit Potential
Inspecting the Property
Calculate Your Profits
Preparing for the Auction
Attending the Auction
z Chapter 11:
Buying Foreclosures Directly From The Banks
Dispelling Some Myths
Investing Overview
Advantages
Disadvantages
Advantage or Disadvantage?
How Lenders Dispose of Their Properties
The Lender’s Asking Price
How to Locate REO’s
Narrowing Your Selections
Contacting Your Profits
Making Your Offer
Closing
z Chapter 12:
Financing Your Purchase
Before You Start
Your Personal Credit
Borrowing Your Money
Partnerships
Investors
Other Sources
z Chapter 13:
Selling Your Properties
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Strategy Overview
Working with Brokers
Selecting a Broker
Pricing the Property for Resale
Marketing Your Property
Advertising Your Property
Newspapers
Flyers
Signs
Final Checklist
Presenting Your Property
Qualifying Buyers
Negotiating the Price
Accepting an Offer
Closing
z Chapter 14:
The RTC, FHA, HUD, SBA… ETC!
Resolution Trust Corporation (RTC)
Department of Housing and Urban Development (HUD)
Federal Housing Administration (FHA)
Veteran’s Administration (VA)
Small Business Administration (SBA)
Federal Deposit Insurance Corporation (FDIC)
Federal Savings & Loan Insurance Corporation (FSLIC)
For More Information…
z Chapter 15:
Get Started!
z BONUS Chapter 16:
Forms
z BONUS Chapter 17:
Resources
z BONUS Chapter 18 WEB:
Real Estate Catalog
z BONUS Chapter 19 WEB:
List Your Properties for Free
z BONUS Chapter 20 WEB:
Industry Press Releases
z SPECIAL!
Complete Creative Investing Catalog
z SPECIAL FUNCTIONS & SERVICES
Member Login
Join
Cancel
Lost ID Number
Search Listings
Consumer News
Residential News
Introduction
Copyright © FEDERAL HOMES 2004
All Rights Reserved
Copyright (C) 2004, Federal Ho...
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How to Buy Foreclosures - Full...
Page 1 of 3
This book would not have been possible without the assistance of The Real Estate Library.
I would like to extend my sincere thanks to Todd Beitler and Jason McQueen who have both done so much to help me grow my
business and enabled me to help you grow your investing business or simply buy a home for the first time.
--Matthew Landry
This How to Buy Foreclosures e-book will give you a good comprehensive overview of foreclosure property investment and some
good tips on buying investment property in general. It is intended as a primer for novice investors and homebuyers new to the
process and interested in foreclosures. We'll tell you about resources for finding these types of property and ideas for financing
them. We'll also cover issues related to picking which properties to pursue based on tried and tested models for evauating your
potential purchase. Last we'll tell you about how to multiply your chances to succeed by working with a qualified and experienced
real estate and investment coach.
This book is certainly not the first publication to come along illustrating the benefits of this industry. It is however one of the finest,
most useful products of it’s kind for it's price.
We'll introduce you to the world of foreclosures. Chapters 1-5 explain what a foreclosures is… how the process works… how
foreclosures occur… the opportunities for profits and savings in buying distressed real estate… how many foreclosures there are…
and understanding the bank’s behavior when dealing with foreclosures.
Chapter 6 is an in-depth look at the various methods of locating properties. This chapter reveals the advantages and disadvantages
associated with using reporting services… and shows you where the best information is… and how to get it. Chapters 7 & 8 prepare
you to buy foreclosures. There is a lot to learn about buying in this industry… these chapters tell you everything you need to know
and set you up to be successful.
Chapters 9-11 guide you step-by-step through the buying processes. You will learn how the nation’s leading foreclosure experts
buy pre-foreclosures… buy at the auction… and buy bank foreclosures after the auction. Every single opportunity and pre-caution…
is pointed out for your benefit.
Chapters 12-14 show you how to finance your foreclosure purchases… sources of money… how to sell your properties with or
without real estate brokers… how to advertise your properties… how to qualify buyers… and almost everything you need to know
about the RTC, VA, FHA, HUD, SBA, etc.
Chapter 15 Talks about the benefits of furthering your real estate education.
Chapters 16-20 are forms and other wen resources that can help you as you progress.
The word “BANK” in this publication is used synonymously with banks and other lending institutions. Any lending institution that
holds a mortgage to real property can foreclose. This includes banks, mortgage companies, insurance companies, credit unions,
savings & loans, etc.
Are there “tricks of the trade?”...
Yes. But, they aren’t secrets!
The tricks of the trade are known and utilized by every knowledgeable Real Estate professional—from actually being in the
business!
Don’t be fooled by promises to teach you “secrets” that no one else knows. The real “secret” is education. Every deal is different
and you need to KNOW what to be on the lookout for so you know when to purchase and when not to.
Learn the basics, take baby steps... buying real estate is a skill that can be mastered just like any other trade. It doesn't matter if
you are buying a new home for your growing family or your first apartment building, it takes a skill set to do it right and limit your
risk while realizing the highest possible gains over time. A master electrician does not become one by simply printing some
business cards. He works hard, finds a mentor or school, learns and finally masters the skills necessary to be successful at his
trade, and then prospers. In that order.
We hope this book will help you further your goals and give you some ideas for other ways you can learn more and be more
successful at foreclosure investing. FederalHomes.com maintains a superior database that you can use to further your real estate
purchasing goals. The information in this ebook is free for you to use and profit from, however we invite you to visit
http://www.FederalHomes.com if you'd like to get the most accurate nationwide foreclosure data available. You may also use
federalhomes.com to locate agents and potential financing sources for any of the properties that we have listed. If you require
further assistance locating a professional to assist you with a HUD, VA or other REO purchase in your area please contact us at
broker@federalhomes.com we'll be happy to locate a professional local to you.
REMEMBER THAT ALL REAL ESTATE INVESTMENT IS SPECULATIVE - LIKE THE STOCK MARKET. YOU CAN LIMIT YOUR RISK WITH
KNOWLEDGABLE PURCHASES AND DILIGENT ANALYSIS, BUT THERE IS ALWAYS RISK. NEVER FORGET IT, AND MAKE SMART
BUYING DECISIONS!
Copyright (C) 2004, Federal Ho...
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How to Buy Foreclosures - Full...
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IMPORTANT NOTE: Laws and customs change dramatically from state to state and even from county to county. This text is not
intended to provide legal advice or investment advice.
This primer is meant to provide a general overview of the real estate industry as it relates to foreclosures. Please consult with
appropriate professionals in your area prior to entering into any real estate transaction.
If you would like help finding a professional in your area to assist you please email me at broker@federalhomes.com
Matthew S. Landry,
Lic. NYS Real Estate Broker
Federal Homes
http://www.federalhomes.com
New York
Extended Preface by Todd Beitler
Financial security derived the old fashioned way, is a thing of the past.
I remember quite clearly… my parents were able to buy a nice home… make improvements to the property… have two cars…
provide for their family… save money for college educations… and take regular vacations… all on one income.
Today, I earn twice what my parents made and can’t afford half of what they had. There are no more guarantees, no pension plans
that can be counted on for life. There are no jobs or industries for that matter that will guarantee you financial security through the
years. For the very first time in our history… a new generation of Americans does not expect to do as well as their parents did.
The only industry I am aware of that continually produces larger than average profits, is real estate. It’s true… today you can’t just
buy a home anywhere and expect it to quickly increase in value. The industry is not the same as it was years ago, but what
industry is? Still, real estate will always appreciate in value.
Bank foreclosure real estate is truly one of the greatest investment opportunities for the average person. Faddish opportunities
come and go. Bank foreclosures are not fads… they are real life opportunities to save thousands of dollars on a home purchase…
and are available to anyone. Typically, you can save 15% - 25% off the market price of a home… merely by purchasing a bank
foreclosure. Savings of 40% - 50% are less frequent, but just as real.
Of the information collected, I have become very disappointed in most of the books, tapes, workshops, seminars, etc., on
foreclosures. Most of everything written comes from one individual’s perspective. That one experience they had, that motivated
them to investigate wealth building opportunities. Maybe it’s the individual who lost a home to foreclosure or bought one and wrote
about it.
Most authors give you their method… I think you should know all the methods of purchasing foreclosures and the ways you can
reward yourself and your family by pursuing the opportunities available in the distressed real estate industry.
Matt's book delivers practical, useful real estate foreclosure information. Just the facts! If the plain truth about buying or investing
in bank foreclosures is what you’re looking for… you’ve found it.
This material will explain just what a “bank foreclosure” is… what the advantages are to buying bank foreclosures vs. government
owned properties… how foreclosures occur and why… how to find foreclosures without getting ripped-off… and step-by-step
methods of buying your first bank foreclosed property.
I am confident that you will find this information educational… useful… and after having studied it… you will be that much closer to
making your future a more profitable one.
Todd Beitler,
The Real Estate Library
http://www.trel.com
About
Copyright © FEDERAL HOMES 2004
Copyright (C) 2004, Federal Ho...
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How to Buy Foreclosures - Full...
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How to Buy Foreclosures
How to Find and Profit from Foreclosures in any Market
is brought to you by:
Company:
Federal Homes
Description:
Timely and accurate foreclosure data in all 50 states.
Web:
http://www.FederalHomes.com
Email:
broker@federalhomes.com
Copyright:
Copyright © 2004 Federal Homes
Portions Copyright © 1994-2004 The Real Estate Library and Used with
Permission
All Rights Reserved
Federal Homes specializes in the search for and sale of HUD and VA properties. Although we are a NY based brokerage, our website
(s) provide numerous resources for home buyers and investors across the country as well as access to merged nationwide
foreclosure searches. (Hud, VA, Fannie Mae, Freddie Mac, Bank REO, More)
Please note that it is not necessary for you to use us as a broker in order for you to use the resources on our website(s): searches,
financing info, grant information, e-books and training, Etc. are available for general public use.
We can also offer buyers non foreclosure homes that are available through the MLS with which we are associated.
Please contact us for more information concerning any HUD, VA or bank REO home that you find listed at our site.
Federal Homes can act as a Buyer's Broker for any Upstate NY Transaction and we'll be happy to assist you in bidding on
transactions in our area.
Our business is focused exclusively on buyer's agency.
We don't list homes, so we don't have dual loyalties or a stable of our own listings we're trying to sell you first.
We work for buyers only to find you the best deal at the best price on either 'regular' homes for sale or for foreclosure property.
Federal Homes is a Member of The Saratoga, Schenectady, Schoharie Association of Realtors. (SSSAR.COM)
We hold membership in the New York State and National Association(s) of Realtors.
Federal Homes is registered with the US Dept. of Housing and Urban Development and with The Veterans Administration.
We will work as your broker in the following NY Counties, Warren, Schoharie, Saratoga, Fulton, Montgomery, Schenectady, Albany,
Rennsalaer and Greene.
(Others upon special arrangement)
We have a large pool of foreclosures available each month, we also have the benefit of extensive multiple listing service databases
to draw on for your individualized property searches.
Call us today at 518-229-5784 and let us help with YOUR next upstate NY purchase.
We'll find the home or investment property that's right for you and help you to negotiate a winning transaction!
If you are not shopping in upstate NY, email us anyway, we'll use our extensive referral network to access professional agents or
HUD/VA reps in any area of the country.
If you are interested in bidding on or inspecting/viewing
a property, please call 518-229-5784 or email
This site has been awarded the Results-net Five Star Site Award. The award is given to those real estate related web sites that
demonstrate excellence in design, usability and effectiveness, and show a commitment to using the Internet as a means of
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delivering information and providing service. Recipients of this award represent the top one percent of Internet Web Sites, and are
truly the "best of the best"! -- Results Net 08/03/2001
Please note:
The federalhomes.com portal is a private website providing foreclosure resources to the general public.
We are not affiliated, endorsed, authorized, or licensed by the United States Department of Housing and Urban Development or the
Department of Veterans Affairs.
Matthew S. Landry is a New York State Licensed Real Estate Broker registered with both the Dept. of HUD and the VA.
Federal Homes
PO Box 62
Galway, NY 12074
(Office) 518.229.5784
(Fax) 800.887.7684
You may check our New York License status. Just click HERE and then click search for NYS licensees.
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These web sites / domains as well as our electronic books contain links to third party sites. User accesses these sites at User's own
risk; Federal Homes is not responsible for the contents, changes, updates, or other links contained in a linked site. Federal Homes
provides these links merely as a convenience, and the inclusion of such links does not imply an endorsement by Federal Homes of
the site.
Any third party desiring to link to any of the Federal Homes websites must link to the Web Site's home page located at
www.federalhomes.com. No one may link to any other page of this Web Site without the prior written consent of Federal Homes.
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Your use of this website or electronic book implies your consent to the above policy and privacy statement.
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CHAPTER ONE
Describing The Foreclosure Process
“Buying real estate is not only the best way, the quickest way, and the safest way, but the only way to become wealthy…”
----- Marshall Field
Basic Process Explained
Foreclosure is a process of legal action taken by a lien holder or mortgage holder, as set forth by state and local laws and a
contractual obligation. This obligation is spelled out in a mortgage contract or trust deed.
The foreclosure action, pre-arranged in the contract, is taken when the terms of the contract are not met. It almost always means
that the payments on the loan have not been made. The loan which was used to buy real estate… is not being paid back and is
considered in default. “Default” being the non-performance of a contractual or other obligation… such as not making payments on a
note.
The contract (mortgage or trust deed) states… that if the loan is not paid according to the agreement… the one granting the loan is
entitled to gain possession of the property in order to retrieve the money they lent for that property.
The ultimate goal of the foreclosing lender is to end the rights of possession of the property owner. Foreclosure then, is a process
whereby the lender takes a property back from the borrower who’s loan is in default and then sells the property to pay off the loan.
Sounds complicated? Not really.
A simple analogy is that of repossession. Example: When you buy a new car, most likely you will need an auto loan. The loan may
come from your bank, credit union or even the bank or lending institution the auto dealership works with. In most states you get to
drive the car off the lot, registered in your name and the name of the lender of the loan. Likewise, the title to the vehicle is in both
names and held by the lender. When you payoff the loan, the title is sent to you, with only your name on it. You drive the car…
clean it… repair and maintain it… but it isn’t your until the loan is paid off.
Try not making your auto payments for three or four months and watch what happens. Most likely you will receive a series of
letters from the lender, progressively getting a little more unfriendly. The lender may call to try to resolve the matter of late
payments.
Whether or not satisfactory arrangements are made… make no mistake about it… you are in default of your contractual obligation
to make the timely loan payments stipulated in the loan agreement.
If the contract is not adhered to, the lender has the right to protect his interest in the agreement. The lender’s exposure is secured
by your signature on a promissory note and by the vehicle itself.
According to most contracts or agreements of this nature, the lender will have the right to… and may choose to accelerate the
loan… thereby making the full amount of the principal portion due and payable immediately… not just the portions or payments in
arrears.
Acceleration, commonly known as “calling in the note or loan,” is done so that the lender can avoid having to chase a borrower
through cycles of being behind in payments and playing catch-up.
Most lenders will work with you when you get behind in your regularly scheduled payments. If you fall behind enough… show no
ability to get caught-up in a reasonable length of time or are just generally uncooperative with the lender… the lender will most
likely accelerate the loan.
Banks and other lending institutions are not in the automobile business. Banks only male money on the interest they charge. If the
loan is not performing, the lender is not profiting on its investment. Its profits come from the interest you pay on the loan.
All banks are regulated. That means that they have to perform within very specific guidelines and the laws of the land. The banks
us our money to loan other’s money and to invest. If the return (the interest) on the investment or loan the bank makes is not
enough to cover its expenses and make a reasonable profit, then the bank is not running profitably. Who then, in their right mind,
would want to deposit their hard earned dollars in a business or bank in this case… that was not running profitably?
Banking regulations are supposed to protect the consumer from fraud… misuse… and misappropriation of the monies the consumer
entrusts the bank with.
Following is an example of the acceleration process.
Let’s say that you bought $12,000 car. You put $2,000 down and you borrowed $10,000 at 9.50% interest for 36 months. Your
monthly payments would be $320.33. If you make no payments what-so-ever, the scenario would look like this:
30 Days You Owe 320.33
60 Days You Owe 640.66 plus late fees for 1 month
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90 Days You Owe 960.99 plus late fees for 2 months
91 Days You Owe 10,000 plus late fees, interest and collection expenses
If suitable arrangements can not be made the lender will “call in the loan,” thereby making the full amount of the original $10,000
loan due and payable immediately. (plus interest, late fees and other expenses associated with trying to collect on the loan)
While all contracts and loan agreements vary, typically, 90 days is all you get.
If you still can not make satisfactory arrangements… remove your personal possessions from the vehicle… because the truck with
the ‘hook’ on the back will surely come.
About Mortgages
Much is the same with real estate loan agreements and mortgages.
When you secure a home loan from a bank… you will sign two of the most important documents you will ever sign. The first is the
promissory note. It outlines the terms and conditions of the loan… and your obligation to make the specified monthly payments to
the bank. Technically speaking… the note is the signed document that acknowledges the existence of a debt,,, and the promise to
repay the debt.
The second document is the mortgage contract. It is a pledge of security… collateral for the debt. This legal instrument is created to
give mortgagee (lender) certain rights to the property in the event the mortgagor (borrower) fails to perform as agreed in the loan
agreement… by pledging the property being financed as collateral. The mortgage given to a bank… is alien against the property…
“and not evidence of a debt.”
A mortgage simply pledges the property as security for the payment of the loan.
There are several types of mortgages prepared for all kinds of situations. In some states, the contract actually transfers the
property to the lender until the terms of the mortgage contract are met. In other states, the mortgage acts as a lien against the
property. The borrower retains possession and use of the property, as long as the terms of the mortgage contract are met.
Theodore J. Dallow, a recognized foreclosure expert and editor-in-chief of “FORECLOSURES,” a professional newsletter, points out
the five basic covenants in a mortgage agreement.
1. the borrower agrees to pay the principal mortgage debt.
2. the borrower will keep the property insured against fire, for the benefit of the lender.
3. no building on the property will be removed or destroyed without the consent of the lender.
4. the full amount of the principal portion of the loan will become due and payable, in the event that the borrower defaults on the
payment of the “principal, interest, taxes or assessments.”
5. the borrower will agree to the appointment of a receiver, if foreclosure proceedings occur.
The contract states that the borrower will protect the property and pay the loan back. It also states that if the borrower doesn’t
abide by the agreements, the lender will accelerate the loan if payments aren’t made… and that the borrower agrees to the
foreclosure process should it become necessary.
Therefore, by signed contract, the lender must accelerate the loan and must foreclose on the property, should it become necessary.
The lender is regulated and is loaning out the consumers’ moneys. The lender must protect its depositors. By law and by
contractual obligation, the lender must accelerate and/or foreclose.
Trust Deeds
This “mortgage method” of foreclosing on real estate is used in about half of the states in the nation. The other most popular
method is the Trust Deed, or “Deed of Trust.”
A Deed of Trust is also a legal instrument and is used as a mortgage is used. The “deed” to the property is placed “in trust” with a
third party, to assure payment of the loan and/or other stipulations of the loan agreement.
There is also a difference in the titles of the parties involved. The lender is known as the “beneficiary.” The borrower is the “trustor”
and the third party is known as the “trustee.” The trustee holds title to the property for the benefit of the lender as collateral or
security against the loan, in the event that the borrower defaults on the loan.
Both the deed of trust and the mortgage serve the same purpose… to secure the loan through title, repossession or foreclosure of
the property… to gain control of the property and its assets… and to remove the borrower from controlling or possessing the
property. Both of these methods, are known as security devices.
Judicial vs. Non-Judicial Methods of Foreclosure
The deed of trust is the security instrument most widely favored by banks and other lending institutions. All deeds of trust contain a
power-of-scale clause which allows the trustee (the third party) to advertise and sell the property if the trustor defaults on the loan.
The trustee (typically a title or trust company) can sell the property without the authorization or prior approval of the courts.
The judicial method, favored by lenders, is practiced in “lien theory” states. The lien theory dictates that the borrower pledges or
hypothecates the property’s title to the lender… and that in case of default… the lender shall through court proceedings… foreclose
on the property and gain clear title. Hypothecation creates a lien on the property, as agreed to in the contract, by both the lender
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and borrower.
Whether a property is sold or auction… whether or not it goes through the foreclosure process… a lot of people have a lot of money
at stake. There are very specific rules, regulations, laws and guidelines that dictate how these events will unfold.
In the judicial method of foreclosure, the one petitioning the courts to begin foreclosure proceedings may not profit from the
experience! At least not at the auction.
If a bidder at the foreclosure sale successfully purchases the property for more than what the lender is owed (including the
principal, interest for the late payments and other expenses as stipulated by the court) the overage, or the amount bid over the
amount owed to the lender, is returned to the borrower. The lender merely presents its lien, its court ordered judgment for the
amount owed at the foreclosure sale and usually ends up with the property.
STATE INSTRUMENT TYPE
Alabama Mortgage
Alaska Deed of Trust
Arizona Deed of Trust
Arkansas Mortgage & Deed of Trust
California Deed of Trust
Colorado Deed of Trust
Connecticut Mortgage
District of Columbia Mortgage & Deed of Trust
Florida Mortgage
Georgia Mortgage
Hawaii Mortgage
Idaho Deed of Trust
Illinois Deed of Trust
Indiana Mortgage
Iowa Mortgage
Kansas Mortgage
Kentucky Mortgage & Deed of Trust
Louisiana Mortgage
Maine Mortgage
Maryland Mortgage & Deed of Trust
Massachusetts Mortgage
Michigan Mortgage
Minnesota Mortgage
Mississippi Deed of Trust
Missouri Deed of Trust
Montana Deed of Trust
Nebraska Deed of Trust
Nevada Deed of Trust
New Hampshire Mortgage
New Jersey Mortgage
New Mexico Deed of Trust
New York Mortgage
North Carolina Mortgage
North Dakota Deed of Trust
Ohio Mortgage
Oklahoma Mortgage
Oregon Deed of Trust
Pennsylvania Mortgage
Rhode Island Mortgage
South Carolina Mortgage
South Dakota Mortgage
Tennessee Deed of Trust
Texas Deed of Trust
Utah Deed of Trust
Vermont Mortgage
Virginia Deed of Trust
Washington Deed of Trust
West Virginia Deed of Trust
Wisconsin Mortgage
Wyoming Mortgage
STATE METHOD TYPE
Alabama Power of Sale
Alaska Power of Sale
Arizona Power of Sale
Arkansas Power of Sale
California Power of Sale
Colorado Power of Sale
Connecticut Power of Sale
District of Columbia Judicial
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Florida Power of Sale
Georgia Judicial
Hawaii Power of Sale
Idaho Power of Sale
Illinois Power of Sale
Indiana Judicial
Iowa Judicial
Kansas Judicial
Kentucky Judicial
Louisiana Judicial
Maine Judicial
Maryland Power of Sale
Massachusetts Power of Sale
Michigan Power of Sale
Minnesota Power of Sale
Mississippi Power of Sale
Missouri Power of Sale
Montana Judicial
Nebraska Judicial
Nevada Power of Sale
New Hampshire Power of Sale
New Jersey Judicial
New Mexico Judicial
New York Judicial
North Carolina Power of Sale
North Dakota Judicial
Ohio Judicial
Oklahoma Judicial
Oregon Power of Sale
Pennsylvania Judicial
Rhode Island Power of Sale
South Carolina Judicial
South Dakota Power of Sale
Tennessee Power of Sale
Texas Power of Sale
Utah Judicial
Vermont Strict Foreclosure
Virginia Power of Sale
Washington Judicial
West Virginia Power of Sale
Wisconsin Power of Sale
Wyoming Power of Sale
Again however, if an investor bids more than the “upset price,” the price stipulated in the foreclosure complaint, then the amount
paid at auction goes to satisfy the debt owned t the bank first, with the balance going to the property owner.
Deficiency Judgments
If a property at the foreclosure sale does not sell for the previously established price… if it sells for less and does not cover the
amount stipulated in the lien or judgment… the lender may through court action… seek a deficiency judgment.
A deficiency judgment is another lien or judgment filed against the borrower. This judgment is filed to make the borrower pay the
amount not collected at the time of the sale.
Webster’s New World “Illustrated Encyclopedic Dictionary of Real Estate” describes a deficiency judgment as “a judgment issued
when the security for a loan is insufficient to satisfy the debt upon its going in to default. It is the awarding of the amount still due
on a foreclosed mortgage, after applying the sum received for the sale of the property.”
The lender or bank filing a complaint with the courts for a deficiency judgment, can only demand payment for the balance owed.
The lender can not file a complaint for more than what is owed.
Deed in Lieu of Foreclosure
A Deed in Lieu of Foreclosure simply means that the defaulting borrower surrenders the deed to the property, to the lender, to
avoid foreclosure. In order to avoid formal proceedings, the deed is conveyed (transferred) from the borrower to the lender.
The property owner… knowing that he or she can no longer make the loan payments… and rather than struggling with this matter…
gives up. That is why the deed in lieu procedure is known as a friendly foreclosure.
Years ago, a property owner in trouble may have mailed the deed and the front door keys, right to the lender. Today, with all of the
laws and regulations in place, this probably couldn’t happen.
There are no clauses in a mortgage or trust deed that gives the borrower the right to just mail in the deed in exchange for
terminating the foreclosure process. The lender has to agree to and accept this procedure. It is completely optional.
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James I. Wiedermer, a certified real estate law specialist, states: “The acceptance must be knowing, which requires an offer and an
acceptance n both sides sufficient to meet traditional contract test for offer and acceptance.”
There are several reasons why a lender would not accept the deed in lieu procedure. The main reason is that the lender would lose
his ability to pursue the borrower for any deficiencies against the loan. Depending upon individual state laws, the lender may lose
his right to sue the borrower or pursue legal action of any kind.
In states where the foreclosure process moves quickly, the lenders will be less likely to accept a deed in lieu. In states where the
process can go n for years… the lenders are generally more willing to go along.
In states that use the judicial system of foreclosure, the lender can incur a lot of expenses. Accepting a deed in lieu, allows the
lender to sell the property and turn his loss into a profit. This can actually benefit the lender if there is enough equity in the
property.
It is estimated that 10% of all foreclosures may end up this way.
Rights of Redemption
In many of the states in the union, the borrower has a right of redemption. This right gives the homeowner a specified time period
within which he or she may free their property from the foreclosure process by paying the debts and/or fees that caused the
foreclosure action initially.
These rights vary from state to state. Some states have no rights of redemption. Some states allow the homeowner to redeem his
property up to one full year after the foreclosure action. A borrower may even be able to redeem the property well after it has been
sold at the auction!
Acquiring Foreclosures
The actual purchasing of a bank foreclosed property can occur anywhere along the line in the foreclosure process. While Chapters
9, 10 and 11 are devoted entirely to the methods used in successful foreclosure investing, it’s important to get an understanding of
the basics.
Foreclosures can be purchased before the auction, while the homeowner is in default of the loan agreement, but is still in
possession and control of the property… at the auction, where the homeowner can bid on his own property , but usually no longer
controls it… or after the auction, usually from the bank or lending institution that forced the foreclosure initially.
Buying a property before the auction process begins, is buying a pre-foreclosure. This involves working with the homeowner,
sometimes the homeowner and the lender.
When purchasing a foreclosure at the auction, you bid and compete with the lender and other bidders for the property.
If you buy a foreclosure after the auction process, it is called a REO. REO is an acronym that stands for Real Estate Owned. (You
may hear the term OREO, or Other Real Estate Owned… we’ve even seen ORE, for Owned Real Estate.)
Buying a REO from the lender, means that you will work with someone specially assigned to handle these properties. It may be an
REO Officer or someone with a title like, “Special Assets Manager,” that works in the REO Department or Special Assets Division of
the bank.
There are great opportunities to be had in all of the purchasing, methods. Some methods require less time and effort… some may
reap greater rewards.
How you invest or partake in these opportunities is up to you.
Summary
The foreclosure process occurs when the homeowner… who originally borrowed money for the purchase of his/her house… goes into
default and can not live up to the obligations of the contract that came with the borrowed money.
The laws regarding lending, borrowing, redeeming and foreclosing are developed to protect the interests of the lender, the
borrower, and the public at large.
The borrower (mortgagor or trustor) has to live up to the terms and conditions of the loan agreement and mortgage. If not, the
lender (mortgagee) must begin to force foreclosure action.
The deed of trust method of foreclosure is quicker, easier and less expensive overall, compared to the court authorized and
monitored judicial process.
A power of sale clause… authorizing the sale of the property should the homeowner be in default… can be included in any
agreement… mortgage or deed of trust.
Rights of the lender and homeowner vary from state to state. So do the rights of redemption and the foreclosure process itself.
Lenders prefer to work with delinquent borrowers. Foreclosure is the last thing the lender wants to do. It costs the lender time and
money. The lender does not realize the intended profit from the loan if they have to foreclosure and will most likely take a loss.
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While it is extremely rare, lenders may foreclose for any breach of the contracts, not just lack of payments. There are rare
examples of lenders foreclosing because the property owner did not maintain the property accordingly.
Opportunities for investing and purchasing foreclosures occur all through the foreclosure process.
BARRON’S “Real Estate Handbook,” 3rd Edition, defines foreclosure as:
“a termination of the equity of redemption of a mortgagor or the grantee in the property covered by the mortgage. Statutory
foreclosure is effected without recourse to courts, but must conform to laws (statutes). Judicial foreclosure submits the process to
court supervision…”
and foreclosure sale, as:
“the public sale of a mortgaged property following foreclosure of the loan secured by that property. Depending on the type of
foreclosure proceeding, the sale may be administered by the courts (judicial foreclosure) or by an appointed trustee (statutory
foreclosure). Proceeds of the sale are used to satisfy the claims of the mortgagee primarily, with any excess going to the
mortgagor.”
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CHAPTER TWO
How Do Foreclosures Occur And Why?
“… one problem after another presents itself and in the solving of them we can find our greatest pleasure.”
-- Karl Menninger
Foreclosures occur when borrowers do not live up to the demands of the original loan agreement. Therefore we can assume that
most, it not all foreclosures occur when payments aren’t made as promised, and that the foreclosure process centers around
finances or the lack thereof.
While this may be summarily correct… it can be just as important to the foreclosure investor to understand the reasons behind the
financial trouble. In other words… “why didn’t the borrower make his or her payments?”… “what caused the borrower to become
delinquent or go into default?”
So… why do people fall behind in payments… how do they get into financial trouble?
There are several reasons why borrowers stop making their regularly scheduled payments.
All foreclosure “experts” agree on the top five or six reasons… they don’t all agree n which of these reasons is most common today.
The Most Common Reasons For Foreclosure Action
Divorce
A few short years ago… divorce was the number one reason for home loans going into default. THAT’S RIGHT… DIVORCE!
Within this are several components that contribute to the eventual foreclosure of the home.
Typically, the husband is the breadwinner in the family. If the wife is a homemaker (a profession in itself) there is only one income.
When a couple splits up… they both must reside somewhere. More likely than not, this requires two mortgage payments, or two
monthly rental payments, or a combination of the two. With only one income, it becomes close to impossible to support the two
households.
Typically, the wife ends up with the house. Even with alimony and support payments, this may not be enough to meet all the
monthly obligations. The husband can only contribute so much… because he must now support himself independently.
Even in the most amiable divorces, there just is not enough money to go around in this one income scenario.
In the dual income scenario… typically the couple is aggressive in their quest for a better standard of living… and having not
anticipated divorce… are used to living a style of life that the two incomes can provide. Then comes the divorce and the beginning
of two households. What the two incomes could achieve while sharing expenses, is no longer true when the two incomes are
separated and required to support the two households.
Unfortunately, some divorces do not end up so civil. If the separation is a bitter one, tensions and emotions may run at a fever
pitch. Again, and very unfortunately, people sometimes express their pain and anger by hurting others… even those they love… or
in this case… used to love. Anger goes beyond the emotional to the irrational.
In this scenario, it almost doesn’t matter how many incomes there may be in the household, because this couple is embroiled in an
emotional dispute.
Once the mind-games and other nonsense are over… the only way to hurt the one someone used to love… is by affecting their life
in such a way as to intentionally discomfort or disrupt their life style.
This obviously is a LOSE, LOSE situation. Emotions stand in the way of rational thought and behavior. Frequently, no payments are
made n the house, the loan goes into default and the foreclosure process begins. This is also known as the “if I can’t have it… no
one will have it,” syndrome.
Job Loss
This is perhaps the easiest reason to understand. When we lose our jobs, we lose our income. One’s regular monthly expenses do
not disappear with the loss of their job.
The average person who is out of work for an extended period of time experiences how quickly their cash reserves are depleted.
For some reason this always seems to surprise most people.
Here’s a quick example of savings depletion and what is takes to get back on track.
Let’s say your average take-home pay is $2,000 per month. Your regular expenses total $1,800 per month and every month you
sock away $200 into your savings account, where your account balance is now $3,600.
In just two short months of unemployment your, savings account has a $0.00 balance, you have no income and the bills are due.
Three months after your job loss, you become gainfully employed. That’s surely good news. The bad news is… by the time your first
paychecks start rolling in… you are almost 30 days behind on your bills. Even at the same salary range… with the extra $200 per
month… it will take nine months to get current with all of your bills.
Worse, is that it will take another year and a half to get your savings account back to the $3,600 balance.
The total time from job loss to full recuperation is now 21 months!
Health Matters
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Today, most Americans do not have or can not afford proper medical care. Over 28 million working Americans either do not have,
or can not afford health insurance. Over 55 million Americans have no health coverage!
Rising health care costs have put the insurance premiums, as well as the treatment costs out of the range of many.
Even a temporary, moderate illness can cost thousands. Many of us have experienced some type of health problem in our lives. If
you have had an experience like this recently, you’ll understand how expensive the doctor visits… treatments… hospital stays and
medication costs can be.
Extended medical problems can destroy a family’s finances almost overnight. Added to this, is that fact that an extended medical
problem can lead to loss of part or all of one’s income.
Individually, these hardships or losses can be crippling… together they can be devastating.
The Economy
Today and for the past few years… the economy has become the #1 foreclosure maker.
Not just the economy itself… but the results of a cyclical economy… coupled with a fast paced real estate market… and the events
that occurred from this not so “dynamic duo.”
Real estate went through the roof in the late 80’s. People bought homes at high interest rates, the economy was strong and
confidence was high. This was natural because real estate was appreciating at a fantastic rate and real estate made sense in terms
of investing.
Added to this was the relaxing of certain government restrictions regarding lending qualifications and procedures. This allowed
lenders to grant even more real estate loans. Most of this new wave of loans was used for riskier real estate investments.
In the down-turn of the economy, businesses large and small began down-sizing or closing, resulting in massive lay-offs and
unemployment. The real estate market took a “nose dive.”
There are global events that affect our nation’s economy. Who can forget the oil embargo and the effect that it had no Houston,
Texas, Denver, Colorado and other regions of the country?
The Other Common Reasons
Without going into lengthy detail… the balance of common factors leading to foreclosure can be summed up into:
living beyond one’s means… relocation… death… financial mis-management… military service… business failure… where individuals
may use the equity in their home to finance a business project that fails… interest rates and balloon payments.
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CHAPTER THREE
Opportunities In Foreclosures
“…Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all
industrial investments combined. The wise young man or wage earner of today invests his money in real estate…”
-- Andrew Carnegie
What Is Distressed Property? The term “distressed” is generally used to describe property that has some type of financial burden
attached to it. This can be confusing because the house doesn’t make the mortgage payments, the owner does. The owner in
financial trouble, ready to lose his or her property, should be the one distressed!
Distressed is also a term loosely used to indicate a run-down, broken-down, over-grown property usually in need of repair.
For the purposes of this material… we use the term distressed to indicate that the property has a financial burden attached to it.
This may be in foreclosure… a pre-foreclosure… a REO (bank 'real estate owned' property) or other.
Distressed property comes in many sizes, shapes and forms. It may be a tract of land that a contractor was developing for an office
park. Construction loans get “called” too… not just residential home loans.
Single family homes… apartment buildings… gas stations… mansions… industrial complexes… warehouses… even vacant land are
subject to the foreclosure process.
Why Buy Distressed Real Estate?
So, why buy distressed real estate? This is why!
If real estate buying and investing… or the ownership of one’s home… represents the best opportunities for one to increase his
personal wealth, financial security and personal well being… then buying this real estate at a substantial discount off the regular
market price… would definitely be outstanding!
Remember, there are no industries, jobs or employers that can guarantee financial security for you and your family forever. Buying
real estate at market prices today is not the same investment it used to be.
Buying distressed property has numerous advantages over that of buying properties at regular “retail” prices. It doesn’t matter
what your particular purposes for buying these properties are. Whether you are buying to won a home… intending to rent the
property for monthly income… or buying and selling the property for quick profits… there is no other opportunity that will allow you
this investing flexibility… like that of distressed properties… namely foreclosures.
Advantages of Buying Foreclosures
Lower Purchase Price
The first and most obvious reason to buy real estate at a discount is the cost savings.
It is true that the purchase of a home is the most expensive purchase the average person will ever make. If you would go out of
your way to clip food coupons to save money on food… or shop around carefully when buying a new car… or even going to a
department store on a certain “sale day” to save 20% n an article of clothing… then why wouldn’t you save at least that much n
your most expensive purchase ever? Of course you would.
If you are in the market for a home that typically costs $75,000… you may be able to purchase this home for $45,000 to $60,000.
A home that would normally cost $125,000 may sell for $80,000 to $100,000.
Purchase price reductions of 20% - 30% are very common. Savings of 50% or more are much less frequent, sometimes even rare,
but they do happen! On average, the foreclosure investor looks to buy property at 20% - 40% off market price. Some investors
hold out for greater discounts and won’t be interested in properties that won’t yield at least 35% - 50%. Some investors look at
their return on investment.
We are aware that some foreclosure experts state that you shouldn’t waste your time with any property that can not be purchased
for at least 30% - 40% off the market price.
All real estate purchases are unique. The properties, the loans and agreements, the parties involved and their financial conditions
are all unique.
There are very good deals in the foreclosure marketplace that can be bought for 10% to 20% lower than the market price. These
can be bought for 10% to 20% lower than the market price. These can be very attractive to the first time investor or home buyer.
Don’t let anyone tell you that you are wasting your time with a deal that only yields 10% - 20%. How you invest is entirely up to
you! Besides, you will soon learn that some deals are actually much more profitable than they appear initially.
Some of the bigger more experienced investors may overlook properties in this discount range. These properties can yield higher
than average returns to the shrewd investor. It is important to research your properties very carefully. This will be covered in detail
in Chapters 9, 10 and 11.
Additionally, as market conditions change from region to region, you may find that 10% - 20% off the fair market value for a
property is indeed a good deal.
Finally, for investing purposes, the return on your investment will be more important than the actual retail savings. You may be
able to get a 35% return on your money, while buying a property that’s only 15% below market value.
Lower Down Payments
The lower the purchase price of your property… the lower down payment will be required at closing time.
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Clearly, if a 10% down payment was required for the purchase of your new $150,000 home… you would need $15,000 for the down
payment. If you’ve purchased this new $150,000 home for only $112,500… then your 10% down payment would only be $11,250.
Immediately, you have saved $3,750.
More For Less
Another advantage to buying foreclosures, is getting more for less.
Let’s say that you have been able to save $11,250 for the down payment on a house. In the 10% down example, you could afford
a house normally valued at $112,500. Buying a foreclosure or distressed property at 25% off… your savings can now buy you a
$150,000 house.
In essence, it’s the lower down-payment theory in reverse. The point is, that on a limited amount allocated to your down payment,
by buying a foreclosure you can end up with more property for the same amount as a lower priced property.
This might allow you to have more total space than originally planned, maybe an extra bedroom or garage or even a pool. Maybe
you’ll end up with a larger house or even more land.
Perhaps the savings from the lower down payment and the lower monthly mortgage payments, will allow you to buy a house in a
nicer neighborhood with better schools and services.
Motivated Seller
One of the most delicate components of the foreclosure process involves the home owner being foreclosed on. This person is most
likely in some kind of financial trouble. The owner is about to lose his home and the equity in it.
A homeowner facing foreclosure… contemplates losing the shelter he or she provides for their family and themselves… the equity
built… one’s financial credibility… the possibility of getting a new mortgage or loan… the burden of relocating… and the possibility of
a deficiency judgment where the homeowner still owes the bank money after the foreclosure sale.
Generally, people will do anything they have to survive. Spend less money, sell possessions, and even have their automobiles
repossessed, typically come before one allows themselves to loose their home.
Less Competition For Properties
The label “distressed” sometimes has a negative connotation. Therefore most people are not interested in a distressed property.
Many Realtors don’t push the fact that they have distressed properties or foreclosures in their inventories. Some don’t advertise
them at all.
Motivated Lender
The originator of the loan… whether a bank, credit union or other similar institution… is just that… a lending institution. They are
not in the real estate business. When the homeowner fails to make the regular monthly payments, the loan is in default and the
lender has to take action. The bank’s role in the foreclosure process will be discussed further in Chapter 5.
Liens, Judgments and Encumbrances
There are three main methods to buying foreclosures. Depending on the method or foreclosure investment strategy you use… you
can take advantage of this information to make great profits. It is absolutely essential that you learn everything you can about a
property you want to invest in. See Chapters 7 and 8.
Knowing whether or not a property has a lien attached to it, as well as the type and amount, are very important. Many people have
purchased properties from home owners or at auction think they’ve made a great score… only to find liens and judgments attached
to the property that could eventually cost more than the property was worth.
When a home owner is in default of the loan agreement, typically he or she is in default with one or more other agreements. This
can include credit cards, car payments and second mortgages or other loans.
You may end up with the property… but you may also end up with these other bills… if liens have been attached to the property.
Some investors like to contact the hme owner in this default stage to try to acquire the property just prior to foreclosure, by taking
over the payments and working out deals with any lien holders there may be.
Clearly, some liens or judgments may be so high that the discounted price of the property combined with the lien, place the
purchase price out of reach.
Some investors prefer to deal with foreclosures only after the auction process. While there are advantages and disadvantages to
this investing method… one distinct benefit is that of “clear title.” This means that there are no judgments, liens or encumbrances
of any kind associated with the property. This allows for easier, less complicated real estate transactions.
Better Terms
For as many reasons as there are for foreclosures… there are just as many reasons for the lender who has taken back the
property… to be willing to work with you.
The lender who now holds title to a property can offer incentives such as lower closing costs, reduced price, waive points charged
when closing, or otherwise make a mortgage agreement a little more favorable to a distressed property buyer, in an effort to sell
the property quickly.
Someone’s Loss Can Be Anyone’s Gain
I remember admiring my friend’s coffee table. It was more than your average living room coffee table… it was a glass showcase
containing an impressive collection of antique glass paperweights.
My friend told me that the case had a burglar alarm wired to it that sent a signal directly to the police department… and that the
contents of the case were insured for over $1 million!
My friend was an auctioneer. When I asked him how he felt about making so much money from the misfortune of others… he
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reminded me that he wasn’t the cause of their misfortune and that he was just one of those who facilitate the legal process… the
laws of the land.
The auctioning or the selling of property and real estate is a trade, a profession… and someone’s got to do it it’s a fact of life.
Most distressed properties come on the market as a result of someone’s misfortune… again, a fact of life. Remember, these
properties are financially distressed as a result of job loss, or the economy, or divorce, etc.
If it bothers you to think that you may be taking advantage of another’s misfortune… remember that you are not the cause of the
misfortune… and this is just another one of those opportunities that are available to anyone.
If it really bothers you to think that you may be taking advantage of someone, consider this. If you buy a distressed property
before it goes to auction, you can do a lot of good for the homeowner. For starters, you can make up the back payments when
acquiring the property, thereby saving the homeowner’s credit rating and allowing the home owner to get anther mortgage. You
can give the home owner some money to put down on a new house, or to be used as a deposit on a new dwelling when he or she
signs over property.
You can also take some pride knowing that you have rescued a distressed property. By acquiring and maintaining the property,
chances are you will increase its value and property values in the neighborhood. At the very least, you will have stopped the
depreciation of the property and surrounding neighborhood.
If those weren’t enough reasons, here’s one more. By rescuing this distressed property… by acquiring it before the foreclosure
sale… you will most likely also rescue the loan… thereby making the lender very happy. This should make you happy to… if this
lender is the same institution where you deposit your hard earned money! That’s right, you’re helping the bank.
Ownership or Investment?
Whether you are buying your first home or your fifth office building… buying real estate at a discount provides one of the most solid
wealth building opportunities available.
If you rent currently or own a home and want to upgrade… buying foreclosures is the easiest way to save 10%, 20%, 30%, 40% or
more off the regular price of a home.
No matter which method of foreclosure investing you choose… you will immediately experience greater profits… or greater equity…
or greater monthly income… merely by successfully investing in distressed real estate.
Disadvantages
The only disadvantage to foreclosure investing… is not investing.
The opportunities are endless… the foreclosures numerous. If you truly want to succeed and profit from the buying and selling of
foreclosed real estate, you can and you will.
Like any good opportunity… it is only as good as those who seize it.
Thousands of people are making tens of thousands of dollars buying and selling distressed properties. The very successful ones
work at it diligently.
Foreclosure investing takes time… sometimes hard work… and always a strong desire to succeed. Like any other great opportunity…
you must work at it.
The great thing about investing in foreclosures is… it doesn’t require any special training or education. Anyone can buy a
foreclosure. Depending on your investment strategy… buying a foreclosed home can actually be easier than buying a regular
home… and you save money too!
If you want to save a little on the purchase of one house… you can. If you want to buy and sell… or buy and hold… or buy and
rent… you can. The level of your personal involvement in profiting from bank foreclosures is entirely up to you. Whatever level you
choose… you can reap fantastic profits… but you will have to work for them.
Foreclosure Investing: An Overview
The opportunities associated with foreclosure investing occur due to state and local laws… and regulations regarding real estate
transactions. Obligations aren’t met… and action is taken. It’s a process of law and contractual obligation.
The new foreclosure investor should not confuse this opportunity with the highly publicized “no money down” methods of real
estate investing.
Foreclosures occur. Investors profit. More and more investors are getting involved. Opportunities will still exist, even though many
people are aware of these opportunities… they will not take advantage of them. Many more are not even aware that saving money
on real estate this way is possible.
In Chapters 9, 10 and 11, you will learn the various methods of successful foreclosure investing. For now, know that there are
three main methods of investing and that within each of these methods, there are many people involved in the process.
Obviously the bank or lender… the title or mortgage company and the homeowner are involved… also the lawyer… Realtor…
sheriff… courthouse… lien holders… auctioneer… trustee… bidders… loan and REO officers… court clerks… reporting services and so
on.
Many are interested in exploring foreclosures… so there are the magazines… reports… journals… newsletters… printers… advertisers
and distributors, as well.
Today you can get the information “on-line”. There are many services that supply accurate courthouse information that you can
access from your computer.
Not all investing methods work for everyone. Nor do all methods deliver the same results for the same amount of effort. Likewise,
all local and state laws vary. Economic conditions vary from region to region… foreclosures, investors, sellers, and banks will
behave differently from region to region.
Investing in distressed and foreclosed real estate is an industry.
Fortunately for us… not everyone is aware of the amazing profits made from foreclosures… and of those who do… many do nothing
about it.
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CHAPTER FOUR
How Many Foreclosed Properties?
“Facts do not cease to exist because they are ignored.”
-- Aldous Huxley
Declining economies equate to job losses on a national scale… hence the quantity of foreclosures on the market today.
Regional conditions are also important considerations.
NTIC, the National Training and Information Center, reports:
Community organizations across the country are telling NTIC that home foreclosures are ravaging their neighborhoods, leaving
behind abandoned homes, depleted property tax revenues and displacing families. The city of Chicago, which experienced a nearly
20% increase in homeownership in the past decade, has been hit hard by foreclosures. Annual foreclosures started in Chicago
increased 74% from 1993 to 2001, from 4,927 to 8,556. Several community areas on the south and west sides of the city
experienced over a 300% increase in the number of foreclosures started. There is a similar story from Cleveland where foreclosures
started increased 200% in the past four years.
In a survey of over 50 metropolitan counties, TRW RED! Property Data, a Riverside, California company concludes “foreclosures are
declining in most areas of the country.”
Fear not foreclosure buyers and investors…
there will always be plenty of foreclosures available.
Regarding more specific local statistics: InnoVest Resource Management of California says:
The monthly count of All Deeds is important because it gives an accurate current measure of the overall activity of the market (hot,
lukewarm or cold) and portends its direction for the short term (the next 6 months or so). Thus, if the count is high (i.e. the market
is strong) we might be much more aggressive in our bidding than we would be if we sensed that it was trending downward instead.
Another interesting relationship is the percentage of NOD's that go all the way to the trustee's sale, as witnessed by the recordings
of the Trustee's Deeds. The percentage of trustee's deeds that are currently going to sale is a very strong indicator of the current
foreclosure trend. Your chances of being able to make a profitable buy rises dramatically with each increase in the % Went to Sale.
By looking around the net for different statistical resources, you can see that depending on the reporter and their agenda or
affiliations, their outlook and statistical 'conclusions' may vary widely.
The important thing to remember is that although a portion of the foreclosure market is certainlt economy driven, much of it is
simply circumstantially driven. There are new foreclosures generated in a good ecomony and in a bad one. There are always fresh
foreclosures in any market. Therefore there is ALWAYS property to buy
Just because the economy may be improving, this may not reflect the volume of loans going into foreclosure. It is largely due to
the fact that the foreclosure process itself can take up to a year or more to complete it’s full cycle. Added to this… is while some
industries may be rebounding and optimism is strong… the number of new jobs just doesn’t come soon enough for those who have
been desperately struggling to keep their property from the clutches of foreclosure.
Foreclosures lag behind the national economy. An individual who losses his job today, may have the necessary funds to keep up
with the mortgage payments for quite some time. After this individual can no longer make his or her regular payments, it may take
3 to 6 months to initiate the foreclosure procedure. It may be a year or more before the property is actually available as a
foreclosure.
There are several reasons for this as well. Some of these reasons include the rights of redemption available to the homeowner
and/or the shrewdness of the homeowner in being able to stall or delay the process.
Today, foreclosures are abundant. Exactly how many foreclosures are on the market right now? We don’t know.
A respected author figures abut one half of 1 percent of all households in America are in foreclosure.
We have read regional studies indicating that three-quarters of 1% of the nations’ properties are in foreclosure.
It is generally accepted that just less than 1% of all residential properties nationwide, may be in foreclosure. If you figure that
there may be 100 million households in the United States today… then almost 1 million of them are about to… or are already in
foreclosure.
Needless to say, there are plenty of opportunities available in the foreclosure market place.
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CHAPTER FIVE
Understanding The Banks Position
“A moment’s insight is sometimes worth a life’s experience.”
-- Oliver Wendell Holmes, Sr.
If you are going to invest in bank foreclosed real estate… you should understand why the bank does what it does!
Why did the bank foreclose on Sam the homeowner, instead of allowing him more time to get caught up? How can Mary’s bank give
her anther 6 months to work out a payment plan?
The Bank’s Legal Obligations
All banks and lending institutions are regulated by our federal government. Regulations are laws and rules designed to control and
govern one’s behavior. They are designed to ensure that all involved will conform to certain standards.
The idea of foreclosing or repossessing one’s home, conjures up the old fashioned images of a “Snidely Wiplash” type character.
Some nasty looking guy in a black cape with a handle-bar mustache, waiving a piece of paper around that will allow him to
unmercifully throw you out on the street, homeless and broke.
Modem laws don’t allow for this type of behavior.
All banks are chartered. Technically, a charter is a written document that authorizes the creation of a corporation or institution
(such as a bank) that will be regulated by the authority granting the charter. (Usually a government or legislative body.) The
charter stipulates the rights, privileges and purpose of the organization. Non-compliance with these stipulations can result in the
loss of the organization’s charter.
Loss of charter is like losing your license to do business.
It’s similar to owning a fast-food franchise. You can buy and own a McDonalds franchise. It will be your business, but you must run
the business according to the rules governed by McDonalds and you must sell/use their products and materials.
The success of the entire chain depends on control and consistency. You would never be able to re-name the “Big Mac” or sell soft
drinks in containers labeled “Shirley Johnson’s Burger Palace”… it just wouldn’t happen.
The success of these chains are also built on recognition. Anywhere you go in the world, you may see a McDonalds’ sign and
immediately you know what to expect in terms of the product offered, the quality and the cost. The products don’t vary from
restaurant to restaurant.
Banks are regulated by federal agencies and can be held highly accountable for problems in their performance, to such agencies as:
Department of Housing & Urban Development… The Justice Department… Comptroller of the Currency… the Internal Revenue
Service… the Federal Deposit Insurance Corporation… the Federal Home Loan Bank Board and the Federal Reserve… to name a few.
Banks are constantly under the watchful eye of these agencies and have to perform accordingly.
A bank foreclosed property… for the purposes of the bank’s balance sheet… is a non- performing asset. It’s loan that was made
which is no longer earning interest… it is no longer profitable.
Other Influences
In addition to those named above, there are other agencies that influence how the lender or bank will respond to a non-performing
asset.
In many cases, a mortgage company or lender will sell the mortgages they hold to larger mortgage investing pools. The lender then
only “services” the loan. Servicing consists of collecting the payments, forwarding the payments and basically managing the
account. For this, the lender receives a small fee.
The lender or mortgage company may service the loan, but it is now owned by a different corporation or investing group that has
ultimate control over that loan.
A homeowner in default can (and should) visit his or her banker, explain the circumstances and what they intend to do about it.
The homeowner’s friendly and neighborly banker may appreciate the environment and grant additional time to make payments or
make other arrangements to help the troubled borrower.
Or, the homeowners may go to their friendly bankers to discuss the matter… only to find that their loan has been sold to the ABC
Corporation… and the ABC Corporation who owns the loan… says that if payments are more than 90 days late… action will be
taken!
These corporations can set strict procedures for action to be taken on non-performing assets that are serviced by a lender. The
local lender will have to adhere to the guidelines set forth by the entity that owns the mortgage… thus making him appear a lot less
friendly.
The most popular of these larger investing groups are nicknamed Fannie Mae and Freddie Mac. These stand for the Federal National
Mortgage Association (FNMA)… and the Federal home Loan Mortgage Corporation (FHLMC).
These agencies buy the mortgages from your bank or lender.
There is a lot of confusion regarding the purpose of these agencies or corporations.
Fannie Mae for example, used to be, but is no longer a branch of the U.S. Department of Housing and Urban Development (HUD).
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Some of Fannie Mae’s functions used to be that of management, liquidation and financing of the government’s low-rent housing.
These functions have now been assumed by the Government National Mortgage Association (also known as Ginnie Mae) (GNMA).
Fannie Mae is a privately held corporation. As a private corporation however, it is under the watchful eye of the Secretary of
Housing and Urban Development. Fannie Mae is regulated by our federal government, but it is not a federal agency.
Today, Fannie Mae’s main purpose is to buy mortgages from mortgage companies… insurance companies… trust companies…
banks… and savings and loans.
Fannie Mae actually assists these lenders by freeing up more dollars to be used for new home loans.
See Chapter 14 for more information on buying from these agencies.
The Bank’s Exposure
The main purpose of a bank (or any other lender for that matter) when lending money, is to participate and profit from a sound
investment. The bank lends the money… the loan is paid back with interest… everybody’s happy.
It makes sense then, that banks would like to grant and approve as many home loans as possible. They do!
The banks are happy to loan money for sound, secure investments like real estate. Even these real estate investments must meet
guidelines that are imposed to ensure a safe and profitable loan for the bank.
That’s why those who need a loan from a bank, but have little or no assets or collateral, almost never get the loan… while those
who have a lot of money or assets, usually have little or no problem.
Banks are businesses… corporations driven to make profits. Because banks use our money, they can not be too risky in their
investing activities.
Strict guidelines and procedures apply in the loan process. When bad investment decisions are made… it’s a reflection on that
lender’s ability to make wise investment decisions.
It may be one thing to have for example, an automotive plant that shuts down, leaving 3,000 unemployed in a town. Clearly, if
these plant workers aren’t gainfully employed within a reasonable amount of time… the massive job loss in the area will eventually
lead to a larger than average amount of loans being foreclosed.
Initially, these were good investment decisions and anyone can clearly see that the lenders had all good intentions, as did the
borrowers. Federal regulators in this case may appreciate the regional condition and act accordingly.
A single bank however, in a growing community with 20 other profitable banks… whose foreclosure ratio or percentage of nonperforming loans is greater than the norm… will stick out like a sore thumb.
As we have all seen lately, regulators have no problem coming in a bank… seizing it… and shutting it down… while the regulator
decides on how it will dispose of the bank’s assets.
One way the regulatory agencies monitor the banks, is through the quarterly reports submitted to these agencies.
Bad investments create the bank’s non-performing assets. This costs the bank even more than the loan amount itself, because now
the bank has to incur additional expenses in the collection and management of troubled accounts.
In real estate foreclosure, typically the lender can incur tremendous expenses in the repair, maintenance, collection and eventually
sale of the property.
Bank stocks are traded. Therefore there are shareholders that the management of the bank is accountable to. A bad balance sheet,
or an indication of financial or procedural mis-management, can create nervousness amongst the shareholders. This can cause
tremendous hardships for the bank, if all the shareholders start taking action.
The same holds true for the depositors. If my bank had a bad record… or if I kept reading about it’s troubles in my daily
newspaper… I’d think more than twice about keeping my money there.
There has always been a negative stigma attached to a bank that forecloses on one of it’s neighbors… “The big bad banker who
came to throw The Smiths out of their house!”
Part of this “bad feeling” about foreclosing bankers, is historical. It probably started back in the days when unscrupulous lenders
took advantage of homeowners and borrowers for power, greed, control and profit.
Today, we know that there are a sea of laws created at national and state levels to prevent this type of behavior.
What It Costs The Bank
Once the bank gains possession of a property… it has entered into a lose, lose situation. The double loss results from a lack of
income from the property (loan)… and the expenses incurred in holding the property.
Property taxes have to be paid to the appropriate authorities regardless of ownership or condition. The property has to be
maintained so that it does not fall into disrepair.
The home may have been damaged (intentionally or otherwise) by the homeowner or renters of the property. Now it becomes the
obligation of the bank to repair the property to salable condition.
Maintenance and upkeep can be costly to the banker, especially of the foreclosed property is outside the bank’s normal business
area. The bank will most likely contract with an out-of-town management or maintenance company to provide landscaping, snow
removal or other services.
Since it is virtually impossible for the lender to catch a flight every time an investor or buyer wants to see a property… the bank will
work with property managers and Realtors in the area where the property is located. This too costs the lender. To sell the property,
the lender will most likely offer a local Realtor a standard commission of 6%.
Even if the property is local… the banker has to expend time… energy… manpower… and real dollars to maintain the property.
Banks with larger inventories of REOs, often have whole departments dedicated to the management and sales of these properties.
This too can get very expensive for the bank.
The Bank’s Motivation
Banks stand to earn tremendous profits by investing wisely. Bad investments, as outlined above, can cost the bank everything.
It is in the bank’s best interest to turn the non-performing assets into “performing” assets as quickly as possible. They may take
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the bad loans and to try to convert them to a more profitable situation, or at the very least, attempt to reduce their losses. It’s jus
a matter of managing the losses.
The banks want to remove these negative figures from their records. By selling a foreclosed property, the bank can either work
with the new homeowner by having him or her take over the existing loan or by creating a new and profitable loan.
Taking over the loan in default and bringing it current… removes the red ink from the bank’s balance sheet.
A new and profitable loan is obviously one for the plus side in the bank’s portfolio.
Either way, the bank has very strong reasons for wanting to dispose of their non- performers.
Not wanting to look like the bad guys… banks have been very quiet about their foreclosures in their possession.
The bottom line is: the last thing the bank wants to do… is foreclose on a non- performing home loan.
A loan for the bank, is just like a purchase at a store. When the loan officer approves a loan, he may ring a bell announcing proudly
that a sale has been made. The last thing the banker wants to hear from the customer, is “What is the return policy?”
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CHAPTER SIX
How To Locate Bank Foreclosures
“If hard work were such a wonderful thing, surely the rich would have kept it all to themselves.”
-- Lane Kirkland
Now that you understand the basics of the real estate foreclosure industry, we will start exploring in more detail, those areas that
will effect your efforts most. How to save time, effort and a lot of money in locating bargain properties… requirements before
getting started… understanding the “big picture” (some tricks and traps)… and how to buy bank foreclosures.
Bargain real estate is a reality. It happens everyday.
There are countless opportunities associated with foreclosure investing. Investing opportunities appear all through the foreclosure
process. There are different techniques you can utilize to find these bargain properties in their different phases of this process.
As alluded to earlier… there are 3 fundamental phases of the foreclosure process. They are: the default phase… the sale or auction
phase… and the REO (bank owned) phase. Think of these phases as before, during and after the auction.
The method of locating foreclosures will vary, depending upon the investing style you select. This investing style you develop
(maybe one of them, or all three) will reflect the opportunities you are pursuing in one of the three phases of the foreclosure
process.
This chapter will breakdown all of the various methods for finding foreclosed real estate.
Where To Look For Properties
The most obvious place to start looking for properties is in your own neighborhood.
If you intend to stay in the town, city or country you live in now… there should be little reason to look elsewhere.
The advantages to shopping in your own “backyard,” are that you may already be familiar with housing or real estate costs and the
real estate market in general. You may already know friends or neighbors that are in the industry that can be useful to you.
Even if you are not familiar with your local market and know no other locally in the industry… it is much easier to start and become
familiar with your local market. It is also less expensive and more convenient for you.
Getting started can be easy as subscribing to your local daily newspaper and reviewing the Real Estate section. This allows you to
get a handle on the market, housing prices, numbers of foreclosures in your area, as well as becoming familiar with those in the
industry that may advertise goods and services that you may soon want.
If you are relocating to a new area, start to gain as much information about the area you plan on living in, as soon as possible.
Research the area before you move. Subscribe to the local newspaper and have it mailed to you… call the local area Chamber of
Commerce to get information… contact Realtors and indicate that you are moving into the area… go to your local library and look
up demographic information on your new locale.
Demographic information provides a profile, a picture of what the area looks like in terms of population characteristics. You can
learn the population trends… ages… incomes… housing characteristics and more.
This information is very useful in determining where you may want to live, or invest, in a new community. The U.S. Department of
Commerce, Bureau of the Census, provides the most accurate and detailed demographic information available. They have the
detailed information on just about anything you may want to know. Census Bureau statistics can be overwhelming in their
presentation however.
To research a new area you may want to live in… check you local library for a publication titled, “Places Rated Almanac.” Published
by Prentice Hall Travel… it is one of the best all around publications of it’s kind. This book rates 333 major metropolitan areas by
job markets… climate… safest and most dangerous neighborhoods… schools… museums… libraries… traffic laws… sports and
recreation… even by SAT scores!
The main objective outlined here is to get familiar with the area in which you plan on doing your buying or investing.
Even if you are not prepared to invest today… you will benefit quickly, by collecting your information as soon as possible.
Where To Find Bank Foreclosures
Information on bank foreclosures is everywhere. The quality of the information varies as much as the properties themselves. There
are pros and cons associated with all information retrieval methods. The variations depend on your investing methodology and your
personal preferences.
The Banks
A natural place to start locating bank owned properties… is at the bank.
Start simply by contacting all of your local banks. There is a good chance that they have some REO’s in their possession. If they do,
they may direct you to their REO Officer or Special Assets Officer. This individual will have all of the current listings of the bank’s
REO’s and is in the best position to assist you.
A bank representative may tell you that their REO’s are handled by the larger central office. Get the name and phone number of
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the person in charge of all the REO’s for that bank and it’s smaller regional offices.
Call this individual and explain that you are interested in purchasing a property. Indicate that you are gathering information on
properties in your ‘special’ investment area and that you are interested in buying properties “in that area.”
The bank representative might indicate that they currently have no properties in that area. That’s okay. Ask to be put on a list of
investors that are interested in buying REO’s in that area. Make sure that you leave the RE Officer your name and number so that
you may be contacted! Be sure to follow up with that contact periodically. Sometimes they may forget or are too busy to contact all
potential investors every time a new property becomes available.
Most banks that have substantial amounts of foreclosure in their inventory, work with Realtors to aid them in the sales of these
properties.
Some banks work exclusively with one Realtor or real estate agency. Ask for the name of the Realtor that has the exclusive listings
for that bank. The banker should be happy to provide you with this information. Complete this process by contacting all of the
banks in your area. By that time, you will have begun to get a handle on the numbers of properties available, as well as which
banks have the largest inventories.
Simultaneously, you have also contacted many Realtors that may sell for the banks. You have now begun to get your name out
there as well. When properties become available, you may be contacted by these Realtors. Once you have become a proven
investor in these properties, the Realtors will bend over backwards to contact you abut new properties as they become available.
Foreclosures are like a virus to the bank. Most of the time a virus is just a nuisance, but sometimes it can be life threatening. Either
way, there is no known cure!
In the past, foreclosures were not discussed in public and certainly never advertised. Some bank’s are lifting this veil of secrecy and
have started advertising their REO’s in an effort to sell them more quickly. The federal regulators don’t seem to mind, because it is
in everyone’s best interest to sell these properties as quickly as possible.
Realtors
There are several other reasons to work with a Realtor in your search for bargain properties. First and foremost, is that this is the
profession of a Realtor… to help the consumer buy and sell real estate. It’s what they do for a living… it’s their job.
Realtors should be professionals in their field. They are equipped with the basic working knowledge of real estate transactions.
Further, many Realtors become specialists in certain areas. These areas may be specific geographical areas (actual locations) or
experts in specific types of real estate sales or practices.
Some only sell commercial properties, like office complexes, warehouse space or retail strip centers. Some deal exclusively with the
most expensive and most prized homes in a given area.
There are Realtors that have experience in the foreclosure market. Likewise, there are many with no experience what-so-ever.
There are those Realtors that hate the whole concept of everyday people like you and me investing in foreclosures. You won’t get
too far with this person. Nor would you want to. Apparently, some Realtors just have bad attitudes when it comes to these types of
opportunities.
When contacting Realtors, just like you did with the banks, be candid. Tell the Realtor that you are interested in buying
foreclosures… and ask him or her what they think abut investing in distressed real estate. If they respond favorably, you may want
to proceed.
Doors will either start opening or closing with these calls. That’s great! You should start right away… “separating the men from the
boys.”
Try to find and work with a realtor that has expertise in your investing area. Typically, this person has been involved in several
transactions in the neighborhood and can provide very useful insight and information regarding the area.
As you will soon learn, a Realtor can be very useful to you. If you intend to buy and sell properties, Realtors can help you sell your
properties.
With increased awareness of consumers investing in foreclosures, some Realtors have started advertising their properties and/or
have shown an interest in working with foreclosure investors. These ads appear in many consumer related publications.
Realtors are professionals in their trade. They subscribe to and abide by certain codes of ethics regarding real estate transactions…
their representation of buyers and/or sellers… and the general conduct of one who participates in the industry. Realtors and real
estate agents are salespersons! They make their living on the commissions they earn from selling real estate.
Newspapers
Newspapers can contain a bundle of information on foreclosed properties, or at the very least, a lot of collateral information.
Foreclosed properties may be advertised by banks, Realtors or by a homeowner in default. In this case, the homeowner may be
making a last ditch effort to sell his or her property before the property is auctioned off.
You can find legal notices and private ads in newspapers. You may also find notices of auctions, HUD or RTC sales, advertisements
from Realtors and investors, even your future competitors.
While you may not get involved with HUD or RTC properties; it would be wise to get familiar with the “lingo,” the terminology of the
distressed real estate industry. Find the notices of auction and attend some that are convenient for you. Don’t go to buy! Just go to
see what goes on at the auction. See who attends… how many attend… and how many bidders versus on-lookers.
The real estate section of a good metropolitan newspaper typically contains articles or other newsworthy events that may affect
your investing decisions.
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Ultimately, newspapers can be an excellent source of general real estate information. Check the newspapers in your special interest
area. You many find, for a very small subscription fee, a world of daily information.
Legal Notices
Legal notices can be found in most metropolitan newspapers. The names or titles on these notices vary, depending on the type of
notice and the type of foreclosure process (judicial or non-judicial).
Regardless of the type of notice is the fact that all foreclosure actions must be advertised to the public. (at this time, we are not
aware of any state that does not require public notification).
The types of notices vary… so do the dates or times when the notice must be published… as well as the type of newspaper the
notice must appear in.
Depending on where you live… you may have available a daily or weekly real estate, law or business publication. Typically these are
called “reviews” or “journals”… like, Your Area’s Real Estate Journal or Your Area’s Business Review.
Many of these publications specialize in reporting Notices of Default… New Foreclosure Case Filings… Notices of Foreclosure Sales…
Trustees Sales, etc.
The information contained in professional newspapers is usually top shelf. The information is generally excellent because this
publisher is catering to the professionals that use this information the most, like inventors… bankers… lawyers… and real estate
agents.
Some of these publications have additional ‘on-line’ services for the real estate investor… so that he or she may receive critical
information faster than the average subscriber. This allows the investor to get a jump on new properties entering the marketplace,
at least a day or two earlier.
Lawyers, title companies, lenders, foreclosure research and reporting services, inspection services and investors… like to advertise
in these publications.
These are the people you will need in the future.
State laws vary on the publication requirements for foreclosure auctions and sales.
For example, Florida Statutes on “Civil Practice and Procedure”, Section 45.031.1 states…
“Notice of sale shall be published once a week for 2 consecutive weeks in a newspaper of general circulation, as defined in chapter
50, published in the county where the sale is held. The second publication shall be at least 5 days before the sale. The notice shall
contain:
(a) A description of the property to be sold.
(b) The time and place of sale.
(c) A statement that the sale will be made pursuant to the order of final judgment.
(d) The name of the clerk making the sale.
Most state laws are similar in that the “notice” must appear in a newspaper of “general circulation” or in a newspaper with the
largest circulation.
This common statute wasn’t developed to ensure the embarrassment of the homeowner, rather to protect the homeowner. In the
past, many less than ethical lenders would advertise the notice of action or sale, in a publication with a very small circulation. This
allowed the lender to comply with the regulations regarding advertising the “notice”, while trying to avoid “tipping off” the borrower
that they were in trouble.
Depending on the type of notice and it’s purpose, a borrower may never find out about “past due’s” or late tax payments, until it is
too late.
Today, most of these laws are written to provide the borrower with every reasonable opportunity to become aware of an existing or
pending problem… and to do something about it.
Real Estate Publications
Real estate publications is a term we use for all of those free “Homes Magazines” that you see in your local supermarkets or in
boxes at street corners. (This term does not apply to recognized, nationally distributed magazines such as “Better Homes and
Gardens” or similar magazines.)
These real estate publications (for lack of better terminology) can be found in almost every major metropolitan area of the country,
with some produced for rural areas as well.
The main focus of these publications is to promote the local Realtors and the properties they have for sale. This usually applies to
licensed real estate brokers, developers and related services only.
The majority of “Homes Magazine” publishers are very conscientious about the type and quality of the services their advertisers
promote. While they are not abundant in foreclosure information… more and more ads for foreclosure services have appeared in
recent years.
Many of these publishers will not entertain promoting foreclosure properties or services, because the nature of buying discounted
real estate is in direct conflict with the realtor’s attempt to sell and promote their properties at full market value.
If a publisher accepts advertising of foreclosed properties, or foreclosure properties, or foreclosure goods and services… he or she
runs the risk of having the realtors discontinue their ads. The advertising revenue from the Realtors is typically 85% - 100% of the
publication’s total revenue. A loss of Realtor’s ads could devastate the publisher.
Some publishers have come to realize that the buying, selling and investing in foreclosed properties, is here to stay. Some are now
allowing foreclosure services and Realtors to advertise their foreclosed properties.
There are several hundred other real estate publications around the country. Some are produced by smaller independent
publishers, some are produced by local daily newspapers. They too, will promote local Realtors and the local real estate market.
Most of these publications contain other useful real estate advice and information.
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Foreclosure Reporting Services and Listing Publications
Some of the best information on foreclosures comes from a “Foreclosure Reporting Service.”
Some reporting services were actually born from those who did the original courthouse research for lawyers, title or search
companies. Recognizing the demand for this information, some have expanded these reporting services, making the information
available to the consumer. The information retrieved is usually very reliable, after all, it is used by professionals in the industry.
The quality, type price, and timeliness of the information offered by these services vary greatly!
There are several “top-notch” organizations that strive to deliver accurate and timely information to their customers. These
organizations know the value of this information. They understand the foreclosure investor and try to satisfy his informational
needs.
Unfortunately, there are too many REO list “publishers”… that do a minimum of research… pay no attention to detail… deliver
almost useless information… don’t deliver the information in a timely manner… and who generally don’t understand the foreclosure
investing concepts. Rather, these publishers are in the “information business,” not in the foreclosure business.
The type of organization you purchase information from depends on the type of information you need.
It depends on your personal method of foreclosure investing. For example… if you enjoy purchasing foreclosures before the auction
or actual sale of the property… you may want daily information on loans going into default, or complaints originally filed. Notices of
Default (NOD) for instance, signal the beginning of a distressed property. The foreclosure process is just beginning and is ripe for
the investor desiring to participate in this stage of the process.
You may prefer going to auctions to buy your properties. An accurate listing of Trustees’ Sales, Sheriffs’ Sales and foreclosure
auction dates, with detailed property descriptions, would come in very handy.
The most available… and perhaps the most widely abused area of information reporting comes from those who publish “lists” of
REO’s. These are the properties that have been through the auction process and are now in possession of the banks or other
institutions.
Some publishers claim to be networked with 3,000 to 4,000 banks around the country. That’s complete garbage. There is no such
national network… some banks aren’t even networked with their own branches! Quite often, a bank may not even be aware that
one of its own branches just obtained an REO.
Since there is no national network or single source for bank foreclosures… specifically REO’s… the only way a “list publisher” can
obtain this information is directly from the banks.
This means the publisher must contact each and every bank and/or their branches… and request a current list of properties. The
reason for the request is that the bank doesn’t have to supply a list of foreclosures to anyone. There are no laws or regulations
requiring the banks to do so. Banks maintain lists for their internal records, clients, Realtors or others for the purpose of disposing
of the properties.
There is no standardized format for keeping or exchanging REO information. You may contact a bank and receive a professional
looking computerized report of their current REO inventory… or you may receive a hand written list of one or two properties from
the notepad of a secretary’s desk… updated maybe 6 months ago.
Anyone claiming to be “networked” with the banks, is only trying to impress you.
To gather data from the banks, some publishers hire teams of “researchers.” These folks call and sometimes harass the bank
employees for lists of properties.
Some banks update their information monthly, some weekly, some only as a new property becomes available.
After the list publisher receives the lists of REO’s, the information must be compiled. Properties no longer available should be
removed from the old list… and newly available properties should be added.
By the time the research, compilation and printing is complete, a great deal of the information contained in the list will be obsolete.
If you subscribe to a “monthly” list publication or service… you must be aware that by the time you receive the information many of
the choice properties n that list will already have been sold.
The Information contained in these lists are fairly similar from publisher to publisher. Most REO lists contain: the property address…
property description… bank asking price… date of listing… numbers of bedrooms and bathrooms… or square footage (for commercial
properties)… and a contact name and phone number.
You will not find case numbers, lot and block descriptions, or plaintiffs and attorneys. The simple reason is, these properties have
been through the auction phase of the foreclosure process. The sale is over and the property now belongs to the bank.
We know of several list publishers that include VA, FHA, RTC, FDIC and SBA properties in their REO lists. While these properties
indeed may have been taken back by a lender or a bank… working with and buying the properties from these agencies is quite a bit
different than purchasing the property directly from the bank or property owner. SEE CHAPTER 14.
In all fairness to the legitimate REO list publisher, it should be noted that the process involved for accumulating, sorting and
properly distributing this information is difficult at best.
Having to assemble this information in a handy format, (structured by state, county, city, property type, price range, etc.) is a
monumental task. The same is true for updating, deleting and modifying or changing descriptions, prices or contacts.
It could take an REO list publisher 8-12 weeks or more, to get this information to you. It is therefore inevitable that some of the
information you receive will be outdated… some of the properties will no doubt be sold or under contract. It is widely recognized
that a list of REO’s published monthly, will only be 70% - 80% complete or accurate.
There are several good reasons for subscribing to a listing service. The main reason being that a list of REO’s can be delivered to
your door with current foreclosure information for your area. You can quickly scan the list and note properties that may be of
interest to you, thus eliminating a lot of wasted time in your search process. Merely drive by the property or properties that you’re
interested in for a quick evaluation, and/or call the contact listed with that property for more information and details.
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If you are interested in a four bedroom, three bath, split-level, with a two car garage and a pool, in Bergen County, New Jersey…
you merely scan the list for that type of housing description in the Bergen County section of your list.
By yourself… you would have to contact hundreds of banks… request their lists of foreclosures… wait to receive the lists… then sort
them by county… then by property type. By the time you have completed this process… a brand new list could be at your door…
making your search immeasurably easier.
Before you subscribe however, there are some important considerations to bear in mind.
Many RE list publishers produce a statewide product. In other words, a list publisher in Florida may produce a monthly report of
REO’s for all 67 counties in Florida. While this is commendable, it is not necessarily useful to most REO buyers.
Most Americans move to a new home in the same county they live in now… and at least half of those who do move to a different
county… move to a county adjacent to the one they live in now. The result is that almost 80% of us move to the same or
neighboring county we live in now. Most investors prefer more localized information.
There are also national lists available. While some very large national investing groups may have a great deal of use for this
information, the average foreclosure investor has no need for lists or properties in all 50 states. Who can afford to jump on an
airplane to inspect properties all over the country? Even if you could… why would you want to?
Become an expert at housing prices and market conditions in your investment area. You will learn quicker… network faster…
establish more contacts… gain more experience… and profit sooner!
Most REO list publishers sell annual subscriptions. This can be okay for the full time investor… however, it may be more than one
needs for a single foreclosure purchase.
Before you subscribe to a listing publication or reporting service… make sure they can provide you the type of information you
need.
Request a sample to be mailed or faxed to you. Don’t expect this to be the entire list… just a sample. If it appears to have the type
of information you need… you may wish to proceed. Forget those who will not send a sample.
Request additional information on the company you intend to do business with. If you are uncertain about an organization… call the
Better Business Bureau… County, City or Township Occupational Licensing Division… Consumer Affairs or fraud Division… or the
state’s Attorney General’s Office. Find out if there are any consumer complaints, how long the company has been in a business, etc.
There are some excellent services available. They have at least two things in common. First, they understand the needs of their
customers… customers who are foreclosure investors and who need accurate and timely information. The second and perhaps most
important common denominator… is that the material produced is derived from courthouse records. There is no better source of
pure real estate transaction information… than the courthouse.
The Courthouse
The absolute best source for all foreclosure information is at the county courthouse. All real estate transactions are recorded in the
county where that property lies. This information is a matter of public record, and anyone can access the information without
restriction.
To search for information on a particular property, you must go to the courthouse in the county where the property lies.
Courthouses are not networked. You can not for example, research a property in Nassau County, New York… in the Suffolk County
courthouse.
Before going to the courthouse, call and ask to be directed to the office or department that handles recordings of real estate
transactions. This may be the Clerk of the Courts, County Clerk, the County Recorder’s Office, etc.
You can save time by calling this department and asking the clerk: where their office is in the courthouse… hours the office is
open… best time to work with the clerk in assisting you to do your research… and believe it or not… how much it costs to make
photocopies… if there is a photocopy machine accessible.
Whether you intend to buy foreclosures before the auction (working directly with the homeowner), or at auction… the information in
the courthouse records will become invaluable.
Finding information on pre-foreclosures for example, depends on the state where you are located and the security devices used in
that state.
In “Title Theory” states, that use the Trust Deed, you will be looking for Notices of Default. In “Lien Theory” states that utilize a
standard mortgage as the security device, you will be looking for a Lis Pendens. Whether a “Notice of Default” or “Lis Pendens”,
both are considered as “notices”, whereas a notice is an official communication that states that a party or parties intend to bring
abut some form of legal action.
The Notice of Default is sent to the defaulting borrower (known as the Trustor) as a notice that they are in default. A Lis Pendens is
a recorded notice of the filing of a law suit. This official notice makes all aware, that there is a “suit pending”.
The Notice of Default is used in the non-judicial foreclosure process, whereby the Beneficiary informs the Trustee that the Trustor
has defaulted on his obligations, and instructs the trustee to begin foreclosing. The Lis Pendens is the official notification that the
lender has filed a complaint, in court, to sue the Mortgagor (borrower) for failure to live up to the terms of the original loan
agreement.
In either case, these “notices” signal the beginning of the foreclosure process… and these “notices” are a matter of public record
conveniently located at the county courthouse.
The court clerk (or whatever title is used) can be one on your best allies. You would do well to become friendly with these
individuals. Their assistance in helping you learn your way around the court records will be invaluable.
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Don’t wait until your are ready to start buying… to start learning the ins and outs of your local courthouse. Start Today!
While at the courthouse you can also access the Tax Collector’s office. This office will be able to tell you if there are any unpaid or
uncollected municipal or property taxes n the property taxes on the property you are interested in.
On-Line Services There are several organizations that provide all the information you will never need… right from the comfort of
your own home or office. These organizations provide information “on-line”. In other words, through your computer… you access
the same type of information you would find in the courthouse records… without having to go to the courthouse to do your
research. Of course, to utilize these services, you must have a computer with a fax/modem utility available.
Information will appear on your computer screen, just as if you were at the courthouse flipping through the tax rolls or any other
documents. This information can be down- loaded or printed as needed.
The cost of these services are generally high… however, retrieving information this way, is perfect for the serious investor.
There are publishers that also have on-line services… and those that concentrate on computer accessible information only.
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CHAPTER SEVEN
Doing Your Homework… Researching Properties
"… Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and
safest method of becoming independent, for real estate is the basis of wealth…"
-- Theodore Roosevelt
Putting It All Together - Getting Ready To Buy
Understanding What You Are Doing - The Big Picture
The buying and selling of distressed real estate… the business of foreclosure investing… is an industry. It's an industry because of
the size, types and numbers of people, organizations and federal agencies involved.
Anyone wishing to invest in bank foreclosures… is strongly advised to learn as much as they can about the industry. Read books,
newspapers and magazines, talk with those involved in the industry. Start immediately.
Before diving into the "pool" of foreclosure investing… you should check the depth of the water.
The "depth", in this case, is the size of the industry the shear availability of properties and the ease with which one can participate.
The world of foreclosure investing is expanding. There are more properties than ever before, and more and more people getting
involved. Even if the numbers of foreclosures start declining in the next several years, there will still be enough to go around. The
number of people investing in foreclosures continues to increase as more and more see this as an excellent opportunity to increase
their wealth. There is no shallow end to this pool… not in the foreseeable future anyway.
GET STARTED TODAY
How do you know the water temperature? Stick your toe in and find out… ask someone already in the pool… or do both and judge
for yourself.
Carefully select an investing area… and become an expert at property types and values in this area.
Is your farm area reasonably active? Is there at least a normal level of real estate transactions taking place? Is it growing, stagnant
or idle? Does this area contain a sufficient quantity of properties of potential interest? Do these properties match the types you
want to invest in? Are there others investing in your area? (some of these people will be competitively seeking the same properties
you are… if they weren't, the properties may not be worth seeking in the first place. You can learn a lot from those who have
experience!)
If you want to buy and sell foreclosures for quick profits… make sure the area you search contains properties that have mass
appeal… properties that will sell quickly to the average buyer.
If you want to buy and hold the property for future gains, you may want to search in an area that shows promise for strong and
steady growth. If you will be renting properties to tenants, the monthly rent will have to cover your costs, "and then some." Make
sure that the area you invest in can bring you a decent return on your investment, as well as be in a rental price range that is
affordable and attractive to the average renter.
If you are buying your very first home, upgrading, or for whatever reason changing your residence, location may be your first
consideration. You may want to live closer or further away from your job. Schools and other services should be considered as well.
Read the real estate section of your local newspaper… get familiar with your areas. Read real estate publications. Talk to people in
the industry. Drive by the area and notice "for sale by owner" and brokers' signs. Go to your library and get more information. Go
to auctions and observe. Go to the courthouse and dig. Network with people. Ask questions. Foreclosure investing is a never ending
learning process. Conditions, as well as laws, change constantly.
Don't get too excited… or discouraged about things you may hear. Someone may tell you that "This" neighborhood is declining and
"That" area shows no promise. This could be an investor trying to discourage you from investing in the area. It could be someone
without real knowledge of the area. Be a good detective. Ask questions and do your homework. Between what you have
discovered… what you read… and what has been said… you will begin to judge for yourself the potential of an investing area.
Open your mind to the possibilities of a particular area. Most people you talk to will answer your questions from their frame of
reference. This is only natural, because it is unlikely that one could speak abut a subject that they have no education or experience
in. The experience one person describes to you… may have no bearing what-so-ever on what you are trying to accomplish. If so,
move on. After a while, you will begin to recognize those that are more consistently correct in their evaluations.
A shrewd entrepreneur recognizes opportunities where others do not.
Check you motivation and goals. Know why you are doing this… why you want to invest in foreclosures. Is it to make millions of
dollars?... to supplement your current income?... to buy a house cheap?
How do you decide to invest is up to you. You can buy before, at, or after the auction. You can hold, rent, sell, or flip a property as
you see fit. You can invest part time or full time. You can invest only once in your life, or as a steady diet. You can save money
buying your first home. You can buy residential properties, like single family homes or condos, you can buy commercial properties
like office buildings or retail centers, you can buy raw land, even drilling rights… in foreclosure.
No one can tell you what is right for you. Only you know. You must decide what you want to achieve… and plan a pathway toward
that achievement.
If you were to take a "road trip"… from California to Virginia, you may use a road map to show you which way to go.
Consider this your wealth building road trip. You decide where you want to go… how far you want to go… and how long you want to
stay there. It's all up to you.
Your Motivation
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To be successful in this industry, you must be motivated enough to plan your activities… do the research… pursue sellers…
negotiable with lenders… acquire and possibly flip properties… and receive your just reward.
Foreclosure investing is not some fancy "get rich quick scheme." Ordinary people do get richer investing in foreclosures. You can
get a lot richer, a lot quicker than most other investing opportunities, but you must work at it. You must apply yourself.
My company receives scores of "get rich quick" opportunities, weekly. Mail that reads, "Earn $60,000 a month, part-time, from your
home." I think that if these opportunities really did exist in the manner they were presented… that we would all be doing whatever
it takes to earn this income… part time from our homes!
So far, the only people I see getting rich, are the ones sending you the information! Besides, if you could make so much money so
easily, why would you tell the whole world about it. Why not keep it to yourself?
The opportunities in foreclosure investing are real. Many are making fortunes everyday.
If you have a strong desire to get involved in this industry, but lack the motivation… get the motivation. Do whatever it takes to
push yourself in the right direction. Don't make excuses. Just do it!
At the very least, you may want to get help to get motivated. There are good books, tape programs, seminars and professionals
that can assist you.
You may want to try a classic. "Think and Grow Rich", by Napoleon Hill, has helped millions to see the light at the end of this
tunnel.
"Your reward will come… it's just a question of how and when"
-- Todd Rundgren
The Seller's Motivation
Perhaps the single biggest key to opening the lock of profitable foreclosing investing… is the seller.
Whether the homeowner or the lender, both are motivated to correct a bad situation.
The homeowner is trying to save himself the possibility of financial ruin… the loss of his home… social embarrassment… a bad credit
rating… and at the very least… some dignity and self esteem. The lender has a bad loan on the books and wants to remove this
sore spot as quickly as possible. Either way, the seller is motivated. This is key, because without this motivation, the profitable
opportunities for investors would not exist. It is the seller's motivation, that creates different opportunities in the foreclosure
process.
The more motivated the seller is, the better potential there is for larger profits, less out of pocket expenses and carrying costs, and
fewer delays in the transferring of the property.
If the banks didn't in some way make the REO's attractive to the buyers, there would be no need to seek REO's from the banks.
When dealing with homeowners and lenders, the more motivated they are, the better opportunity there is for you.
A homeowner just entering the default phase, may feel that he or she has plenty of time to work things out and may not be
responsive to foreclosure investors. Likewise, a lender that has just acquired a new and desirable foreclosure, may not be in such a
hurry to give it away.
A "stressed out" homeowner… just days away from the auction block… should be very motivated… and may jump on any
reasonable offer. The same holds true for the lender. The longer the lender has the property on their books, the more it costs them
the "story" is behind the foreclosure of the property.
The Team Concept
Because the buying and selling of real estate foreclosures is sometimes a complicated process… and so many parties are typically
involved… it makes perfect sense to start to get to know these parties. Lenders, lawyers, title companies, inspectors or appraisers,
repairmen, Realtors, insurance companies and court clerks are all somewhat connected and intertwined in this industry. Not only
does it make sense to get to know them, it makes more sense to have these people assisting you in your efforts. Why not have
some of these people n your team?
An experienced foreclosure investor will have established relationships with these people. Put together a team of professionals in
the industry. Consider these team players as your aids or advisors.
How do you do this? By talking to people, asking questions and listening carefully to their answers.
You are about to embark on a new venture. This venture requires knowledge and assistance from others in the industry… but, not
all in the real estate and related industries support the concept of investing in foreclosures.
Choosing people for your team carefully. As these people will be your advisors, make sure they have the knowledge and skills
necessary to assist you. Also make sure they have strong positive attitudes regarding foreclosure investing! These are the people
that will help you the most.
You will want to research courthouse records. Don't make an enemy of the court clerk! Make him or her your friend. You will want
to do "title" searches or have O&E reports done on properties. You will need people on your team that can do this for you quickly
and inexpensively. You may need a handyman. A person that can be on call, to give you repair estimates, or make repairs
efficiently on short notice.
A real estate broker may have a great deal of experience in your investment area. A good broker or Realtor is a must on your
team! If you want to sell the properties you buy in foreclosure, a Realtor can be the best way to go. In exchange for the Realtor
bringing you information about foreclosures in your area… neighborhood comparison values… and assisting you in other ways… you
can give the Realtor an exclusive on the properties you want sold or rented.
A good real estate attorney is a must. The laws regarding foreclosures vary from state to state. Laws change or get modified from
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time to time. It is essential to know, and be properly advised n foreclosure laws in your state. At the very least you want to make
sure that you are represented properly in any real estate transaction.
Start putting your team together right away. Don't wait until you are ready to buy. The more networking you can do… the more
people you meet and talk with… the better.
Researching… Be A Good Detective
Several first time foreclosure investors have learned that researching property and loan information correctly, is absolutely
essential. Unfortunately, they learned the hard way. There are potential hazards in bank foreclosed real estate. There are liens and
other devices that can complicate the investing process.
A "lien", is a charge against the property for payment of a debt. The charge makes the property security for the debt. Liens are also
known as "clouds" or encumbrances" on or against the title of the property. A homeowner, or even lender for that matter, does not
have "clear" title to a property with a lien on it.
If you buy a foreclosure from a homeowner who does not disclose the fact that there is a lien on the property… you would be
responsible for the payment of that debt. If you don't order an O&E report or do any kind of title search prior to your purchase, you
can have problems.
Many enthusiastic beginners have purchased foreclosures at auctions, only to find that liens or encumbrances have turned a good
deal into a disaster.
You wouldn't want to order a title search on every property that comes along. You wouldn't want to get involved in that many
properties. Besides, it's much too expensive. Reports can cost from $150 - $500 or more. An O&E Report is a report that indicates
the Ownership & Encumbrances associated with a property. While it does not give you the full picture, it can provide you with
specific information you need. This may help you to decide to pursue the property or drop it. The cost for this kind of report is
usually between $50 - $100. A small investment considering it can help you save thousands of dollars.
These reports should not be used alone. O&E reports do not disclose any tax or municipal information that may be important. Full
title searches disclose all of the legal and pertinent information that both buyers and sellers must be aware of when closing the
deal.
Select the properties that meet you investment criteria and pursue them. Once you have significantly narrowed your choices and
determined your best opportunities, go to the courthouse and verify all pertinent information. Many real estate transactions have
not been completed successfully, because information pertaining to the owner or property was incorrect.
You can use information from reporting services to initiate your search… locate properties… call contacts for more information…
etc… but never rely n this information solely when you are ready to do business.
The courts only recognize the information contained in the courthouse records. If a case number… loan number or amount… exact
name or names of borrowers… or property address is listed incorrectly… the deal could become null or void. Relying on outside or
second hand information can be dangerous.
Many people are involved in the recording of real estate transactions. It is therefore, not unusual that errors in recording
information occurs. It's been said, that as much as 10% of the recorded information in a typical county's records… may be
incorrect.
Always double check the information regarding property you're interested in. Cross reference the homeowner's information with the
attorney's information, with the courthouse information, and the lender's information.
Save yourself hardships from homeowners, lenders, lien holders, tax collectors and so on… by taking the time to review all of the
documentation very carefully!
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CHAPTER EIGHT
Understanding The Basics of Buying
“Oh, the times! Oh, the customs!”
-- Cicero
Introduction To Buying
It is essential to bear in mind some key factors regarding the purchase of foreclosures.
First, all homeowners and lenders are different. No two are alike. All properties and their histories are different. Second, don’t get
carried away with your first prospective deal. There are thousands of “deals” on the market. There will be plenty of foreclosures
available… you don’t have to buy the first one you see. Third, don’t bid on or pay anyone, any amount, until you are absolutely sure
that the outcome will be in your favor, and that all possible difficulties have been removed. Fourth, make sure you have assembled
your team of expert advisors to assist you in your ventures. Do not enter into any contract or arrangement until you have the
endorsement of your advisors. Later, you will gain the ability to handle these transactions independently. Fifth, make sure you
know the laws pertaining to foreclosures in your state. At the very least, make sure you have a competent attorney on your team…
one that can fully explain the laws and advise you accordingly. Sixth, do your research properly, don’t take short cuts. Mistakes in
the recording or researching of documents, can result in a loss. Seventh, be professional. Never, ever misrepresent yourself to a
homeowner or lender, and never take advantage of a homeowner in default. Eighth, become an expert in your area. It is too
difficult and unproductive to try to cover the world. Ninth, determine what investing style best suits your needs or abilities… and
practice, then perfect your style for maximum profits. Tenth, learn as much as you can about the real estate industry in your area…
collect pertinent materials… read books… stay in touch.
Whether you buy and sell properties “ for a living,” or get involved on a casual basis… you can buy property at a discount… property
that can be sold quickly for large profits… property that will appreciate well… or rent well… or possibly a combination or all of the
above. Make no mistake about it, any of the aforementioned investments will increase your personal wealth.
As is with everything we buy… if the purchase price is discounted… there must be a reason why. This reason will help determine the
price of the property, its condition, or both. If this property could have been sold at full market price… it probably would have.
Discover the history of all properties you are interested in. Expect to hear and see unusual events or occurrences that led to the
original default.
You will be dealing with lenders, lien holders and/or homeowners. You will be engaged in legal real estate transactions that require
attention to detail. Pay attention to the details.
As each situation you encounter will be different, you should maintain enough flexibility of thought and dollars in your offers. I
encourage you to be creative… but not too creative! Stick to the basics, especially at first. These are tried and true methods. Learn
from the mistakes of others… who are now professionals… and who do this everyday.
Read these chapters over and over again, until you can see yourself getting involved. See yourself going to the courthouse or
working with brokers and title companies… see yourself negotiating with homeowners and lenders… see yourself at the courthouse
steps participating in an auction… see yourself negotiating with a broker or banker… see yourself doing this part time or full time.
Start to get comfortable with the terminology and the concept of buying real estate at a discount.
The Three Basic Methods
The three “phases” of the foreclosure process produce three different sets of investing opportunities. The default or pre-foreclosure
phase, provides you with an opportunity to buy the property from the homeowner before the property goes to auction.
The auction or sale phase allows you to bid at the time the property is auctioned off.
After the auction, or the REO phase, you can work with Realtors and sometimes directly with lender to get attractive properties at
discounted prices.
All three investing opportunities present advantages, depending on who you talk to. These advantages depend heavily upon your
capabilities, desires and willingness to take risks. By following the suggestions in this guidebook, you will minimize your risks.
The Judicial Foreclosure Explained
In the judicial foreclosure process, the lender must file a complaint, an intent to bring legal action against the delinquent borrower.
The lender must provide evidence to the court, that the borrower is in default of his or her agreement to make regular payments on
the loan. The mortgage stipulates, that if the conditions of the loan agreement aren’t met, the lender shall have the right to begin
the foreclosure process.
This is the common method in “Lien Theory” states. The lien theory dictates that the mortgage contract pledges the title of the
property in question to the lender. While the lender does not actually hold title to the property… it is assumed to be the title holder
by virtue of this mortgage contract… until the terms of the contract have been completed. The mortgage contract is recognized as a
lien.
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Because the judicial process is a legal process, the lender must petition the court to allow the lender to foreclose on the property.
Most states’ courts have developed systems to deal with foreclosure complaints without resorting to jury trials. While it is possible,
it rarely ever happens.
Several “judicial states” use a Summary Judgement Hearing. Here, the judge can decide in favor of the plaintiff (the lender) if there
is no opposition from the defendant (the borrower). In other states, the lender pleads with the court to summons the borrower to
appear. The defendant must show proof that the lender is incorrect and the foreclosure should not be granted.
If the borrower can not show “good cause,” or fails to appear according to the summons, the judge can decide in favor of the
lender and allow the foreclosure procedure to continue.
The time frames involved in the process vary greatly. The time a lender allows the borrower to be in default… the time within which
a property owner may have a right to redeem the property… the time it takes the courts to process all of the necessary actions and
hearings.
A typical judicial foreclosure proceeds in this manner:
When a loan is in default, the lender will send the borrower a “Notice of Intent to Foreclose.”
This notice informs the homeowner that the loan is in default and the lender intends to take action if the problem is not cured. This
notice will contain the amounts due. This notice is not a public notice.
If the process continues, the lender (who is also now the “plaintiff”) files a “Complaint for Foreclosure and Other Relief” or a “Motion
to Foreclose Mortgage,” at the county courthouse.
Next is the Lis Pendens, which is the legal recording of the warning notices sent to any interested parties. Interested parties are
those who may have some claim against the property or its ownership. The attorney for the plaintiff will order a title search to
identify any interested parties.
When officially “served,” the Lis Pendens informs the interested parties that there is “legal action pending” that might effect them.
This notice is served as a summons, by the court, delivered by the sheriff. As you will see in the case study in section 2 of this
publication, those served had 20 days to respond.
The Lis Pendens is of critical importance because it signals the beginning of the foreclosure process. It states that a suit was
brought about by the plaintiff… against the defendant(s)… regarding a particular contract (loan, deed or mortgage)… and that relief
is sought in a manner as to foreclose on the contract (mortgage)… held by the plaintiff… against the property which is security for
the debt… as entitled by law.
The Lis Pendens identifies the plaintiff… the defendant(s)… and typically contains the following:
1. this is an action to foreclose on a mortgage
2. the date of the promissory note and mortgage
3. where this mortgage was recorded in the official public records
4. the plaintiff is the holder of the mortgage
5. a default has occurred
6. the plaintiff declares the full amount due and payable
7. the principle amount due and other expenses
8. any expenses paid by plaintiff to protect his interest
9. all conditions have been met to accelerate the note
10. identifies legal title of borrower(s)
11. for collection purposes, the plaintiff has hired an attorney and is obliged to pay for said services
12. other defendants may have some claim on the property (these claims identified by title search, are shown with the names of
the defendants… date filed… amount of claim… case or file number… and location of recording in the public records)
13. the plaintiff seeks a judgment to foreclose the mortgage… and that if the proceeds of the sale do not cover the amount sought…
a deficiency judgment be pursued.
A copy of the original mortgage and/or note are usually attached.
The Lis Pendens is an official court document and is matter of public record. This is the first opportunity for the general public, or
foreclosure investor to become aware of this distressed property.
The lender petitions the court, as it is entitled to by law, to enter a Summary Judgment of Foreclosure and Attorney’s Fees. A
Notice of Hearing is sent to all interested parties for the Summary Judgment. This notice informs the parties that the plaintiff wants
the court to decide in its favor… and to recoup the attorney’s fees.
The actual “Motion for Summary Judgment and Request for Attorney’s Fees” will be attached. The “Motion” states that the plaintiff
can proceed in this manner as a matter of law… cites state laws supporting the action… the ability to foreclose to secure a debt…
the lender’s right of acceleration… status of the lien… and a statement showing that evidence is provided of the loan… the
mortgage… “as well as the defaults thereon and the balance due.”
A “Summary Judgment of Foreclosure” is ordered, adjudged and decreed. This “decree” indicates that the court acknowledges the
plaintiff’s rights under the law… terms of the documents and devices in question… the plaintiff has provided competent evidence of
said allegations… the mortgage does indeed constitute a valid lien… the court recognizes and grants the requested attorney’s fees…
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a final judgment amount… the property’s “legal description”… notice that the court clerk shall sell the property at a specific date
and time… and the address and location of sale… if the amounts as previously outlined are not paid. The balance of this sometimes
lengthy document contains information and instructions for the distribution of the proceeds of the sale.
The Summary Judgment or “Final Judgment,” is the green light that signals the beginning of the end. By order of the judge, the
court will sell the property, typically via the Sheriff, if the debt is not satisfied. Since the court clerk has the duty of supervising the
sale of the property, the court must send a “Notice of Sale” to all interested parties.
The Notice of Sale states that pursuant to the “Final Judgment of Foreclosure,” the sheriff will sell the property at a specific time
and place. The date and time of the sale is stipulated in the Final Judgment. Typically the place is the courthouse steps. A copy of
the Summary or Final Judgment is usually attached.
If there is still no satisfaction, the property will be sold at the courthouse steps as outlined, to the highest bidder.
Except for states that allow the homeowner a “right of redemption,” the homeowner will have just lost all control, ownership rights
and interest in his property.
The Non-Judicial Foreclosure Explained
In the “Lien Theory” states, the judicial foreclosure process is applied as previously outlined.
In “Title Theory” state however, the non-judicial foreclosure action is used.
The security instrument used is the Deed of Trust, not a mortgage. Deeds of Trust differ from mortgage contracts in that the
borrower (Trustor) conveys his or her title to the property… to the Trustee (a neutral 3rd party)… who becomes the legal title
holder of the property… until the Trustor has completed the terms and obligations of the note.
The major difference between the judicial and non-judicial methods of foreclosure is obvious. The judicial method involves the
courts, the judicial branch of government. The non-judicial method does not. Court approval to foreclosure on a property is not
required because the method of foreclosure is stipulated and agreed upon when the original loan agreement is made. A Trust Deed
pre-authorizes the sale of the borrower’s property if a default in the original agreement should occur. The “Power of Sale” clause
found in all Trust Deeds, authorizes the Trustee to sell the property upon notification from the Beneficiary, that the loan is in
default.
The Trust Deed or Deed of Trust, employs a three party system… the Beneficiary (lender), the Trustor (borrower) and the Trustee
(third party).
A typical non-judicial foreclosure proceeds in this manner:
In this system of foreclosure, the lender attempts to recover the debt through a “Trustee’s Sale.” This is authorized in the Trust
Deed. Most, but not all states us the Deed of Trust in the non-judicial method.
The Trustee has the authority to sell the property, should the borrower go into default. The lender notifies the Trustee of the default
and instructs him to start the process of foreclosure. (All lenders’ policies differ, mortgages or deed of trust notwithstanding. The
number of days late… number of payments behind… dollar amounts owed… will have different effects on different lenders. The
length of time varies from lender to lender… as to when they issue the Notice of Default… and when the Trustee Sale is scheduled.
Local and state laws also effect the time frames associated with this process).
The Trustee prepares a “Notice of Default,” and files it with the County Clerk, Clerk of the Courts, or County Recorder. This notice is
filed in the county where the property lies, by the Trustee. This notice signals the beginning of “public notice,” that a loan is in
default and that foreclosure action has begun. The notice may be posted in a public place and on the property itself.
The Trustee prepares the notice of Default. The notice will include the following information:
The date of the notice
The name of the Trustor (borrower)
The address of the Trustor
The name of the Beneficiary (lender)
The name of the Trustee
The original loan amount and date
The amount in default, including all other charges
The legal description of the property (optional)
Similar to the mortgage, the Deed of Trust accelerates the loan.
The homeowner in default is granted time to cure the problem. This is called the “reinstatement period” or “redemption period.”
The reinstatement period will vary from state to state. The reinstatement period is indicated in the Notice of Default. It is usually 60
90 days, but laws vary. It could be as little as 15 days and usually starts from the day the notice was recorded.
Notices of Default are worded very simply and very severely. A sample of the language used, is:
“IMPORTANT NOTICE IF YOUR PROPERTY IS IN FORECLOSURE BECAUSE YOU ARE BEHIND IN YOUR PAYMENTS, IT MAY BE SOLD
WITHOUT ANY COURT ACTION…”
If the default is not cured within the allotted reinstatement period, a “Notice of Sale” or “Notice of Trustee’s Sale” is recorded like
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the Notice of Default. It is distributed and advertised according to the laws of the land… prior to the Trustee’s sale.
The Notice of Sale states that the Trustor is in default and the property will be sold at a public sale… at a specific time and place…
to the highest bidder… to satisfy an obligation by the Trustor… for the amount owed the Beneficiary… as stipulated in the power of
sale clause in the Trust Deed… and that the Notice of Default (and “election to sell”) was duly recorded in the proper county office…
in said volumes… on said date.
If the problem still has not been resolved, the property is sold at auction. The time between the posting and recording of the Notice
of Trustee’s Sale… to the date of the actual sale… varies according to law.
In both the judicial and non-judicial foreclosure processes, the notices of sale, foreclosure complaints and foreclosure sales are
advertised in newspapers. There are few if any states, that do not require the public advertising of these “notices.”
In both of the foreclosure processes described, the emphasis was on showing the process in action and does not take into account
the efforts made on behalf of the lender or borrower to resolve the matter. This is important to point out, because as you are now
aware, foreclosing on a defaulting loan is absolutely the last thing the lender wants to do. Attempts will be made on both sides to
avoid foreclosure.
Comparing The Processes
There are other significant differences between the two systems. The judicial system example above, is an extremely simplified
example. Things can get a lot more complicated. The main reason is the involvement of the court system. You can see two
examples, the judicial method is more complex and time consuming.
The non-judicial example is also simplified. Comparing apples to apples, you can see why lenders prefer the non-judicial system.
Attorneys need not be involved, nor are there any lengthy court preparations and pleadings. The Trustee merely records the
documents… prior approval from a judge is not necessary. This system is much more efficient from beginning to end… much faster
and less expensive… especially for the lender.
Another major difference effects the rights of the homeowner in foreclosure… and the impact these rights have on the lender and
the foreclosure investor.
The big difference is the right of redemption. In several states, the homeowner has the right to redeem his property after it has
been sold at auction. This redemption period could be a few weeks… in some states a year or more.
The “right,” is more or less a trade-off for the lender’s right to bring a deficiency judgment suit. The mortgage contract (and state
laws) allows the lender to sue the borrower for the balance of the amount owed… if the total amount owed was not collected at the
auction. This stipulation is contained in most mortgages.
In the non-judicial system utilizing the Trust Deed as the security instrument for the loan… the property owner retains no
redemption rights, after the property has been sold at the Trustee’s Sale. Likewise, the Beneficiary no longer has the ability to
pursue the property owner for a deficiency judgment.
Previous
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Copyright © YOUR COMPANY YEAR
All Rights Reserved
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CHAPTER NINE
"Nothing astonishes men so much as common sense and plain dealing."
-- Ralph Waldo Emerson
Buying Pre-Foreclosures
Authors and experts disagree about the advantages and disadvantages of this foreclosure investing method. Some don't see
enough reward… some think it's too risky… and some practice this technique and this technique only!
Make no mistake, foreclosure investing can be risky. You can lose money if you are not careful. Your job is to make sure that you
don't. The way to do this is through diligence in your work and following the basic guidelines.
Buying pre-foreclosures is one of the best ways to invest in distressed real estate.
Reduce your risk by learning as much as you can abut what you want to achieve. Buying this publication was a very wise decision…
because in this chapter you will learn how to invest profitably with minimum risk.
Most of the dollar amounts you can earn in pre-foreclosures may be low to moderate… but there are also many profit yielding
properties you can cash in on.
Many investors build their entire operation around this investing concept… and you will soon see how they have achieved great
success.
This is perhaps the best investing method if you plan on buying and selling several properties… or for investing on a full time basis.
Investing Overview
When a loan goes into default and a property faces foreclosure, both the lender and the borrower enter into a Lose-Lose situation.
Typically, neither make out well at the auction. The homeowner has lost his property and may be sued for a deficiency… the lender
has a bad loan… an unwanted piece of real estate possibly in need or repair… and has to incur expenses to maintain and eventually
sell the property. Further, the lender probably won't get all it's money due at the auction and would have to pursue the homeowner
for the balance… even though the lender is already certain that the homeowner can't afford that either.
Both the homeowner and the lender may try to do anything they can to prevent the foreclosure.
This is the key principal behind profitable investing in this arena. Both the lender and the homeowner are motivated to cure a
problem. This creates windows of opportunities for the informed investor. Be aware of the opportunities.
The experienced foreclosure investor converts this Lose-Lose situation, into a Win-Win situation. Technically speaking, this would
actually be a Win-Win-Win situation. With this method, the homeowner is helped out of trouble (Win #1), the lender's problems are
satisfied (Win #2), and the investor makes something for himself (Win #3).
The way to help the lender and the borrower is to get involved in this situation and workout a satisfactory agreement for both
parties. At the same time you are insuring a favorable return for your efforts.
If a homeowner is in serious default of their home loan… no doubt they have many other serious financial problems. The house
payment is usually the last to start falling behind. Auto repossession will generally occur before one lets go of their home.
The homeowner needs to be rescued. So does the loan. The homeowner is abut to lose his home, he has no money and no where
to go. The loan needs to be brought current… if not… the homeowner's credit worthiness will be destroyed.
If there is enough equity in the property, there is the potential to work out an agreement that satisfies all parties and allows you
the investor to profit handsomely.
That's what pre-foreclosure investing is all about. Buying the equity in the property… working out arrangements with the lender and
the homeowner… possibly repairing the property… and selling it for profit.
The amount of profit that can be earned depends entirely on the amount of equity in the property… any monies paid to the
homeowner… any monies paid to the lender… any and all repair costs… amounts for other mortgages or liens paid… the costs
transferring titles and closing costs… and the costs associated with holding and reselling the property.
This may sound complicated… but after having gone through a few exercises… you'll find the concept rather simple.
To ensure a successful purchase, sale and ultimate profit from the property, the pre-foreclosure investor follows these basic
guidelines:
1.
2.
3.
4.
5.
locate loans in default… evaluate selections and narrow choices to pursue
contact homeowner… inspect property… evaluate homeowner's needs
determine potential sale price and profits
negotiate with the property owner and the lender to arrange workout
close on property... repair property... sell for profit
Investors in pre-foreclosures often obtain properties with little or no money down, making this an attractive investing methodOther benefits include the fact that with some practice, you should be able to "flip" these properties in a short period of time. By
doing this, (reducing the amount of time you hold the property) you incur less costs, which ultimately increases your profits when
sell. Properties in states like California, that practice the non-judicial method of foreclosure with a trust deed, go through the
process much more quickly than that of the mortgage and judicial method. Because the foreclosure process is quicker, the
homeowner has less time to react and work out his problem. The clock starts ticking quickly and loudly. The homeowner is under a
good deal of pressure to resolve his problems. Time is on your side... not the homeowner's. Remember to be patient.
Disadvantages include that of hidden problems and expenses associated with the property and the frequent irrational behavior of
the homeowner in distress. Additional expenses associated with this method involve the researching of property information and
the costs or trade-offs for your team members and advisors.
Proven Step by Step Methods
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There are risks associated with pre-foreclosure investing. By recognizing these hazards and paying careful attention to detail, you
will learn how to avoid them.
This method represents perhaps the best of ail investing opportunities, if you want to consistently average 20% - 40% savings on
the properties you buy.
REMINDER THESE TECHNIQUES ARE USED BY THE EXPERTS READ THIS INFORMATION CAREFULLY, CONSULT YOUR ATTORNEY,
AND DO NOT DEVIATE FROM THE PROCESS.
Because you will buy a property before the auction or sale date, you must acquire the information about the property as quickly as
possible. In the Deed of Trust - non-judicial foreclosure system... when the bell sounds (Notice of Default)... it's "off to the races."
In the mortgage - judicial foreclosure... the race has also begun (with a Lis Pendens)... but will take a lot longer to finish.
Step #1 - Locating Properties in Default
Since lien theory states announce the default through the "Lis Pendens" and title theory states announce the default with a "Notice
of Default"..- and being the first public notices indicating a default... these are the documents you should seek first. The
information contained in these documents show that an agreement is in default and the loan will be foreclosed.
You can access these "notices" in the county courthouse records... newspapers that routinely advertise "public notices"... and
services that report, list or maintain "notice" related information.
The Lis Pendens will contain the address of the property in question. The Notice of Default, contains the "legal description" of the
property. The legal description... is not the property address. It is a method of identifying the property's boundaries and exact
location... typically described as "Lot," "Block" and "Subdivision"... and is recorded in "Map Books."
To determine whether or not this property falls within your investment area, you must have the property's address. To find the
property address from the legal description... ask for assistance at the courthouse, on how to cross reference the information and
locate the exact address... or contact and utilize your teammates. Call the title company representative, your attorney or your
Realtor. They should be able to provide this information for you quickly.
If this property, is in your investment area, proceed.
Start with a PROPERTY ANALYSIS WORKSHEET, fill out all the property information you can from the Lis Pendens or Notice of
Default. This form will help you to get the basic information, i.e., homeowner's name... address... phone... the amount in default...
and the original mortgage amount.
Step #2 - Evaluate Selections and Determine Potential
You know (according to the notices) how much is owed on the loan. Now you must determine the property value. By determining
the property's value, you will also determine (initially) the gross profit potential. This gross profit, is the difference between the
property's market value (what it would sell for today in good condition) and the amount of the debt in default. This figure
represents the known equity in the property.
If the property is in your special investment area, you may already know its average value. It is not necessary at this point to order
an appraisal, just get a good "ballpark" figure. Read the newspapers, real estate publications, call your Realtors, and get market
values (comps) for comparable homes in the neighborhood.
A good rule of thumb to follow is: get current prices on 3 homes in the neighborhood, comparable in size, style, age, construction,
amenities, etc., to the home you are interested in buying. Take the 3 comparison prices- add them up... and divide that number by
3. for an average market value.
Subtract the amount of default in the notice, from the average market value... or a good ballpark figure... to determine how much
equity there currently is in the propertyIf there is little or no difference in the amount of the debt... and the value of the property... forget it! Move on! (a property valued
at $100,000 with debts of $93,000 for example).
If there is a sizable difference between these two figures, then this property shows promise! There may be enough equity in the
property to make a fantastic profit! (a property valued at $100,000 with a default debt of $55,000 for example).
Note: there are some investors who skip over Step #2. We recommend that you do not!
Step #3 - Contacting The Homeowner
You nave identified a property in distress that shows great potential. Now you must contact the homeowner and get your foot- in
the door.
It is necessary to meet with the homeowner if you are to pursue this property further. To begin converting the Lose - Lose
situation, into a Win - Win - Win situation.- you must continue to determine your profit potential... the homeowners needs- and
your ability to satisfy the lender. You will need to meet with the homeowner so you can discuss the situation... review any legal and
financial documents... and inspect the property- Contacting the homeowner in default "is easier said than done."
Remember, that if losing one's home is usually "the last straw" in a long financial downturn... 'the homeowner will have many
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creditors, lawyers and bill collectors coming after him. He is reluctant to answer the door, the phone or the mail. You must
however, utilize those exact methods of trying to contact him!
If you have had a financial hardship or have been in poor financial shape for any length of time, you will understand the
homeowner's position. Homeowner's facing foreclosure stand to lose everything. They are usually very worried and apprehensive,
and with good reason. They are typically "not themselves."
There are some that will try to take advantage of or manipulate the homeowner in distress-.- the homeowner is no doubt leery.
In meeting with the homeowner, you might be met with fear, anguish, skepticism or paranoia. Be prepared!
Start with the mail. Send a letter to the homeowner in distress. Indicate that you are a private investor and that you may be able
to help the owner out of his situation. Follow up with more letters and phone calls. If all else fails, drive by the property, to see if
you can make contact in person. Your goal is to meet the homeowner.
If the homeowner is afraid to answer the door or the phone, your best chance for initial contact is by mail... whereby the
homeowner can identify who is trying to contact him without having face to face or telephone contact.
In the non-judicial system where the foreclosure clock moves swiftly, you should contact the homeowner as soon as possible. If you
can't get your information from the courthouse, you may want to subscribe to a service that provides you with new defaults on a
daily or weekly basis.
In your letter, you must clearly indicate the benefits the homeowner will receive by meeting with you. Why you ask? Simple- The
homeowner is leery... in deep trouble and suspicious. Along comes a letter indicating their troubles may be over... if only they meet
with you. "Well, who are you and how can you help me?" the homeowner will wonder- "What's in it for me?" is a question we have
all been trained to ask ourselves and "What's the catch?" is the question we ask when something sounds "to good to be true."
To accomplish Win #1, you must gain the homeowner's confidence. Do this by knowing what you're talking about, present yourself
in a non-threatening, professional manner. You must point out the benefits of your plan in a credible manner. You are here to help
the homeowner and must convince him of that.
Ted Thomas, a widely respected foreclosure investing expert and author, knows how to use direct mail techniques appropriately.
Mr. Thomas and other skilled investors recognize the importance of "connecting" with the homeowner in distress. Proper techniques
are also used to attract buyers of their newly acquired properties. The end result is more deals through more "connections" and
faster turnarounds of the properties they hold. Bottom line?-. more profits, faster!
The first impression you make on the homeowner, whether by mail or in person... is critical. You must start to establish credibility
with the homeowner with your very first contact.
Say what You Do… And Do What You Say.
Develop mailing techniques that will help you convince the homeowner to call you. Offer things of true importance to the
homeowner to get his attention.
Most homeowners will need to relocate. Some will need cash -for relocating expenses. Some have debts to pay. Most people will be
concerned about their credit worthiness, as the foreclosure is a default and it will appear on their credit reports.
Knowing what concerns the homeowner, gives you the tools to reach them more effectively than the sample letters shown.
Indicate in your letters that you may be able to stop the foreclosure... save their credit rating... provide cash to pay bills... provide
relocation expense money, etc.
These items are of great concern to the defaulting homeowner... use them to your advantage.
Letters from individuals will stand out, if hand written or neatly typed on plain paper.
Do not use a company name or indicate that you are part of some large investing firm... this will only make the homeowner
apprehensive.
Your first letter should be non-threatening and simple... after all, the homeowner is probably getting quite a few threatening letters
from bill collectors and attorneys. Be sincere and focused. State that you are interested in buying a home in the area... you have
noticed that this house may be sold at auction... you have cash to buy a house... and may be interested in this one. Invite the
owner to call at his or her convenience, (make sure your phone number appears in your letter)
The wording used in your letters will vary. Develop a style that works for you- Follow up letters may include wording or offers that
appeal even more to the homeowner. Maybe your letters will get more serious as you send your find, 3rd or 4th letter.
Where the foreclosure process moves quickly (3-4 months) you will want to send several letters as quickly as possible... perhaps
twice a month.
Follow up with phone calls. Your goal is to meet the property owner. Be professional and pleasant on the phone. Never
misrepresent yourself or your intentions.
You are here to help the homeowner... be sincere and honest in your meetings with the owners.
Indicate that in order for you to determine if you can help... you will need to meet with the owner at the property location. Don't be
pushy, but do indicate to the owner that your meeting will be much more productive and less time consuming... if the owner will
have ready... all the pertinent documents regarding the default and the ownership of the property... available. Ask to see the
mortgage and loan documents, insurance policies, etc.
Not only does this give you the ability to research the loan and ownership information... it allows you to start putting the pieces
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together for your offer.
If you are to buy this property, you must uncover the loan information... ownership information... other liens or debts... the
condition of the property... and the owner's needs.
You should not try to conduct a full length interview over the phone. Arrange a time and date to meet that is convenient for the
owner. Remember this person will be angry, upset or otherwise distressed. Be calm, persistent and patient!
Step #4 - Meeting the Homeowner
Use common sense when meeting the homeowner. Some investors will want to impress the property owner's with fancy clothes,
fancy jewelry and cars. This is supposed to convince them that the investor has the money to buy the property.
I suggest you appear neat and clean... in casual but nice attire... and "lose" the jewelry. Your taste might not be the same as
others- most often it will not be. Be as generic in appearance as possible. You may not turn everyone "on"... but you will hardly
ever turn anybody "oft." Dress up or down accordingly... and don't forget your notebook for detailed interview notes.
Meet with the property owner to establish his or her needs for completing Win #1... finding out what the homeowner's needs are
and try to satisfy them.
Be sympathetic to the homeowner's dilemma, but don't get carried away. This is no time to get emotional with the homeowner. As
a matter of fact... be sure to remove any emotions you may encounter within yourself when buying distressed real estate. Why?
because you will lose your edge... your ability to clearly see if this venture will meet your needs and be profitable. At the very least,
you can erode your profit potential by getting 'involved.'
When investing in property for resale, your only interest is to see if you can get in... and get out with a profit. This is not the home
you wilt live in... so don't think about it that way.
Assess the homeowner's needs. Uncover the story (if you can) about the default, (you may already know more than the
homeowner does if you have done your homework properly) Ask questions! Find out exactly how much is owed. is he going to
move?- wait for a last minute loan from his uncle?-.. take the advice of the attorney who sent him an advertisement? You must try
to answer these questions. Does the homeowner need cash?... if so, for what? Is the homeowner in or about to declare
bankruptcy?
This information will be the clay with which you mold and shape you offer to buy.
Make no promises in this first meeting. Determine the homeowner's needs and take detailed notes.
Next, you must review the loan documents. Take notes, copies if you can, of all the pertinent information in these documents and
verify the names, addresses, amounts, dates, and condition of the loan agreements. Do the same with fire and insurance policies.
Record the policy numbers, agents' names and addresses, etc.
Ask the owner if there are any other liens, mortgages, deeds, judgments or encumbrances on the property. Record that information
as well.
Reviewing, recording and verifying this information is necessary to begin formulating your strategy for Win #2... dealing with the
lender and/or lien holders.
A troubled homeowner may lie, forget or be unaware of other liens or Judgments attached to the property.
Get as much information as you can now... you will verify it later.
To start calculating your profit potential (Win #3), you will have to inspect the property carefully. The amount of property damage
may inhibit your ability to buy and sell it profitably.
Do a thorough and careful inspection of the property. Make sure to turn on and off every light and faucet... open and close every
door and window... test all showers and tubs... flush every toilet... and observe. Carefully note all broken or damaged appliances,
walls, doors, etc. Look for stains from leaks. Look under the kitchen cabinets. Look for worn or torn flooring or carpeting- Try to
arrange the inspection of the property during the day.
Indicate all damages on your worksheet! If you are inspecting the property with the owner... don't be bashful about pointing out
the damage. If the house is a mess, most likely the owner is aware that it is in need of major repair. Take your time and itemize
the damages.
As you buy and sell more properties, you will start to get "a feel" for some of the damages and what it usually costs to repair them.
You may want to buy a book on inspecting residential properties- Most of the books and manuals on home inspections are very
good.
Never comment on the condition of the property as a result of one's style of living. If the owner's are slobs, you will know, but it
won't help you to remind them of it!
You may want to ask the owner what he thinks the cost would be to repair the damage. Don't argue... Just ask questions and take
notes!
This part of your job is now complete. You know the default amount, the property value, the property condition, the owner's needs,
the names and addresses of any lien holders and the approximate amount of equity in the property.
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(Advanced practitioners of this method will be able to make an offer to the homeowner at this point. If a preliminary title search
has been done to verify all mortgages, lien holders and judgments... and if the investor brings a "home repair cost estimating
guide" with them... or if they can determine the cost of repairing the damages, "on the spot"... they can assemble all of the
information necessary to make an offer. They simply subtract the cost of repairing the property... from the average market price
determined earlier... to arrive at fair market value for that property.)
(An even further advanced method is to enter into a contract with the homeowner, prior to acquiring any lien or judgment
information, and making that contract "subject to" such information.)
With some experience, you should be able to make a preliminary determination at this point- You will be able to determine whether
or not you should explore this opportunity further. How?
To make a quick assessment of the profit potential, do the following:
Add the amount of default as indicated on the notice, with any other liens or judgments revealed by the homeowner, (a figure you
didn't have before meeting the homeowner} and the estimated costs of repairing the home to salable levels- If the total amount of
these three items is equal to or greater than the average market price (you calculated earlier) then this doesn't appear to be a
good dealAt this point you would indicate to the homeowner that much to your dismay... you don't believe that you can help him
appropriately. Thank him for his time.- wish him luck... and leave.
EXAMPLE:
average market price 100,000
amount in default 55,000
amount of liens, etc. 22,500
estimated repairs cost 8.500
estimated equity $14,000
You may or may not still be interested. It all depends on your investing criteria... and how much you want to make per deal.
Some investors would pass on this deal... others would be happy to work with this properly.
While there will be additional expenses associated with the property if you do buy it (holding costs until the property is repaired and
sold... closing costs... perhaps a brokers' commission), the shrewd investor knows that there may be other hidden opportunities in
the property.
Ask the property owner what he or she thinks it's worth... and what they are willing to sell it for. Don't argue or negotiate at this
point. Write these figures down in your notes.
After completing the inspection and you have recorded all of the loan, default and insurance information, thank the homeowner for
the tour. Tell him that you would like to make an offer on the house and that you will need a few days to prepare it. Thank him
again and leave.
Make no offer at this point and do not give the homeowner any money.
Try to call the homeowner back as soon as possible... set a time and date that you can come back to make your offer... or make a
future appointment with them before you leaveBuying Pre-Foreclosures
Step #5 - Preparing Your Offer
Now you are ready to make your offer to the homeowner, right?
WRONG!
Experts vary on how they proceed from here... however, most agree that you will want to verify all of the information you have
now and investigate all other pertinent information to ensure that you have uncovered any surprise obligations that will effect you
later.
Investigate this deal further to remove any possible risks
To calculate your initial offer, verify that there are no other liens or encumbrances on the title. Call your teammate, the title
company representative and request a preliminary title search or abstract. Check with the local tax collector to make sure that
there are no taxes due on the property. (This may not show up in the preliminary title report)
Make a list of the damages and have another teammate... the handyman or contractor... price out the cost of repairs for the
damages. Decide which items are in need of repair or replacement.
Assemble and record all of this information to determine the ultimate potential of this property.
We will use the following scenario to show the calculations:
You have found (through court records, listing services, title companies, etc.) a Notice of Default or Lis Pendens indicating that a
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loan is in default. The amount of the default is $55,000. That is how much the borrower owes the lender.
If you have failed to get comparable home values as outlined in Step #2... then now is the time to do so.
Studying the comparable values, you determine that this property has an average value of $100,000. By subtracting the $55,000 in
default, you would have $45,000 in gross equity in the property. That is one of the starting points, (or finishing points, depending
on how you look at things).
In our example, we determined there was $8,500 worth of repairs necessary. Subtract the amount of repairs from the average
property value for this comparable home ($100,000 - $8,500), this leaves $91,500. This figure represents the current maximum
value of the property... from the information you have so far.
If you take the adjusted value of the property (after deducting for repairs) and subtract the amount listed in the Notice of Default
or Lis Pendens, you will have a figure that represents your gross profit margin. ($91,500 - $55,000 = $36,500) While this looks like
a handsome profit, there are still more expenses associated with this purchase.
A preliminary title search has to be performed to verify that there are no other liens or judgments attached to the property. If there
are, collect the specific information, i.e., lien holders name, address, phone number, date filed, amount of lien, type of lien and its
position.
What is position? This is the order in which lien holders would be satisfied or paid, in the event that they could be paid off.
The mortgage holder is generally the first lien holder, (as in first mortgage) any additional mortgages (second mortgage) or liens,
are addressed in the date order of filing or recording... and are known as junior lien holders. The date the lien was filed (also known
as "perfected") determines its position in the order, not the amount of the lien.
Using the property in our example, we found $22,500 in additional liens or encumbrances on the property. They were:
second mortgage 15,000 03/13/83
mechanics lien 2,800 11/11/87
mechanics lien 4.700 12/20/92
total other liens 22.500
The liens were recorded in date order as listed above. Generally speaking, if the property in our example went to auction, the
trustee or the courts would have already established the default amount, and have added all other additional charges- This would
be the initial bid amount, (also known as upset price because the successful bidder would have to "upset" or bid more than the
amount of the default)
The default amount in our example was $55,000, so the bidding starts there. The bidding continues and the property is eventually
auctioned off for $71,300. In this scenario, the lender bringing foreclosure has been bought out for their $55,000. The balance of
the proceeds of the sale get paid out in order or priority. That priority is the order (if any) in which others have filed their claims
against the property.
To finish this example, we find that of the $71,300 selling price, $55,000 has to be paid to the foreclosing lender. This leaves
$16,300. The second mortgage holder gets paid his or her $15,000, leaving only $1,300 in net proceeds from the sale.
There are two mechanic's liens on this property for work that was performed and never paid for. The contractor or tradesman
recording his lien first... is the one who gets paid off next... not necessarily the person with the lien of next highest amount.
The lien for $2,800 would have to be satisfied next... however... the net proceeds of the sale equals $1,300... and that's exactly
what this lien holder can expect to receive. The balance of his $2,800 is lost forever... and so is the other lien holder's claim for
$4,700.
If there are not enough proceeds left over from the sale to cover the lien holder's claims... that lien holder will lose and receive
nothing.
Buying foreclosures at the auction is described in detail later in Chapter 10... this illustration is to help you understand the profit
potential associated with lenders and lien holders.
This example has been shown to help set you up for Win #2.
By investigating other liens or clouds on the title of the property before making your offer... you not only make yourself aware of
potential hazards (other lien holders that eventually foreclose on you, the new owner of the property to which the lien is
attached)... you are now in a better position to negotiate with the homeowner because you have more of the necessary facts.
If you felt the deal was not strong enough initially, you might find (and most often you will) that working with a lien holder can
provide you with an additional source of profit. Here's how!
In the illustration above, there was enough bid on the property to satisfy the first and second mortgage holders. There was some
money left over to cover only part of the third party's lien... and the fourth party got wiped out completelyThis is very common. The more lien holders and/or the higher amount of liens... against a property valued at only so muchtypically results in lien holders that lose everything... with no chance what-so-ever to recoup their losses.
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This is where you come in. In our continuing example we showed that after deducting for repairs, our prospective purchase was
valued at $91,500. Subtracting the default debt of $55,000 we showed the gross equity amount to be $36,500.
Now, you have discovered $22,500 worth of liens on the property. If you had to pay them off... that would only leave $14,000.
That's a big difference from the original projection.
So, when would you rather find out about the liens-, now when you are determining the profit potential of this home- or later just
before you close? This is for you to decide.
We prefer now... here's why- With only $14,000 left, we know that to "close" on the property we will have to pay for title
insurance, appraisals, inspections, catch-up payments, transfer fees and costs, holding costs while we repair... then try to sell the
property, and a host of miscellaneous expenses.
If, for example, these costs totaled $5,100... we would have only $8,900 left to work with. If we enlisted the assistance of a broker
to help us sell the property... we would be obligated to pay a commission of $6,000. This gives us $11,100 in additional expenses.
Now we only have $2,900 left to work with. ($8,900 - $6,000 = $2,900)
We know we have to offer the homeowner something for his home... but how much?
Do you still want to be involved in a deal that will only produce $2,900? Is this worth your time, effort, expense and risk?
Most lien holders understand what they are doing when they filed the lien. Those filing liens do so because they are unable to
collect a debt. They know that they may... or may never collect their money. Those that don't know this... should be educated.
You will contact the lien holders and let them know that you are "interested in buying this property." Let them know that you are
aware of the lien they have on the property. Let them know that you are aware of all liens and judgments on the property- (let the
lien holder know that there are other liens, not just his)
By letting the lien holder know that there are other liens on the property... some of which may have been filed before his lien... you
are further indicating that the likelihood of collecting money at the auction will be greatly diminished. This will give the lien holder
even more incentive to work with you!
Indicate that you have met with the owner(s)... and you think you can work something out that may be favorable to all parties
concerned. Make sure you clearly explain to the lien holder that you have inspected the property... and that it has incurred $8,500
worth of damages that you will have to repair. "Plus, with closing costs and other judgments... well maybe it's not such a good
deal."
Explain to the lien holder, that if something can be worked out, they will accept a discounted amount for their lien... you think...
no, you are sure you can make it work. If not however, you will probably pass and take your chances at picking up the property at
the auction... where the lien will be most likely wiped out anyway.
Remind the lien holder, that if the property goes to auction... he will probably never see a dime! Try to explain this to those who
don't understand this process. Try, you won't always succeed, but you should always try. Remember, these are your profits we're
talking about!
Start your negotiations with the lien holders at 20% - 25% of the original debt amount and work up from there... if you have toWorking with the lien holders is one of your biggest sources of profits!
Try to meet with the lien holders. Show them itemized repair estimates from reputable contractors. Take pictures of the damage if
you can. Document everything very carefully... this will only help your case.
In our example of $22,500 in liens on the property... if you could only negotiate down to 60% of the total of all liens, you would
have just made an additional $9,000! ($22,500 - 60% or $13,500 = $9,000)
Now, you would look at paying the lien holders $13,500 instead of $22,500. Now, how does that shape your deal with the
homeowner? In 9,000 new ways... that's how!
Previously in our deal, we had only $2,900 left to work with. If you showed the homeowner that you are sincere about buying the
property... show him your cost estimates... neatly and properly prepared in detail... he will see that after repairing the damagespaying all the debts... closing on the property... and eventually reselling the property... there is only $2,900 left. You can negotiate
from there. Some would offer that exact amount to the homeowner, because all the costs are exposed and well substantiated.
Your profit comes from your negotiation with the lien holders... the $9,000-.. and not a bad return for a few days work!
The whole picture might look like this:
average market price of home 100,000
less: damages 8,500
liens 22,500
closing and catch-up payments 5,100
reselling expenses 6.000
total expenses: 42,100
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Now think about selling the property. If it sells for $100,000... and you spent $42,100 to acquire it- you would have $57,900 in
equity in the property. However, when you sell the property you will pay off the note of $55,000, leaving you with a profit of only
$2,900. Plus... you still haven't paid the homeowner anything yet!
Most investors itemize and substantiate these expenses... then explain to the homeowner that after all of these reasonable
expenses are accounted for... there is only $2,900 of equity left in the property. This is the exact amount the investor will offer the
homeowner.
Wait! If that's what you give the homeowner, where do your profits come from?
Your profits have to be derived from those items that are expenses in the sample above. You may decide to repair the home only
as necessary, (bring it up to code and standards) Negotiate with the lien holders to increase your profit margins. Negotiate with
lenders for lower closing costs. Sell the house yourself and save on the broker's fees.
You will incur expenses selling the property by yourself for advertising... signs... flyers... etc. It may even take a little longer...
costing you more to hold the property. These expenses however, should be well worth the trade-off for the $6,000.
The point being, you may have passed on this opportunity, had you not discovered an additional $9,000 in profits available.
Build your profits in up front... from the beginning... rather than fishing them out in the end.
One investor we know, lets the homeowner know about any deals negotiated with the lien holders. Why? Because this person has
had success in telling the owner, "I've been able to work out an arrangement with all your creditors... you can sell your house with
peace of mind knowing that your credit rating has been protected... your debts are paid... and you will have cash to start over
with." This investor took the remaining equity... plus any negotiated deals... and split the remainder with the homeowner. Is that
fair?
The homeowner wins and the investor wins! Could this investor have made more? The answer is yes! Remember, you are taking
risks and deserve the proper reward associated with taking those risks- You are also seizing an opportunity. That opportunity was
created at the expense of another. NEVER take unconscionable advantage of a homeowner in distress.... but don't "short change"
yourself either.
Use your head when negotiating with lien holders. A new lien... for a small amount... on a high value property... provides less
negotiating room. Likewise, an older lien for a larger amount... on a property of lower value... has a great chance of being
negotiated down to the bone! This relates to the individual lien holders motivation... and is a reminder to DO YOUR HOMEWORK.
How you arrive at your offer is up to you. Your job is to make sure you satisfy the lender, the lien holders, the homeowner and
yourselfIn our example, the investor offered the homeowner the $2,900 of equity and an additional $1,000 as an incentive.
This investor "built in" her profits by negotiating with the lien holders, saving on the repair costs and selling the property by herself.
The better you negotiate... the more money you earn...
Of the $8,500 estimated repair cost... you may decide to live in this property... and save a great deal of cash by making the repairs
yourself. You may find paint, carpeting or other goods and services, for less money than the costs on the estimates. If you could
repair this property to good condition for $6,500... then why wouldn't you want to keep the extra money?
If you were to buy and sell the property, no doubt you will be working with your teammate, the Realtor. If your Realtor sells the
property for you, he or she is entitled to their commission. This amount (typically 6%) would have to be deducted from the amount
of equity in the property... ultimately, the amount you can offer the homeowner.
Some investors increase their profit margins here. By showing the homeowner your calculations and worksheets, you can justify all
of the normal expenses associated with buying and selling the property.
After all, if you are to buy... close... repair... sell and close again... you will have to deduct all of these expenses from the gross
profit margin in the property... to determine if there is enough left over for you.
The seller's commission on our $100,000 house would be $6,000 or 6%. If you sold the house yourself or at a lower commission
rate, you would have increased your profits by that amount.
Is this deceptive practice? Not if you fully disclose these facts to the homeowner as required by state law. Some states have very
strict laws regarding the purchase of the equity in one's home. California has some of the strictest laws in the land regarding home
equity purchases. (We are currently unaware of any laws that slate you can not do this!) If there are no laws pertaining to this
matter... then the only question is... do you find this to be acceptable?
ALWAYS CHECK WITH YOUR ATTORNEY FIRST!
Some states may have laws that effect the disclosure of information regarding these transactions.
Personally, unless as required by law, I would not disclose my negotiations with lien holders or anyone else for that matter, to the
homeowner. My goal is to help the homeowner, satisfy the lender and ensure a profit for myself... for my time, my effort, my
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expenses and risk.
"Is there any more profit potential in this deal?" you ask. You bet there is! It all depends on how creative you are!
For example, in your meeting with the property owner, it was revealed that one of Ms. Jones' biggest concerns was paying back the
debt to the department store where her fiancé works- The debt is $1,500You can negotiate around the $1,500 or maybe even offer to pay that debt in full- Some investors see this as an opportunity to
reduce the amount of cash involved in purchasing the property- Suppose you have a charge account at the very same store. It you
paid the balance in full using your charge account... you have eliminated paying out $1,500 in cash... and the charge on your
monthly statement might increase by $30 - $50 or so.
If you are buying the property to resell, wouldn't it make more sense to pay $50 a month for the 3 months you own the property
until it's sold... rather than paying the full $1,500? Sure it does. Many investors use their personal "bank" credit cards this way.
Consider tapping into a line of credit to reduce your cash outlay.
Uncover the needs of the homeowner... think about the best way to resolve his problems... and structure a deal that makes sense
for you.
To conclude our example, and show you your actual profit, we will assume that the property you purchased has just been sold for
the full value of $100,000.
Here's how it works:
Sale Price: $100,000
less:
catch-up with lender 2,500
negotiated liens paid off 13,500
repairs completed 8,500
Closing costs 2,600
net to seller 3,900
brokers commission 6,000
Total Expenses 37,000
When you sell the property for $100,000, you will pay off the existing note on the house for $55,000... leaving you with $45,000.
You did however, incur $37,000 worth of expenses in buying the property. This leaves $8,000 profit. ($45,000 - $37,000 = $8,000)
Originally, all of the profits came from the negotiations with the lien holders ($9,000). The investor offered an additional $1,000 to
help out the homeowner.
Is this a good deal? That's up to you to decide. If this whole process took 6 weeks from start to finish... and you continually
repeated this process... at this rate you would have made 8,000 in 6 weeks or about $1,333 per week. That's about $69,333 per
year.
If you sold the property yourself and saved the 6,000... even with selling expenses of let's say $500... you would have made
$13,500 on this deal. ($6,000 - $500 = $5,500 + $8,000 = $13,500)
That equals $2250 per week or $117,000 per year. Now is it a good deal? This deal may have taken 6 - 8 weeks to complete, but
might not have consumed more than 40 hours of your time.
Imagine $13,500 for the equivalent of a week's worth of effort... that's over $337 per hour!
Even more important perhaps... is the return on your investment. At an $8,000 profit, your $37,000 investment returned almost
22%! At the $13,500 profit example, your investment returned almost 37%!
This entire example was presented to show you how the system works. Read it over again if necessary, until you really begin to
understand the concept. This sample is not intended to show a good deal or a bad deal. What you earn is up to you... and you
alone!
This in a nutshell, is the philosophy behind pre-foreclosure investing. Satisfy the homeowner, the lender and yourself. Create the
"Win - Win - Win" scenario- and you will be successful!
The key to profitable pre-foreclosure investing is... knowing where your profits come from... and they are:
1 Start with a property that has a higher amount of equity in it. (older homes generally work better than newer homes) The larger
the difference between the property value and default amount, the better.
2 If you are buying to resell, make sure you add every conceivable and legitimate expense associated with buying and reselling the
property.
3 Complete a thorough inspection of the property and itemize every single expense or cost for repair at retail, not at discounted
prices
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4 Negotiate with the lender. Depending on the amount of the loan, the length of default, other lien holders and the condition of the
property... this lender may want to "cash out"... or otherwise be willing to discount the amount of the loan to get out of the deal.
5 Negotiate with the lien holders. As seen in the previous example... this can be one of your best sources of profits.
6 Negotiate with the homeowner. Why pay full price if you don't have to?
7 Ask questions... and listen to the answers the homeowner gives you. Are there ways you can help him without pulling all the cash
out of your pockets?
8 Be patient! Time is on your side... not the side of the homeowner9 Don't be greedy. You might find that another investor has purchased the property you wanted, because he was willing to pay the
homeowner a little bit more than you were.
10 Be creative. Is there something about this property you see, that others do not?
You may want to formulate your offer by asking the homeowner how much he or she wants for the property. After deducting all of
the expenses we reviewed above... you may be able to meet the asking price.
Perhaps you will present an offer that would be the exact same amount the homeowner would net if the property were sold
normally, with broker's fees and new financing- The net of the sale price minus the customary deductions, is the net equity in the
property that you will offer the homeowner.
Remember, you have to negotiate your profits from there.
Finally, if you saved the $5,500 by selling the property yourself... and were able to repair the house to a salable condition for half
of the estimated repair costs... you would have made almost $18,000 on this deal! A 49% return on your investment!
Perhaps the ultimate argument for the "talk with the lenders and lien holder's first" theory, is the infamous "due on sale" clause.
This is a stipulation found in deeds of trust and mortgages ... whereby the lender shall have the right to demand the full amount of
the loan... due and payable immediately... if for any reason the property is sold or ownership is transferred. It is similar to the
acceleration clause found in the mortgage contract- Bottom line: if the lender is foreclosing on the homeowner... and you buy the
property... the lender could foreclose on you!
There are some very advanced techniques used by the experts to combat this problem. Most investors, however, prefer to know
this information "up front"... they contact the lender before purchasing the property... and work out a satisfactory arrangement.
If you present your case to the lender appropriately... and if the lender is satisfied with the arrangement... you should be
successful at least 85% - 95% of the time.
Lenders will want to work with you- It is to their advantage to sell the property or work out a suitable arrangement... rather than
going to auction... where they will typically lose money and incur additional expenses.
Make Sure To Accurately Calculate Your Profits Before Signing Any Contracts !
Step #6 - Presenting Your Offer
Before presenting your offer to the homeowner you must make absolutely certain that all of your forms and worksheets have been
filled in completely and correctly. Ail loan documents and default notices should be compared and double checked for accuracy. The
same holds true for any preliminary title searches, appraisals and inspections.
In your presentation, you will have to justify your offer through this documentation.
Show the homeowner your inspection checklist and the estimates for repairing the damage. Make sure you use a recognized,
reliable contractor or handyman. Do not call your cousin Charlie for a quote.
Utilize reliable or well known title companies, appraisers and attorneys.
Always use reliable, well known professionals in your work.
Eliminate any possibility of having the homeowner become suspicious of devious activities, (for example, over-inflated repair
estimates)
As you are already aware, there are several hungry sharks swimming around the homeowner's property. Most of these sharks do
not offer the homeowner what you can offer- You must clearly explain to the homeowner, the benefits of working with you and not
the others.
Skip Lombardo, a real estate developer, investor and author, points out the best defenses against this competition.
Many attorneys are skilled in bankruptcy laws. By explaining the benefits of bankruptcy, they may persuade a homeowner down
that path.
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Depending on the state you live in and the local laws, you may not be able to stop the foreclosure and/or the mortgage lien may
not be dissolved. Point out that a temporary, possible "quick fix," is usually not worth the longer term credit problems associated
with bankruptcy.
Real estate agents may contact the homeowner in an attempt to gain a commission by selling the property of a very motivated
homeowner.
Credit counseling and debt consolidation companies can be very useful for those who cannot control themselves financially. The
best help these companies can provide however, usually comes long before the homeowner has gotten himself this deep into
trouble.
If the reason for foreclosure stems from the economy, death, divorce or unemployment,.. there may be very little left for these
companies to work with on your behalf. In order for these organizations to help you... they have to work out satisfactory
arrangements with those that you owe money to. !f you have no money or no income, there is little if anything that counseling or
consolidation can do to help.
There are lenders and groups of investors that will compete with you in your quest for this properly.
Lenders offering high interest, short term loans offer very short term fixes. The homeowner could never borrow enough to pay off
all his debts... this shark won't tend that much. The bottom line results in a loan at very high interest rates, that only burdens the
homeowner further by putting him into deeper trouble.
Be prepared to show how you arrived at your figures.
Carefully explain and make sure the homeowner understands that you will assume the loans on the property... you will pay the
back payments to get the loan "caught up"... you will put cash in his pocket... you will satisfy the judgments and liens against
him... and so on. (Do not promise all of this, if you do not intend to deliver!)
Once you have calculated your profits and determined your best approach, your offer will take shape. You have listened to the
homeowner's needs... and developed an offer that meets those needs.
If you are competing against other offers, you may win the battle by showing the homeowner clearly in your documentation that
your numbers are very real. Challenge and ask to examine an offer from another investor. Ask how that investor arrived at his
figures- It's possible that the homeowner doesn't know. Show the homeowner the benefits of your offer... and how you arrived at
your figures. If a competitor's offer looks bogus or does not do as well for the homeowner--. point this out! Ask the homeowner
"how much cash goes into your pocket from this other offer?"
Don't be bashful, you have worked hard trying to make a satisfactory arrangements with those that you owe money to.
If you have no money or no income, there is little if anything that counseling or consolidation can do to help.
There are lenders and groups of investors that will compete with you in your quest for this properly.
Lenders offering high interest, short term loans offer very short term fixes. The homeowner could never borrow enough to pay off
all his debts... this shark won't tend that much. The bottom line results in a loan at very high interest rates, that only burdens the
homeowner further by putting him into deeper trouble.
Be prepared to show how you arrived at your figures.
Carefully explain and make sure the homeowner understands that you will assume the loans on the property... you will pay the
back payments to get the loan "caught up"... you will put cash in his pocket... you will satisfy the judgments and liens against
him... and so on. (Do not promise all of this, if you do not intend to deliver!)
Once you have calculated your profits and determined your best approach, your offer will take shape. You have listened to the
homeowner's needs... and developed an offer that meets those needs.
If you are competing against other offers, you may win the battle by showing the homeowner clearly in your documentation that
your numbers are very real. Challenge and ask to examine an offer from another investor. Ask how that investor arrived at his
figures- It's possible that the homeowner doesn't know. Show the homeowner the benefits of your offer... and how you arrived at
your figures. If a competitor's offer looks bogus or does not do as well for the homeowner-- point this out! Ask the homeowner
"how much cash goes into your pocket from this other offer?"
Learning the fundamentals of negotiation never hurt anyone. You don't however, need the skills of a Donald Trump. There are
several good books on the market to get you comfortable with the basics of negotiating. If you follow the methodology outlined
above... you will greatly reduce the amount of negotiating skills required... because the integrity of your research and your offer
will speak for themselves.
"Let us never negotiate out of fear. But, let us never fear to negotiate."
-- John F. Kennedy
With your attorney, prepare an Equity Purchase or Real Estate Purchase Agreement. (This agreement should be well thought out.
Use the guidelines shown when developing a standard agreement form.)
Call the homeowner and arrange a mutually convenient time to meet at the property. Be prepared to go over your offer in detail.
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Take the time to explain each and every benefit to the homeowner. Ask if he has any questions. If the homeowner accepts your
offer... complete the "Agreement" with both sets of your signatures.
If the homeowner wants to think about your offer, remind him that you will soon be buying a property in the area and that your
offer can only be extended through the date you have indicated on the bottom of the offer. You may want to remind him of the
foreclosure sale date... if it's getting close!
Give a copy of your offer to the homeowner, thank them and leave.
When you can not sign a contract with a homeowner in your second meeting, be sure to follow up on a regular basis. The better
you market your services, the better chance you have of winning the deal.
This property may be bailed out before the auction, maybe not. It's your job to follow up and find out.
Step #7 - The Purchase Contract
When the homeowner agrees to sell you the property... you will both need to sign an Equity Purchase Agreement or a Real Estate
Purchase and Sale Agreement.
All parties recognized in the mortgage contract must sign the agreement. (If the mortgage is in the name of the husband and wife,
both must sign)
Sign no contracts without prior approval of your attorney!
Depending on the state you live in... you may have laws that stipulate the type and/or requirements of such a purchase and the
contracts to be used to conduct these transactions.
You may find a standard Equity Purchase Agreement in your local office supply store, that meets state regulations. You may want
to draft your own, with your attorney, and use it as your standard form.
No book on purchasing foreclosures would be complete, if it didn't emphasize the importance of knowing the laws regarding this
subject matter... as it pertains to your state.
Californians may have it the hardest. The laws in this state are very specific. The penalties for non-compliance with these laws are
severe. The Civil Codes, the laws in California, specifically state that your contract must contain this or that... and that you must do
that and this. These laws dictate that you use very specific wording in your agreements.
Terms of the Agreement
This is a critical part of your agreement. You must state the terms of the agreement clearly, and in plain language.
If problems arise later, your best defense will be the manner in which you provide your evidence. This is best done by keeping
nothing less than perfect records... and making your agreements perfectly clear.
Your agreement will state the purchase price, the amount you will pay the seller (sometimes known as "Net To Seller"), the closing
date you agree upon and the terms with which you will purchase the property.
Investing experts agree that your purchase agreement must contain the following:
1 Always include a "Subject To" clause... an escape clause that allows you to bow out of the deal if everything is not a originally
agreed upon. This could be the condition of the property, amount or condition of the loans, unknown liens, termite or damage from
pests, etc2 Include a statement that allows you to "show" the property, if you are buying to resell, you will want to show and sell that
property as quickly as possible.
3 A clause that states that the property must appraise at a certain value.
4 The property must be vacant... all tenants and their belongings must be removed by a certain date5 The buyer and seller agree that the payments for the current loans on the property equal "X."
6 The sale is subject to the conditions of the title How To Buy Bank Foreclosures and loans or encumbrances against the title.
7 The buyer shall pay for all the costs incurred at closing.
8 And the seller shall:
a deed the property to the buyer
b authorize the buyer to record said deed at the appropriate time
c. be aware that the buyer may resell the property
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d. be aware that the purchase price is below market value
e. leave the premises in good condition and pay for damages incurred after the contract has been signed, and before the seller has
left the premises
f. agree to pay for any damages or repairs necessary, as discovered by termite and roof inspections
g vacate the premises on the date specified
9 All net proceeds paid to the seller, will be paid at closing
CAUTION! Many states require that you provide the seller with a "Notice of Cancellation". In California for example, this notice is
mandatory! It gives the homeowners a period of time, usually a few days, to back out of the deal should they decide to. This period
is also known as the "Right to Recission" period.
These notices were developed to protect the homeowner from the unscrupulous "home stealer."
Use this notice to your advantage by showing the homeowner his rights under the law. He might not be aware that these laws
exist. Continue to establish credibility throughout the process. Show the homeowner that you are aware of... and are in full
compliance with all local and state laws. How can they refuse?
The homeowner must understand that he will receive his money at the time of closing... and not before. Investors should
remember... never to pay the equity or amount agreed upon in the contract... or any other amount to the seller... until the seller
has completely vacated the premises.
This information must be contained in your contract. Do not depend on verbal commitments or you will run into problems.
Step #8 - Ready, Set, Close!
Some investors will give the homeowner a good faith deposit upon the signing of the contract- This is optional and entirely up to
you. Should you decide to leave a deposit with the seller keep it small, no more than $100.
Call your attorney... indicate that you have signed a contract with a seller... and you will need assistance and/or representation for
the closing of the deal- Start arranging your financing. If you are assuming the loan from the seller... and have made prior
arrangements with the lender... make sure the lender can stop the foreclosure process before the sale date. The lender will want to
be paid the past due amounts, at the very least. Make arrangements to do so.
If you have previously negotiated with the lien holders, have your attorney coordinate a Release of Lien... to be recorded at or
before closing... if that's when the lien holder's will be paid... or prior to closing.
Order your certified property appraisals and inspections as required before closing. Have your attorney or title company assist you
regarding closing requirements.
Order your termite and roof inspections as required or as necessary.
Have your attorney, title company or escrow agent (whoever is handling the closing) advise you on... and have ready... a
Statement of Identity (this verifies the identity of the seller)... an Assignment of Impound Account (to transfer funds held by lender
for taxes, insurance, etc.) and any other documents necessary to successfully complete this transaction.
From the seller you will need the deed to the property... the property and fire insurance policies... the title insurance policy... all
loan and payment books and his or her signature (or both) on a Property Insurance Transfer document.
Verify from the full title search, that there are no other liens or judgments against the propertyIf anything shows up in the title search... you can accept it... deal with it... negotiate it... or maybe best of all... forget it. You have
that stipulation built into your Equity Purchase Agreement or Real Estate Purchase Agreement. If this clause is not in your
agreement... you could run into trouble. Make sure it's there!
Have your attorney, title company or escrow agent handle the closing.
Coordinate escrow instructions with your attorney. The escrow agent will handle and transfer all funds and documents. The escrow
agent has to follow [he escrow instructions as indicated by the buyer and seller. Cover your bases. Consult your attorney.
At closing, documents will be collected, signed and distributed. Debts will be paid... escrow, taxes and title fees will be paid... and
the seller will be paid. You then, will be the proud owner of a property that you purchased... well below market value.
If you decide to move in... you will be the envy of the neighborhood... because you probably Just spent 20% - 40% less for your
house than the neighbors did.
This isn't 20% - 40% off the price of a set of baseball cards... it's not 20% - 40% off the price of designer sheets from a
department store sale... this is 20% - 40% off the price of a home... this is property- this is real estate!
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Previous
Next
Copyright © FEDERAL HOMES 2004
All Rights Reserved
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CHAPTER TEN
Buying At The Auction
“The happiest time in any man’s life is when he is in red-hot pursuit of a dollar, with a reasonable prospect of overtaking it.”
--Josh Billings
Buying At The Auction
If you are purchasing distressed properties when they are being auctioned off or "sold," you are buying at the courthouse steps... in
a courthouse hallway or office— at the actual property sight or other location-, from the trustee... court clerk... sheriff...
auctioneer... or referee.
This is the second phase of the foreclosure investing process. The pre-foreclosure or default stage has passed. By proper
notification and adherence to all contracts and laws... the property will now be sold to the highest bidder at a public sale.
Buying at the auction provides perhaps the best opportunity to make tremendous profits on each and every purchase. Some of the
highest profits in foreclosure investing are generated at these sales. The greatest opportunity to lose your money is also generated
in this investing phase. There are more hazards associated with investing this way... than the other two styles combined!
This opportunity is presented during the second part of the investing process, but make sure you understand this is the end of the
foreclosure process.
The original intention of the foreclosing lender, was to recoup its tosses from a non-performing loan, secured by real estate. In
order to do this, the lender has to initiate the process of foreclosure which ends the rights of possession of the property owner. This
"sale" is the final step in ending the property owner's rights and finally separating the property owner from the property.
By this time, the property owner has most likely moved or has been evicted. The property may have been abandoned for quite
some time... leaving it susceptible to mischief and vandalism.
The lender and investors will show up at the auction. Occasionally, lien holders may also appear- Finally, there are on-lookers,
spectators who come to see what an auction is all about.
There may be several investors or just a few. Some of the greatest auction stories told of fantastic rewards... are those that allude
to the lack of attendees. Adverse weather conditions or other unknown reasons may prevent an investor from showing up on time,
or at all. You may find that you are the only bidder at the auction.
A typical auction may be crowded with people, but perhaps only two or three actually intend to bid on the property. In severe
weather, the sale may not have been postponed, leaving the property available to whomever shows up to bid on it.
The lender or its representative will show up to bid on the property to protect its interest. The lender, either through the judicial or
non-judicial method, has already established with the trustee or the courts, the amount of the debt claimed. This includes the
principal amount of the debt, past due payments, interest, penalties, court and other legal costs, the costs of "serving" defendants
and the costs of the public notifications or advertisements.
Depending on the state and its laws, the lender may bid or merely present its claim, (its Judgment for the amount owed) to start
the bidding process. The highest bidder at auction wins the property. The funds are distributed to the lender bringing the action
first— any other liens or judgments second (in order of the date the lien was recorded) with the remainder going to the
homeowner... if indeed there is a remainder.
Most of the time there is no amount remaining. Most of the time the lender does not recoup the full amount owed. This is where...
in states that use the judicial method of foreclosure... the lender can file an additional law suit... and have the courts find in its
favor... a deficiency judgment. This suit is for the amount unrecoverable by the lender at the sale. This is the difference between
the amount owed by the property owner and the amount received at auction.
The last thing the lender wanted to do... was foreclose. Now, the last thing the lender needs... is to have another property on its
books. The lender is praying that the property will be sold at auction. Unfortunately the lender ends up with the property about
85% of the time.
You've read the warnings about various laws throughout this publication... now it's time for a few more.
Some states set minimum bids for a property being sold at auction. This is to protect the homeowner from unfair deficiency
judgments. If for example, our $100,000 home with a debt of $55,000 on it, only brought $20,000 at auction... the homeowner
could be sued for $35,000 in a deficiency judgmentThis is unfair because the homeowner had as much as $45,000 of equity in the property. If the highest bid was only $20,000… it
doesn't mean the property is only worth $20,000... and it does not credit the homeowner appropriately... for that property at
regular market value.
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If the homeowner has paid $45,000 into the property... then gets sued and has to pay an additional $35,000... the now exproperty owner would have contributed $80,000 to a property that only had $55,000 worth of debts attached to it! The icing on the
cake is... they no longer own the home!
The lender is just looking for $55,000... and is taking legal action to collect on that debt. You can see, however, the problems this
can cause the homeowner. It is for reasons similar to these, that laws are written.
Jack P- Friedman and Jack C. Harris, a real estate consultant and a real estate research economist respectively, and authors both,
note that in Texas... the courts demand that the lender provide evidence that the highest bid at the auction was at least 70% of the
market value of the property being sold. If the highest bid is not at least 70% of the market value... the sale is declared
"inconclusive"-, and will be rescheduled.
To avoid the hassle and expenses associated with rescheduling the sale... often the lender will bid the minimum amount (the 70%)
and take the property.
This being the case... then how could you ever buy an REO from a lender in Texas... at 50% below the fair market value? The
lender, or any successful bidder for that matter, would have to pay at least 70% of the fair market value.
Investing Overview
At the sale of the property, you will not be working or negotiating with the homeowner, lender and/or lien holders. You will be
attending an auction performed by a neutral party- (sheriff, trustee, etc.)
Consult Your Attorney Before Attending Any Auctions!
Some of the same rules you use to buy pre-foreclosures... you will use to buy at the auction. Some of these rules even apply to
buying properties directly from the banks and other lenders.
The basic concept of buying distressed properties does not vary from method to method. The basic concept is that of buying low
and selling high. Your profits are made "in between." At the very least... buy low... and sell at or just below market value.
It's important to envision the entire process of foreclosure investing. You are buying and selling properties. No matter how you
invest.- you should always be conscience of the fact that you are buying distressed or discounted real estate... to be resold at a
higher price. This is what many businesses do. They either produce or wholesale products or services that will be sold to the end
user... for a higher price.
Your business is to make a profit. This can only be achieved when you buy properties with enough margin in them as to allow you a
reasonable profit after expenses.
The common theme for all methods... is to locate the opportunities... research them... pursue realistic opportunities calculate your
potential profits and determine whether or not to proceed... weigh the risks associated with the investing style... eliminate any
possible risks... consult with your advisors... and then purchase the property.
Before attending the auction, you will have to locate, qualify, research and evaluate the properties you my want to bid on. You will
also have to research the auction itself, to find out if there are any requirements like minimum bids, payment methods, or
cancellations.
You must calculate your potential profit before attending the Auction.
Disadvantages in Auction Buying
Buying distressed properties at sales and auctions can be the most rewarding way to reap the benefits this industry has to offer.
The dangers of this method however, are numerous.
When buying at the auction, you will be competing with the lender for the property. You will also be competing against other
investors.
Before bidding on any properties at an auction... go to a few... see what goes on. Go early and observe. Some auctions proceed
very quickly. Being five minutes late, could mean the loss of your opportunity to bid.
Auctions are frequently postponed or canceled. After having done a lot of research on a property and making the appropriate plans,
your big day may never come. Call the day before the auction to verify the time and place. You will find out if the auction scheduled
for that day will take place as expected. Eleventh hour tactics may be employed by attorneys and desperate homeowners, causing
delays in the sales as scheduled.
The right of redemption, available to property owners in some states... haunts investors at the sale. Can you imagine taking a lot of
your time and effort to buy a property... going to the sale... being the successful bidder... arrange the financing... repair the
property... and find that 6 months later... the original owner has bought the property back! While you will probably get back the
money you paid for the property at auction, you will have lost any additional money you put into the property, as well as all of your
time and effort.
Financing is a big problem in this arena. You must check with those conducting the sale to find out how payment for the property is
expected.
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Most of the time, you will find that a certified or cashier's check is required. This will be for the deposit you must put down, to
qualify yourself as a buyer. The amount of this check will be at least 5%, sometimes 10% of the purchase price. Sometimes it may
be a set amount such as $1,000 or $5,000 or $10,000... whatever.
The balance of the payment on the property will usually have to be paid almost immediately. While some states offer 30 or 60 days
or more, many states require the full amount to be paid within days... some only hours. That means if our $100,000 house with the
$55,000 default sold at auction... not only is the deposit required the morning of the sale... the balance of the $55,000 might have
to be paid by_3:00_ PM that afternoon. Depending on the state and local laws... if you fail to deliver the balance due by the time
allotted... you could lose your deposit!
The usually large cash outlay, is one of the single biggest deterrents to buying properties at the auction.
Another problem is that of the title. If you buy at the auction, you replace the homeowner's position in the property. If you bid
more than the upset price and win the property, you also can win all the headaches the original homeowner had. This includes liens
and judgments... as weil as tax problems.
A novice auction buyer may be attracted to a $100,000 property that's being auctioned off for $10,000. The professional knows
that there is probably a hidden danger lurking in this property.
If a second mortgage holder forecloses, it may appear to be the deal of a lifetime. A homeowner acquiring a second mortgage,
typically does so to make improvements on the property... or to be used as a loan for other purposes. This second mortgage
amount is usually much smaller than the first mortgage amount.
You could bid the $10,000 and win the property, then realize that there is a first mortgage of $80,000 and $15,000 worth of liens
attached. This is obviously a losing proposition... but it happens all the time. Don't let this happen to you!
Just because a property is being sold at auction, it doesn't mean that it is the first mortgage holder doing the foreclosing. If the
holder of a third mortgage forecloses— it does not wipe out the obligations created by the first and second mortgage. This means
that you have to take over those mortgages as well. The only way to guarantee this is not a first mortgage foreclosing... is via a full
title search which can cost $500 or more.
Why a full title search instead of an O&E report, abstract or preliminary title search? The reason is simple. This is not a preforeclosure... whereas you do preliminary research to be used in making a decision to pursue the property. This is sale day! The
property will be sold today! Lien holders and others whom the property owner may owe... will have their last chance to collect... by
filing a lien against the property. This can happen the day before the sale! Your abstract or "prelim" from the week before is now
useless.
With diligent and accurate courthouse research and a preliminary title report, you can get most of the current information regarding
the property without the full title report... you do run a greater risk however, without it.
If the lender was unsuccessful in evicting the tenants from the property, you may find yourself in the lender's position trying to
accomplish the same. A good attorney can help the homeowner fight eviction for 6 months or more. You now have a property you
can't access. You are trying to rehab a property and sell it as quickly as possible. How easy will it be to sell a property that has a
hostile tenant in it? And what of the property itself? Will it be damaged by the irate homeowner?
You may not be able to inspect the property. In that case, how would you estimate the damages and repairs needed to make the
property salable?
There may be land use problems associated with a property. This can be zoning problems or problems pertaining to toxic waste or
land contamination. A good clue to problems like these... is when the foreclosing lender either doesn't show... or doesn't bid at the
auction. Why wouldn't the foreclosing lender bid on the property? It's simple... they don't want it. There are problems associated
with the property that makes the lender decide to bail out and take its losses.
Another danger is that of the dreaded "auction fever." If you feel it coming on—leave immediately... while you can still afford to!
Auction fever is what happens when excited bidders get caught up in the frenzy of the process itself. This process can be
electrifying... and like all electricity... is very dangerous. The atmosphere is such, that people will continue to bid way past the
regular market value of the property!
"Shills" are also part of the auction process and should be watched. A shill is a person hired by... and who works with an
auctioneer. This person is more or less a "plant." The shill is sent out into the crowd under the guise of being a bidder. The shill
helps build up the price of the merchandise... they bid like a buyer... even though they have no intention of buying, it's a scam to
bring up the price of the goods. Typically you won't find shills at real estate auctions... but they can appear if the auction is
conducted by an auctioneer.
There may be other types of shills at these auctions. They are actually regular investors. Regular groups of real estate investors
meet at auctions almost like a private membership club. They have probably agreed on the selling price of the property in
question... and have already decided who's turn it is to buy the property. All of these arrangements may have been worked out in
advance, over coffee that morning at the local diner.
Does this mean that you can not bid on the property? Of course not! As a member of the public at large, you can bid on anything
you want. A good deal however, may be pre-arranged by these experienced professionals. Anyone coming in to bid on the
property, may be faced with this group's experience head on. If the members of the group suspect a novice is participating... they
may bid up the property so much, it will discourage the newcomer. When the newcomer leaves, they withdraw their bids and
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purchase the property the way they originally intended to... after the novice has left.
Step #1 — Locating Sales and Auctions
To find your properties... utilize the same sources you did before- Look in the newspapers for "Foreclosure Sales", "Sheriff's Sales".
"Trustee's Sales", and Auctions.
Check the real estate publications that contain ads from Auctioneers.
Go to the courthouse and do your original research. That is... find the Lis Pendens or Notice of Sale, whichever is applicable- In this
case, the "Notice of Sale" will be more important than the "Notice of Default."
Talk with auctioneers, banks, lenders and others in the industry to find out about upcoming sales or auctions. Depending on where
you live, you can also contact the Court Clerk or the Sheriff's Department for sale informationStep #2 — Evaluating Properties and Determining Potential
Perform the same type of research and evaluation of the property you would perform for any property, no matter how you buy it.
Evaluate the default amount and determine the estimated fair market value of the property. If the property is in your "farm" area,
you may already know the average price. If not, do your research. Call real estate agents and get the asking price of homes in the
area that are for sale. Consult with your advisors if necessary.
You must know the average market price of the property... before you even think about bidding on it!
Have your title company representative do a preliminary title search (an abstract) on the property. If things appear to be okay,
(not to many liens or encumbrances) you should proceed. If the property is loaded up with liens and judgments..- forget that one
and move on to another.
Step #3 — Inspecting the Property
Assuming all is well, you will want to inspect the property. This can be a problem, because many times you will not have the
opportunity to do a physical inspection. This is one of the dangers in buying at the auction.
If you have done your research properly, you will already have the property's address. Drive by if you can... walk up to the house if
you can (don't do this if the property is occupied). If the property is vacant, try to see inside.
If the property is available for inspection, make sure you have the right information regarding the dates and times you will be able
to view the property.
Take your time when inspecting the property. Some of your profits and your losses, can be made or lost in property damage and
repair.
Step #4 — Calculating Your Profits
If you visit Las Vegas, Atlantic City or the Bahamas to participate in casino gambling... you will feel right at home with this
investing method... if you don't take the necessary precautions first!
Before you enter the casino... you say to yourself... "I may have $500 in my wallet but, I am not going to spend (lose) more than
$300!... that's my absolute limit!"
That's the exact same attitude you must have when buying at the auction. If you do not determine a pre-set spending limit... you
could be in for trouble.
To calculate your potential profits, start with the price that you think you can sell the property for in good condition. Subtract the
estimated costs of repairing the damage. From this figure, subtract your costs associated with "holding" the property.
This figure (holding costs) is what it will cost you to make all the necessary loan, insurance and tax payments, while you are in
possession of the property.
Again, subtract from this number, the closing costs when you sell your property... and a 6% broker's commission if you intend to
sell the property that way. (many people use an average of 1% of the selling price to calculate the closing costs)
This figure is the amount you can expect to receive when you sell your property after all other expenses have been deducted. This
is the net amount paid to you.
An example would look like this:
Your Sale Price $100,000
less:
repairs 8,500
holding costs 2,325
closing costs 1,000
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agent's commission 6,000
Net To You After The Sale 82,175
This figure is your starting point for the rest of your calculations.
From your abstract property report, you found one lien for $13,500. Subtract that amount from the figure above. ($82,175 $13,500 = $68,675)
From the final notices you will have the amount being foreclosed on, the default amount. Subtract that figure from your latest subtotal as well:
Net To You After The Sale 82,175
less:
liens or judgments 13,500
default amount 55,000
Gross Profit Potential 13,675
If you have a full title search done prior to the auction, remember to deduct those expenses as well.
Doing a full title search prior to the auction is not absolutely necessary. There is the risk that you will not receive clear title to the
property. A full and complete title search, while expensive, is one of the only ways to find out what you're up against. As expensive
as it can be, it is the most affordable way to avoid disaster.
You will not be negotiating with lien holders- They may be present to bid on the property to protect their interest, whereby you will
be bidding against them!
Many have heard... "the auction process wipes out all lien holders." That depends on who is doing the foreclosing.
If you buy a property at auction... the property goes from the homeowner to you, non-stop. The court doesn't own it, neither does
the bank. You "enjoy" all the rights of ownership the previous owner had... debts and all!
This is why it is so important to know what you are doing when buying at the sale. Once you have committed, there's no backing
out. You can not turn to the bank for help... because it doesn't own the property... it never did. Likewise for the courts and the
trustees. If any foreclosing is to be continued after you have purchased the property... it will be you doing the foreclosing.
The bidding for this property will start at $55,000. You have pre- determined, that after having accounted for all known expenses,
there is $13,675 of potential profit in the property- (that doesn't include saving on the repairs)
If you bid more than the upset amount of $55,000 and win the property, you stand to make an estimated profit of $13,675 (barring
any unforeseen circumstances)
So then, how much should you bid? Bid the lowest amount you can. If the sale starts at $55,000, bid $55,100. (you may be
prohibited from bidding in $100 increments, but start there anyway) Never bid more than you have to!
If your bid of $55,100 wins the property, your estimated profit is the same less the extra $100. Bidding up the price in larger
increments only erodes your profit potential.
You can not bid more than the default amount, plus you profit potential amount, if you did, you may own the property... but with
no profit. ($55,000 + $13,675 = $68,675) This figure would equal the net amount you would receive after you sold the property.
Your minimum bid is the lowest amount you can bid over the $55,000... and the maximum you would bid... would be any amount
less than the amount you would receive when you sell the property. Your bidding range is $55,000 to $68,675. At the $68,675...
we determined that you just "break even" with no profit.
Well, that's no fun... and that's not why we're here!
Determine the minimum profit you want to make. If it's $10,000, your maximum bid would then be $58,675. ($68,675 - $10,000 =
$58,675) If you settle for a $5,000 profit, your maximum bid could be $63,675. ($68,675 - $5,000 = $63,675)
It is not recommended that you settle for a small profit when buying at the sale. Some of the highest profit producing buys come
from the auction process. This is where the experienced investor can buy real estate at a 40% - 50% discount, if done properly.
The risks are generally too great to make such a small profit.
Remember to calculate your potential profit before you attend the auction.
Other considerations in bidding are that of hidden expenses, whether repairs, liens or others. You may want to "build in" an extra
reserve of $5,000 or $10,000 or more. If you do this and win the property... assuming that there are no additional expenses or
hazards involved... you have just increased your profits by the amount of the reserve you built in. If the property will incur
additional expenses, you have planned ahead and hopefully have them all covered.
Step #5 — Preparing for the Auction
Find out what requirements there are for purchasing properties at the auction. What are the deposit requirements... when will the
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balance be due and in what form (certified funds, all cash, etc.) Find out who is conducting the sale. A Trustee? An auctioneer?
Make sure you have all of your financing arrangements set and in place before you attend the auction. Don't lose your deposit
because you failed to come up with the balance when due!
Step #6 — Attending the Auction
Arrive early! If the sale is held at the property location, this may be your only opportunity to inspect the property.
Determine if the sale is being conducted by an attorney, trustee, sheriff, or auctioneer. If an auctioneer is involved... you may want
to be extra cautious in your bidding.
You will be required to "register" as a bidder. This process separates the onlookers from those seriously intending to buy a
property. Your proof of ability to purchase the property will be required at this time. This is the verification of deposit requirements.
You may have to provide certified funds for the full amount you intend to. bid!
If you arrive late, you may lose your opportunity to register, thereby eliminating yourself from the competition.
After the reading of the complaint and the property description... the bidding will begin. Note who starts the bidding. If the lender
does not bid… BEWARE!
Whatever you do, do not bid more than the pre-determined limit you set when you calculated your potential profits!
In this foreclosure investing method, you are not trying to create a Win - Win - Win scenario. Just one Win is enough... however, it
must be you that wins.
Upon purchasing the property, you will receive a deed. The type of deed depends on who is conducting the auction and as always,
your state and local laws.
Seek the advice of your "title company" people and your attorney. You will want to "record" that deed as soon as possible. Avoid
any further complications that may arise over the question of ownership.
You will want to acquire title insurance as soon as possible. Due to the nature of the transaction, this can sometimes be difficult.
Title insurance will be your best defense against any would be actions against the property. While it may be uncommon,
occasionally a long lost relative of the homeowner may appear claiming certain rights to the property. Defend yourself by taking the
proper precautions.
Look! Up in the sky! It's a bird... it's a plane... no it's— it's... ...just another property. Think of all your real estate deals this way
and you won't get hurt. Never get wrapped up in a property... don't get emotional. Buy it or don't buy it! There are plenty of
properties on the market to choose from.
Our best words of advice... if you feel that you must purchase property this way... is to have a lot of cash behind you.
Our second best wave of advice goes like this:
1 research and learn as much as you can about auctions
2 attend several auctions to get a feel for how they work
3 talk to those attending auctions, listen, watch and learn
4 follow the normal steps for calculating profits in a property, set a price that you would bid on for that property, go to the auction
and observe. does the winning bid come close to yours? repeat this process if necessary or until comfortable, if the sale price is
always greatly different from your price... find out why
5 never bid at an auction without proper financing pre- arranged
6 never bid at an auction without having first inspected the property
7 never bid at an auction without knowing the property's value
8 never bid at an auction without having calculated your potential profit
9 never bid at an auction without having a title search done
10 never bid at an auction without the approval of your advisors
There are many experts that would advise the novice investor as follows: NEVER BID AT AN AUCTION!
Once you have acquired some experience buying and selling property... you may want to explore this method. The rewards are
usually very good, sometimes unbelievable!
Gain experience in other methods first, then try this one when you can afford to-
Previous
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CHAPTER ELEVEN
Buying Foreclosures Directly From The Bank
“You can search high, You can search low, But there’s no better deal, than an REO.”
-- Unknown
Buying Foreclosures From The Bank
Dispelling Some Myths
Many new investors want to buy foreclosures directly from the bank! The "banks" seem to have a draw of their own. No one says,
"I want to buy foreclosures from the credit unions... insurance companies... savings & loans— and mortgage companies."
The draw to the term "banks" is understandable, because that is where you normally borrow the money you use to buy your new
house. Many people think that since you borrowed the money from the bank... the bank owns the property.
Whether a deed of trust or a standard mortgage, when you buy your house the title is either held by a third party or pledged as
security for the loan... but the bank does not own the property.
Banks are in the loan business, not the real estate business. You borrow money from the bank and give the mortgage to the bank.
The mortgage is used to secure the property in the event that you default on the loan. In fact, unless you bought a bank
foreclosure when you bought your home, your bank never owned the property.
There are several institutions that lend money for home loans. At! of these institutions will eventually foreclose on the loan, if you
fail to meet the terms of the loan agreement- Therefore, all of these institutions will, at one time or another, have foreclosures on
their books.
Further, since a bank or lender will sometimes sell their mortgages to those in the secondary mortgage market... the original lender
may only be servicing the loan. The lender will collect the payments, pay the taxes and insurance, and generally manage the
account. If the property owner goes into default, the lender (who is servicing the loan) will initiate the foreclosure process on behalf
of the institution it represents.
"What's the point?" you ask. The term "bank foreclosure" is used very loosely to refer to REO's.
A REO is the property the lender acquires when the property is sold at the auction... if no one bids higher than the default amount.
This is the first time the bank actually owns the property.
If you recall. Chapter 6 described the vast differences in the numbers of REO's listed by several different foreclosure reporting
services- This is due in part to the fact that some organizations report on inventories from banks only. Others, in an effort to "beef
up" their publications, also list VA, FHA, SBA, RTC, FDIC, FSLIC and other institutional properties. Some even list foreclosures held
by mortgage companies, insurance companies and "home loan" equity lenders.
All of these properties having been through the auction process and now in the hands of the lender... are commonly and mistakenly
called bank foreclosures. If nothing else, these properties are all REO's (Real Estate Owned)
A myth of larger implications for the investor, is that of the lender's ability to profit on real estate and foreclosures.
It is often thought that the lender, who now owns the foreclosed property, must give it away- It has also been written that the
lender may not by law, make a profit on real estate. This is incorrect.
When a lender forecloses on a non-performing loan... no matter which of the methods employed... the goal is to recover the
amount of the original loan... plus late fees, penalties, interest, taxes paid, etc. The lender, depending on the state and the
method, can only attempt to recover its losses... but in doing so, will add up every conceivable and allowable expense. This is the
amount the lender claims is owed by the property owner... and this, is the maximum amount the lender can pursue in foreclosure.
That's how most of the laws are written.
After the foreclosure sale... it becomes "a whole new ball game." The lender now owns the property... and as property owner... it is
entitled to do anything it wants with the property.
The lender can now rent, sell or hold the property as it sees fit- The lender can sell the property for any amount it so chooses. The
lender is no longer constrained by agreements and documents or laws and regulations concerning foreclosure actions. The lender is
no longer in a situation with a property owner... it is the owner!
All lenders are in business to make money. Now that the lender owns a piece of real estate, why shouldn't it sell it for the highest
price it can get?
Bottom line: while in foreclosure, the lender is not entitled to make a profit or take advantage of the property owner in any way.
The lender may try to recover its legitimate losses only. After the sale of the property... if the lender has successfully acquired the
property... the lender can sell and make as much profits it wants... as it is entitled to... by virtue of its lawful ownership.
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The final myth to clarify, is that all banks in the nation are bending over backwards to give their properties away- Nothing could be
further from the truth!
Yes, there are more foreclosures on the market today than ever before. It is also true that these banks and other lending
institutions are under pressure to dispose of these properties. But in no way are these institutions under pressure to take big
losses. Lenders will attempt to sell properties as quickly and efficiently as possible... without taking huge losses. Conditions vary
from state to state and region to region. In some areas, banks may indeed be giving their properties away... in others, foreclosed
properties may be selling at or near market value.
This business of foreclosures is not a new phenomenon. The lenders have learned the best ways to effectively manage these
problems... and have developed methods for their disposal.
Few people realize that there are a lot more foreclosures "in the system," than they are aware of. Think about what would
happen... if every lender in America... who had REO's... dumped them all into the marketplace at once! If all these properties could
be had at 30% to 50% discounts... it would devastate the real estate market as we know it.
Investing Overview
Buying REO's from the banks, or anyone else for that matter, is the most popular method of foreclosure investing. Remember, that
these properties have been through the auction process and are now owned by a lending institution... whether a bank or not.
In this third of the three investing opportunities, the foreclosure process as we know it is over. Typically, the property owner was in
default of the loan obligations and for whatever reason... suitable arrangements were not made with the lender... that would have
canceled the foreclosure process.
At this point, the lender had to protect its interest in the loan by removing the rights of possession of the property owner. This, as
described in Chapter 1, is what foreclosing on real estate loans and mortgages is all about.
By ending the owner's rights to the property... the lender is now in a position to actually sell the property. By selling the property,
the lender is attempting to recoup its monetary losses created by the property owner when he failed to meet the obligations of the
loan agreement. The mortgage and the Deed of Trust as you will recall, are the two most common 'security devices" used by the
lenders. These security devices allow the lender to pursue this course of action.
When investing in pre-foreclosures... the smart investor attempts to create the Win - Win - Win scenario- When buying at the
auction, the emphasis is on creating a big Win for yourself while satisfying the auction requirements.
When investing in or buying REO's... the wise investor focuses on creating a Win - Win situation... a Win for him or herself... and a
Win for the lender.
Why a Win for the lender? Simple. That's who now owns the investment property you want to buy!
The lender is now in possession of a property that it doesn't want. The objective is to help the lender remove this property from its
inventory in such a manner as to simultaneously satisfy its requirements- Buying REO's is the most popular method of buying
foreclosures. It is also the easiest and safest method.
No matter which of the three investing methods you decide to utilize, you must create a winning investment for yourself. The only
other requirements are those of the other party you may have to satisfy... whether the homeowner, the sheriff or the lenderWith all three foreclosure investing methods there are steps you should take to ensure a reasonable profit for your efforts... and to
prevent any problems.
When buying an REO, you will still have to locate properties effectively-.. choose appropriate opportunities... inspect the property...
calculate your profits and expenses-.. and negotiate your way to success.
Advantages
The advantages in buying REO's over the other two investing opportunities are numerous. Many investors are attracted to this
method because of the ease with which one can participate.
There is much less effort required to buying REO's- The foreclosure process is now over... and the rights of the original homeowner
have been legally and finally removed. Chances are very good that the homeowner is long gone.
Any liens or encumbrances (with the possible exception of tax or IRS liens) have probably been erased. Typically, it's the first
mortgage holder that forecloses on the property. Being in the first position, the lender bids the amount of default at the sale and
most of the time it gains .possession of the property. In doing so, all other junior lien holders... second and third mortgages
included... are wiped out. The lender now has "clear title" to the property. When you purchase property from a bank, you don't
have to worry about hidden problems and liens.
When buying pre-foreclosures or properties at auctions, there may be delinquent state or municipal taxes due. It is your job to
research these matters in an effort to make a profitable investment. When buying from the lender, these taxes will most likely have
been paid. It's just that much less research or work that you have to do.
The very nature of the fact that the property has officially "changed hands," means that the lender who bought the property at
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auction, has probably done all of the necessary legal work to remove any complications surrounding the property. All of this saves
you time and money... and reduces your investment risksThe ease of this investing method stems from the fact that many of the typical investing roadblocks have been removed. You may
not have to worry about evicting tenants... doing title searches... negotiating with lien holders... or doing extensive research.
Investing in REO's, is much less expensive than the other two foreclosure investing methods.
The appeal is the same as the other methods... that of buying real estate below market value. The costs for you to get involved
however, can be much less. In the pre-foreclosure methods, we found that a good deal of cash can go along way. Cash to pay off
the property owner, cash for repairs, cash to get caught up with the lender and cash to pay off lien holders. When you buy at the
auction you need certified funds, in large amounts and essentially have to pay cash for your purchase.
Rather than the standard 20% down usually required to buy a home the conventional way... you can get into an REO for much less.
The lender, wanting to sell the property quickly, will work with investors to help them purchase the property. Chances are you can
buy the property for very little down.
The lender, being a lender, is in a position to create or structure an arrangement that can save the investor money in other areas
as well. This includes waiving or reducing the points charged when closing... the actual closing costs... and offering loans at
competitive rates.
Since risks run in proportion to rewards-., buying REO's can be less rewarding, in terms of price discounts off fair market value.
While you may be buying below market value... chances are you will find few "50% off" deals. The down payment required may be
slightly less than average- You may be able to shave some points and reduce somewhat the closing costs- None of these reductions
alone however are fantastic savings.
Robert Irwin, a real estate broker, investor, consultant and one of the most prolific authors in the field of real estate... tells us that
while it may be possible to get better financing, a better price, or a lower down payment... it is the combination of the three that
makes this a better than average opportunity.
I like to think of it as one-stop shopping. Think of it as your local "convenience store" of bargain real estate.
Renters and first time home buyers can do very well in this arena. It makes sense because of the combination of overall lower
costs.
Disadvantages
As mentioned before, there is generally much less risk associated with buying an REO. Therefore, it stands to reason that one can
expect smaller profits. An investor in REO's should have no problem acquiring properties at 10%, 15% maybe even 20% below the
normal market price. Savings of 25% - 35% are harder to find. Savings of 40% - 50% do happen, but less frequently.
Essentially you trade off the rewards, for the cost of reducing your risks. If you were to buy a property in the default stage and
closed before having a title search done... you risk having a lien holder or some other party pursuing you and your property for
someone else's debts. The reward is small (you saved maybe $500 on the title search) but the risk is tremendous, (you may now
be pressured to pay thousands of dollars in past dues, liens or judgments)
Buying an REO means that the lender may have already performed and paid for title searches and appraisals. So while you may not
have to perform these functions and incur the expenses... the lender most certainly did... and you will end up paying for those
services or functions somewhere in your final purchase price. The lender can pass those expenses on to you- Certainly the lender
will attempt to sell the property quickly... but the idea is to do so while making a profit.
As you are again reminded, all real estate transactions are unique... no two are alike. The conditions of the properties in REO
inventories vary. Some may be heavily damaged, some in perfect condition.
Occasionally, you will find lenders selling property "as is." Expect little cooperation from the lender when it comes to repairing this
property. (If the property was easily and inexpensively repaired... the lender would have done it)
Less often, but always a possibility, is the problem of tenant or homeowner eviction. For some reason, the lender may have a
difficult time removing the occupants residing at the property. Depending on state and local laws, the eviction process can take
some time.
A frustrating deterrent, is the sometimes lengthy process involved in buying from the lender. The auction can be over in five
minutes... negotiating with homeowners and lien holders can take weeks... but sometimes buying REO's can take months. Working
with large organizations like S & L 's and banks could involve their different departments and committees that may slow the
purchase process.
Advantage— or Disadvantage?
I have often thought the following: "If there are so many pre- foreclosure investors who rescue homeowners and properties before
they go to auction... how come there are so many auctions?" And, "if there are so many properties sold at the auctions... how
come there are so many REO's?”
The questions really aren't about the how's and why's, or the numbers. We know how and why, and why foreclosures are so
plentiful. (SEE CHAPTERS 2 & 4) The underlying questions are: why wasn't the property worth saving by the homeowner... why
didn't a pre-foreclosure investor buy it... and why didn't the property sell at auction?
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It is likely that several pre-foreclosure investors and others... were very interested in the properly... and probably tried to contact
the defaulting property owner. We can also assume that there were some pretty shrewd investors at the auction... yet the property
did not sell there either. So, what's wrong with the property that no one seems to want?
On the other hand... this just could be a case of an out of state property owner,.. that after several attempts... could not be
contacted by the lender or investors. The property for sale at auction may have not encountered any bidders. Maybe due to poor
weather... maybe a confusion in scheduling. Perhaps an investor attempted to purchase the property at the auction... only to have
his financing fall through.
We also know that buying at the auction is difficult for those who do not have access to a lot of cash... and that the lender ends up
with the property about 85% of the time.
This could be a horrible property to own or the occasional jackpot, the 50% - 60% off "deal of a lifetime."
The question boils down to, "why is this property still on the market, after so many opportunities to buy it a discount have come
and gone?"
While this question will remain unanswered... there is one statement about this industry that comes shining through- There are
many more properties available in the foreclosure real estate market... than there are investors buying them!
How Lenders Dispose Of The Properties
Depending upon the amount of foreclosures, size of the institution, and its policies... foreclosures are typically sold through one of
two channels.
The first channel or direction the lender takes, is to utilize the services of a real estate broker. The lender, not being a real estate
expert, will often work with brokers to sell their properties. The brokers will usually know investors who want these properties...
and help the lender to make a quick and efficient match.
The broker may "mix" these properties in with other properties they list for sale. A home buyer may be shown properties that were
foreclosed on... and not know it.
The second and most obvious method of selling foreclosures is for the lender to handle these transactions internally. Depending on
the size and complexity of the REO situation... the lender may have one part-time associate handling the affairs... or an entire staff
of REO Officers or Special Assets Managers, etc.
If a real estate agent is used to sell the property, expect to pay more. The lender is obligated to pay the agent a seller's
commission and may pass that cost onto you. If the property is sold directly by the lender..- you could encounter one of two
extremes... or absolutely anything in between!
You may approach a "squeamish" banker in a small rural community that runs a small unassuming bank... who is embarrassed and
shy to talk about this "problem on his books"... who may practically give the property away... just to wash his hands of it.
You may encounter a "tough as nails" REO Officer in a larger bank... in a larger city... who knows the market... and who will make
you kick and claw your way to discounts on her properties.
Chances are in your favor that you will experience something in between.
The Lender's "Asking Price"
Several factors go into determining what price the lender will ask for the property. The amount of the default that originally brought
the foreclosure action is usually the first consideration. Even after the foreclosure process has ended, the lender is trying to recoup
its losses on a non-performing asset. The lender will consider the amount of the loss as the least amount it could sell the property
for.
Next come the expenses associated with bringing the foreclosure action... any legal fees... advertisements... recording and filing
fees... etc.
This is all the foreclosing lender could hope to recover from the foreclosure process. Now however, the lender can add the costs of
maintenance and upkeep on the property, as well as repairs made to the property and a broker's fee for selling the property.
Also, because lenders are in a business "driven" to make money... they will consider the property type... the demand for that
type... and local market prices.
If the property is a run-down shack on some obscure parcel of land by the swamps... they may consider a very low sale price...
even at a loss if necessary. A very clean 4 bedroom / 3 bath colonial or split-level... in a very desirable suburb... would be a
different story. Don't expect the lender to give this house away. They know they can get a good price for it... maybe even full
market price.
Buying From The Bank
Step #1 — How To Locate REO's
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In locating REO's, you will utilize many of the same techniques you used to find your other investing opportunities. A Us Pendens or
Notice of Default might be useful, but is no longer necessary. You are no longer seeking to acquire property before the sale. If you
have copies of these documents for properties you are interested in, you may use them to locate the name and address of the
lender or plaintiff.
The Notice of Sale can still be useful even though you won't be buying at the sale. If you still have a copy of this notice, you will
know when the sale was scheduled. Start contacting the foreclosing lender after that sale date... to see if the lender now owns the
property. Remember, approximately 85% of all properties at the sale are taken over by the foreclosing lenderDon't count out the county courthouse just yet! Even though there may be easy ways to get REO information... the courthouse is
and will. always be the best... most accurate source of real estate transactions. When the lender acquires the property at the
auction... the deed will be recorded appropriately- This "recording" is a real estate transaction... of public record... filed neatly in
your county courthouse. Just look for the lender's name as the buyer.
Newspapers that print all of the notices we reviewed in Chapter 6 are still good sources of information. Even those newspapers that
print all real estate transactions "in general." Just look at the names of the buyers in these transactions, if the buyer is your local
bank, credit union, or insurance company... then, there it is! Newspapers may also contain ads from Realtors and banks advertising
REO's to investors.
Real estate agents are an excellent source of foreclosure information. Indeed, many market the lenders' foreclosed properties.
This is another reason to have a good real estate agent as a teammate working with you!
Real estate publications and "homes magazines" typically contain advertisements from brokers that specialize in "investment
properties." These publications often contain ads from foreclosure reporting or listing services.
Foreclosure reporting services can be of great convenience to you, if you are unable to visit the courthouse. The information
received from most of these publishers, is sorted by state, county and city, then by property type.
Utilize your teammates. Talk to your friends at the title company.
Finally, let us not forget the banks.
Start by contacting banks that service your area. You can find them in the phone book. The yellow pages will have the entire list of
banks in your area. (this goes for credit unions, savings & loans and mortgage companies, as well) Your local library may have
directories in the reference section, that contain lists of banks by region. One quality source of bank listings is Folk's Bank
Directory. At almost $200 a copy you wouldn't need to order it... just review it at the library. If they don't have Folk's they're
bound to have an equivalent directory for your use.
You can try to obtain lists of foreclosures from the banks... but don't hold your breath. You shouldn't expect every bank to tell you
they have foreclosures. Most of the time, the person you will speak with initially, will have no idea what you are talking about. Be
courteous and persistent. Ask to speak with the individual that handles the REO's. If that doesn't work, ask for the Special Assets
Division or Real Estate Owned Department! If the bank representative still doesn't understand your needs... politely ask to speak
with a manager.
Most banks prefer not to take calls requesting lists of foreclosures. Some may indeed indicate they have no REO's, so as not to
encourage investors calling for lists. That lender may be selling its REO's through brokers. Perhaps they work very closely with a
just a few investors.
It may be wiser... if you must search for lists from banks... to get the name of the individual in charge of that bank's REO
department... and send him or her a friendly letter. Indicate that you are looking to buy a home in the ABC area of town, and that
your price range $XXX,XXX. Ask the individual to send you any information they may have that meets those requirements.
You may get a response, you may not. You may receive a list of that bank's property in the mail... or at least a letter indicating
how the banks sell their properties... and a "thanks" for your interest. The point is that you will be better received... if you are not
just another pesky investor.
Step #2 — Narrowing Selections
Try to find properties that meet your investing criteria. Look for properties in or near your farm area. Look for properties that meet
the physical specifications of the home you want to buy... if it's for your primary residence.
If the property is to be resold or rented... establish with your advisors-.- properties and areas that lend themselves well to the
average buying and renting public.
Even though you will be buying properties at a discount... they aren't free! Most likely some cash will be required. Therefore, you
should also look for properties that fit your investing budget.
Your next job is to determine whether or not these properties you are considering are true bargains. Do this by determining the
property's average market price.
For any investing method you consider... you must know the price you can get for the property when you sell it. You will also have
to know how much you can expect to receive, after all of the closing and selling expenses have been deducted.
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If this property is in your farm area, you should have a good idea of how much it's worth... in good condition.
Be consistent in your evaluations. Never try to compare the value of two properties in different conditions or states of disrepair.
Always compare properties as valued in good condition.
If you are unfamiliar with the average price of homes in a certain area... call your advisors. A real estate agent, title company
representative or even a contractor can help you with prices.
Look in the real estate section of the local daily newspaper. This section is divided into categories that list homes for sale by
different areas. Study the paper. Find properties in the same area, that meet or come close to the property type you are interested
in... to come up with a ball park figure of the property's value.
Do a "drive by" if you can. Get in the car and visit the neighborhood. Try to get a look at the property. Take names and phone
numbers of real estate agents who may have properties for sale in the area. Look for the sale signs.
Having estimated the average market price of the property, determine if indeed there is a bargain to be had. If you have received
your information from a broker, bank list, or list service, and have the bank's asking price handy, you can make the simple
deduction. Use the same techniques you would utilize if you were to buy a pre-foreclosure, or at the auction.
Take your estimated average market price (the price you can sell the property for)... and deduct the bank's asking price for the
property.
If the bank is asking $93,000 for a property worth $100,000- is this a good deal? In the world of foreclosure investing... not really.
To the first time home buyer... maybe, if you saved $7,000 on the purchase of your new home... had closing costs waived
($1,000)..- and had a reduced down payment (10%)... and a lower interest rate— you might buy this $100,000 home for as little
as $9,300 down with very low monthly payments.
Is this still a bad deal? In this scenario you didn't "steal" the house from the bank... but, there is probably no one else on your
street that got such a good deal. Your neighbors probably paid $100,000 for the house... with 15% to 20% down... ($15,000 $20,000) paid closing costs... ($1,000 - $1,500) and have a higher monthly mortgage payment. This method of investing or buying
can be great for those just starting out.
An experienced investor looks for initial savings of at least 25% to 30%. Some of that percentage may get eaten up in
compromises and negotiations... so start with enough room to negotiate. You may end up with a discount of only 15% to 20%...
but that can work well for you too.
"Why is 15% to 20% good?" "Isn't that a small percentage?" As we will discuss a little later... your ultimate goal is to invest wisely.
A wise investor considers the return on their investment, not just the discount off the market price.
If the bank's asking price is not indicated on your list, you can call the bank or look up the records at the courthouse. The Notices
of Default & Sale, as well as the Lis Pendens will have the amount of the default or suit.
Knowing the default amount is less relevant when buying REO's than the other two methods- It would be very nice to know what
the default amount was... but you won't be "bidding" or offering to "purchase the equity" of the property from the bank. Besides, if
you are very happy with a deal you Just made... say 25% below the market price... then what difference does the default amount
make... or even whether or not you know the amount?
Step #3 — Contacting The Bank
If you have been unable to get the bank's asking price for the property, you will want to contact them. If you have the price and
think that this property is worth pursuing, you will need to contact the bank officer in charge to arrange for an inspection.
Either way, it's time to make contact. There are important lessons to be learned about this first meeting that will help make your
investment opportunity much more fruitful.
(If the property is being sold through a real estate agent... you will need to contact that. individual. There is a reason the bank
chose this individual or organization to represent their properties. It is recommended that you do not try to avoid the real estate
agent, by going directly to the bank... they might just send you back to the agent.)
Attitude and Approach
A bad loan, non-performing asset or foreclosure can look bad on the banker's "balance sheet." Banks have to report their earnings
and losses. These losses can be a bad reflection on that bank's ability to make profitable loans. They are under the watchful eyes of
state and federal agencies. Banks have to report to their stockholders.
A foreclosure to a bank is like a big pimple on its face! No, it is not "the plague"..- just a pimple. While it is true there are a lot of
foreclosures currently available (which accounts for this industrial acne).-- the patient has been to the doctor... and the medicine
has been prescribed. Banks as well as other organizations, have applied the medicine and sharpened their foreclosure management
skills.
The moral of the story? Don't walk into the lobby of your local bank... meet the REO officer... and point at the blemish! This would
be considered as rude behavior... and may not get you past the lobby!
The banks are aware of their problems and how to deal with them. You should be aware of this... and learn how to deal with the
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banks.
The banks do want investors and others to take these properties off their hands... but they don't need you... like you need them!
Several dealings with arrogant investors can "turn off" your local REO officer. The unwelcome investors are self-important, rude and
demanding. They think they are doing the bank a favor by offering to buy one of its properties- They usually have an attitude that
would be considered offensive.
I recently heard of one "would be" investor who demanded of an REO officer, "Okay lady... how much you got in the property!?"
The bank officer kept her composure... however she was tempted to throw this guy through the window... like something you
might see in a bar room fight scene from an old western movie.
Many REO officers have several years of experience behind them- Some have disposed of thousands of REO's. These people have
reliable investors they can count on to help them move the properties- REO officers will be happy to work with you too... If you
have the right attitudeWhen working with an REO officer, don't demand to know how much money the bank has "into" the property. The numbers may
reveal themselves as you work with the bank... if not, find out for yourself. Get the information from the courthouse where the
property transaction was recorded... get the information from the legal papers and journals that print the information... go to the
auction and observe the bank's winning bid... but don't demand the information from the banker.
Once you have the bank's asking price, you can determine whether or not you think this property is worth pursuing. Remember
that you are contacting the bank to find out how much it wants for the property. You will also want to inspect the property and
know what the appraised value is.
Make sure that you indicate in your meeting that you are interested in the property... and will need to know what the appraised
value is. Ask to get a copy of the most recent appraisal. Indicate to the banker that you would like to see the property- Arrange a
time that the banker or other representative will be available to meet you there.
Step #4 — Inspecting The Property
To further determine how good a deal this property may be, you will want to inspect it for damage and necessary repairs, ff there is
a good deal of damage, you will use the amount of calculated repairs to negotiate with the bank.
Just as you read in Chapters 9 & 10, you will use the same techniques to inspect this property.
Be very thorough in all your inspections. Never rush through them- Every item you miss, you will have to repair and pay for later.
This is especially important when it comes to dealing with banks.
When you inspect a property for a pre-foreclosure purchase... you are making sure that you calculate your profits correctly in order
to make a proper offer to the homeowner. The same is true when inspecting a property that you intend to buy at the auction. The
only difference is that you are not negotiating with a homeowner, you are just trying to calculate your profits and determine
whether or not to bid on the property.
The banks have become much sharper at disposing their REO's. They now know what it takes to move them swiftly. This includes
making allowance for repairs, or actually making the repairs themselves.
The banks sometimes hire contractors to make repairs on their REO's. The banks, in business to make profits, will do the exact
same thing you do when calculating their profits. It only makes sense then, that the bank repair the property to salable condition.
This doesn't mean that every single repair will be made. Maybe the bank will only allow for, or make repairs that only include fresh
coats of paint inside and outside... some flooring... and a few minor repairs. The property now appears in good condition and is
salable.
In our example of a property that had an estimated $8,500 in repairs necessary... the bank may only acknowledge and repair
$4,000 worth of the damages.
The banks, having had to repair many properties, may work with a contractor that offers reduced rates in exchange for the work.
You would then argue that this property has a full $8,500 worth of damages that need to be repaired... and the banker counters
with the fact that he can have the same work done for $4,000!
In your inspections, you may very well come across properties that have already been repaired by the bank. Expect to have the
cost of those repairs passed on to you.
If you are accompanied by the banker or real estate agent... make sure you verbally and physically point out all of the damages!
Step #5 — Calculating Your Profits
Determine your profit potential. Do not at this point, rely on your casually determined average market price- Make sure that you
get the most current appraisal from the banker or real estate agent. (This is not something you should have to pay for) Being the
new owner of the property and in a position to sell the property... the bank should have a recent appraisal handy.
We will use an example of a property valued at $150,000-. with a bank asking price of $120,000 to illustrate this purchase. This
represents a 20% discount off the average market price for a comparable property.
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Take the appraised value of the property and determine what you think you can sell the property for. Cross reference the appraised
value with the asking prices of the comparable properties in the neighborhood you previously researched.
Deduct the commissions and closing costs you would incur when you sell the property.
EXAMPLE:
your selling price $150,000
less: commissions @ 6% 9,000
closing costs @ 1% 1,500
net to you after sale 139,500
From this amount, deduct the down payment for the purchase of the property... mortgage payments, insurance and taxes for the
few months you will own the property... and repairs if necessary.
less:
net to you after sale $139,500
down payment @ 10% down 12,000
holding costs @ $849 per month for 3 months 2,547
repairs 3.800
purchase costs $18,347
In addition to these expenses, you now have a note of $108,000 that you owe the bank. ($120,000 purchase price minus the 10%
down payment of $12,000 = $108,000)
The $18,347 it will cost to buy, repair and hold the property, coupled with the new note of $108,000... equals $126,347.
Your total costs of $126,347 would now be deducted from the amount you will receive after selling the property at market price and
deducting expenses, which were $139,500.
Your profit for this venture would be $13,153.
"Is this a good deal?" you ask. The answer is yes! A profit of $13,153... is no laughing matter. More importantly however, is the
return on your dollar investment. Add up every dollar you actually spent on this deaf... commissions, closing costs, down
payments, repairs and holding costs. This adds up to $28,847. ($10,500 in selling and closing costs plus the $18,347 in payments
and repairs)
The $13,153... is the profit you made on your investment of $28,847... not the $150,000 property.
Divide the $13,153 in profits... by the $28,847 in expenses... and you will find your investment returned a profit of 46%-'
Now I ask you... "where else can you find investments that return 46%?"
Try getting a 46% return on your investment anywhere else. You will not get that kind of return on the money you deposit in your
checking or savings account. Mutual funds, IRA's and Certificates of Deposit return a mere pittance... 2%, 3%, maybe as much as
5%! Now deduct the cost of inflation against the money you earned... and you may have actually lost money... if you kept it in one
of these accountsYou may decide that $13,000 is not enough to make on a foreclosed property... good for you! You may believe that making
$13,000 on one transaction is outstanding... good for you too!
Only you know what wilt make you happy. Only you know how much money you have to work with. If you do not have the funds to
strike a "killer deal"... start with something smaller. Take the profits from your first investment... and roll them over into the
second. Everyone has to start somewhere. The important thing is getting started.
The second most important thing is the return on your investment. The return on your investment— is the only true measure of a
profitable investment.
Whether buying pre-foreclosures, foreclosures at the auction, or REO's from the banks... your profits are directly effected by the
length of time you hold the property... the amount of repairs you make... the amount required as a down payment... and your
purchase price versus the selling price.
Okay, that money making example was easy. What happens when the bank's asking price is close to, or at the regular market
value of comparable properties?
If the property offered by the bank is valued at $150,000... and the bank is asking $140,000... run the numbers as before and
determine your profit potential.
After selling the property at the $150,000 price previously established, we agreed that you would be left with $139,500.
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Run the new figures to compute your profits.
net to you after sale $139,500
less:
down payment @ 10% down 14,000
holding costs @ $991 per month for 3 months 2,973
repairs 3.800
purchase costs $20,773
(the figures in these examples are computed for a 30 year loan at 8.75% interest)
Add every single expense associated with the property as before and you will have spent $31,273. Let's not forget the note you
signed, which is now $126,000. ($140,000 - $14,000 down payment =$126,000)
Your expenses of $31,273 and the note of $126,000, equals $157,273! The property was only valued at $150,000— and you lost
S7.273.
This property... at this price.- represents a small savings for the home buyer... and a total loss for the foreclosure investor.
The two biggest expenses associated with this purchase are the down payment ($14,000) and the seller's commission ($9,000). If
you could negotiate a 5% down payment with the bank, you would have saved $7,000. If you can sell the property by yourself, you
would have saved an additional $9,000!
To calculate whether or not a property is a good deal run the numbers.
If you find a very desirable property with a bank asking price of near market value... you will have to calculate your profit potential.
If the end number is unattractive... re-calculate your numbers, so as to provide yourself with a desirable profit. This is the figure
you will use to start your negotiations with the bank!
For example... take the $140,000 bank asking price... and try reducing it by 15%. ($140,000 X 0.15 = $21,000) Now run the
numbers again to determine if the profit potential is strong enough for you to invest in. If it is not enough... re-calculate your
numbers again at a 20% discount.
Continue with this process until you have reached a desirable profit for yourself- You will use this figure in your offer to the bank. If
the price you are willing to pay is only 50% - 75% of what the asking price is... don't expect the bank to comply.
In all foreclosure investing methods... you have to seek out the profitable opportunities. If you can't find them... you have to create
them. If you can't create them... find another property!
AS ALWAYS, YOU MUST KNOW HOW MUCH YOU CAN SELL THE PROPERTY FOR… BEFORE YOU BUY IT!
If you are buying this property to hold and rent for a monthly income... you will look at the figures differently- If you could
negotiate with the bank sufficiently to reduce your monthly payments... and rent the property at an amount that exceeds your
mortgage payments, insurance, taxes and maintenance... you would have created another Winning situation for yourself.
This in itself, is one of the greatest attractions to owning real estate. In this situation, you have created a steady monthly income...
established ownership and equity in a property... and hopefully own a property that will appreciate in value.
Step #6 — Presenting Your Offer
If you are working with a real estate broker representing the bank... you may have to do most of your negotiations with the agent.
Your offer will most likely appear on a standard purchase and sales agreement, which will be chauffeured to the bank by the agent
along with your check for a deposit.
You might find it a bit more difficult to negotiate with the bank through the agent. The agent, who will earn a selling commission
based on the selling price, will not hand over the property without a fight.
Try to get the agent working for you. In other words... remember to point out all the damage when doing your inspection with an
agent present. This agent may eventually enlighten the REO officer with regard to the property's condition. This can only help your
case. By being an expert in your "area"-, you may be in a position to inform the agent that a similar property in the same
neighborhood, only sold for $137,800.
Ultimately, your best bet is working directly with the banks. The better the relationship you establish, the better the opportunities
you will find.
You should submit a written offer for the property in question. This offer should be neatly typed and include:
1
2
3
4
5
6
7
a statement indicating intent to purchase real estate
the property address
legal description (optional)
your offer - purchase price
your financing terms
your down payment terms
closing dates
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8 other contingencies
9 deposit
10 your name, address and phone number
The better your documentation and presentation, the faster you will establish credibility.
You will be working with professionals in their industry. REO officers receive offers on properties regularly. Make sure your offer
stands out if you want to get noticed. This does not mean that you should type your offer on fluorescent green paper... Just a
sharp, clean image will do.
Your offer must start at the lowest price, or the best terms, or both... that you think the bank will realistically entertain. In other
words, make sure you leave room for negotiation and make sure your offer doesn't end up in the trash can at the same timeIf the REO officer has several offers on the same property, he will be less likely to consider an offer that would be out of line.
Some investors might "shoot for the moon" in the initial offer- The investor wants to pay nothing down... get the lowest
possibleinterest rates... pay no points or closing costs... ask the bank to finance the whole deal... cover the costs for repairs... and
get the property at a discount... all at the same time.
Depending on regional conditions, housing demands and a dozen other variables, this type of offer will either be considered or
ignored. Today, this offer would go straight to the paper shredder.
Many experts today agree on the following methodology:
Start an offer at 20% - 25% below the average market value for comparable properties. Perhaps in your initial offer you will leave
out the terms. Let the bank officer consider your dollar offer only, at first- As this probably will be lower than what the bank would
normally ask, the bank may counter your offer with a higher dollar amount and possibly throw in an attractive financing offer. Only
you can determine if this is still a good deal. Re-calculate your numbers based on the bank's offer.
Several experts recommend that you take the bank's offer of financing... and only give a little on the price. Let the bank counter
again with a higher price... and an even more attractive financing offer. Again, except the newer, better financing terms and still
only give a little on the price.
In the long run, you are still trying to accomplish the same goals... that of a lower selling price, lower closing costs and better
terms.
Utilizing the method above, you give the bank an opportunity to entertain a respectable offer. You may get lucky and have the
bank counter with very favorable terms immediately... with only a slight increase in the selling price. Finally, you are opening
negotiations with the bank in a non-threatening manner... while stating your intent... and showing that you respect the process.
Respecting the bank's position will go a long way. To do that you should practice the philosophy we've discussed in this chapter.
The rules are the unwritten laws of mutual respect for both parties. It's just like kids playing ball with each other. When one of the
kids doesn't like the rules, she would say, "... well it's my bail, so we play by my rules!" The ultimate reply comes, "... well it's my
ball field, so we play by my rules, or we don’t play at all!"
Learn how to play by the bank's rules as well as your own, and you will do well.
Perhaps your offer will contain your purchase price, and a suggested outline of terms and conditions. This shows the bank that your
offer is realistic (by the price)-.. that you have given this property some consideration (by the supporting documentation)..- and
that you understand and respect the rules of the game. (by suggesting investor-like terms... while leaving some room to negotiate)
Your best bet is to meet with the REO officer. Get to know this person and let them get to know you.
In your meetings, make sure you have all of your facts neatly prepared and ready to present. Show the damages to the property
and the estimated cost of repairs. You will negotiate better-, with the facts in hand- You should take notes. Listen to what the
representative is saying. Try to "read between the lines" to discover how much you can actually get this property for. There may be
a hidden price consideration, financing consideration or both.
Where do you start in your negotiations with the banks? When meeting with the REO officer, you start with the offer you
developed... or ask the officer... "what is the best price and the best terms you can offer me for this property?" You may like the
answer you get... you may not... at least it's a starting point for your negotiations.
George Chelekis, a best-selling author on real estate opportunities, suggests the following: Since you know the banks are under the
watchful eyes of federal regulators... and they have to report their •financial conditions to these regulators... find out when these
reports are submitted. In other words, if banks report quarterly, find out when the quarterly report is due... or the bank's "quarter
ending" period.
If your offer arrives in the beginning of the quarter... it may not get much attention. Up your offer a little and follow-up. If your
offer still hasn't been accepted... increase your offer again... but by a smaller amount... and provide further evidence of your intent
and ability to purchase the property. Do this by showing the REO officer a copy of your credit report... savings account statements
and pay stubs.
Continue to motivate the bank into selling you the property... by helping the banker to not have to report this liability on yet
another federal, quarterly financial report.
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You can see why buying foreclosures from the lenders is so popular. It's much easier. You should also be aware that the discounted
amount of the property... from the average market value for comparable properties... will not vary that much. The discounts on the
best properties are small at best. Which brings me back to Chapter 6... where we found so many publishers of REO listsadvertising properties at "50% OFF!"
How can there be so many properties at 50% off? If there was that much equity in the property to begin with... wouldn't the
homeowner have sold the property? Wouldn't a sharp pre- foreclosure investor notice this opportunity? Wouldn't this property have
been sold at auction? If it was such a great property... wouldn't the bank get top dollar for it?
I would have to think... that if the bank was willing to sell me this property for 50% off the regular market price for a comparable
property... there is something about this properly that I shouldn't want either!
It would be wrong to say that you will never find a property offered by a bank at 50% off the normal price. It would be equally
wrong however, to say that thousands of properties are available at 50% off— and the banks are Just dying to give them away.
Do not get emotionally involved in properties you want to buy- even if this property is for your own persona! use!
The banks go through properties, like water through a sieve. The banks have no emotional attachment to the properties.
Auctioneers, Trustees, Sheriffs, Insurance Companies and real estate agents have no emotional ties... neither should you. To most
in the industry... it's just another property.
If you have ever brought your old car to an auto dealer to trade on a new car... you will know recognize the scenario. There you
are with the vehicle that has brought you good times and solid transportation for years. You know how well you took care of it...
and how much money you sunk into it. The dealer could care less. The dealer only sees another hunk of steel, that he can make a
profit on. When the dealer offers you a ridiculously low price... you take objection- "But what about the brand new tires I just
bought?" The dealer doesn't care. The vehicle is only worth so much... he has already calculated what he can sell it for! The dealer
knows that an offer of $1,500 is good, because the car will sell on the used car lot for $2,700!
Like anyone should when buying at wholesale and selling at retail... you must know what you can sell for— to determine your
profits.
Getting emotionally involved in a property can cause you to overpay, thereby canceling out your wise investmentStep #7 — Closing
When the bank accepts your offer, you will need to have all the necessary documents signed as quickly as possible. To avoid any
further delays or problems that may arise from competitive offers... you will want to "close" as soon as you can- Have your
attorney help you prepare for closing... as you would with any real estate purchase.
Make sure you are prepared to take over the property. Get ready to make repairs to the property... evict tenants... get a certificate
of occupancy if necessary... whatever.
Just because the bank has become the owner of the property, doesn't mean the property is free of problems, physical or otherwise.
Utilize your advisors... do your research— investigate the properties... eliminate your risks... and reap your rewards!
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CHAPTER TWELVE
Financing Your Purchase
“Happiness Is A Positive Cash Flow.”
-- Fred Adler
Financing Your Investment
Before You Start
Nothing is more difficult than trying to buy a property with no money- Many people want to invest in foreclosures but don't feel
they can come up with enough cash to buy one. This chapter offers suggestions and tips for finding the money you need. We will
also discuss some techniques the experts use to reduce their down payments and general cash outlay.
There are books on real estate investing and financing in your local bookstores. Flip through these publications to see if they meet
your needs. Buy a book or two that you think will help.
Why acquire additional material on financing? Because the subject is such, that it requires additional information. This chapter
would exceed the contents of this entire publication... if we tried to cover all there is to know about financing.
Your main objective will be to come up with enough cash to purchase a pre-foreclosure, the deposit required at the auction, or a
down payment when buying an REO.
Your Personal Credit
Your "credit rating" is probably the best source for your much needed cash. If. you have a good credit rating and stable
employment... you can probably qualify for a loan.
Banks will "qualify" a borrower before lending any money. They need to know that you will have the money necessary to pay back
the loan- The banks also need to Know that the property you intend to buy has enough value in it to support the loan. In other
words... the sum of your down payment... your regular monthly mortgage payments... and the value of the property... should
exceed the amount of the original loan.
Let's clarify this a little further. Let's say you want to buy a house priced at $100,000. Your down payment is 15% or $15,000. With
your good credit and steady income... the bank win consider granting you a loan for the property. Their decision is based in part,
on the fact that the $15,000 received as the down payment... along with the property valued at $100,000... is more than the
$85,000 loan the bank will lend you.
Banks use sophisticated formulas to determine whether or not you qualify for a loan. One such formula is the loan-to-value ratio.
This is determined by dividing the loan amount by the property's appraised value.
The homeowner will have made a down payment... and is expected to make regular loan payments. This coupled with the value of
the property... reduces the bank's risk in granting the loan. If the bank has to foreclose due to lack of payments... the value of the
property should cover the loan balance.
If this is true... then why do you need good credit? Can't the bank recoup its expenses or the loan balance as described above? The
answer to the second question is yes... that is why the banks use these methods for determining loan qualifications. The only
problem with this scenario... is what we have described several times already- Banks are not in the real estate business... they are
in the loan business.
Banks want to make loans without having to be in the real estate business. This in itself is the answer to the first question. With
your good credit... the bank is still taking a risk... but statistically, the risk is reduced by granting loans to those who have good
credit. This credit rating is an indicator... a barometer of the borrower's ability to make the regular scheduled payments. While a
good credit rating can not predict whether or not a borrower will actually make his payments on a timely basis... it does indicate
this person's payments for other loans or charges have been paid appropriately.
Before exposing your credit rating... it would be wise to get a copy of your personal credit report and look it over. You are entitled
to know what the credit reporting agencies are reporting about you, according to The Fair Credit Reporting Act of 1971. This "Act"
was established to protect the rights of the consumer against fraudulent and unfair credit reporting practices. Since you are entitled
to challenge any incorrect information in these reports, you may be able to erase any negative information. Occasionally, items
may appear on your report that have nothing to do with you or your life what-so-ever!
I recently sent for copies of my personal credit report from one of the three big agencies... only to discover that one of my past
employers was an oil company in Oklahoma! The fact of the matter is, I have never worked for an oil company and I have never
lived or worked in Oklahoma. I've never even been to Oklahoma!
Small blemishes on your credit report... whether valid or not... can remain on your report for years. It is up to you to verify and
correct any problems reflected on your personal credit report. Call these reporting services and request a copy of your report.
There may be a small fee... but it is worth it.
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The three major credit reporting services are TRW, Trans Union and Equifax. Check your local phone books. If you live in a rural
area that may not have these companies listed in the local directories... go to your local library. Most libraries will have telephone
books for larger metropolitan areas. Continue your search there... or try contacting these companies at:
TRW INC.
Complimentary Credit Report
P.O. Box 2350
Chatsworth.CA 91313
Phone: 1.800.392.1122
Fax: 1.214.390.3919
TRANSUNION CORPORATION
Customer Relations Department
P.O. Box 7000 Department P.
25249 Country Club Boulevard
North Olmstead, Ohio 44070
Phone: 1.800.851.2674
Fax: 1.714.447.6032
EQUIFAX, INCORPORATED
P.O. Box 740241-0241
Atlanta, Georgia 30374-0241
Phone: 1.800.685.1111
Fax: 1.404.612.3150
Borrowing Money
If you are using your own money... try to find sources for cash that won't cost you a lot. in other words, borrow. The objective is to
reduce the actual amount of hard cash you have to shell out to acquire the property.
Loans and "lines of credit" can be established in many forms. Most credit card companies offer lines of credit- This enables you to
virtually "charge" your cash purchase... and defer the cost. Some credit cards will allow $5,000 or $10,000 or more in cash
advances. Some investors tap into several of their credit cards to come up with the necessary funds to purchase a property.
You might consider a commercial finance company such as Beneficial Finance or Household Finance. After checking your credit
rating... they may provide you with a personal loan. Often you can qualify rather easily. Loans can be for any purpose, however, it
would be wiser to indicate that you are seeking a "personal loan" or a "debt consolidation" loan... rather than a "foreclosure
investment" loan.
The cost may be as low as $30 or as high as $60 per thousand for every one thousand you borrow. The point is that you buy your
foreclosed property with this cash, instead of your own. By doing so you will create a new personal obligation, but only for a short
time, if managed correctly.
After calculating all the costs for a pre-foreclosure purchase .-. you estimate you need $15,000 to satisfy the lender, lien holders
and homeowner— and to repair, hold and sell this property over a 4 month period. A loan of this nature may cost you $450 a
month in principle and interest payments. The $450 multiplied by the number of months you own the property, (4) is the amount
of cash you actually put into the property. In this case the total cash outlay is $1,800. After the property is sold you will pay off the
loan, thereby maintaining your good credit and providing yourself with the opportunity to borrow again when another good deal
comes along.
You will have paid some extra money in interest charges for the length of time that you borrowed the money... perhaps several
hundred dollars... however, that cost is insignificant compared to the challenge of coming up with $15,000 in cash.
If you are a homeowner, consider a home equity loan. You may want to refinance your property... or even sell it. Seek out
alternative sources. With a decent credit rating... you should be able to borrow somewhereThe experts remind us that we all have "hidden assets." Things we own that are worth something. If you have personal possessions
worth selling... and you don't mind parting with them... this may be an option to consider. Collections, artwork, jewelry, stocks and
bonds, even personal electronic equipment and furniture, are suggested as possible "cash raising" alternativesThe author and publisher do not recommend that you exploit your borrowing capabilities to the point of Jeopardizing your assets
and/or over burdening your liabilities... nor is it recommended you try to raise cash in such a manner that you may regret!
If you are confident enough in what you are doing and the opportunities before you... talk to a friend or relative about borrowing
the money you need. Explain what you are doing and why you would like their help- Offer to share some of the profits for their
investment and risk. If cash is not available from a friend or relative, consider asking a relative to co-sign a loan. Their credit may
be strong enough for the lender to grant the loan, without either of you putting any cash up front.
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Partnerships
In a good partnership arrangement, typically one partner will find, investigate, research and prepare to buy the property. The other
partner is the money partner. This person has the cash to invest... but doesn't want to do the work.
(f you can find yourself a good "money partner," you may be all set. The arrangements you establish with your partner... are up to
you.
You can create partnerships with your friends, relatives or co- workers. If $15,000 was required to purchase a property that would
return 100% (another $15,000) in 120 days... wouldn't it be easier for three people to come up with $5,000 each, rather than you
coming up with the full $15,000? Everyone involved will take a risk, but it's a smaller risk. Likewise, everyone involved will profit,
but only by one-third of the dollar amount. Everyone's return on investment however, is still 100%. ($5,000 invested, $10,000
returned)
You may find that your teammates or your advisors, will want to become partners with you... after having proven yourself as a
wise investor.
Investors
Check your local daily metropolitan newspaper. In the classified section you should find a category for people who want to lend
money... typically called "Money To Lend," or something similar. Here you should find several sources that will be interested in
lending money. Contact these individuals to find out what kind of lending they do- Some may lend in large amounts. Some may
lend with strong collateral only, such as your house. Shop around, compare terms and interest rates, see what's out there.
You can attract investors by placing a small ad in that same newspaper. Look for a category called "Money Wanted" in that same
newspaper. Look the ads over. See what they have in common. What kind of returns are offered in the ads? Call some of the phone
numbers... pretend you are an investor... pretend you have money to lend- By reversing roles temporarily, playing the role of an
investor, you will ask the person requesting the money:
how much money is being requested ?
for how long ?
at what interest rate ?
for what purpose is the money to be used ?
how will the borrower secure the debt ?
You will find some people have ready, carefully thought out plans, and some have no idea what-so-ever- Don't be the person that
has no idea how they are going to use the funds they want to borrow!
The fastest way to turn-off an investor, is by being an amateur. The fastest way to succeed with an investor, is to have your facts
and details ready. Let this individual know that you want to borrow money... for a quick and highly profitable return. Convince the
investor that you know what you are doing... the same way you did with the banks and other lenders... have your documentation
ready— and be prepared to back up your investment strategy with this documentation. Offer a competitive return for the investors
efforts.
Chances are good you will receive many calls from your ad. Don't waste your time and money by being unprepared. Shop around...
know what the competition offers... place your ad... and win the confidence of the investor.
Other Sources
There may be several other sources of money you can tap into. Most states have a Home Buyer's Program. They go under several
different names, such as This State's Housing Finance Program, This State's Housing Authority, or This State's Residential Financing
or Housing Development Agency.
Typically, these agencies assist "first time" home buyers and low income home buyers. They also like to help those that are willing
to buy property in low income or distressed areas.
The biggest benefits of working with these agencies are the low interest rates charged, (usually a few points below average) and
the low down payment required, (usually under 5%)
These agencies may even have programs that will benefit the investor whether or not this is a first time home purchase.
Consult your phone book for listings of state agencies.
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CHAPTER THIRTEEN
Selling Your Properties
“Say No… Then Negotiate.”
--Unknown
Strategy Overview
The completion of the foreclosure buying process is achieved when you purchase your first property. The end of the foreclosure
investing process is complete when you sell the property you just bought.
It is now time to reap the rewards of your hard work. In order to receive the money you earned, you must sell the property.
In the examples used in this book, we referred to holding costs. These are the expenses associated with your ownership of the
property... from the time you buy it... to the time you sell it- Typically, you will have to pay the mortgage payments, plus any
property taxes, insurance and homeowner's or condo association fees. The longer you "hold" onto the property... the more it will
cost you. Your objective, is to sell the property as quickly as possible in order to reduce your holding costs.
The suggestions in this chapter will help you sell your property faster and more profitably.
Most foreclosure investing experts agree that you must begin to Market your property immediately. You will recall that in Chapter
9, (Buying Pre-Foreclosures), a good Home Equity Purchase Agreement contains a statement that allows the buyer to "show" the
property. This clause is written into the agreement so the investor can show the property to his buyers... before he has taken
possession of the property. This investor will line up potential buyers for the property... as a matter of the entire process. Selling
the property is incorporated into the investing concept. This is why you calculate what you can sell the property for... before you
buy it.
The concept of buying and selling quickly... is known as "flipping." In essence, you flip the property over to another buyer quickly,
to reduce the amount of time and money it costs you to hold the property.
The only danger involved in showing the property "very early"... is the property may not be in it's "good condition" yet. If the
property has not been repaired... the would be buyer might be turned off by what he or she sees.
Most people do not have good imaginations. They can not envision what the property will look like in good condition. The only thing
they really see... is the broken window... holes in the carpet— and the chipped tiles in the bathroom. These are the only images
buyers remember when they think of your property. You can spend all day describing what the property will look like when you are
done repairing it... and still not make the sale.
Depending upon the type of property you are selling and to whom, you may want to wait until most of the repairs have been
completed before inviting in potential buyers. Do not waste your time or money attracting buyers... until the property is ready to be
shown.
The experts follow these basic guidelines for selling their properties quickly:
buy the property right
hold the property for no more than 3 - 4 months
price the property to sell
present the property in good condition
aggressively market the property
start marketing your property as soon as possible
Working With Brokers
Whether or not you decide to use a broker to help you sell your property... is entirely up to you.
In Chapters 9, 10 and 11... we discussed how to buy these properties... and how to calculate your profit potential. Some of these
calculations included the future cost of selling your property through a broker. For this, you should have allowed an average of 6%.
Ultimately, "costs" should determine whether you use a broker or not. Not Just the cost of the broker's commission... but the cost
of holding onto a property too long... the cost of not being able to sell a property with low demand... the cost of buying the wrong
property... and the cost of not being armed with the right information.
Single family homes are typically in high demand. A nice property in a nice neighborhood should sell quickly. An office building will
be harder to sell.
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Brokers can be especially useful when selling a difficult property or a "fixer upper." The broker should know investors interested in
these properties.
If you feel you might be stuck with a property that does not show good promise... consider enlisting the aid of a broker. You will
have to pay the broker a fee, but you may be able to negotiate- Discontinue the repairs and let the broker sell it "as is." Your
asking price will have to be reduced because of the condition of the property. The trade off for these losses, is the reduced holding
costs you incur by having the property sold by a professional... and the money you saved by not making the planned repairs.
Calculate the cost of using a broker... against the cost of holding the property for 6 - 12 months. If you must take a loss... keep it
small!
Selecting A Broker
It is advisable to have a good real estate broker as one of your teammates- !f you don't have one... get one.
Having a clear understanding of what you intend to do (buy and sell foreclosures for a profit).-, interview brokers and discuss your
plans with them. As we discussed in Chapter 7, you will want to work with those who appreciate and want to participate in your
investment activities.
Follow these basic guidelines when selecting a broker:
1 always work with a broker that has a good local reputation
2 select a broker familiar with your "farming" area
3 select a broker that will aggressively market your property
4 ask how soon they expect to show the property
5 ask what price you can expect to sell for
Realtors, real estate agents and brokers are salespersons. They make their living on a commission charged when they sell a
property. To get the opportunity to sell a property... this salesperson has to convince you that he or she can indeed sell it quickly...
for the amount you want. This sometimes leads to an inflated selling price quoted by the broker.
Part of your decision in selecting a broker should be based on the following:
1 make sure the broker will let you sign a short term contract (3 months) that stales a minimum amount the property can be sold
for
2 do not sign any contract giving the broker
exclusive rights to advertise and promote your property *
3 make sure the broker will list your property in the MLS listing service
4 your ability to negotiate selling commissions
* Most brokers will not want to sign an agreement in which they are not the exclusive listing agent- That's okay. Your goal is to
negotiate a "listing agreement" with the broker... that allows him an exclusive "broker's" listing... while allowing you to market your
property simultaneously.
Pricing The Property For Resale
You should have a firm grasp on the property's value and what it can be sold for... before you buy it.
Consider the repairs you actually make to the property... versus the repairs you originally planned to make. If the amount differs,
add or subtract that amount from your original projections. You may decide to adjust your asking price accordingly.
Consult with your teammates or your broker to determine a fair asking price.
Compare the prices of houses in the area... consider size... type... condition... age-, and amenities of comparable properties.
As you have just bought the property, you should spend some time getting familiar with it and the surrounding properties. Find out
if there is anything "special" about your property that may justify a higher price. Likewise, find out if there are any problems that
make the property less attractive. Adjust your asking price accordingly. Remember to add or subtract any additional fees or
expenses you incurred while repairing and holding the property.
Your best hope for selling your property quickly, will be to price it attractively- Everybody wants to get a deal on a piece of
property. So before you buy, consider how much money you will make if you sold it 3%, 5% or even 10% below the market value.
Does this sound crazy? Not really. If you pick up a bargain property at 20% below market value and flip it for 7% below market
value... you can still make a bundle! If this property has a market value of $150,000... you buy it for $120,000 and sell it for
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$139,500... you have made a profit of $19,500! Your property will be very attractive to buyers at that discount. In this example...
the buyer would have bought the property for $10,500, less than the average market price.
If there is little or no interest in your property, try reducing the price. Reduce it in small increments. The longer you hold it... the
more it's costing you. Don't give the property away, just reduce the price enough to make it appealing and to cover your expenses.
Finally, remember that buying a property involves negotiation. Make sure you leave enough room in your asking price to negotiate.
Marketing Your Property
Whether or not you use a broker to sell your properties... you still must learn how to sell properties by yourself- How else will you
know if the broker is doing a good job? You can't know... if you do not know what is involved. Besides, if the broker doesn't do a
good job, who are you going to turn to? The answer is yourself.
While not necessary, it would be better to plan your purchases and sales around the highest property selling seasons. Spring and
fail months are better for buying and selling. People are anxious to move after a long cold winter. People are also motivated to
move or buy a new property in early fall. Their goal is to get into their new home before the new school season starts.
In the summer, many people are on vacation or otherwise away from their homes. In the winter it is difficult to relocate. Added to
that are all of the holidays that consume so much of our time- Expect to take 3 to 4 months to sell your property, from start to
finish. Consider this when calculating holding costs.
Marketing your property is relatively simple. Target those people who may be interested in your property... get the information to
them... then close the sale when you have made the right match.
Before you start advertising your property— make sure it's ready to sell- Present the property in a manner that appeals to the
prospective buyer.
Assuming you have completed the basic repairs... look around to see if anything looks offensive. If it does, remove it. See if you
can find those things that may turn someone off.
There are several inexpensive things you can do to a property to enhance its image... its salability... without spending a lot of
money. If the address numbers on the house are old, faded or rusted... put new ones on. It will not cost more than a few dollars.
Consider changing the door knobs (passage or entry sets) inside the property. For a few dollars each, you could have brand new,
shiny brass door knobs. If the porcelain sinks or tubs are chipped... you can touch them up with porcelain touch-up paint, that
matches that fixture's color- Porcelain touch up paint can be found for under $2.00 a bottle- You may consider inexpensive blinds
for windows that have no covering.
Present your property in its most favorable light. Remove things that may be objectionable- If your are re-painting the interior,
consider using an off-white flat paint. This is also known as "eggshell white" or "Navajo white" or "antique white." It doesn't matter
that you prefer green, blue or yellow. You are not selling this property to yourself. Prepare the property in a way that will attract
the average home buyer... and most people prefer off-white. That is why off-white paint is the number one selling interior paint
color. Always use light, neutral colors when painting.
Look around the property. See what else you can do to make it more appealing, without spending a lot of money. You would be
surprised how an $11.99 light fixture can change the entire look of a dining room.
Think like the professionals think- When you go to look for an apartment or new home... the agent or broker may show you a
model apartment or house- The model is "dressed up" with fresh flowers on the living room coffee table... places set at the kitchen
or dining room table... perhaps even some plants carefully placed.
Make your property look like a nice place to live- Prospective buyers will try to imagine themselves living in it. Help them to see
how nice it will be by presenting your property in that fashion.
Advertising Your Property
Advertising starts with the classified section of your daily newspaper. Place your ads in the local daily newspaper... not a weekly
"shopper type" publication.
Your ad should appear on Saturday or Sunday... whichever is the biggest of the real estate advertising days. Check with the
newspaper first.
Typically, Sunday will be the best day for your ad. Your ad will be competing with several hundred classified ads on the same page!
It is essential to make your ad stand out.
To place a classified ad... call the newspaper... ask for the classified advertising department. Indicate that you would like to run a
"home for sale" ad in this weekend's paper. A good "ad taker," sometimes known as an "Advisor," will be able to help you with the
wording.
As you tell ad takers what you want to say in your ad... they will be able to advise you on the length of the ad... the cost of the
ad... which section it will appear in... when it will appear... and so on.
Ask the ad taker to help you make your ad stand out above the rest. Request the headline to be printed in italics or bold typeface.
If it's not available... see if you can have the headline printed in a larger size... so as to catch the attention of your would-be home
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buyer. A larger type size will cost more... because it adds more space.
The ad taker will help you to utilize the standard abbreviations used in real estate sales. Do not make up your own. Most people will
not know what you are trying to say... and may pass on your ad altogether.
Ask the ad taker about other devices used to enhance ads. Some may offer fancy borders around your ad... or graphics to be
incorporated in the ad. You may pay a little extra for these items... but it may be worth it.
Keep your ads short and simple... and make sure you include the following:
1 the price of the properly
2 the area the property is in (not the actual street address)
3 any special amenities that are unique and make the property more salable
4 the number of bedrooms and baths
5 that this property is for sale by the owner
6 and a phone number where you can be reached
By including the area of town the property is in... and the price... you will have indicated to the prospective buyer that this property
is a good deal. Most serious shoppers will have a good idea what certain properties are worth in certain neighborhoods. If your
property is priced well... you should get lots of calls.
If you put the street address in the ad-, you run the risk of a buyer doing a drive-by. It is preferable to have the buyer call you...
so you can describe the best features of the property that you couldn't fit in the ad. If a buyer can drive by and evaluate your
property— you eliminate any possibility of personally selling him.
An indication that a property is being sold by the owner automatically creates an image of cost savings. The owner is most likely
selling the property by himself to avoid paying the broker's fees. This cost savings can be passed onto the buyer.
Flyers
Another 'inexpensive way to advertise your property... is through flyers. Flyers can be created and distributed quite reasonably.and often create some excitement regarding the property being sold.
Creating a flyer is easy. If you own or have access to a computer with a word processor... you can create professional looking
materials very quickly. If not, you can user markers, stencils or paste on lettering to create a good flyer.
Once complete, consider using a "quick print shop," to make a hundred or so photocopies of your flyer. Try to use colored paper
when reproducing your flyer... it will stand out better. Do not go overboard. Try to avoid fluorescent greens, yellows, oranges, reds
and pinks. While these extremely bright colors will attract attention... the print on these colored backgrounds can be too difficult to
read... and sometimes actually offend the reader.
Distribute your flyers around neighborhoods where people most likely to buy your property will see them. The same can be said for
your newspaper advertising. Try to find those papers or publications that your potential buyer reads... then place your ads there.
Leave several flyers... perhaps small stacks in grocery stores... convenience stores... beauty parlors... sandwich shops and lobbies
of office buildings... in your property's neighborhood.
Get creative. Wouldn't it be great if you could leave stacks of your flyers in the rental offices of apartment complexes? These
complexes are great targets for home buyers. If this is impossible (and you can bet it will be in most cases) consider the common
areas of the apartment complex. How about the laundry rooms, exercise rooms, pools or garage areas?
Flyers should be sent to all the real estate offices in your community- Real estate agents know people looking for properties- You
have now enlisted the aid of real estate professionals to help market your property... without signing any contracts.
If a broker brings you a buyer... the broker will have to understand ... it will be the buyer who pays the commission... not youAfter all, that's why you are selling the property yourself... to save the commission expense.
You should not be "penny wise and pound foolish." If a broker can not get enough from the buyer... it may be wise to offer some of
the expense... to make the deal go through quickly, in other words... if you negotiate to pay the broker $3,000 on a property that
will bring you $23,000-.. it may be worth paying the $3,000-.- Just to get $20,000 right away.
Try using your newspaper ads and flyers to announce an "open house." The open house concept works well for several reasons.
First and most obvious is the prospective buyer gets to see the property. Second, is many people have a hard time when meeting
face to face as buyer and seller.
It is similar to the showdown you might experience when buying a new car. There you are eyeing a beauty on the showroom
floor... while a salesperson is lurking around behind you. You know the salesperson is there.-- and he knows that you know... he is
there. It makes for an uncomfortable atmosphere.
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When buyers come to an open house... they are there amongst many other buyers... thereby reducing the pressure of being
singled out.
Open houses can create a fun, party like atmosphere. It's a gathering! Enhance this party like atmosphere with a plate of cookies
or a few dishes of candy, etc.
Indicate in your flyers or ads... there will be an open house... on Sunday... between 12pm - 4pm. This is an ideal day and time to
hold your open house. Make sure your flyers have the exact street address when advertising, an open house. Let the people know
how to get to your property. It may be a good idea to draw a small map or supply directions.
Make sure your ads contain the date and time of the open house- Be prepared early- Some buyers will want to get a jump on the
others. If your open house is scheduled for 12:00pm - 4;00pm... be ready to show it by 11:00am.
Signs
Make sure you put a yard sign on the property. Ask your teammate the real estate agent about getting a sign... or go to your local
"home improvement center" and buy one. Make certain that your phone number appears on the sign.
Use signs (posters) to help prospective buyers find your property. When conducting an open house, tack signs up on the corners or
intersections that are immediately adjacent to the street your property is on. Use consistent sizes and colors when making these
posters. Make them large enough... and tack them high enough to be seen from a car driving down that street.
Some real estate agents and developers use helium balloons to attract attention to a property. You can also attach them to the
posters and signs, to draw more attention to them.
Final Checklist
Prospective buyers have many questions. Be prepared to answer them. How much will it cost per month to support "this price"
home? How much will closing costs be?
Utilize your teammates. Work with your broker, attorney and title company representative to derive these figures. Work with a
bank representative to determine how much they would lend a qualified buyer... and at what interest rate.
Prepare another flyer... or "fact sheet"... that includes all of the pertinent information about your property. This would be similar to
the flyer you distributed announcing the sale of your property... except... you will want to add more details regarding the price...
terms... loan information... perhaps even a map of the local area- showing the proximity to schools and other services.
Distribute fact sheets to all that come to your open house and to those who you show the property to individually. Prepare for your
records, a list of the names, addresses and phone numbers... of all those who came to see the property. If you are conducting an
open house... you may leave a "guest book" near the front door for people to sign. Follow up on prospects a few days after the
open house. Ask if the prospect has any other questions you can answer.
Presenting Your Property
One of the most important things you can do to ensure a successful showing... is to present your property in the best fashion
possible. Your repairs should be complete. All painting, stripping and wallpapering should be done.
Make sure your property has been thoroughly cleaned inside and out. This doesn't mean a quick dusting! Scrub the kitchen and
bathrooms... make sure they have that nice clean smell! Vacuum, scrub, clean, polish or wax all floors as necessary. Polish all
brass or chrome fixtures. Remove any garbage or debris from both inside and outside the property.
Open all window shades and curtains during the day... and turn on all lights when showing the property at night. Rearrange the
furniture (if you have furniture in the property) to provide a more open look. Remove any clutter.
Make sure the exterior of the property is ready as well. Prune the trees, shrubs or bushes as necessary- Cut the grass and clean it
up. Do not leave piles of debris on the grounds- Look at your property from the street. See if you can see, what a prospective
buyer might see. If it is a bad sight... correct it!
Go over your property with a fine tooth comb. Make sure your property is in the best condition it can be in.
Qualifying Buyers
If marketed properly... you will find many interested people calling you... or showing up at your open house. Not all of these people
however, are really in a position to buy your property- Many will not qualify for a loan.
Your job is to pre-qualify these individuals. By pre-qualifying, you separate those who have the ability to buy... from those who do
not.
This is important because you could spend a lot of time and energy with a prospect... only to find that the sale will not go through.
Why waste your time?
To pre-qualify a buyer... you will have to ask him or her... some straight forward questions.
Ask your more serious prospects:
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1 if they now own or rent
2 are they currently employed
3 how are their credit ratings
4 do they have funds for the down payment
5 can they afford this property
6 are they using a broker
7 are they working with lenders
Negotiating The Price
Expect anything to happen when showing the property. You may have an interested party who wants to discuss price right away.
Indicate what your asking price is for the property.
It might be best, not to enter into verbal negotiations over the priceof the property at this stage, indicate to the prospect that all
legitimate offers will be entertained and ask the prospect to make an offer. This should be a written offer. Ask your attorney for
help in preparing "standard offer" forms that you can hand out to your prospects. You may be able to find forms like these in an
office supply store or local stationery store.
You already know how much you want for the property... and you know that most people will want to negotiate the price- Be
prepared.
Accepting An Offer
When you receive an acceptable offer... you will want an "earnest money deposit" from the buyer. This deposit shows the buyer's
intent to purchase your property at a specific price and under certain conditions. The deposit should accompany an "earnest money
agreement." This agreement will spell out the details of the proposed transaction. Seek the advice of your attorney in drafting an
earnest money agreement. This agreement should include the following:
1 the price of the property
2 the down payment
3 the ending balance due from the buyer
4 how the balance will be paid
5 date of closing
6 date of possession (if different from closing)
7 that financing arrangements will be applied for within 72 hours
8 any contingencies
Closing
Upon receipt of the earnest money deposit and agreement... you will begin the "closing" process. This can be confusing and
sometimes a bit frustrating due to delays from various parties.
This is where you will utilize your teammates the most. You will need your title company representative or attorney to begin an
escrow account. Escrow is where the paperwork and monies are held by a third party (usually an escrow company) to assist and
process in a professional manner... this transaction.
Most of the details of this transaction will be handled by the escrow agent- Remember however, this is your property and your deal.
Never rely on anyone to do your work for you. Stay on top of the escrow agent... find out what's going on. Stay in touch with your
attorney and have him or her stay in touch with the escrow agent. Find out if there are any problems that may delay the closing.
Be flexible enough in your asking price and the terms of the sale.- and you will come out a winner!
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CHAPTER FOURTEEN
The VA... FHA. And Other Initials
“A billion here, a billion there, and pretty soon you’re talking big money.”
-- Everett M. Dirkson
As mentioned in the Introduction, this publication focuses on buying distressed properties from the property owner, the lender or at
the auction when the property is "between" the two parties. This involves the lending institution that granted the loan to the
property owner. This can be a bank, insurance company, mortgage company, credit union... or any institution that grants loans and
accepts mortgages from a property owner. These properties are commonly called "bank foreclosures."
No publication pertaining to the foreclosure investing industry would be complete... without a discussion of those agencies that also
play a role in this industry.
This chapter outlines some pertinent information regarding various government and non-government agencies that we hear so
much about. The properties owned, managed and sometimes sold directly by these agencies, are commonly called "government
foreclosures."
The following describes; who they are... what they do... how to contact them... how to buy properties from them... and the
advantages and disadvantages of working with these agencies... in abbreviated form.
HUD
The United States Department of Housing and Urban Development
The Department of Housing and Urban Development is a federal agency- It was originally established to manage federal housing
and community development programs.
HUD properties are sold to the public when a FHA (SEE FHA) insured mortgage loan has gone into default and has been foreclosed.
HDD pays the original lender the amount of the loan due and additional expenses- HUD then resells the property.
"HUD homes" can be of lower to moderate value. Typically "blue collar" type residences... HUD homes are usually in better overall
shape than the average RTC home. The same holds true for HUD properties versus VA properties.
You can find HUD properties by calling a local real estate agent... looking in the newspaper for HUD Property Sales... or call HUD
directly. You can also check your local phone book for HUD registered real estate brokers.
Discounts on HUD homes are far better than those of the RTC. Discounts of 25% - 35% are becoming more common.
The red tape involved in buying HUD properties can be frustrating. Offers are accepted periodically by sealed bid only. You will need
the help of a HUD representative or HUD registered real estate broker to conduct this transaction.
Deposits required may be as low as $500... or as high as 10% of the bid amount. Terms and conditions vary from state to state.
Begin your HUD home buying process by contacting a representative or by locating HUD sales information from/your local
newspaper. Drive by and inspect if possible any properties you may be interested in. Contact the HUD registered real estate broker
for assistance in preparing your bid.
Ail HUD home purchases must be financed through a conventional mortgage lender. HUD does not finance the purchase of its
properties.
If you don't mind the red tape and complexity of buying a HUD home... you can do well in the "moderate priced ranged" property
arena.
HUD has regional offices that oversee smaller field offices.
FHA
Federal Housing Administration
The Federal Housing Administration was created under HUD, to assist home buyers in achieving their dreams. Low to moderate
income families and first time home buyers are assisted by the FHA, through the offering of lower down payments and lower than
average interest rates.
Originally established in 1934 under the National Housing Act...the FHA was granted the authority to insure mortgage loans made
by private lenders. The FHA issues an insurance policy... the premium for which is paid by the borrower.
The FHA works with approved FHA lenders only and does not grant loans.
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The FHA ensures that a loan granted under its terms... will be paid in full to the lender... should a default occur. The lender who
may not have granted the loan initially... is secure knowing the loan is insured by the federal government. This allows lenders to
grant loans they might otherwise not consider.
If a FHA loan goes into default... the FHA steps in... pays the lender and acquires the property. This property is now like any other
REO.
FHA loans are made more liberally. There is less qualifying and the deals are much better. All FHA loans used to be assumable,
making them even more attractive. Some of these benefits have changed. Today, you may have to qualify to assume an FHA
mortgageBecause the FHA is managed by HUD... check with the HUD regional office for information about FHA properties and availabilityThe advantages to FHA properties are the lower than average down payments and relative ease of ass urn ability. Discounts are not
fantastic.
Because these properties are owned by the federal government they are widely advertised, unlike bank owned properties.
The FHA is not under the same pressure the banks are under to dispose of its properties. There are no "depositors" or
"shareholders" pressuring the "corporation."
VA
Veteran's Administration
The Veterans' Administration was established just after World War II. The VA originated as part of the Servicemen's Readjustment
Act- This "Act" authorized the VA to guarantee a certain percentage of loans to eligible military veterans, from qualified lenders.
If a veteran with a VA loan goes into default, the original lender will start the foreclosure process. The VA who guaranteed the loan
steps in and buys the property from the lender. This is done during the foreclosure process, before the auction.
To locate VA properties, check with your local real estate broker. VA properties are sold directly... and through real estate brokers.
Bids are accepted from the public- Properties are sold "as is"... or [like some FHA properties... may have been repaired and brought
back to good condition.
The VA prefers not to make loans, but it will in certain cases. Like FHA properties... the VA prefers to make these loans to those
who will occupy the property.
One similarity to FHA properties, is the VA tries not to give its properties away. Both of these agencies are sensitive to "dumping"
discounted properties. Because of this, properties are offered very close to market value.
Similar to the FHA, the VA probably has tens of thousands of properties available.
Consult a good real estate broker for more information.
SBA
The Small Business Administration
The Small Business Administration was founded in 1953. It's purpose is to advise, counsel and assist America's small businesses.
The SBA will either grant loans directly to small businesses or guarantee the loans businesses borrow from the lenders.
Traditionally, these loans are made at low interest rates.
The SBA will loan or guarantee a business loan for a multitude of reasons and purchases. Often, these loans are for commercial real
estate.
Similar in action to the VA... when the lender forecloses on a mortgage loan guaranteed by the SBA.- the SBA will buy the property
from the lender... thus becoming the new owner.
The SBA does not sell its properties directly. Auctioneers are used to dispose of the properties.
Bargain properties are found in raw land and commercial properties. There are very few residential properties available.
SBA properties may be hard to find. You will have to contact a SBA office or an auctioneer for more informationFDIC
The Federal Deposit Insurance Corporation & FSLIC
The Federal Savings and Loan Insurance Corporation
The FDIC was established in 1933 as a public corporation. Wait, we have also found that the FDIC and the FSLIC were established
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in 1934 as federal agencies. Which one is it?
Both the FDIC and the FSLIC were created as bank insurance corporations. The role of these corporations was to "collect and se t
aside insurance premiums from member banks." The main purpose being to ensure the bank's depositors from loss. If a FDIC or
FSLIC member bank failed-.. the depositor's funds would have been insured and paid back by the federal government.
During the Great Depression, consumers who feared for the safety of their deposits, made "runs" on the banks that eventually
wiped them out. The banks, not having enough in cash reserves, were devastated. So were thousands of depositors who could not
get their money out.
The maximum amount of insurance per account, is $100,000. There soon may be new guidelines or procedures regarding the
extent to which the federal government will insure accounts in the future.
The FSLIC did for the Savings & Loans, what the FDIC did for the banks. The FSLIC became insolvent in the late 1980's, and its
responsibilities were transferred to the FDIC.
When a bank or similar institution fails... the FDIC takes over... tries to arrange a takeover by another institution... or arranges a
merger with a stronger lending institution. If the FDIC closes a bank and takes it over, it must sell the assets of the bank.
Doesn't this sound like the role of the RTC? You're right... it is.
In 1989 when the RTC was created, it took over the responsibility of disposing of the assets of all the failed savings & loans. The
FDIC maintained supervision of disposing of all failing institutions' assets before 1989-.. and for all failing banks after 1989.
The FDIC has a Board of Directors just like a corporation. The three board members consist of the Comptroller of the Currency and
two Presidential appointees. The best answer we have heard to the question, "What is the FDIC?" is. "It's an independent agency
within the executive branch of the government."
FDIC properties are sold directly, through brokers and at auctions. Contact your local broker for more information... or look up The
Federal Deposit Insurance Corporation in your local phone book or at the library.
If you can obtain lists of FDIC properties, use them to search for properties as you would with a REO list. Do drive-bys, take notes,
arrange inspections, and so on.
It has been said that FDIC properties can be had at 10% to 25% off the market price- There may be some financing available
through the FDIC. Conditions vary and the requirements may seem unattractive.
Like the FHA, VA and SBA, the FDIC tries to sell its properties at or near market value.
Previous
Next
Copyright © YOUR COMPANY YEAR
All Rights Reserved
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CHAPTER FIFTEEN
SHOWTIME
Are you ready to test your skills?
Go out into the “real world” and do a trial run. Before you ever put a dime of your own money or a drip of your own sweat into your
new business, you need to go through some field exercises.
Why?
You’ll be putting yourself in touch with other people who are already in the business. There are a lot of real pros and nervous
novices out there today. Tell them you’re just starting your business.
Ask them questions.
Ask them for tips.
Most people I've met are more than happy to talk about themselves and how they make money. -(smile)- Be a SPONGE. Soak up
all the information you can about how the other guy gets it done.
This is the start of building your own network of colleagues in the real estate profession. No one can do this all alone – you need all
sorts of people to help you. From the property buyers and sellers to the support resources (attorneys, financial advisors, HUD/VA
program reps, Realtors, etc.) you work with to put together your ventures, you are forming a team of professionals.
Identifying and seeking out real estate colleagues who are successful in foreclosures and pre-foreclosures will put you further down
the road of success at a faster pace.
Still not ready to go out there on your own?
No problem. We can help. We know that working with foreclosures requires some specific skills and confidence.
There’s a lot to learn and master. Here’s a word of advice:
Build your foreclosure real estate portfolio – not a room full of “how to” materials.
While there are books you should have in your library, they don’t help by simply buying them. The real trick is putting them to work
for you by implementing their suggestions.
Remember:
* You don’t make money by purchasing books on how to make money.
* You do make money by putting the right offer in at the right time on the right property.
That is why we have put together our team of affiliate coaches.
See what our coaching can do for YOUR bottom line!
What do we offer?
Just email us at coaching@federalhomes.com with your name, address and telephone number.
We'll have a specialist get back to you right away!
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The following are forms which can be used as examples for the types of records you should be
keeping...
MARKET SALES ANALYSIS FORM
INSPECTION REPORT
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PROPERTY ANALYSIS FORM
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CASH FLOW ANALYSIS
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REPAIR/REPLACE/REHAB ANALYSIS
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CHAPTER SEVENTEEN
Please choose a category or search for a term related to your interests.
You'll be presented with a listing of electronic books and products from our library that match your
needs.
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Search 100% of ClickBank Marketplace by
product name, description, or ClickBank nickname.
Search ClickBank!
Market Place
Business to
Business
Education,
Industrial,
Management, New
Products,
Promotion,
Publishing,
Reports, Web
Design,
Health & Fitness
Addiction,
Alternative,
Beauty, Cooking &
Recipes, Diet,
Fitness, Medicine,
Mental Health,
New Products,
Nutrition,
Remedies,
Spiritual Health,
Womens Health,
Home & Family
Cooking &
Recipes, Crafts,
Family Tree,
Garden, Home
Improvement,
Kids, Marriage,
New Products,
Parenting, Pets,
Real Estate,
Students &
School,
Computing &
Internet Banner
Design, Browsers,
Domains, Email
Services, Graphics,
Network
Administration,
New Products,
Programming,
Screensavers, Site
Design, Web
Hosting,
Money &
Employment Debt,
Education,
Entrepreneur,
Finance, Home
Business,
Investment, Jobs,
Management, New
Products, Real
Estate, Resume,
Self Employment,
Fun &
Entertainment
Astrology, Games,
Hobbies, Humor,
Magic, Music, New
Products, Novels
& eBooks,
Psychics,
Screensavers,
Tarot,
Marketing & Ads
Banners,
Classifieds,
Consulting, Ezines,
How To's, New
Products,
Promotion,
Resources,
Submitters,
Society & Culture
Charity, Fine Arts,
Investigation,
Language, Law
Enforcement, Love
& Romance, New
Products,
Philosophy &
Religion, Politics &
Government,
Science,
Shopping, Travel,
Sports &
Recreation Autos,
Casino, Extreme,
Golf, Horseracing,
New Betting
Products, New
Sports Products,
Outdoor, Sportspicks, Team
Sports, Training,
Shoppers in system: 87
Put This System To Work For You!
12/03/2005
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How to Buy Foreclosures - Full Version
Main
.:: Quick Search
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Buyers
Help
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Buyer inquiries are sent through FSBOMonster so visitors cannot
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S KS Kansas
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S NJ New Jersey
S NM New Mexico
z Find Foreclosure Homes ::: Nationwide Listings
S NY New York
S NC North Carolina
z The Real Estate Library
S ND North Dakota
S OH Ohio
S OK Oklahoma
S OR Oregon
S PA Pennsylvania
S RI Rhode Island
S SC South Carolnia
S SD South Dakota
S TN Tennesee
S TX Texas
S UT Utah
S VT Vermont
S VA Virginia
S WA Washington
z ForeclosureConnection.org Creative Real Estate Store
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Send mail to adratesheet@FSBOMonster.com
S Canada
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REAL ESTATE INVESTING
Mark Walters, 3rd generation
real estate investor and author
WELCOME TO REAL ESTATE
INVESTOR'S BASE CAMP!
Below are categories showing you each step of a successful real estate deal.
If you're just starting out, you will quickly learn what you need to succeed. If
you're an old pro, you will find new tools to help make you far more *money!
Discover all the exciting, profitable and incredibly affordable information
found in this one-of-a-kind investor's real estate base camp. If you have any
questions, email them directly to me at..... info@CashFlowInstitute.com
We want you to succeed!
Mark~
Enroll NOW and Get an Incredible Gift:
Instant Access to my popular Mini-ECourse...
"What You Need To Know To
Win With Real Estate!"
First Name
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* Your information will never be sold or disclosed to anyone.
I respect your privacy and hate junk email with a passion!
The Ecourse will be sent to you via email -- each day for the next seven days.
Simply submit your first name and email address in the form above to receive
"Part 1" of this Ecourse in your email box.
Base Camp's "TOP of the SUMMIT" Recommendation...
"How To Make Money In Real Estate
Without Owning Property"
This is master investor Tom Lucier's red hot book explaining his very
profitable option tactics. Investor's have just discovered this guide and it
is now on our best seller list!
For Details...
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1. Learn The Basics.
Many potential real estate investors just don't know the difference between
a deed, a trust deed, a mortgage and a note. They buy material concerning
lease-options, double close, owner carry-backs, short sales and foreclosures,
but don't know how to fill out a purchase agreement or a Warranty Deed.
Learn the basics!
"The Big Collection - 90 Real Estate Forms!"
"Essential Guide to Real Estate Contracts"
2. Learn How to Buy and Profit from Property
The best investors start with little or no cash. They have to
make good deals to survive... and that probably should be everyone's attitude.
Many of the investing techniques listed below require little or no cash.
"The Million Dollar Foreclosure System"
"Single Family Homes, The No Risk Investment"
"Short Sales - A Guide for Foreclosure Investors!"
"The Best Real Estate Investment Nobody Knows About!"
"Last Great Real Estate Secret"
"HUD Home Secrets"
"Profits in Probate Real Estate"
"Subject To & Lease Options"
"Foreclosure Short Sale Tool"
"Free Foreclosure Investing Newsletter"
"Skip Trace Foreclosure Profits!"
"Stop Foreclosure!"
"Buy FSBOs The Easy Way"
"Slick Subject To Software"
"The Complete Package"
"Money-Saving Real Estate Success Package" CLICK
3. Adopt a Marketing Plan
Our contention is that people fail at marketing, not investing. They learn all
the clever buy-sell tricks, but never uncover enough motivated sellers to really
become successful investors. The truth is that real estate investing is just like
any other business. If you don't market and advertise you will fail.
"Postcard Power - Investor Marketing"
"How to Market To Attorneys"
"Full Powered R.E. Investor Web Site"
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"Motivated Seller Magnet"
"Your Own Real Estate Web Page"
"Advertising Promotional Items"
"Advertise With Car Window Decals"
"Your Personal Caricature"
4. These Techniques Work!
There is so much exciting about profitable real estate
investing that it becomes a lifelong passion. The following items
should be near the top of your "advanced learning" list:
"Land Contracts"
"The Wrap Around Mortgage"
"Adverse Possession"
"Land Trusts for Privacy & Profit"
"How to Find, Buy and Turnaround Small, Mismanaged
Rental Properties for Maximum Profit"
"How To Make Money in Real Estate Without Ever Buying Any
Property"
"Find and Assign Ugly Properties Without Cash,
Credit, Risk"
"How To Buy Real Estate With Your IRA"
"How To Do Real Estate Title Searches!"
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5. Have An Exit Strategy
Exit strategy? That just means that every time you buy a
property you must have a plan on how you will get to your profit. You must
have a sound exit strategy for every property BEFORE you buy! That will
force you to think through your investing plan.
"How To Sell A Home In 5-Days!"
"A to Z Appraising"
"Improve Curb Appeal For Big Profits"
"Sell Homes Through Flat Fee MLS Listing"
"Landlord Cash Flow Analyzer"
"FREE Rent Master Software"
"Contractor City - How-to Books for Rehabbers"
"Electronic Real Estate Investment Appraisal"
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6. Mobile Home Investing
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Mobile homes have became THE affordable housing choice for many.
This has opened a little noticed profit opportunity for the informed investor.
Here's are the very best mobile home investing guides available....
"Mobile Home Investing!"
"How To Rehab UGLY Mobile Homes"
7. Yes, There's More!
Below is a list of material you will need at some point in your investing
career. Add one or two to your investing library every now and then to be sure
you are operating at the highest level of profitability possible.
"How To Build A House FREE"
"How to Reduce Property Taxes"
"How to Win Your Property Tax Appeal"
"Residential Development Made Easy"
"How Real Estate Investors Pay Zero Taxes"
"The Secret of Buying Land for Profit!"
"How To Build A New Home"
"The Christian Lending Network"
"Real Estate Loans"
"Your Mortgage Lender Is Cheating!"
"Opportunity In Canadian Real Estate"
"Opportunity In New Zealand Real Estate"
Save $6,300 When Buying A New Home
8. Legal!
You must create entities that will protect the assets you
are accumulating.
"Do You Have Living Trust Protection?"
"Form Your LLC or Corporation the Easy Way"
"Land Trusts for Privacy & Profit"
"Legal Forms"
9. Cashflow!
Real Estate investing quickly teaches you that it's very
important to always be on the correct said of the cash flow. That means you
always want far more cash flowing into your pocket than is flowing out. Many
investors prefer to focus on ways to generate cash flow without owning
property.
"The Complete Guide to Judgment Investing"
"How To Buy Bad Debts For Profit"
"How To Buy Tax Liens"
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"Note Brokering - An Introduction"
"How to Turn Bad Notes into Big Profits!"
"Tricky Little Facts About Mortgages"
"Monster Marketing Machine"
"Gateway To Cash Flow Industry Books/Software"
"Private Investor Loans"
"Easy Guide to the HP 12C"
"How to Get Quick CASH Today!"
10. A Few Other Ideas!
Really there are plenty of ways to make more money and lead a better life.
We list a few here.
"Learn to be a Loan Officer/Mortgage Broker"
"Become a Real Estate Investment Consultant"
"Easy Stock Market Profits on the Internet"
"MORE Easy Stock Market Profits on the Internet"
"The Penny Stock Trading System"
"Slash'em - Tax Reduction Tool Kit"
"Kill Your Debts"
CLICK FOR FREE BOOK OFFER
REAL ESTATE HEADLINES
Home Buyer Downpayment Gift Assistance Programs March 12, 2005 - About.com : Yes,
they re for real. Downpayment gift assistance programs can help home buyers close on a
home by providing funds for downpayment and closing costs. There s a catch though...find
out how they work and what you ll need to do to take...
Decorators Pitch: Let s Put You On The Couch March 12, 2005 - RealEstateJournal.com :
A small but growing number of interior decorators are restyling themselves as "design
therapists," offering to find clients the perfect Biedermeier cabinet, match paint chips to
fabrics -- and examine childhood traumas in the bargain.
Taking Advantage Of The Vacation Home Boom (Part 6 of 10) March 12, 2005 EscapeHomes.com : Decide what type of vacation setting you desire and identify a number
of locations that meet your environment criteria.
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Please visit our sister Web sites for more money-making material:
http://www.ThePowerLetter.com
http://www.BusinessOpportunityReview.com
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