Secrets To PreForeclosure Profits
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Secrets To PreForeclosure Profits
Content
About the Author ................................................................................................... 3
Introduction to Pre-Foreclosures ........................................................................... 5
The Basics of Foreclosure .................................................................................... 9
Step 1: Organizing Your Office ........................................................................... 16
Step 2: Researching the Market and Qualifying Homeowners ............................ 20
Step 3: Selling the Homeowner on You .............................................................. 30
Step 4: Performing Due Diligence ....................................................................... 35
Step 5: Inspecting the Property ........................................................................... 43
Step 6: Estimating Property Value ...................................................................... 61
Step 7: Negotiating with Homeowners and Others ............................................. 68
Step 8: Preparing and Presenting the Purchase Agreement .............................. 75
Step 9: Closing the Sale ..................................................................................... 81
Step 10: Maximizing Property Value and Appeal ................................................ 84
Step 11: Achieving Maximum Profit .................................................................... 90
A Word on Short Sales ....................................................................................... 95
Conclusion ........................................................................................................ 100
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About the Author
This book is dedicated to all those who’ve suffered hard times and want to make
a success of themselves in the wonderful field of real estate. I know your story
because I’ve been through some hard times myself. Let me explain…
My brother and I escaped Vietnam on a fishing boat in 1986. I was 11 years old
and my brother was 18 at the time. We spent seven days and six nights at sea
and were mugged by pirate boats. They stripped us of all our valuables, but,
luckily, didn’t kill us as happened with other unfortunate escapees. Eventually, a
Malaysian boat picked us up, and we spent six months in a refugee camp before
being transferred to a camp in the Philippines. After a short stay there, the
United States accepted us, and we ended up in Houston.
Neither my brother nor I had much money, so we lived in a two-bedroom
apartment—with eight to 12 other single guys! Needless to say, it was crowded,
and some of our roommates weren’t the best people. One day, I came home
from school to find out the apartment had been raided by the FBI looking for
drugs and illegal hand guns!
Although my brother and I were poor and dressed in clothes bought from charity
organizations, we worked hard. I graduated from high school, went to college,
and worked in the IT field for two years. I had a good job, but, in 2002, the
software company I worked for crashed and went out of business. There I was
without a job!
I’d always heard that real estate was the place to make good money, so I started
studying by taking home study courses and attending seminars to gather the
basic knowledge I needed. Then, I began knocking on the doors of homeowners
for a few months and discovered very quickly that no one wanted to talk to me!
Realizing that door-knocking was not an effective method of getting deals, I
become a ―bird dog‖ for other real estate investors. A bird dog finds good leads
for investors and then is paid for those leads that pan out. In the meantime, I
worked at finding my own deals. After about four months, I found a good one. I
bought a home for $55,000 and put $22,000 worth of repairs into it. I sold the
home for $134,000 dollars at a five-day auction. I earned a $57,000 profit (minus
3% of the buyer’s closing costs)! This kind of profit doesn’t happen every time, of
course. But through a combination of luck and hard work, I was on my way in a
real estate career!
As of this writing, I’ve bought over 340 properties, including single-family homes,
condos, town homes, and vacant lots. I specialize in wholesaling but have also
done many rehabs, subject-to’s, pre-foreclosures, and short sales.
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I’ve had a lot of success, and I want to share it with you. I want you to make the
money you deserve! This book is part of that sharing. It will provide you the
fundamental and essential knowledge necessary to operate effectively in the pre-
foreclosure market.
Let me be clear. This book is designed to provide you with essential basic
knowledge, but it’s only one part of my real estate ―curriculum.‖
You can gain advanced ―real world‖ knowledge by visiting
www.dodeals.com/preforeclosureprofits
You can also gain access to hot bargain-price property leads at
www.dodeals.com/preforeclosureleads. You’ll receive the following benefits:
Foreclosures / REOS
PreForeclosure Leads - these are homeowners who just got kicked out
of bankruptcy. Chances are they’re headed into foreclosure.
Deep-discount Wholesale Deals
Bankruptcy Leads - these are homeowners who’ve just filed bankruptcy
and want to avoid foreclosure.
Motivated Sellers – these are homeowners who have unwanted
properties
In this book, my seminars and on my websites, I provide you with everything you
need to be a success in the pre-foreclosure market—and beyond! What you
need to supply is hard work, persistence, and a positive attitude that you will
succeed no matter what obstacle is placed in your path!
I wish you the very best of luck in your real estate career!
To Fun, Fortune and Freedom,
CEO DoDeals.com
Founder and President: Certified Real Estate Investors Association (CREIA)
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Secrets To PreForeclosure Profits
Introduction to Pre-Foreclosures
In the real estate market, knowledge is definitely power—and the secret to
profits! Since the subject of this book is pre-foreclosures, it’s important for you to
understand exactly what pre-foreclosures are and what opportunities are
available to you. This book is dedicated to helping you build and/or improve a
career in real estate through my hard-earned experience and knowledge, so let’s
get started!
What Are Foreclosures and Pre-Foreclosures?
A foreclosure is a legal process. It’s initiated by lenders when home owners (and
others) fail to meet their mortgage obligations. In other words, home owners fail
to meet their payments and, as a result, lenders want the property back. The
foreclosure process starts when a lender files a law suit or a notice of default
(more on this topic later) in the official public records. We’ll cover this process in
more detail in the next chapter.
A pre-foreclosure sale takes place between the time when the lender files suit
and when the property is scheduled to be sold at a public foreclosure action or a
trustee’s sale. A pre-foreclosure is not a formal legal process; it’s an opportunity
for you to assist stressed-out home owners and make a profit at the same time.
Why Do Foreclosures Occur?
Often, people tend to think that foreclosures occur because of poor financial
management by home owners and others. While this certainly can be true, there
are really many different reasons why foreclosures take place. It’s important for
you to understand these reasons so you can deal effectively with home owners
facing foreclosure and help them to make the best of a bad situation.
One reason can be a poor local or national economy. When jobs are lost due to
cuts, outsourcing or other factors, homeowners lose their income and can no
longer afford the mortgage payments.
A second reason can be personal problems. Most commonly, foreclosure is
caused by divorce, death of the sole provider, or, increasingly, overwhelming
medical bills due to the high cost of health care in the United States.
A third reason is the tendency of some first-time home buyers to over-extend
themselves. They fall in love with the American dream of home ownership, but
fail to have cash reserves to handle unexpected costs and emergency repairs
that come with owning property. This means they fall behind and end up in a
continual and losing game of ―catch up.‖ Eventually, they can’t meet their
payments, and foreclosure is the result.
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A fourth reason is the availability of loans with high loan-to-value ratios. These
days, loans are offered at 90 to 100% of the value of the property securing the
loan. This means buyers can purchase a home with little or no down payment.
Since they have little invested in the home, they may walk away at the first sign
of financial trouble.
A fifth reason is the lenient terms offered by such governmental agencies as the
Federal Housing Administration (FHA) or the Veteran’s Administration (VA). This
means lenders can be tempted to offer loans to individuals with suspect credit
and job histories. Unfortunately, the result can be foreclosure.
A sixth reason is the existence of predatory lenders. These unscrupulous
individuals and institutions target borrowers with low income, low credit scores,
bankruptcies, and excessive debt. Since these borrowers can’t tap into the
conventional loan market, predator lenders offer them ―subprime‖ loans with high
interest rates and outrageously high late fees. Again, the result is often
foreclosure.
A seventh reason is, oddly enough, low interest rates. Low rates can tempt
buyers into purchasing more house than they can afford. Most families these
days have two income earners; however when one of the earners loses his or
her job, the family can often no longer afford the payments on an expensive
home. They fall behind in those payments, and the lender starts the legal
process of getting the property back.
As stated earlier, it’s important for you to understand all these reasons. It will
help you empathize with your customers—the home owners—and, at the same
time, avoid bad deals. Now, let’s look at the benefits of making a living in the
pre-foreclosure market.
What Are the Benefits of Working in the Pre-Foreclosure
Market?
There’s no doubt about it—the pre-foreclosure market offers many advantages to
the careful investor.
First of all, you can buy properties at a deep discount. Discounts can range from
20% to over 40% of market value. This means you can buy a property, turn
around and sell it at under-market value, and still make a great profit.
Second, you can structure deals that will cost you very little money or, in some
cases, no money at all. This doesn’t mean you’ll be able to operate in the market
without cash reserves. That’s just plain foolish. However, it does mean you can
get creative and legally use other people’s money to finance your deals.
Third, you can buy properties quickly without all the rigamarole that goes on with
conventional transactions. This not only means that you don’t get buried in
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paperwork, but you’re also able to turn relatively quick profits while moving on to
the next deal.
Fourth, a great advantage of operating in the pre-foreclosure market is that
you’re able to research and inspect properties. This isn’t possible during the later
auction phase of foreclosure which means you could end up with a ―pig in a
poke‖ if you’re not very careful. Buying a pre-foreclosure avoids this potentially
disastrous possibility.
Fifth, you’re able to structure sales agreements in a creative fashion. This
means you can generate the best terms possible for you while, at the same time,
helping a home owner out.
Sixth, you have the opportunity for financial and personal freedom. In effect,
you’re an entrepreneur, and you can set your own hours, rules, and profit goals.
You’re no longer slave to a boss and a rigid office routine. Best of all, once you
become proficient at buying and selling pre-foreclosure properties, you can
ensure a secure future for you and your family since you’re not limited to the
amount of money you can make. Also, your knowledge of the pre-foreclosure
market will transfer to other aspects of real estate, allowing you to expand your
efforts into different markets.
Of course, every field has its disadvantages as well as advantages, and it pays to
be aware of them so you’re prepared to deal with and overcome them. Let’s look
at the disadvantages next.
What Are the Disadvantages of Working in the Pre-Foreclosure
Market?
Let’s face it—foreclosure is not an easy process for the homeowners. That
means you’re going to deal with people who may be angry, frustrated, and
looking for someone to blame. In some cases, they can be very difficult to deal
with, and you have to be prepared for these situations. Working with home
owners in foreclosure situations calls for tact, patience, and empathy. In effect,
you have to be a ―people person.‖ We’ll discuss this at length later in the book,
but the best attitude to take is that you are a problem-solver; that is, you’re there
to help the property owner out of a bad situation in the best way possible. This
attitude will help you maintain your sense of perspective and humor in all your
dealings.
Another ―disadvantage‖ is that you’ll have to do a considerable amount of
courthouse research to make sure your deals are profitable. This is hard work,
requiring extensive attention to detail to make sure the property isn’t loaded down
with unexpected liens and other items that can entangle you in legal procedures
over a long period of time and end up reducing your profit—or even resulting in a
loss. When dealing with pre-foreclosure properties, the devil is indeed in the
details!
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Finally, competition is tough in the pre-foreclosure market! After all, other buyers
will be seeking the same profit opportunities that you’re looking for. This means
you have to be up-to-date on local conditions and opportunities and stay on top
of the market at all times!
What Does It Take to Become a Successful Player in the Pre-
Foreclosure Market?
You don’t have to be a financial genius to operate successfully in the market, but
there are definitely certain pre-requisites you must have. Most fundamentally,
you need complete and detailed knowledge of not only the market, but the local,
state, and national laws regarding foreclosures. This book will provide you with
the basic information on that subject, but you’ll need to study real estate rules
and regulations in detail so you can operate effectively and not inadvertently
break one or more of those laws.
This means you’ll need to do your research and do it well. If you’re a person of
action and don’t enjoy reading all that much, think of it this way: You wouldn’t go
hunting with an empty gun. You’d just be setting yourself up for failure and
wouldn’t bag any game at all! So, consider research your ammunition. Once
you have a full load, you’ll be able to hunt down and bag the best and most
profitable bargains possible!
No doubt you’ve heard the famous saying that there are only three things
important in real estate—location, location, location. Well, in the pre-foreclosure
market, there are three other things that are very important—persistence,
persistence, persistence! Absolutely nothing beats persistence! You have to be
willing to dig and dig (in terms of research) and to deal effectively with owners
and your competitors. Remember, the race doesn’t always go to the smartest
person around; it goes to the person who never, ever gives up!
Pre-foreclosure investing is one of those investing strategies that you do not
require any money or credit for. Sellers will often deed you their house for free.
Okay, that’s the introduction to pre-foreclosures. Now, let’s get started on
gaining the knowledge you need to become a successful investor in this lucrative
niche of the real estate market!
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The Basics of Foreclosure
In order to invest profitably in the pre-foreclosure market, it’s necessary to
understand all aspects of the foreclosure process and how to operate in each of
the stages within that process. It’s also necessary to understand what options
are available to homeowners so you can see the process through their eyes and
help them to make the best decision possible as well as the best one for yourself.
Let’s start by looking at the three stages of foreclosure—pre-foreclosure,
foreclosure and real estate owned (REO or OREO). As an investor, you can
operate in any three of these stages, but, as you’ll see, the pre-foreclosure stage
offers the greatest profit opportunities and the least amount of hassles.
The Pre-Foreclosure Stage
As you learned in the introduction to this book, a pre-foreclosure sale takes place
between the time when the lender files suit and when the property is scheduled
to be sold at a public foreclosure action or a trustee’s sale. Here’s an overview of
the benefits of buying pre-foreclosure properties so you can contrast them with
the disadvantages of the foreclosure and REO stages.
Benefits of Pre-Foreclosure
Deep discounts
Greater profits
Ability to research inspect property/more accurate value estimates
Ability to avoid the potentially expensive bidding process
Ability to structure sales agreements in a creative fashion
Less hassle from third parties (lenders, etc.)
The potential for minimum cash outlay
The Foreclosure Stage
When institutions (banks, lenders, etc.) lend money to individuals for the
purchase of a home or other property, they naturally expect to be paid back.
They’re in the business of lending money to make a profit. When borrowers
(mortgagors) fail to meet their mortgage obligations, lenders want the property
returned so they can re-sell it to others for a profit or at least reduce their losses.
They regain the property through the foreclosure process.
Of course, both mortgagors and lenders will do their utmost to work out an
agreement that will allow people to keep their homes and the lender to keep
receiving payments. In addition, neither the mortgagors nor the lenders want the
legal complications of the foreclosure process. Unfortunately for them—but
fortunately for you!—they can’t always work out an agreement, and the lenders
have to initiate foreclosure proceedings.
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So, how is the foreclosure process begun and what’s involved in it? It’s
important for you to be aware that every state and county has different rules and
regulations that you’ll need to learn well. Otherwise, you may miss something or
make a mistake than can cost you money. However, in general, every state
within the U.S. uses one of two types of foreclosure—judicial and non-judicial.
Judicial Foreclosures
In states with this system, foreclosure can only take place through court action.
The process usually begins when the home owner falls behind on his or her
mortgage payments due to one of the several reasons described in the
Introduction (divorce, health issues, loss of job, etc.). Typically, the foreclosure
process goes like this:
1. A lender files a lawsuit with the appropriate court to foreclose on the
mortgage or deed of trust.
2. The borrower must respond to the lender’s ―complaint.‖
3. A court hearing date is set.
4. During the hearing, the judge evaluates the complaint and either
dismisses it or orders foreclosure of the loan.
5. If the decision is for foreclosure, the judge then orders that a public
foreclosure auction sale be held on a specified date.
6. The public foreclosure auction date is then advertised to the public.
7. At the auction, the property is sold to the highest bidder. Or, if there’s no
acceptable bid, the property reverts back to the lender.
8. A ―deficiency judgment‖ may be levied against the borrower. This is a
personal judgment against the borrower for the remaining balance on the
loan after a foreclosure sale.
9. After the sale, the borrower does have the opportunity to exercise
―statutory redemption rights.‖ That is, within a specified amount of time,
he or she can regain the property by paying all costs and interest (in
addition to the mortgage debt) to the lender.
10. If the borrower does not exercise statutory redemption rights within the
specified amount of time, a sheriff’s deed or certificate of title is given to
the highest bidder.
Non-Judicial Foreclosures
In states with this process, the foreclosing lender makes use of the ―power of
sale‖ covenant specified in the mortgage or trust deed. This is the right of the
lender to force the sale of a property without judicial action. Typically, this is how
the process works:
1. The lender files a default notice with the appropriate office (county
recorder, public record, etc.).
2. A trustee’s sale date is set.
3. The sale is publicly advertised.
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4. At auction, the property is sold to the highest bidder. Or, it’s taken back by
the lender if no bids are acceptable.
5. As with judicial foreclosures, the borrower may exercise statutory
redemption rights after the sale.
6. After statutory redemption rights have expired, the deed is given to the
highest bidder.
At this point, you may be thinking to yourself, ―I could pick up some pretty good
bargains at an auction sale.‖ And, it’s true—you can! However, an auction has
several disadvantages that make it a poor choice compared to pre-foreclosure
bargains. Here’s what they are:
Greater competition—by definition, auctions are public which means
everybody and his brother knows about the sale and can enter the
bidding. This can drive the price up and have two potential negative
results. One, it can put the property beyond your means. Or, two, if you
do win the property, it may well reduce the profit you can earn.
Fixed sales terms—at a public auction, there’s no opportunity to
negotiate sales terms unlike in the pre-foreclosure stage. You have no
flexibility and no opportunity to negotiate terms that could earn you more
profit.
No inspections—at a foreclosure auction, you buy the property ―as is.‖
You have no opportunity to inspect it in order to discover any defects
(leaky roofs, etc.) that could end up costing you a lot of money.
Proof of funds is required—if you’re a bidder at a public auction, you’ll
be required to show proof that you have the money necessary to complete
the purchase. For example, you may be required to have cash or a
cashier’s check for X amount of your winning bid (5%, 10%, etc.). Then,
it’s likely that you’ll be required to pay the rest of your bid amount within a
short period of time as well as title transfer fees. (This requirement keeps
non-qualified bidders from slowing down the process.)
No leverage—since auctions are strictly ―cash and carry,‖ you’re not able
to use the opportunity to line up a lender to finance the balance of the sale
price. If you’re new to investment and have little free cash available, this
means you’re effectively shut out of the auction process.
You may not be able to insure the title—title insurers do not like risk,
and most of them consider foreclosed properties to be an unacceptable
risk. They’ll take a very close look at such property titles and, if they find
any errors, they may well refuse to insure them. This, in turn, may leave
you with unacceptable risk.
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Potential for bidder collusion—there’s always the possibility that a
group of bidders may meet before an auction sale and determine a
maximum bidding amount on a desired property. This has the effect of
restricting competition among other, less well-heeled, bidders. The
result—you don’t get the property and end up wasting your time.
Poor property condition—after you win a property, you may find it’s in
such poor condition that no property or casualty firms want to insure it.
The possibility of unfriendly occupants—if the property is occupied by
unfriendly owners or tenants, you may be forced to evict them. This can
be expensive and time-consuming. Basically, it means you can’t do
anything with the property until the occupants are ousted—not a good
scenario for making a profit!
The “right of redemption” obstacle—from earlier in this chapter, you’ll
remember that owners have the right to redeem their property after the
sale within a specified amount of time. The redemption period varies with
the state and can range from anywhere from 30 days to a year. So, this
means you run the risk of losing the property after having bought it.
Technical flaws in the foreclosure process—errors can abound in the
foreclosure sales procedure—misspelled names, Wrong Street addresses,
math errors, failure to adhere strictly to procedures, etc. This opens up
the possibility for the previous owner to appeal for an overturn of the sale.
Resolving these issues can take months and add up to a big headache for
you in terms of time and money.
The REO Stage
This stage takes place after the property has been foreclosed, and it’s been
taken back by the lender. The term ―REO‖ stands for ―real estate owned.‖ It’s
also commonly known as ―OREO‖ (other real estate owned). Typically, there are
many of these properties available on the market, and, on the face of it, they
might look like bargains. But a closer look reveals some real roadblocks to
making a profit:
Roadblock 1: Most are sold through real estate brokers. This means they’re
sold at full market value, so there’s little incentive for you to purchase one
because there’s no real profit in it.
Roadblock 2: There are many rules you have to follow. Many lender-owned
properties are HUD (Department of Housing and Urban Development) or DVA
(Department of Veterans Affairs) homes. This means you’ll need to follow a strict
set of rules, rules that are enforced by the federal government. Plus, on other
non-HUD and non-VA properties, you’ll have to follow the rules set up by the
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lender. In short, you could be facing a lot of hassles, hassles that you won’t face
in the pre-foreclosure market.
Roadblock 3: You’ll need verifiable proof of funds. As in the foreclosure
stage, no one wants amateurs with no money slowing down the sale process, so
you’ll need to have funds on hand to pay the down payment and closing costs.
You’ll also need to prove that you’ve been pre-approved for a loan to finance the
purchase.
Roadblock 4: You don’t have the opportunity to do an inspection of
important home systems. Many REO properties are vacant and all important
systems—electrical, heating/cooling, plumbing, natural gas, water, etc.—are
turned off. This means you can’t inspect these systems. Since they can be
extremely expensive to repair, you definitely don’t want to invest in a property
without knowing their condition.
Roadblock 5: REO sales are final! All these sales are ―as-is,‖ so if there are
problems with the property, you’re stuck with them. Problems can range from
environmental concerns (mold, asbestos, lead-based paint, etc.) to hidden
structural damage. They can all be expensive to correct, and, legally, you have
no opportunity to seek compensation from the seller.
From the above information, you can see why I feel the pre-foreclosure stage is
the best area to target. It offers the greatest profit potential, the fewest hassles,
and the least amount of risk.
Now, let’s take a look at foreclosure through the eyes of the property owner so
you can fully understand the options they have when facing foreclosure. This will
help you to show them the benefits of working with you in the pre-foreclosure
stage rather than undergoing the difficulties of foreclosure.
Owner Options
In general, property owners have seven options available to them when they’re in
danger of losing their home or other property to foreclosure.
Loan forbearance/modification—This can be a strategy worth pursuing
for property owners. In this situation, the loss mitigation department of the
mortgage company may make arrangements with the owner to pay some
of the back payments now and the balance within a certain time period.
Here’s a typical example: John and Janet Smith owe $9,000 in back
payments, attorneys’ fees, etc. Since the mortgage company doesn’t
want the trouble and expense of foreclosure, it may accept $4,500 now
and $750 per month for the next six months. Of course, the Smiths would
have to resume making their normal monthly payments.
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A loan modification is a permanent change to their mortgage that may
lower their payments, and the delinquent payments may be added to the
mortgage balance. A loan modification or forbearance is easier to arrange
prior to the mortgage company filing a foreclosure lawsuit. Some lenders
will not consider this after filing, but it’s worth trying. Loan modifications
are more common in FHA loans.
Reinstatement of the mortgage—As you learned earlier in this chapter,
owners have up to and including the morning of the auction to catch up on
their payments. So, if the Smiths have the cash, this is obviously a good
solution.
Refinancing of the mortgage—It’s usually very difficult to arrange new
financing when owners are already in default on their existing mortgage. If
you can find one, chances are it’s rare and they’ll only refinance up to 70%
LTV*. That means the seller must have a lot of equity.
*Note: “LTV” is an acronym for “loan to value” ratio. It’s the percentage of the
property's value that’s mortgaged. To get the LTV, you divide the mortgage
amount by the lesser of either the appraised value or the selling price. Different
lenders use different standards to determine whether or not a loan will be granted
with a certain LTV. Commonly, owner-occupied residences will get loans at an
LTV of 80%. Investment properties are often required to have a higher LTV.
Here’s an example of an LTV for a home: The home is appraised at $400,000,
and there’s a $320,000 mortgage on the property. So, $320,000 / $400,000 =
.80 or 80% LTV.
Chapter 13 bankruptcy—This can be a viable alternative for property
owners if their financial situation has improved. Filing bankruptcy prior to
the foreclosure auction will stop the sale. Unfortunately, for most people it
only postpones the sale for one or two months. Let’s use the Smiths
again to illustrate how the bankruptcy process works: Immediately after
filing a Chapter 13 Bankruptcy, John and Janet will have to file a
repayment plan with the courts. This plan has to show that they have
sufficient monthly income to pay basic living expenses such as food and
utilities and other monthly payments such as credit cards, car payments
etc. In addition, their income must be sufficient to resume making their
monthly mortgage payments. All past due amounts are usually spread out
between 24 and 60 months. For example, we know they owe $9,000 in
missed payments, attorneys’ fees, etc. Spread out over 48 months, this
would result in an additional $187.50 due each month to the court
appointed trustee. So, if they feel they have the income to immediately
begin repayment of all their debts and the court agrees, this may be a
good choice for them to save their home.
Sell the home on the open market--This is probably the most under-
utilized option available to owners facing the possibility of foreclosure.
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The fact is, selling their home will give them the most money in their
pocket. Did you know that on FHA loans, the lender will postpone the sale
and give them 90 days to sell their house?
Sell the home to investors--If efforts to save their home have been
unsuccessful and time doesn’t permit selling their home on the open
market or they just don’t want to, but want a quick sale with no problems,
they can sell it to an investor—you!
Let the home be sold on the courthouse steps – Most of the time this is
the worst option available to property owners. To be honest, I’ve
experienced times when a house sold at auction for more than what I
could have offered the owners. However, this is not all that common.
And, as mentioned previously, owners can also face several expensive
and embarrassing actions as a result of the foreclosure process—
deficiency judgments, evictions, etc
From the information in this chapter, I hope you can see how targeting the pre-
foreclosure market is an excellent method of earning a profit and helping out
home owners at the same time. With knowledge and professionalism, you can
create a ―win-win‖ situation for everyone involved. Now that you have the
required basic knowledge, it’s time to get started on learning the eleven steps to
success in the foreclosure market. Here’s an overview of those steps:
The next chapter will cover the organization of your office. It will show you how
to set that office up in the most efficient and cost-effective manner possible.
The Eleven Steps to Success in the Pre-Foreclosure Market
Step 1: Organizing Your Office
Step 2: Researching the Market and Qualifying Homeowners
Step 3: Selling the Property Owner on You
Step 4: Performing Due Diligence
Step 5: Inspecting the Property
Step 6: Estimating Property Value
Step 7: Negotiating with Homeowners and Others
Step 8: Preparing and Presenting the Purchase Agreement
Step 9: Closing the Sale
Step 10: Maximizing Property Value and Appeal
Step 11: Achieving Maximum Profit
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Step 1: Organizing Your Office
Setting up and organizing an office used to be an expensive affair. That’s no
longer true thanks to today’s technology. For a minimum investment, you can
now set up a highly efficient and effective work environment. Here’s a list of the
basic equipment you need to get started:
A computer—These days, computers are a bargain. You can buy one
cheaply. However, it pays to get the latest model since the computer
world is forever changing and improving itself. I’d recommend that you
buy one that has a minimum of 1 megabyte of memory and will allow
expansion for more memory. This is important because new software
applications get larger all the time and become ―memory hogs,‖ which can
slow down the computer While this may not be so important at the
beginning of your career, it’ll become so as you become more successful
and the complexity of your investments increases.
A good “office” software suite—you’ll need software that includes word
processing, accounting software, computer slide generation, etc.
Microsoft Office is the most common suite, but there are other, cheaper
applications available (WordPerfect Office, etc.). Often, the application
comes with the computer you buy so make sure the office suite comes
with the features you need. Eventually, if you move into other, more
complex areas of real estate (multi-unit dwellings, commercial real estate,
etc.), you’ll want to buy software that’s designed specifically for the real
estate market.
A high speed Internet connection—whether it’s a DSL (direct subscriber
link) or cable connection, access to the Internet is absolutely vital these
days. The Internet is a great source for research and information on all
real estate topics. Definitely do not use a dial-up connection! Although
such connections are cheap, they’re maddeningly slow and tie up your
phone line. Both you and your clients will end up frustrated at the inability
to communicate quickly and effectively. In short, a high-speed Internet
connection can win you business; a dial-up connection can lose it.
A good laser or inkjet computer. Printers are dirt-cheap these days.
The manufacturers make a greater profit from supplying the ink cartridges,
so it pays to get a printer that’s economical with the ink. It also pays to
buy a printer that produces high-quality letters and images. This
contributes to your image as a serious and professional investor. While
image is not quite as important in the pre-foreclosure market, it will
definitely be a vital factor once you move into other areas of real estate.
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Banks, mortgage brokers, title companies, etc.—they all expect to see a
polished and professional image in the people they deal with.
A reliable cell phone—as you probably already know, this is one of the
most important tools you can have as an investor. A cell phone allows
you to be in contact with buyers and other individuals quickly and easily.
Basically, it’s an information-gathering device that helps you identify deals
and set them into motion. So, it’s important that your service be of high
quality and not subject to a lot of dropped calls. Check out the service
records of the cell phone providers in your area and go with the one that
has the best record of reliability at a fair price.
Those are the basics then, but we need to cover one more subject that’s vitally
important to your success—accounting and record-keeping.
Accounting and Record-Keeping
Real estate is governed by many local, state, and federal regulations. That
means it’s vital for you to keep good records. As you start out, you may not need
anything more than pad of paper and a pencil. However, once success arrives,
you’ll definitely need computerized records and an accounting application. They
not only help you keep your records straight, but make the whole process faster
and easier. They’re well worth the investment! Below is a list of items you
should definitely make use of in maintaining your records:
Accounting software—If you decide to move beyond pre-foreclosures,
you’ll definitely need to add a spreadsheet program (Excel, Quicken,
QuickBooks, etc.) for all basic accounting requirements.
And if you decide to eventually move into property management, then
you’ll need to add software designed specifically for such properties as
apartment buildings, commercial properties etc. This software should
include the following:
A complete accounting package (general ledger, accounts
receivable/accounts payable along with check writing, budgeting and
financial reporting capabilities). Ability to track work orders and
reminders, prints late notices, leases, checks, 1099s, etc.
Tenant and lease management capabilities (including rental
management forms). Pop-up reminders to remind you of late rent,
expiring leases, etc. categorized by building, unit, owner or tenant.
Capabilities to organize tenants, contractors, etc.
Templates for letters and forms, etc.
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You can use the Google search engine on the Internet to study and
evaluate property management software. To help you out, I’ve listed
several software package names and their URLs in alphabetical order.
I don’t recommend a particular package. I simply recommend that you
try them out and see which one works best for you and is relatively
easy to understand.
MRI Residential (http://www.realestate.intuit.com/)
RentRight (http://www.rent-right.com/)
Spectra (http://www.spectraesolutions.com/)
Tenant File (http://www.tenantfile.com/)
TenantPro (http://www.propertyautomation.com/)
You should be able to customize any of these programs to fit your
specific needs.
A separate checking account— Definitely keep your real estate financial
transactions separate from your personal checking account! This is
extremely important because you don’t want to invite a visit from the
Internal Revenue Service (IRS). If you don’t keep a separate account, the
IRS will be very suspicious of any claims for expenses, losses, and
depreciation you put on your federal tax return. It may not consider you a
legitimate business, and, if you’re audited, you may have a devil of a time
proving expenses if your records are mixed in with your personal checking
account. Also, it’s wise to have a credit card in the name of your business
and charge all business expenses to this account. This also keeps
business records separate from personal accounts.
Expense records—Document every expense you have and keep
organized records. Expenses can include bank statements, cancelled
checks, tax returns, invoices, etc. In short, always have proof available in
case the IRS challenges items on your tax return.
Mileage records— It’s essential to keep business-related travel expenses
well-documented. This is because the IRS has a requirement that tax
payers maintain records of business-related mileage in order to claim that
mileage as a business expense on tax returns. As of 2007, the standard
mileage rate that can be deduced from federal taxes for the cost of
operating a vehicle is 48.5 cents per mile for all business miles driven.
Depreciation—Depreciation accounts for the fact that most assets lose
their value over time and must eventually be replaced. You definitely want
to take advantage of IRS rules to make sure you earn the highest profit
possible. So, on your tax returns, claim the maximum depreciation
allowed on such items as office equipment, software programs, cell
phones, etc.
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Storage—Store all documents in an organized fashion so they’re easy to
find and access. You don’t want to waste valuable time trying to locate
items when you could be out finding more business. Use an organization
method that works best for you (three-ring binders, tabbed folders, etc.).
Photocopies of documents are fine for your office, but you may want to
store originals in a safe deposit box at your local bank. However remote,
there’s always the possibility of fire or water damage destroying originals,
and, if that happens, you could spend a lot of time and trouble proving
ownership of property and other items.
Hire a professional for tax returns— Choose a board-certified tax
attorney or CPA to prepare your taxes. This is a must. You may be
tempted to use an off-the-shelf product (TurboTax, etc.), but I advise
against it for the simple reason that these products can’t represent you
before the IRS! Also, an experienced professional will have knowledge
that a tax program couldn’t possibly possess. He or she will be well aware
of all the intricacies of federal tax law and will be able to use them for your
maximum benefit.
Hire independent contractors—At the beginning of your career, you
don’t need the hassle of maintaining employee records (wages, social
security, etc.) and dealing with a myriad of state and federal government
agencies (OSHA, the Department of Labor, etc.). As your business
grows, you may find it necessary to hire part-time and/or full-time
employees. However, in the beginning, it’s much less trouble to hire
independent contractors.
The suggestions mentioned in this chapter should get you off to a good,
organized start in the pre-foreclosure market. Now, let’s move onto Step 2:
Researching the Market and Qualifying Homeowners.
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Step 2: Researching the Market and Qualifying
Homeowners
In the pre-foreclosure market, there are two keys to your success—finding
homeowners who’ve tried to solve their financial problem and failed to do so and
qualifying those homeowners. This puts in you in the position of working with
motivated sellers, and that’s half the battle! In order to find these motivated
sellers, you have to do some hard work and research several sources of
information.
Essential Sources of Information
Below is a list of my favorite information sources. Keep in mind that you’ll be
using a combination of these sources at all times. Don’t limit yourself to one or
two. You want as many open highways to profits as possible.
Courthouse offices—This is the first place to look so you can become
familiar with your local and state government agencies handling
foreclosures. The name of the agency varies with the state; it could be the
county clerk, office of state register, registrar, etc. Find out if you can
access foreclosure proceedings online. This is ideal since you’ll be able to
download the list on to your computer quickly and easily. If the
government office doesn’t have its records online, ask if there’s a
foreclosure reporting service you can use. Keep in mind that, generally
speaking, one of two foreclosure actions will be initiated by the lender’s
attorney and will be available as a matter of public record—a Notice of Lis
Pendens (judicial) or Notice of Default (non-judicial).
A Notice of Lis Pendens means ―a pending lawsuit.‖ It describes the
period between a filing of a lawsuit and when the case is heard in court.
A Notice of Default is a legal notice filed in the public record to let the
public know that the mortgage or deed of trust is in default and is
scheduled to be foreclosed on at a specified time.
Newspapers—State foreclosure laws require that foreclosure notices be
published in newspapers established as ―newspapers of record‖ by the
courts. Usually, this means the newspaper that has county-wide
circulation and is read by the majority of residents within that county.
Also, don’t forget to check the ads in the real estate section. Often, you
can find owners advertising homes for sale in order to avoid foreclosure.
Typical ads include phrases like ―Foreclosure soon. Must-sell
bargain‖…‖Home priced to sell fast to avoid foreclosure‖…etc.
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Foreclosure Reporting Services—There are many foreclosure reporting
services on line. Do a Google search to find ones that target your area.
One of these companies is (www.dodeals.com/preforeclosureleads).
Direct Mail—This can be an effective means of finding motivated sellers,
but don’t use a ―shotgun‖ approach and mail to everyone within your
areas. It’s a waste of time and money. Instead, target those who are in
foreclosure or who have some sort of financial distress. (See ZIP code
targeting later in this chapter.) Also, make sure you mail several letters to
these individuals, as many as four, five or six. People receive a lot of junk
mail these days, so, more likely than not, they’ll throw your first letter out.
But, if you’re persistent and consistent, they’ll eventually open one up and
discover that you can offer them relief from a bad situation. Of course,
send the letters well ahead of the foreclosure auction and space them out.
For example, mail the first letter approximately eight weeks before the
auction, then one per week after that. Another tip is to make your letter
look as personalized as possible so it stands out from junk mail. Avoid the
―bulk mail‖ look at all costs. Below is an example of a letter you can use
as a template and modify to meet your own needs. Notice that it stresses
benefits to the homeowner—avoid stress, creates a win-win situation, etc.
(Date)
Dear Mr. (Mrs., Ms., etc.) Smith,
My name is Jonathan Jones, and I’m a private real estate investor who
would like to help you out. I see that your property is scheduled to be
sold at auction on May 16 on the steps of county courthouse.
I’d sincerely like to help you avoid the stress of a public auction. I have
many different options available, including a quick sale that can create
a win-win situation for both of us.
I’m available at any time to help you work through the available options.
Feel free to call me at 1-800-XXX-XXX, and I’d be happy to discuss
different solutions to your problem.
If I’ve made a mistake and your property is not scheduled for
foreclosure, my sincere apologies!
I hope to hear from you soon!
Sincerely,
Jonathan Jones
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One of my favorite variations on direct mail is to send homeowners a non-
negotiable check for anywhere from $5,000 to $15,000. I put the
homeowner’s name on the check and, on the accompanying letter, say,
―Call this number to get this money.‖ It lets owners know upfront how
much money they can receive by dealing with me and provides a great
incentive to make the call. An example of this technique is shown at the
end of the chapter.
Signs/flyers—Posting signs and flyers is one of my favorite methods of
finding motivated sellers. However, be aware that the posting of signs
may be illegal in your county or state. Check with local government
officials before using this method. Signs can be as simple as:
HOUSES BOUGHT!
Contact me today!
1-800-XXX-XXX
Or
FACING FORECLOSURE?
We can stop it!
Call for a free consultation!
1-800-xxx-xxxx
Flyers can have similar language with more detail. For example:
SEEKING A QUICK SALE TO AVOID FORECLOSURE?
I can help! I’m a private investor who can help you get out from
under your debt. I look at all properties, no matter what their
condition.
Get rid of that stress by calling me at 1-800-XXX-XXXX
Or
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I WANT TO BUY YOUR HOME!
Financial difficulties? Recently divorced? Facing a transfer? I can
help you out! Let me talk to you about buying your home so you
can rid of unwanted stress.
I specialize in helping good people out of bad situations!
Call 1-800-XXX-XXXX
Promotional devices—This includes business cards, refrigerator
magnets, etc.—anything that puts your name and service in front of the
public. People love useful items like magnets, and they can be placed in
places (like refrigerators!) where your name will be constantly seen.
Telemarketing—Phone calls can sometimes be effective. You’re able to
call several people for a minimum of time and investment. However, be
aware that homeowners facing foreclosure sometimes do not want to
answer their phones for obvious reasons. Also, make sure you’re not
violating any telemarketing laws within your state.
Door knocking—This is also a possibility for finding motivated sellers.
However, it has several negatives. Homeowners facing foreclosure don’t
necessarily want strangers at their door! So, you’d better be prepared for
some negativity or, in bad neighborhoods, even worse. Another negative
is that door knocking takes a lot of time and effort, both of which could be
spent using more targeted methods. So, I don’t recommend this tactic
highly.
Networking with wholesalers—Wholesalers get properties under
contract to buy and then sell those properties ―as is‖ to others (like you) for
a profit. You can network with them to find potentially profitable homes.
Real estate agents/agencies—Agents handle homeowners who want to
put their homes on the market at lower prices so they don’t have to face
foreclosure. So, it pays to build good relationships with local agents and
agencies. Experienced real estate agents know the market better than
anyone and can be very valuable resources. Just make sure that any
relationship you have with one creates a win for them as well as for you.
Tax liens—A tax lien is a government-issued lien. It has priority over
mortgage liens. Tax liens are placed on home owners who haven’t paid
their property taxes. It’s likely that if they’re not paying their property
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Secrets To PreForeclosure Profits
taxes, then they’re not paying their mortgage payments. This means they
may be candidates for foreclosure and, thus, potential clients for you.
Title companies—Whenever homeowners are issued Notices of Default
on their properties, these notices are also sent to title companies. So, a
little research on the title companies in the local area can get you on their
mailing lists and give you a handy source of properties facing foreclosure.
Although not all title companies will be willing to work with you, most will
for the simple reason that they know you’ll be needing title insurance. The
Yellow Pages is a good source to find these companies.
Word-of-mouth—As has often been said before, word-of-mouth is the
best advertising possible. Once you’ve established yourself as a fair and
honest professional, your customers will spread the word to their friends,
neighbors, co-workers, etc. So, in the long run, it pays great dividends to
create and maintain a good reputation.
ZIP code targeting—This is a great method of targeting motivated buyers
in stable neighborhoods with middle-income residents. It eliminates poor
risks from lower-income neighborhoods. There are convenient and free
Internet sites where you can find ZIP codes listed by county for your state.
One is MelissaData.com
http://www.melissadata.com/lookups/countyzip.asp. Another is
ZipExpress.com http://www.getzips.com/county.htm .
Qualifying Homeowners
Here’s an ironclad rule you should never ever break: Always, always verify a
homeowner’s loan information before proceeding with a deal! Never let the
excitement at the prospect of making a profit overwhelm your common sense.
You need to know if a pre-foreclosure has enough equity to make a deal a good
one.
There are several ways to qualify a homeowner. First, after a homeowner has
expressed interest in working with you, get his or her written permission to
contact the foreclosing lender. Then, contact that lender as soon as possible to
find out the following information:
Type of loan (conventional, FHA, VA, private, etc.)
The unpaid principal loan balance, the interest rate, amoritization period
and total monthly payment (including principal, interest, taxes and
insurance)
Complete amount of loan payments, accrued interest, late payment
charges, and legal fees that must be paid to end the default and reinstate
the loan.
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Secrets To PreForeclosure Profits
Ideally, the homeowner will have Internet access to his or her mortgage loan
account. This speeds things up considerably. Otherwise, you’ll have to work
with that homeowner to get the information by other means from the foreclosing
lender.
Upon your initial meeting with the homeowner, make it clear that you’re simply
gathering information at this point and want to review the necessary legal
documents (mortgage or deed of trust, promissory note, loan payment records
latest escrow analysis, etc.). To keep track of all this information, use a
worksheet or checklist. You can easily create one yourself on your computer.
I’ve provided an example of an interview form at the end of this chapter for your
use. Feel free to customize it to fit your own needs.
It’s wise to create another form to track the owner’s loan information. This will
help you keep the numbers straight to see if the deal does indeed have profit
potential. An example of such a form is also provided at the end of the chapter.
Another wise method of qualifying a homeowner is to have that homeowner
request a Letter of Estoppel from the foreclosing lender. ―Estoppel‖ is a legal
doctrine. It prevents parties from later denying factual information that they’ve
certified as true. For example, if a lender sends you an estoppel letter stating
that the mortgage or deed of trust has a principle loan balance of $120,000 on
July 1, 2007, that lender can’t later claim that the balance was $130,000 on
August 1, 2007. Normally, these letters are sent to a person in the lender’s loan
loss mitigation department. To help the homeowner out, find out the name of
that person for them so they’ll know who to contact if the lender is slow to
respond.
In addition to the estoppel letter, you can request that the homeowners send an
authorization letter to the foreclosing lender. Such a letter allows you to discuss
the homeowner’s loan information directly with the loan loss mitigation
department of the lender. This letter should request that the appropriate
information be sent directly to you via letter, fax, or email.
In some cases, homeowners will have obtained their mortgage financing from
private lenders. These lenders can be harder to deal with since they may prefer
to go through foreclosure proceedings. However, it’s worth a try. Have the
homeowner send an estoppel letter to the private lender requesting the pertinent
loan information.
In the next chapter, you’ll learn about Step 3—selling the homeowner on using
you and your services.
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Secrets To PreForeclosure Profits
USA TRUST BANK 00055
18421 MAIN PLACE
ABC Company HOUSTON, TX 77009
123 Main
Anywhere, USA 77777
777-777-7777 DATE AMOUNT
8/20/2009 $11,000.00
Eleven Thousand Dollars and No Cents
PAY TO Owner Name
123 Elm Street Call Me NOW To Get This Check
THE Anywhere, USA 77777 Signed!
ORDER __________________________________________
777-777-7777
OF _________
00000000000000000000000000000000000000000
You’ve been through enough already.
Let me save your credit: No Foreclosure. No Bankruptcy.
Let me put CASH in your pocket in as little as seventy-two hours.
It’s not too late, but on April 1, it will be.
Dear Friend,
If you want to STOP FORECLOSURE before the sale of your house in April, I can help you. I not only want to stop the foreclosure
Of your house, but I also want to save your credit and put $11,000+ into your pocket. But you need to call TODAY!
If you wish to stay in your house, please contact me soon. I can help you stay there. I’ve helped many people stay in their homes,
Even when they thought it was impossible. Call me now for a FREE consultation. I want to help you.
Your situation qualifies you to receive $11,000 or more if you choose to sell your house. If you are interested in selling, please
Contact me immediately at 777-777-7777 or tim@email.com. I buy houses. Time is running out, so call now.
Are you considering bankruptcy? Often this is not the best option. Let me explain the hidden dangers of bankruptcy that lawyers
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Before I can help you, I need you to call 777-777-7777 or visit my company’s website at www.website.com. There, you will find
More information about our company and what we do. Feel free to submit an email from the website. It will be answered within 24 hours.
I want to show you:
How to avoid a bank foreclosure
How to find help to make up back mortgage payments
How to sell your home quickly and profitably
How to clean up a credit report
How to file for Bankruptcy without paying outrageous legal fees
How to get your finances back in order
To get your free consultation, call me now at 281-582-8080, and I will begin to assist you immediately. This is a FREE service.
Sincerely,
Tim Mai
Foreclosure Prevention Specialist
tim@email.com
www.website.com YO HABLO ESPANOL
DoDeals.com – Copyright 2009 Page 26
Secrets To PreForeclosure Profits
Sample of an Interview Form
Name of Owner(s): _____________________________________________
Owner(s) Mailing Address: _______________________________________
Address of property: ____________________________________________
Home number: ________________________
Work number: _________________________
Assessed tax value of property $___________________
Date of last assessment ________________
Type of loan (FHA, VA, conventional, private, etc.) ___________________
Months behind on mortgage payments? ______
Is the loan assumable? ( ) Yes ( ) No
Monthly loan payment: Principal $_____________ Interest $___________
Taxes: $_________ Insurance $ __________ Total Payment: ___________
Principle loan balance that’s unpaid ________________________________
Liens or judgments against the property? ( ) Yes ( ) No
If so, how much? __________________________
Recent property appraisal? ( ) Yes ( ) No If so, how much was it appraised
for? ___________________________
Have you attempted to sell your property? ( ) Yes ( ) No
How long has the property been for sale? ______________
Any written offers yet? ( ) Yes ( ) No If you’ve had offers, what amount was
offered? ____________________
The property’s scheduled foreclosure date is _______________________.
Other information:
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Secrets To PreForeclosure Profits
Example of a Loan Worksheet
First Lender
Firm Name: ______________________________________________________
Loan Officer Name & Number: _______________________________________
Loan Account #: __________________________________________________
Type of Loan (FHA, VA, conventional, private, etc.) ______________________
Original loan date: ______________ Original loan amount: ________________
Interest rate: __________ Is the loan assumable? ( ) Yes ( ) No
Monthly loan payment amount $______________________
Total amount of payments in arrears $_______________________
Total amount of accrued interest, late charges, penalties, and legal fees owed
$_____________
Total amount required to end default and reinstate the loan $______________
Second Lender
Firm Name: ______________________________________________________
Loan Officer Name & Number: _______________________________________
Loan Account #: __________________________________________________
Type of Loan (FHA, VA, conventional, private, etc.) ______________________
Original loan date: ______________ Original loan amount: ________________
Interest rate: __________ Is the loan assumable? ( ) Yes ( ) No
Monthly loan payment amount $______________________
Total amount of payments in arrears $_______________________
Total amount of accrued interest, late charges, penalties, and legal fees owed
$_____________
Total amount required to end default and reinstate the loan $______________
Third Lender
Firm Name: ______________________________________________________
Loan Officer Name & Number: _______________________________________
Loan Account #: __________________________________________________
Type of Loan (FHA, VA, conventional, private, etc.) ______________________
Original loan date: ______________ Original loan amount: ________________
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Secrets To PreForeclosure Profits
Interest rate: __________ is the loan assumable? ( ) Yes ( ) No
Monthly loan payment amount $______________________
Total amount of payments in arrears $_______________________
Total amount of accrued interest, late charges, penalties, and legal fees owed
$_____________
Total amount required to end default and reinstate the loan $______________
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Secrets To PreForeclosure Profits
Step 3: Selling the Homeowner on You
In many ways, this is the most important chapter in this book. That’s because
although you’ll be buying and selling pre-foreclosure properties, the only way you
can get those properties is through people. That means you need to know how
to handle different personalities and their different needs. Some owners of pre-
foreclosure properties will be pleasant; others will be very negative because they
don’t enjoy being in the situation in which they’ve found themselves.
This often means that you need to present yourself as a problem-solver. After all
no homeowners enjoy facing foreclosure and will definitely be looking for
solutions to their predicaments. Although they may not realize it at first, you’re
the person who can provide the solution they need. So, it’s up to you to show
them the benefits of using your services. This calls for a combination of
techniques that are easy to learn and apply. This chapter will show you how to
convince homeowners of the benefits of accepting the solutions you offer them.
One of the key skills of every successful business person is the ability to create
―rapport‖ with others. Rapport means ―building a relationship of mutual
understanding or trust and agreement between people.‖ In other words, it’s
easier to convince homeowners to use your services when they like you. That’s
no secret, of course, but it’s absolutely essential to build personal connections
with homeowners whenever possible. And you can build these connections
through the following effective techniques.
Be Yourself
Be natural, easy-going and friendly. Remember, when homeowners first talk with
you, they may be suspicious due to their dealings with lenders and others, so
their first inclination may be to tell you to take a hike. However, if you’re friendly
and natural from the start, it’s more likely that you’ll be able to overcome this
barrier.
Dress to Fit the Homeowners’ Style
Homeowners feel more comfortable when they’re dealing with someone who
dresses in the same manner as they do. By the same token, they can feel very
uncomfortable with a person who dresses unlike them. For example, if you show
up in a fancy three-piece suit at a home where the homeowners are down-to-
earth people wearing jeans and work boots, you’ve already put yourself at a
disadvantage. You may remind them of lenders or other creditors, and the last
thing they’ll want to do is deal with you! So, always dress to the level of your
customers.
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Be Polite and Respectful
Always treat homeowners facing foreclosure with respect. After all, they may feel
that they haven’t been treated well by the lender and others so a little heartfelt
respect right from the start can go a long way toward creating a positive
connection that may end up in a good deal for you.
Offer Benefits
Benefits are items that tell homeowners what you’re going to do for them. In the
case of foreclosures, benefits can be similar to the following:
Elimination of the stress of foreclosure
Relief of debt
Avoidance of the embarrassment of foreclosure
The opportunity to seek options other than foreclosure
Here’s an example of how this might work either over the phone or in person.
―Mr. Thompson, my name is Ned Jones. I’m a private investor who
specializes in properties like yours. I can offer you several options for
avoiding foreclosure. They’ll help you out of a stressful situation and
assist in getting rid of debt. I’d love to talk to you about these options.
How would you feel about discussing them with me?‖
Notice that in a few short sentences you’ve introduced yourself, stated your
purpose (help in avoiding foreclosure), offered benefits (reduce stress, get rid of
debt), and asked for a commitment to discuss the options. This is a standard
and very effective technique used by successful salespeople over the years. It
gets the point quickly and efficiently. With a little practice of this technique, you
can make it a natural part of your presentations to homeowners.
Look for Connections
Once you’re in a home, look for honest connections between the homeowners’
lives and yours. For example, if the husband plays a sport (softball, golf, etc.)
and you love the same sport, it can be a good icebreaker to talk about that sport.
If he has sports trophies on a shelf, say something similar to, ―I see you’re into
golf. What courses do you play? My favorite is Riverside.‖ This forms a
connection between you and him and can build the necessary trust to do a deal,
if it’s appropriate.
One important point to keep in mind--never lie about being involved in a sport or
hobby. If the homeowner is very knowledgeable about such activities, he or she
will want to talk about them more, and if they discover you’re faking it, you’ll be
out the door fast with no deal.
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Match the Personality of a Homeowner
As you already know, different people have different personalities. The main
point to remember about personalities is that people tend to prefer to deal with
individuals who are like them. Extroverts are people who are friendly and
outgoing and ―outward-directed:‖ i.e., they’re comfortable with people and enjoy
talking with them. So, when you’re dealing with an extrovert, it pays to display
the same kind of personality.
On the other hand, some homeowners are introverts; they’re quiet and don’t
open up easily. They tend to prefer a low-key approach and may want to discuss
things in a calm, objective manner. So, that approach may work well for you in
that situation. Just remember not to overdo the matching of personalities. Keep
it subtle; otherwise, homeowners may feel that you’re being false simply in order
to gain an advantage over them.
Create Empathy
Simply put, ―empathy‖ means the ability to put yourself in the homeowner’s shoes
and feel what they’re feeling. To create empathy with homeowners, you need to
get them to open up. The best way to do this is to use the technique of asking
open questions.
Open questions are ones that encourage a person to open up and expand on a
subject. Often, they begin with words like, ―What,‖ Why,‖ ―How,‖ ―In what way,‖
or ―Tell me more,‖ etc. Salespeople often use this technique because it’s so
effective. Here are some examples:
How do you feel about your present situation?
In what ways can I help you?
What kind of options to foreclosure are you interested in?
Why are you interested in exploring alternatives to foreclosure?
Tell more me about your situation so I can understand it better.
Once you’ve created empathy, you can then ask closed questions to gather the
specific information necessary to determine if the deal is a good one or not. A
closed question is one that asks for a ―Yes‖ or a ―No‖ answer as in, ―Does the
home have any liens on it?‖…‖Are you ready to sign the agreement?‖…‖Do you
understand how Chapter 11 works?‖…‖ etc. Use closed questions once you’ve
gotten beyond the initial conversation and built trust. They’ll help you analyze the
situation and decide if it’s a good deal or not.
Listen!
This can be the most important skill of all, right from the first contact through to
the closing of the deal. One reason for its importance is that homeowners don’t
expect you to really listen to them. So, when you do actually listen to their needs
and problems, they’re pleasantly surprised and more open to you. Listening
builds rapport!
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A second reason for practicing good listening skills is that it allows you to pick
up clues and information as to what homeowners are thinking and how they’re
feeling. This permits you to offer them the best solutions to their foreclosure
situation and enhances your chances for closing the deal. To become a great
listener, follow these common-sense guidelines:
Focus on the person. Give your full attention to the homeowners and
maintain eye contact with them (if appropriate for the culture). Don't let
your eyes wander about. This can indicate boredom, impatience or
lack of interest to homeowners, and turn them off to your deal.
Don’t interrupt. Homeowners facing foreclosure often want to talk
once you’ve broken the ice with them. They want someone to
understand what they’re going through—to simply listen. This can
cause you to become impatient and want to interrupt. After all, time is
money for you. However, unless the homeowner is a complete
motormouth, it’s usually best not to interrupt. By interrupting, you’re
letting them know that what they’re saying isn’t important, and that’s
not the sort of impression you want to make with someone who may
provide you with a good deal. Besides, by letting them talk, you may
be able to gain valuable information that can help you construct a good
deal for both you and the homeowners. So, in most cases, let the
homeowner finish before you begin to talk. Everyone appreciates
having the chance to speak without being interrupted.
Use prompts. If you want homeowners to keep talking, nod your head
while they’re speaking or use verbal prompts like, ―I see…‖…Go
on…‖…‖Tell me more,‖ etc. The use of prompts not only keeps them
talking, but, at the same time, tells them that you’re listening closely
and value what they’re saying.
Use summaries. I’m sure you’ve had the experience of talking
several minutes with people only to discover that they haven’t really
understood what you’ve said. This can happen with homeowners.
One way to prevent this from happening is to use short summaries of
what they’ve said at strategic intervals. This gives them the
opportunity to either expand on what they’ve said or correct any
misunderstandings on your part. A summary can be as simple as, ―So,
what I hear you saying is that you’re not really sure how the process of
selling your home to me really works. Is that a fair statement?‖
Summaries also have another great advantage; they can keep an
overly talkative homeowner on track toward a deal!
You’ll find that the basic skills discussed in this chapter will also come in handy
during the negotiating phase (covered later in Step 7). As a matter of fact, they’ll
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come in handy in all aspects of your business life. To increase your knowledge, I
recommend that you get further education on selling skills and customer
management. There are many good DVDs, CDs, audiotapes, and videotapes
available for self-study. Or, if you prefer an instructor-led approach and have the
time, there are also many good seminars, workshops and classes available. In
short, my recommendation is—ALWAYS KEEP LEARNING! Go to
http://www.dodeals.com/preforeclosureprofits for more information.
Okay, let’s assume you’ve done a good job of working with the homeowners and
discovered the information you need to formulate a deal. This means it’s time to
take the next critical step—perform due diligence. That’s the subject of the next
chapter.
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Step 4: Performing Due Diligence
―Due diligence‖ is a fancy way of saying ―find all possible risks before buying a
property.‖ Here’s the central rule of this chapter:
Always perform due diligence!
It’s one of the most important actions you can perform to prevent yourself from
buying a dog of a property that will come back to bite you right in the wallet.
Remember, a majority of properties don’t come without some problems. Most
have minor problems that are obvious at a glance. However, other properties
can look great and still have hidden, major problems (plumbing, electrical, etc.)
that can cost you major cash for repairs.
So, once you’ve identified a pre-foreclosure property, your work is only
beginning! You’ll need to use various tools to find out information about that
property—the phone, letters, etc. One of the best tools is the Internet. It’s made
the whole search process much easier and faster than in the past. It’s a
wonderful real estate search tool, so if you don’t have an Internet connection
now, definitely get one! It will dramatically reduce the legwork you have to do in
terms of due diligence. As I stated earlier in the book, be sure to get a high-
speed cable or DSL connection. Cheap dial-up connections are infuriatingly
slow, tie up a phone line, and can cause you much frustration, particularly when
trying to download large documents or materials.
This chapter will show you how to find and examine public records to determine if
a pre-foreclosure property is worth your time. In fact, all the information in this
chapter is handy and essential for researching any type of property. So, if you
decide to move from the pre-foreclosure market to, say, the multi-unit or
commercial markets, you’ll be ready to do due diligence in those areas as well.
In terms of public records, I want you to keep a central fact in mind—the records
are not always accurate. That’s why you need to review them closely and verify
the information contained in them. You want to make sure there are no
unpleasant surprises that crop up after you take on a pre-foreclosure property.
Now, let’s look take a specific look at methods of researching properties of
interest.
The Internet
The first step in using the Internet is to use the Google search engine. In many
people’s opinion, it’s the best search engine available. To find out information on
a property, it’s as simple as entering the property owner’s name into the Google
window. If they’ve broken the law in some fashion, then their name may pop up
in court records, and, thus, on your computer screen.
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However, most often, it’s a matter of accessing local records and digging into the
information available there. So, once you’re on the Internet, where do you go to
find information about a specific property?
County Property Appraiser/Assessor Sites
Your first stop on the Internet should be local county property appraiser/assessor
site and other appropriate sites. On these sites, look for the following
information:
Code violations—search for code violations cited for the pre-foreclosure
property by your local code enforcement agency.
Comparable sales—usually, the county property records will show sales
of comparable properties during the past six months. This information
gives you an idea of current worth of the property.
Crime search— check with your local law enforcement agencies to
determine the crime risk rating for the property’s address. Obviously, the
worse the crime rating, the more risk you take by buying a property in the
defined area.
Demographic information—check all demographic data to see what the
makeup of the neighborhood is, trends, etc.
Flood zone map search—there should be federal flood maps available.
If the property is in or near a flood-prone area, check the maps carefully.
Hazardous waste search—avoid any property with hazardous waste
issues! Clean-up of this waste can be extremely expensive, and you
could end up with the bill. So, examine the records carefully for any
evidence of environmental hazards. Any violations could be on local,
state or federal agency sites.
Property records—search and examine the county property
assessor/appraiser’s property records to find out information on
ownership, sale, tax assessment information, etc.
Property tax records—search the country tax collector’s property tax
records for information on tax payments.
Don’t forget there are many other Internet sites you can visit to check for more
specific information on topics. Here are several:
Crime Statistics
The Disaster Center http://www.disastercenter.com/crime/
NeighborhoodScout –subscription site
http://www.neighborhoodscout.com/neighborhoods/crime-rates.jsp
These are just two examples. Many other sites on crime are available on the
Internet. Use Google to find them for you.
Demographic Information
ESRI—business information solutions http://www.esri.com/data/index.html
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Federal Financial Institutions Examination Council (FFIEC) Geocoding
System http://www.ffiec.gov/Geocode/default.aspx
U. S. Census Bureau
o http://quickfacts.census.gov/qfd/index.html
o http://www.census.gov/cgi-bin/gazetteer
Environmental Hazardous Waste
Department of Housing and Urban Development (HUD)—HUD has
environmental maps available http://egis.hud.gov/egis/
Environmental Protection Agency (EPA) http://www.epa.gov/superfund/
Enviromapper (EPA)—allows you to search by zip code
http://www.epa.gov/enviro/sf/
Scorecard.org—information on pollution and environmental hazards
http://scorecard.org/
Property Records
Property Reports (Intelius) http://find.intelius.com/property-check.html
PublicRecordFinder.com http://www.publicrecordfinder.com/
searchsystems.net http://www.searchsystems.net/
Many more such sites are available online. Do a Google search to find them. As
a precaution, I advise that you double-check information with your local
government offices to ensure there are no code violations, tax liens,
environmental hazards, etc. Sometimes, these agencies may have up-to-date
information that hasn’t yet made it to their web sites.
So, if you live in an area where the county property records aren’t available on
the Internet, how do you find the necessary information? If this is the case, then
you’ll need to call the customer service department at your property
appraiser/assessor’s office and provide them the property’s street address. With
that information, they should be able to tell you:
parcel or folio number
owner’s name and mailing address (if it’s different from the property
address)
when and how much the property last sold for
current tax-assessed value
Of course, if you’re a person who likes to deal directly and in person with your
county offices, then visit them and tell them politely you want to do a title search
to determine if there are liens, etc. They’ll direct you to the record books and/or
microfiche files. Also, at some point in your career, you may want to locate
owners of vacant properties, and, often, you can find this information in the
records. However, if this information is missing or incorrect (as sometimes
happens), then you can check the following governmental sources:
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County
Business license records
Jail inmate records
Public library patron records
Voter registration records
State
Bar association records
Department of Motor Vehicles records
Fishing/hunting licenses
Professional license records
Prison inmate records
Vital statistic records
Federal
Prison inmate records
Social Security Administration (death index)
Property Owner Names
Check with your county property appraiser/assessor to find out the names of
property owners. Tax rolls normally contain nearly all names and list every
parcel of land within a given county. The tax identification numbers will vary
according to the office’s regulations. In some cases, they can be an assessor’s
parcel number (APN); in others, they have appraiser’s folio number. To find out if
your county’s tax roll is online, use the Google search engine. Type ―tax rolls‖
and the county and state information into the search engine window.
As part of your property records search, you’ll need to examine closely two areas
to make sure there are no problems—liens and titles. Let’s look at these areas
next.
Liens
A lien has many different definitions, but it all boils down to this in terms of real
estate: A lien is legal claim against an asset which is used to secure a loan and
which must be paid when the property is sold. Why are liens important to you?
For one very crucial reason--a lien affects the ability to transfer ownership! In
other words, if there’s a lien on a pre-foreclosure property you want to buy, the
ownership can’t be transferred until that lien is paid. So, if you buy a ―liened‖
property, you can’t do anything with it until that issue is resolved. You’re stuck
not making any money and, possibly, losing it.
Liens can be voluntary (mortgage or trust of deed lien) or involuntary (the result
of legal action). If you need to find information on liens, here are common
sources to check:
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Circuit court office—check for tax liens on state income, state
inheritance, state franchise taxes, etc. Also, check for liens against
estates of deceased persons, guardianship of minors and incompetents,
termination of joint tenancies, etc.
County clerk’s office—same as above.
Country recorder’s office—search for judgment liens (mechanic’s liens,
etc.), property tax liens, federal tax liens, etc. Also, check for conditional
sales contracts (contracts for deed, land sales contracts, etc.) In addition,
look for notices of ―lis pendens.‖ As I stated earlier in the book, this Latin
term means ―suit pending.‖ Notices of lis pendens should be red flags
since they indicate that the title or right to the possession of the property is
in litigation.
Municipal clerk’s records—examine the records for any liens for failure
to pay for municipal services like water, sewer and trash removal services.
Also, determine if there are any code enforcement fines.
United States Courts—search for any federal judgments against the title
holder. These could include federal tax liens and liens resulting from
defaults on FHA, Department of Veterans Affairs (DVA), Small Business
Administration (SBA), and student loans.
Common types of liens are shown at the end of the chapter. Study them so you
can do a thorough search of records. A final note on liens: If there are several
liens on a property, they are generally treated by the law according to
chronological order. In other words, a lien recorded on February 1 would have
priority over a lien recorded on March 1 of the same year. However, liens for
unpaid government services may have priority over other liens in several states.
It’s best to check with your local and state governments to determine what the
rules and regulations are
Titles
Obviously, you want clear and free titles to any pre-foreclosure properties you’re
considering to avoid legal entanglements and expenses. So, a title search is
extremely important. There are two common types:
Current owner—this is a search of public records from the date the
property’s title was transferred to the present owner to the current date.
Full title search—this is a very thorough search of the property’s title from
the date the current owner gained the title back into the past (up to a
maximum search of 60 days).
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You can do a title search yourself, but I don’t recommend it! It’s a tricky and very
complicated area, so you’ll need to hire a professional title abstractor or title
examiner to carry out the task. The cost of professional services is cheap
compared to the cost of getting tangled up in the handling of a lien problem. To
find title companies in your area, check the Yellow Pages. Or go online to The
National Association of Land Title Examiners and Abstractors
(http://www.naltea.org/) and use their directory.
Insurance Claims
Always check the casualty and property insurance claims history of a pre-
foreclosure property (or any other kind of property) before you buy it. It does you
no good to buy a property only to find it’s uninsurable or insurance is only
available at an exorbitant rate.
There’s a good source on the Internet. It’s called CLUE (Comprehensive Loss
Underwriting Exchange), and it’s a database of consumer claims created by
ChoicePoint, ―a leading provider of decision-making information and technology
that helps reduce fraud and mitigate risk.‖
(http://www.choicepoint.com/business/pc_ins/us_3.html). CLUE’s database is
used by insurance companies (and your insurance agent) to determine a basis
for underwriting or rating an insurance policy. A CLUE report includes the
following information:
“…consumer claim information provided by the insurance companies. It includes
policy information such as name, date of birth, and policy number, claim
information such as date of loss, type of loss and amounts paid, and a
description of the property covered. For homeowner coverage, the report
includes the property address and for auto coverage, it includes specific vehicle
information.”
Ask your insurance agent to use CLUE to check this information to make sure
the property is insurable and insurable at prevailing rates for similar area
properties.
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Property Disclosure Agreements
Make sure you’re doubly protected by having the property owner sign a property
disclosure agreement (usually at the time of the signing of the purchase
agreement). The agreement should be one approved for use by your state.
Have the owner sign the statement in the presence of a notary public.
Agreements vary by state, but, generally speaking, they ask questions in the
following areas:
Environmental hazards
Legal problems (unpaid taxes, liens, etc.)
Pest control problems (termites, etc.)
Property defects (leaky roofs, etc.)
Title
Zoning problems
If such questions aren’t asked on your state form, be sure to ask them!
Of course, all of the above efforts need to be backed up with a physical
inspection of the property. In general, you (or an inspector) should be looking at
the following areas:
Code enforcement (good enforcement)
Condition of properties within the neighborhood
Crime rates
Good availability of municipal services.
Public nuisances (sewer treatment smells, etc.)
Public perception of the area
Storm water drainage
Traffic patterns (easy access to main roads)
Physical inspection of the pre-foreclosure property is treated in detail in the next
chapter.
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Common Liens
Bail bond lien—a bail bond allows a person arrested on criminal charges to be released on
bail pending his or her trial. One way to get a bond is to pledge capital in the form of real
property (a home, etc.)
Child support payment—when a property own fails to make court-ordered child support
payments, the state government places a lien against the property’s title.
Code enforcement lien—this type of lien occurs when a property owner has been fined for
failing to correct code violations and has failed to pay the resulting fine. The local
enforcement board then places a lien on the property’s title.
Corporate franchise lien—this lien can occur within states that have a corporate franchise
tax for the right to do business within those states. If a corporation fails to pay the tax, the
state places a lien against any corporate real property within the state.
Federal judgment lien—this lien concerns debtors who’ve defaulted on federally guaranteed
loans (SBA loans, student-guaranteed loans, etc.). When default occurs, a lien is placed
against the property title.
Federal tax lien—when a person fails to pay federal income tax, the Internal Revenue
Service has the statutory power to place a lien against the title of any real property belonging
to that person.
Homeowners’ association lien—this lien can occur when a member of a homeowners’
association fails to pay their dues as per the deed to the property. The lien is placed against
the property title.
Judgment lien—this type of lien occurs when lawsuits award monetary damages to the
plaintiff. In this case, a lien is placed against both personal and real property of the defendant
until the judgment is placed.
Marital support lien—when a property owner doesn’t pay court-ordered marital support, a
lien is placed against a property’s title. This can be done on the local, state and federal
levels.
Mechanic’s lien—this is a statutory lien which allows architects, contractors, engineers,
mechanics, surveyors, etc. to take legal action against a debtor who’s failed to pay for
furnished work or material for the improvement of real property. The lien is placed against the
real property being worked on.
Mortgage and deed of trust lien—this is a voluntary lien created when real property is
pledged as security for the repayment of the debt.
Municipal lien—when a property owner fails to pay for municipal services (water, sewage,
trash removal, etc.), the local government places a lien against the property’s title.
Public defender lien—when a property owner fails to pay for a court-appointed public
defender, governments (local, state, federal) place a lien against the property title.
Real property tax lien—when a property owner fails to pay his or her property taxes, liens
are placed against the property by local authorities (usually city and county tax collectors).
State inheritance tax lien—this is a tax levied against the estates of deceased individuals. If
the tax isn’t paid, a lien is placed against the estate for the amount owed.
Welfare lien—when a property owner fraudulently collects welfare payments, the local, state
and federal governments can place a lien against the property’s title
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Step 5: Inspecting the Property
You may be tempted to inspect a pre-foreclosure property by yourself and forego
the expense of hiring a professional building inspector. I highly recommend that
you resist this temptation unless you actually possess the knowledge and
experience of a professional. You want a detailed, expert inspection to make
sure the property is in fit condition for the investment of your hard-earned money.
Of course, you should do your own inspection first to get a sense of the property
as a potential investment. This is a good course to follow since some problems
may be extremely obvious (sagging ceiling, water damage, etc.) so you’ll know
right away that the property is not worth your time and money. In that case, you
don’t need the expense of a professional inspector.
So, why hire a professional at all? Because they’re experts at finding hidden
defects that can cost a fortune to repair, defects like bad wiring, defective water
pipes, dry rot, mold, rotting roofs, termites, etc! Unless you have experience at
the inspection process, it’s likely that you’ll miss these defects, and devious
owners can be quite good at covering them up.
So, it’s always, always necessary to conduct a thorough physical inspection of
any property you’re considering or to have an inspection done for you. If a
property inspector does find problems, you can require that the seller correct
those problems, reduce the price, or you can walk away from the deal before any
damage is done to your finances.
Many states protect your investment by requiring that a seller provide a
disclosure statement. In general, sellers are responsible for disclosing only
information within their personal knowledge. However, some states do define
certain problems that the seller must take responsibility to search for, whether or
not they see any indications of the problem. Be sure to check with your state
government to find out if this is the case.
If you do live in such a state and the seller willfully avoids mentioning the defect,
you can take him or her to court for compensation. Finally, if an owner attempts
to limit your access to or inspection of a property, walk away from the deal! He
or she is likely trying to hide problems.
Choosing a Building Inspector
Always use the services of a licensed building instructor. Non-licensed
inspectors can be incompetent or outright fakes who take your money and do
nothing. I’d recommend you interview a minimum of two or three inspectors
before choosing one. Make sure they’re full-time professionals conducting a
minimum of 50 to a 100 inspections a year (depending on the area).
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Also, request copies of recent written inspection reports from inspectors. If
they’re reluctant to provide them, cross them off your list immediately!
Professionals always want to show you samples of their work. After all, it brings
them more business.
In addition, request a minimum of three references from inspectors. These
references should be from customers who’ve used the inspector’s services within
the last six months to a year. Once you have the references, contact the
customers to get their opinions on the inspector’s work and behavior. Then, after
you’ve made a selection, accompany the inspector on the first tour of the
property you’ve targeted. This not only allows you to see how this individual
works, but you’ll also have the opportunity to learn the specifics of inspection.
I’d recommend that you select an inspector who’s a member of The American
Society of Home Inspectors (http://www.ashi.org/) or the National Association of
Home Inspectors http://www.nahi.org/.
Members of these associations adhere to a code of ethics, plus they’re prohibited
from having a professional interest in the sale, repair or maintenance of a
property they inspect. They’re also forbidden from using their inspection
business as a way to find customers for a handyman service that they ―happen‖
to own.
You may want to go on the Internet and use ASHI’s ―Find a Home Inspector‖ link
to identify potential candidates in your locality. You’ll find that home inspection
rates vary by inspector, region and size of house. According to Bankrate.com,
approximately 40% of buyers pay in the range of $200 to $250. However, as I
said, rates vary, so it’s good idea to survey your local inspectors to find out what
the costs are in your area.
What’s Checked in a Building Inspection?
Obviously, you want a property that’s structurally sound, so you or the building
inspector should do a physical inspection to found out if there are any problems
in that area. Below, I’ve provided you with a general list of questions to get you
started. As you gain experience, you’ll be able to add your own questions to the
list.
What property repairs are required?
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
Which areas are unsafe or causing rapid and expensive damage?
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_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
Are there priorities for repairs? If so, what are those priorities?
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
Which repairs may cost a lot of money?
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
What are the biggest risks of hidden damage?
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
Are there inexpensive alternative repairs? ( ) Yes ( ) No
If so, who’s available to make these repairs at a reasonable cost?
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
Are investigations into other repairs appropriate? ( ) Yes ( ) No
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
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Of course, it’ll be necessary for you or the professional inspector to get more
specific and look closely at the following areas:
Electrical System Wiring, Service Panel, Devices, and Service Capacity
Energy Conservation/Safety Items
Exterior Walls, Siding, Trim
Floor, Wall, Ceiling, Roof Structures
Foundation, Footings, Crawl Space, Basements, Sub-flooring, Decks
Gutters, Downspouts
Heating & Cooling Systems
Insulation & Ventilation
Interior Floors, Walls, Ceilings
Moisture Intrusion/Mold
Overall Structural Integrity
Plumbing Systems, (fixtures, supply lines, drains, water heating devices, etc.)
Property Drainage/Landscaping
Roof, Roof Shingles, Chimneys, Attic
Walks and Drives
Windows, Doors, Cabinets, Counters, etc.
As you gain experience in inspecting properties, you may want to conduct
inspections without the help of a professional inspector. I don’t recommend this.
However, I’ve provided you with a list of clues to look for on the next page as well
as several checklists following it to make sure you do a thorough and complete
job. I highly recommend you use the clues list and the checklists on every
inspection. After all, it’s your money you’re putting on the line, and you want to
make a profit—not incur a loss!
In the next chapter, we’ll look at the all-important step of estimating property
value.
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List of Clues for Damage
Bad floors. Slanting or sloping floors can be a sign of serious problems with the foundation or
the quality of construction. Also, check for soft spots on upper floors. This can indicate
structural damage.
Cracks. Look around the foundation, walls, ceilings, windows and door frames, chimneys and
retaining walls for cracks. If a seller tells you that these are ―subsidence‖ cracks, don’t accept
this story at face value. It may or may not be true. The only way to find out is to let a
professional do an inspection. Otherwise, use this rule-of-thumb: if a crack is big enough to stick
the width of a pencil into it, then something more serious than subsidence is likely occurring.
Evidence of moisture damage and/or presence of mold. Mold can be particularly dangerous to
the health of inhabitants. It can cause allergies, infections, irritations, and toxicities. It can also
be very difficult and expensive to get rid of, so you definitely don’t want it present in any building
you’re considering. Mold has a characteristic musty smell, so check for that odor. In terms of
moisture intrusion (snow or rain), look for discoloration and stains on ceilings and walls and
around windows and door frames. These clues may indicate serious structural damage. Also,
look for sump pumps. They’re specifically designed to handle flooding in basements and lower
levels. If you find them, have the inspectors check the property out in detail.
Grounds. Some soil problems can be very expensive to fix, so look for evidence of poor
drainage, excess groundwater or cracks in the foundation. Don’t forget to check the drains.
They should all be correctly installed and maintained.
Out-of-true structure. Modern technology is a wonderful aid in determining if a structure is out-
of-true. Laser levels are available at inexpensive prices and are definitely worth the cost. Using
such a level, walk through a property looking for floors, walls, and ceilings that aren’t in plumb.
Don’t forget to open and close doors and windows as well. If they stick, you know things are not
in line.
Pest control inspection. Depending on the part of the country, pests can include termites,
carpenter ants, powder post beetles, and any other bug that likes wood as a main course.
These insects can cause very serious damage to a property. Don’t limit your to insects. Also,
look for ―dry rot‖ and other similar fungi. It’s best to bring in a professional pest control operator
to identify any of these problems.
Plumbing leaks. Internal leaks can do a considerable amount of damage, so check all potential
leak sources--sinks, faucet lines, toilets, dishwashers, washing machines, sprinklers, etc.
Special note: Avoid any property with polybutylene domestic water supply systems. Due to its
tendency to gradually deteriorate through interaction with chlorine and other chemicals in
drinking water, it’s been the subject of class-action lawsuits over the years. The most widely
known brand name was Qest (manufactured by Shell Oil Company, and it was a very popular
type of pipe used in residential and commercial installations in the '70's and the '80's. Indoors,
polybutylene pipe is gray colored and flexible. When used in a yard, it’s blue colored. In terms
of overall plumbing, it was used for both hot and cold plumbing.
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Inspection Checklist for Exterior of Property
Area/Item Good Fair Bad Cost of Repair
Carport
Chimney
Carport
Doors
Foundation
Garage
Paint
Roof
Screens
Siding
Soffit/Fascia
Steps
Windows
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Grounds
Area/Item Good Fair Bad Cost of Repair
Lawn
Drainage
Driveway
Outside
Lighting
Plants/Shrubs
Sidewalks
Sinkholes/
Depressions
Streets
Screens
Siding
Soffit/Fascia
Steps
Trees
Windows
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Attic
Area/Item Good Fair Bad Cost of Repair
Air Ducts
Ceiling
Joists
Floor
Lighting
Insulation
Mold
Rafters
Termite
Damage
Ventilation
Wiring
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Basement
Area/Item Good Fair Bad Cost of Repair
Ceiling
Drainage
Floor
Lighting
Insulation
Mold
Plumbing
Termite
Damage
Ventilation
Wiring
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Carport/Garage
Area/Item Good Fair Bad Cost of Repair
Air
Conditioning
Ceiling
Doors
Floors
Heat
Lighting
Mold
Paint
Roof
Soffit/Fascia
Walls
Windows
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Electrical Systems
Area/Item Good Fair Bad Cost of Repair
Capacity
Circuit
Breakers
Electrical
Meter
Electrical
Outlets
Lighting
Riser
Service
Panel
Wiring
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for HVAC
Area/Item Good Fair Bad Cost of Repair
Central Heat/Air
Condenser Unit
Heat Pump
Mold
Natural Gas
Oil Furnace
Solar Panels
Window/Wall Units
Vents
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Kitchen
Area/Item Good Fair Bad Cost of Repair
Cabinets
Ceiling
Ceramic Tile
Countertops
Dishwasher
Doors
Electrical Outlets
Floor
Lighting
Mold
Paint
Plumbing
Oven
Refrigerator
Sink
Walls
Windows
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Bathrooms
Area/Item Good Fair Bad Cost of Repair
Ceiling
Ceramic Tile
Electrical Outlets
Doors
Floor
Lighting
Linen Closets
Mirrors
Mold
Paint
Shower
Sinks/Vanities
Toilets
Tubs
Ventilation
Walls
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Dining Rooms
Area/Item Good Fair Bad Cost of Repair
Carpet
Ceiling
Doors
Electrical Outlets
Lighting
Mold
Paint
Walls
Windows
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Living Rooms
Area/Item Good Fair Bad Cost of Repair
Carpet
Ceiling
Doors
Electrical Outlets
Floor
Lighting
Mold
Paint
Walls
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Bedrooms
Area/Item Good Fair Bad Cost of Repair
Carpet
Ceiling
Closets
Doors
Electrical Outlets
Floor
Lighting
Mold
Paint
Walls
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Inspection Checklist for Home Offices
Area/Item Good Fair Bad Cost of Repair
Carpet
Ceiling
Closets (storage)
Doors
Electrical Outlets
Floor
Lighting
Mold
Paint
Walls
Other
Notes: ____________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
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Step 6: Estimating Property Value
This is a key step in my 11-step process! You have to be able to estimate
property value accurately on a consistent basis in order to make a profit. The
greatest danger lies in over-estimating value. Obviously, if you buy a foreclosure
property for, say, $200,000, and it’s actually only worth $150,000, you don’t end
up with a profit; you end up with a loss, and, to put it mildly, that’s not a recipe for
success. So, my advice is to pay close attention to the information in this chapter
and always, always keep a cool head regarding value no matter how hot the
market is. Hot markets are often where amateur investors lose all perspective.
They catch the ―buying fever,‖ abandon all common sense, and, in the process,
lose their money or, at best, break even.
Fortunately, the computer age has made estimating property value easier than in
the past. In many counties, records of property ownership, sales and tax
assessment records are readily accessible online. However, in order to make an
informed decision, you still need to know the basics of appraisal, and this chapter
will provide you with that vital information.
What Is Equity?
Equity is defined as ―the difference between the market (or appraised) value of a
property and the claims held against it.‖ Here’s an example: Assume an owner
has a property that has a market value of $200,000 and an existing loan balance
of $150,000. This owner has $50,000 worth of equity in the home (200,000 –
150,000 = 50,000).
How Do Appraisers Define Market Value?
The Uniform Standards of Professional Appraisal Practice (USPAP) is
recognized by The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 as the:
―generally accepted appraisal standards and requires USPAP compliance for
appraisers in federally related transactions. State Appraiser Certification and
Licensing Boards; federal, state, and local agencies, appraisal services; and
appraisal trade associations require compliance with USPAP.‖
In plain English, USPAP sets standards for property appraisers nationwide. See
the USPAP website for more information on this organization.
http://www.appraisalfoundation.org/s_appraisal/index.asp .
USPAP’s definition of market value is this:
―the most probable price a property should bring in a competitive and open
market under all conditions requisite to a fair sale, the buyer and seller each
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acting prudently and knowledgeably, and assuming the sale price isn’t affected
by undue stimulus.‖
Also in plain English, this definition means that market value is the probable price
that a property will sell for on the date of appraisal. It also assumes the following:
The buyer and seller are motivated to do a transaction.
They’re both well-informed and are acting in their own best interests.
The property is on the open market for a reasonable amount of time.
Payment is made by cash or a comparable financial deal.
The price is a ―normal consideration‖ of the property sold; i.e., it’s
unaffected by special financing or sales concessions by anyone involved
with or associated the sale.
No one is being forced into the sale.
What’s the Difference Between a Property’s Assessed Value and
Its Appraised Value?
Be sure not to get the terms ―assessed value‖ and ―appraised value‖ confused.
They refer to two completely different things.
The assessed value refers to tax valuation. In other words, it’s the value
established by the local tax authority for a parcel of land and the improvements
made on the land in order to collect property taxes.
The appraised value refers to the estimated value of a property provided by a
licensed property appraiser who must use accepted methods for the particular
type of property being appraised. For example, property may be classified as
residential homestead (owner-occupied), residential non-homestead, agricultural,
commercial, etc. Each of these classifications is typically taxed at a different
percentage of market value.
Beyond the USAP website mentioned above, you can find information on
property appraisers and the appraisal process at the following websites:
Appraisal Institute http://www.appraisalinstitute.org/
American Society of Appraisers http://www.appraisers.org/
What Are the Common Appraisal Methods?
There are three methods commonly used. Often, professional appraisers will
use a combination of all three, but, for your purposes, the easiest and best to use
is the comparable (or comparison) sales method.
The Comparable Sales Method
The comparable sales method is very simple. It establishes an approximate
property value based upon sales of similar properties within a reasonable period
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of time. Appraisers evaluate the properties in the neighborhood around the
subject property and look for similarities, including type of property, age, location,
size, etc. Normally, appraisers look for at least three similar properties in close
proximity to the subject property. They also look for unique advantages and
disadvantages so they can make positive or negative value adjustments based
on those unique qualities relative to the subject property. As I said, this is the
appraisal method you should use for pre-foreclosure properties. However, you
should also be aware of the following two methods for possible future use.
The Income Approach
This method is used most often for larger income-producing properties. It’s not
likely that you’ll use it for homeowner pre-foreclosure properties. However, as
your real estate career expands, you’ll need to make use of this method.
The income approach determines an estimate of total real estate value based
upon the rate of return from potential net operating income from the property
(assuming it was leased to a third party). In this method, the appraiser estimates
an annual income rate for the property based upon similar rates for similar users.
For example, the appraiser might determine that a retail space might rent for a
rate of $10 per square foot per year. This rate should be comparable to other
retail spaces in the vicinity.
Once this lease rate is determined, the property’s value is estimated using a type
of multiplier known as a capitalization rate, or cap rate. Historically, cap rates are
subject to several factors including the strength of the type of tenant, the level of
landlord involvement, economic conditions and type of industry. To use a basic
example, a property with a good tenant in a good location might command a cap
rate of 12 percent in a good market.
The value of the real estate is determined by multiplying the net rental rate by the
reciprocal of the cap rate. To continue the example, the value would be
calculated by multiplying $10 per square foot by 8.3 (100 percent divided by a 12
percent cap rate). This would mean that the investment value of the real estate
would be equal to $83 per square foot. Often, these figures are further adjusted
to take into account other variables such as vacancy rates, property
management costs and other investor related factors.
The Cost Approach
This is also called the ―replacement cost method.‖ Again, it’s not a method you’ll
use for pre-foreclosure properties. However, it may be useful in your real estate
future! It evaluates the replacement value of the property by analyzing the cost
components of the specific land and building.
It’s in common use for new properties, proposed construction or unique, or non-
income producing properties like schools, hospitals, churches, public buildings
and the like. The variables involved in estimating value are dependent upon
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location, geographic region of the country, labor and material costs. Factors
considered are costs for land acquisitions, site preparation, utilities, types of
building materials, tenant improvements and ―soft‖ costs (architectural and
engineering costs, legal and brokerage fees and other similar related expenses).
This method is often useful for estimating replacement cost.
Remember, appraisals are not an exact science. You’ll find that they’re closer to
an art form. However, as you gain experience, you’ll find it easier to accurately
estimate value so you don’t end up overpaying for properties.
Where Can I Find Comparable Sales Data on Residential
Properties?
There are many convenient sites online that you can access. I recommend you
do a search and try out a few to see which ones fit your needs best. To get you
started, I provided a list below of a few sites concerned with foreclosures,
residential properties, and other properties.
Domania.com http://domaniacom.foreclosure.com/
Foreclosedfiles.com
http://www.foreclosedfiles.com/index.php?p=googlewbs
Foreclosures.com http://www.foreclosures.com/lists/?src=google247
RealtyTrac http://www.realtytrac.com/
USHUDsearch.com http://www.ushudsearch.com/
What About Building Replacement Cost Estimates?
In the event you need to consider building replacement costs, contact your local
insurance broker—one who represents insurers specializing in providing property
and casualty insurance for residential and commercial buildings. Simply ask him
or her for a replacement cost quote. In general, such costs are calculated by
using a replacement cost formula that’s based on several factors affecting the
property; e.g., geographical location, street address, age, construction type,
number of stories, roof type, current use, HVAC system, square footage, etc.
How Do I Calculate Costs for Construction Replacement?
The easiest way is to use the Internet and the following sites:
Building Cost Calculator http://building-cost.net/
Construction Cost Calculator http://www.get-a-quote.net/
Construction Material Calculators
http://www.constructionwork.com/resources.php
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What Kind of Debt-To-Value Ratio Should I Look for in Pre-
Foreclosure Properties?
The debt-to-value ratio refers to the total amount of debt owed on a property
versus the property’s current market value. You want low debt to value.
Generally speaking, you want the ratio to be below 75%.
Here’s an example of how the ratio is figured: Assume a foreclosure property has
a total debt of $100,000 (principle loan balance, loan payments in arrears, late
payment charges, legal fees, subordinate liens, etc.) Now assume it has a
current market value of $125,000. Now divide the debt by the market value; i.e.
$100,000 ÷ $125,000 = 80% debt-to-value ratio
How Do I Estimate a Pre-Foreclosure Property’s Market Value?
To estimate market value accurately, you need to know the following information:
The loan value of the property’s mortgage or deed of trust loans in default
The loan payments in arrears
Accrued interest, late payment charges, and legal costs owed by the
owner
The total amount of money needed to cure the default and reinstate the
loan
All judgment liens against the property’s title
The total repair costs necessary to put the property into re-sale condition
The property’s market value (as determined by the comparable sales
method)
Since you’ll be dealing with so many numbers, it’d be wise to draw up a
worksheet to keep them straight, or you can use the one I’ve provided at the end
of this chapter. Simply copy it for your own use.
In order to obtain the necessary information to complete the market value form,
log onto your county appraiser/assessor web site in order to get the tax-assessed
value of the pre-foreclosure property you’re considering. Then do a comparable
sales search by looking at your county’s online property tax rolls. Look for sales
of three to six properties during the past six months. These properties should be
comparable in terms of size, condition, amenities, etc. and located close to the
pre-foreclosure property (e.g., a one-mile radius). Then, analyze those sales and
adjust prices to account for differences among the properties. Finally, calculate
the per square foot cost of replacing the improvements on the property. Be sure
to use the same building materials and method of construction.
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How Do I Determine the Actual Amount of Equity an Owner Has
in a Pre-Foreclosure Property?
Discovering the actual amount of equity is vital for accurately estimating the
current market value of a target property. You do this by deducting the total
amount that it will cost you to reinstate the loan, pay off the liens, and repair the
property so it’s in good marketable condition for resale. In general, I use 70% of
After Repair Value (ARV) minus Repairs to arrive at a sale price
Of course, getting the price you want is all a result of negotiation, and that’s the
subject of the next chapter—how to negotiate effectively with owners of pre-
foreclosure properties.
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Current Market Value Worksheet
Tax Assessment Value $_____________________
Appraised Value $_____________________
Balance of first mortgage or deed of trust $_____________________
Balance of 2nd mortgage or deed of trust $_____________________
Amount of loan payments, accrued interest,
late payment charges in arrears, etc $_____________________
Legal fees owed $_____________________
Amount of money needed to end default and
reinstate loan $_____________________
Amount of liens/judgments recorded against
the property $_____________________
Property taxes owed
$_____________________
Outstanding fines (city, county, state)
$_____________________
Total amount owed against the property
$_____________________
Estimated property repair and clean-up costs
$_____________________
Estimated current market value of property
$_____________________
Cost to buy owner’s equity at discount (50% or more)
$_____________________
Property search, acquisition and closing costs
$_____________________
Estimated equity in property after purchase
$_____________________
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Step 7: Negotiating with Homeowners and Others
Let’s face it—the prospect of foreclosure is not a happy one for property owners.
They’ll be experiencing a range of emotions—anger, anxiety, denial, fear, panic,
stress, etc. And that means you’ll be dealing with people who are not objective
about their situation. Moreover, embarrassment may make them hesitant about
discussing their financials with a stranger—you. In fact, they may be reluctant to
talk about their financial situation because they don’t really understand it in the
first place. In some cases, they may be looking for someone to blame.
What I’m saying is that you have to be prepared to deal with emotional people.
The best way to do this is to adopt the attitude of being a problem-solver as I
mentioned earlier in the book. Also, adopt the attitude of empathy; i.e., put
yourself in their shoes to understand what they’re going through so you can build
a personal connection with them on some level.
Keep in mind that many people in foreclosure are good people who’ve often
suffered problems beyond their control—an unexpected illness and enormous
medical bills, loss of a job, divorce, etc. Others have simply made bad decisions
in the financial area and gotten themselves trapped in an ever downward spiral of
debt.
Some have gotten themselves addicted to alcohol, drugs, or gambling—or a
combination of all three! Obviously, you don’t want to deal with them—or with
people in the middle of nasty divorces where legal entanglements make sale of
the property an iffy proposition at best.
So, you want to do what all good salespeople do—―qualify‖ your prospects. That
is, determine quickly if the homeowners are good prospects for your services or if
they’re not worth your time and investment because of personal problems or
addictions. However qualified homeowners got into their messes, it’s important
for you—and them—to realize that you’re offering a way out.
It’s also important to remember that most property owners facing foreclosure
don’t really want to sell their properties! After all, people invest themselves and
their emotions in their home. It’s the American dream, and no one likes their
dreams shattered. So, they’re looking for any path out of the situation to prevent
the foreclosure from occurring. Again, you can offer escape from a bad situation.
Options Available to Property Owners Facing Foreclosure
Part of being a problem-solver is understanding the options available to
homeowners during the pre-foreclosure period. I covered these in an earlier
chapter but here’s a quick review:
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Loan forbearance or modification
Refinancing
Chapter 13 bankruptcy
Open market sale
Sale of home to investors
Public auction
The reason I mention these options again is that they provide what I call secrets
to ―CA$H‖ profits. That is, you can help out homeowners in two ways.
First of all, let’s assume they want to save their home, not sell it. In that case,
you can offer several services to help them.
You can charge to help them get forbearance on their mortgage ($300-
$1,000 range.)
You can charge to help them postpone the sale ($300-$1,000).
You can charge a referral fee if they qualify for a refinance with a private
or hard money lender ($500-$1,000). Every lender is different so you
might want to check with your local hard money lenders.
Compared to losing a home, these fees are inexpensive, and you can relieve a
lot of tension and stress for the homeowners in the process.
Now, let’s assume you’re working with homeowners who want to sell their home.
In this case, you can offer them the following options:
If the home owners don’t have enough equity, you can ―short-sale‖ the
loan. In a short sale, a lender allows the property to be sold for less than
the existing loan balance. (For more information on short sales, see the
chapter “A Word on Short Sales” later in the book.)
You can put on option on the property and then do a 5-day auction on the
house by using a ―round-robin‖ bidding technique. That is, you take the
current high bid and then call interested parties in turn to see if they’re
willing to beat that price. You don’t need an auctioneer’s license for this
sale. Think of it as being similar to an eBay auction! For more information
on this technique, check out Bill Effros’ How To Sell Your Home in 5 Days.
You can buy the home subject to existing financing, and then reinstate the
loan.
You can pay off the loan completely, fix up the property and retail it.
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Now let’s cover some common-sense guidelines that can help smooth
negotiations with homeowners and allow you to make a good deal.
Guideline 1: Be Professional
Be honest and straightforward in all your transactions. It’s not only the right thing
to do, but it can help keep you out of lawsuits filed by dishonest and disgruntled
homeowners who may claim they were fooled into selling their homes for less
than they were worth. To protect yourself, document every step of the
transaction so you have a ―paper trail‖ that’s transparent and proof that you acted
ethically. Also, remember that honesty is an investment in your future as a real
estate investor.
It’s an investment for two reasons. One, when you treat people well, your
reputation spreads by word-of-mouth—the best advertising possible. It brings in
more business. Two, reputation is everything in the community of real estate
investors. So, if you decide to expand your efforts beyond pre-foreclosures into
other property investments (multi-unit dwellings, commercial, etc.), you’d better
have a spotless reputation. Banks, lenders, and other investors—they’re not
going to grant money to someone they view as an unacceptable risk.
As I mentioned previously in the book, part of professionalism is your dress.
That is, you should dress in a manner acceptable to home owners. If you show
up at home in a modest neighborhood driving a Lexus and wearing an Armani
suit, I guarantee you’ll have lost the deal before it even begins. People facing
foreclosure are not happy to see investors showing up at their doors flaunting
their wealth when they’re headed in the opposite direction! So, show up in
appropriate clothes! If it’s a working class neighborhood, wear jeans and an
open shirt (if you’re a man) or conservative, businesslike clothing and a minimum
of makeup (if you’re a woman). If it’s middle-class neighborhood, you may want
to wear a sport coat and casual slacks (if you’re a man) or appropriate business
clothing (if you’re a woman. Use your judgment in this area.
Guideline 2: Build Rapport
I covered this subject earlier in the book so I’d just like to reinforce one simple
principle in this section: Remember, homeowners will deal with people they like.
At some point in your life, I’m sure you’ve dealt with someone who turned you off
immediately because you simply didn’t like their style. Perhaps, he or she was
aggressive, brash and loud, and you’re a person who likes to conduct business in
a calm, rational manner. Their ―pushiness‖ turned you off immediately to any
further dealings. Naturally, you want to avoid this kind of negative situation. So,
pay close attention to the homeowners’ personal style when you first meet them
and adapt to that style in a subtle fashion.
Guideline 3: Keep It Simple
Remember that homeowners are often ―illiterate‖ in terms of financial dealings,
so don’t assume knowledge on their part. And because they know they’re not
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financial ―experts,‖ they may be uneasy in dealing with you because they’ll be
afraid they’ll be cheated somehow. The best way to handle this attitude is to
keep everything clear and simple. This will build trust. So, explain the
foreclosure process, the options available to them, and the services you can offer
in simple straightforward manner.
Guideline 4: Always Be a Problem-Solver
I’ve stressed this point several times, but want to re-emphasize it here. You’re
not there to intimidate homeowners into selling their properties. That’s a good
way to lose a deal and your reputation. You’re there to offer homeowners
solutions to their problems. That means you should have the ability to quickly
size up their financial condition and offer the appropriate solution.
Guideline 5: Listen
I covered this skill earlier in the book, but it’s so important I’ll repeat it here. The
investors who get the best deals are often the quiet listeners. They encourage
homeowners to talk first and listen patiently to what they have to say. Good
listening has two benefits. One, it builds rapport and trust with homeowners.
Two, it gives you good information that can be very useful when it comes time to
negotiate.
Guideline 6: Always Deal with the Person Who’s the Decision-
Maker
There’s always the possibility you could end up dealing with someone posing as
the homeowner—an identify thief, for example. To prevent this situation from
occurring, it’s wise to politely ask for a form of identification like a driver’s license
with a photo ID. Of course, you’ll have to present your own ID first. Then,
explain that identify theft is a big problem these days, and you’d simply like to
make sure that everything is honest and above-board. Most people are aware of
the identify theft problem due to wide news coverage so the majority of
homeowners will be happy to comply. However, if a homeowner refuses to
show you identification, then simply thank them for their time and leave.
Okay, those are the general guidelines for negotiating. Below are some specific
skills for selling homeowners on your deals. I recommend that you learn them as
a starting point and then, as you gain experience, adapt them to your own style.
Skill #1: The Presentation
After you’ve listened carefully to a homeowner, you’ll want to make a
presentation to convince them that you’re the right person to help them out. A
presentation has three parts:
Summarize the homeowners’ needs
Provide benefits
Ask for commitment
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The second part is often the most important; homeowners have to know what
you can do for them. A presentation doesn’t have to be anything fancy. It just
has to be clear and emphasize benefits. A presentation might go something like
this:
“George, I want to create a win-win situation for us both. You’re facing
foreclosure and want to avoid that unpleasant possibility. It’s created a lot
of stress for you and your family, and I can help you get rid of it and make
your life a lot easier. In order to do that, here’s what we need to do. First,
we’ll inspect your property together. That will help me see its potential.
Second, I’ll do a financial analysis with the loan information you provided
me to see if the deal is a profitable one for me. Third, if I feel the potential
is there, I’ll make you a written offer. Understand that the offer is
contingent upon the status of the property title. Any undisclosed liens or
judgments against the property will affect the deal negatively. But if the
property is clear of liens or judgments and it’s in good shape and you
agree to my offer, then we can close on the property within a week from
today. This will lift the load of debt off your shoulders, and you’ll be free to
move on with your life. If that all sounds good to you, shall we get on with
the inspection?”
Notice in the above opening statement that benefits are stressed throughout; i.e.,
avoid the possibility of foreclosure…get rid of stress…get rid of debt…the
freedom to move on, etc. Also, in the final sentence, our investor asks for a
commitment to do an inspection.
Skill #2: Offering a Deal
The deal you offer will vary with the property’s physical condition and the
homeowner’s situation. As such, you’ll have to be creative and use your
judgment as to what to you offer.
My rule is to use the following formula to determine the price I want to pay:
Sales Price = ARV x Margin – Repairs
Here’s an example: Assume a property has an ARV of $100,000. The margin is
.70. The estimated repairs are $10,000. So, the calculation looks like this:
ARV $100,000
Margin x.70
= $ 70, 000
Minus Repairs $ 10,000
Sale Price = $ 60,000
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Skill #3: Closing the Deal
There’s an old saying: If you don’t ask, you don’t get. So, if you’ve done a good
job of offering benefits and know the deal meets the owner’s needs, you have a
right to ask for commitment to that deal. In fact, here’s a simple, but effective
way to ask for commitment:
Summarize the homeowner’s needs
Summarize the benefits that meet those needs.
Ask for commitment
Here’s an example:
“George, you’ve said that you don’t your property to go on the foreclosure
auction block and you definitely want to get all this stress out of your life.
With the deal I’m offering you, you’ll get rid of that stress, have the
possibility of foreclosure off your back, and be free to get on with your life.
To my mind, this is a win-win situation for both us. Shall we close the
deal?”
In the above example, the investor summarized needs (need to get rid of stress
and foreclosure possibility), then summarized the benefits that meet those needs
(elimination of stress, avoidance of foreclosure, freedom to get on with life).
Then, the speaker asked for a commitment to close the deal.
Skill #4: Handling Objections
It’d be a great world if every homeowner immediately said ―Yes‖ and signed the
deal. Of course, that’s not reality. You’ll run into resistance from some owners
who may feel that what you offer them is not a good deal. This is a natural part
of the selling process so it pays to be prepared to handle objections. An
objection is something a homeowner doesn’t like about your offer; usually, it’s the
amount of money being offered. The model for handling objections is this:
Acknowledge the objection, but don’t agree with it.
Offer counterbalancing benefits.
Ask for acceptance
Here’s an example of how to handle an objection. Assume a homeowner objects
to your offer and says, ―That’s not enough. I need more money.‖ You might
reply with a statement similar to the following:
“I understand how you might feel that way. However, remember with my
deal, you’ll not only be free of foreclosure headaches, but I’ll be paying
your closing costs* and keeping foreclosure off your credit record as well
as offering you debt relief. Plus, I’ll be giving you a relocation allowance.*
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When you look at all those benefits, doesn’t my deal look pretty good to
you now?
*If appropriate to the deal
In the above statement, you acknowledged the objection without agreeing with it.
Then, you offered counterbalancing benefits (payment of closing costs, debt
relief, relocation allowance) and finally asked for acceptance of those benefits.
Of course, people being people, you’ll find that this technique doesn’t work every
time, but it does work on a consistent basis! It works especially well if you
practice it on a regular basis and adapt it to your own unique style.
All in all, negotiations are a combination of hard-headed financial sense and
artful handling of people. As you gain experience, you’ll find it becomes easier.
And once you’ve completed a successful negotiation, then it’s time to move onto
to that all-important purchase agreement—the subject of the next chapter.
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Step 8: Preparing and Presenting the Purchase Agreement
In real estate, a sales contract is called a ―purchase agreement.‖ It’s the legal
document that outlines the specifics for the purchase of the pre-foreclosure
property (or any other kind of property).
Here are two central facts to keep in mind. First, all states have different terms
for purchase agreements (sales contract, offer to purchase, a contract of
purchase and sale, an earnest money agreement, deposit receipt, etc.) so be
familiar with the term used in your state.
Second, and even more important, all states have different rules and regulations
regarding purchase agreements. This means you can’t use generic forms
downloaded off the Internet. They simply won’t be specific enough for your
needs and can cause you a lot of financial and other headaches if you use them.
If sellers decide, for whatever reason, that they haven’t been treated fairly, they
can launch lawsuits and possibly win if the purchase agreement isn’t considered
legal in your state.
So, study this subject closely and make sure any purchase agreement you draw
up meets state legal requirements in terms of foreclosure and real estate laws.
Also, it shouldn’t include any clauses that the courts can decide are unfair and
unenforceable. Of course, make sure it fully protects your interests in the
transaction.
Make no mistake about it—the purchase agreement is the most important
document in the purchase and sale of pre-foreclosures and other real estate
properties. That’s because it specifies the following:
How much you pay
When you pay
The terms and conditions for closing the transaction
Cancellation terms
I recommend that any purchase agreement be written in plain, clear English.
Lawyers and others have a tendency to include a lot of gobbledy-gook language
that ends up confusing people and can cost you money if you agree to something
you don’t understand. So, if you plan on working with a lawyer, request that it be
written in plain language. Then, once it’s drawn up, read it carefully with the
attorney. If you don’t understand specific items, then ask for an explanation.
Cross out any clauses that don’t apply or you don’t agree with. Initial any
changes you make. Now let’s look at some of key stipulations you’ll find in
purchase agreements so you’ll understand them fully.
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Key Stipulations
I’ve listed key stipulations below in alphabetical order. All of these stipulations
should be included in your purchase agreements in order to clearly define the
rights and responsibilities of both the buyer and the seller.
Assignment of the purchase agreement. Stipulate the right to assign or
sell the purchase agreement to a third party.
Default by buyer. Stipulate that the earnest money paid is the sole
remedy in the event that the buyer or buyer’s assigns fail to close on the
purchase of the property.
Default by seller. Stipulate that the buyer or buyer’s assigns will have the
right of specific performance in the event the seller defaults on the
agreement by refusing to sell the property.
Description of property. The agreement should include an exact legal
description that’s written on the recorded deed of the property in the
purchase agreement.
Earnest money deposit. Stipulate that if the buyer doesn’t perform the
agreement within the specified time, the buyer’s earnest money deposit
will be forfeited, and this forfeiture will jeopardize the seller’s right to sue
for specific performance.
Eminent domain action. Stipulate that you will be entitled to a full refund
of the earnest money deposit paid, plus any accrued interest, if the
property is condemned by eminent domain prior to the closing date.
Entry right. Stipulate that you have the right to enter the property and
inspect, repair, market and show it to third parties prior to the closing date.
24 hours’ notice must be given to the owner.
Examination of records. Stipulate that you have the right to examine all
financial and tax records associated with the property prior to the closing
date.
Marketable title. Stipulate that you must be capable of obtaining an
owner’s title insurance policy commitment letter from a title insurer in order
to close on the purchase of the property.
Parties to the agreement. Be specific and designate all parties to the
purchase agreement as buyer and seller. This should include their legal
status as to whether they are a single individual, husband and wife, or a
business entity (corporation, limited liability company, etc.)
Purchase price. State the purchase price of the property.
Risk of loss. Stipulate that you’re entitled to a full refund of the earnest
money paid (plus accrued interest) in the event the property is damaged
or destroyed by fire, weather, or earthquake prior to the closing date.
Subject to final inspection. This allows you to back out if the house
needs more repair than you expected.
Terms of purchase. Stipulate exactly how the property purchase will be
financed.
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Vacation of property. Stipulate that the seller must completely vacate
the property and grounds prior to the closing date.
More on Real Estate Lawyers
Real estate investment can be a tricky business due to the complexity of laws,
statutes and regulations. That’s why it’s wise to have the services of a good
attorney. Naturally, you want one who’s board-certified and specializes in real
estate. You may not like paying the fees, but he or she can save you a lot of
time, money and trouble in the long run.
In your search for attorneys, look for ones who are very experienced in dealing
with your state’s pre-foreclosure laws. Then, check qualifications and
references. You can do this by first contacting your local or state bar association
referral service for information. Then, search online for your state bar
association membership to find out if the attorney is licensed to practice law in
the state. Finally, check to see if there are any disciplinary actions or misconduct
actions cited against the lawyer. If you need to look nationwide for attorneys, use
one of the following sites to search for information on them.
FIndLaw.com (http://findlaw.com/#) – click on the ―Research a Lawyer‖
link.
Lawyers.com (http://www.lawyers.com/)
LegalMatch.com (http://www.legalmatch.com) – click on ―Real Estate and
Housing‖ link.
As I stated earlier, you want an attorney who can speak and write in plain
English, so talk to several to find out which ones can explain foreclosure
purchase agreements in language you can understand easily. This means they
communicate well, and you’ll be able to work easily with them.
Presenting the Purchase Agreement
A key in presenting a purchase agreement is to have witnesses on hand to attest
to the signatures on the agreement. Every state has its own requirements as to
how many witnesses are required so make sure you have the right number on
hand. If you don’t, you run the risk of a court declaring the purchase agreement
invalid should it come to a lawsuit. This can happen when you run into an
unscrupulous seller who gets a perceived better offer after the signing and wants
out of the deal. So, be sure to protect yourself in this regard.
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At the signing, also have the homeowner sign a state-approved property
disclosure statement. This is absolutely necessary protection for you and your
interests. The disclosure statement should require that the homeowner answer
questions in the following areas:
Are there any hazardous substances on the property?
Are there any documents filed in the public records that negatively affect
the property title?
Are there any liens against the property for unpaid bills?
Are there any actions (judgments, bankruptcies, liens, etc.) recorded in
public records or pending in court that will negatively affect the property’s
title?
Any unpaid taxes, lien claims, etc. that would be an encumbrance against
the property or property improvements?
Are there violations of building codes and/or zoning regulations created by
improvements?
Are there any current or past legal disputes concerning the boundary lines
of the property?
Is there any person or entity, other than the owner, legally entitled to
possession of the property or is in current possession of the property?
Are there any legal disputes regarding the title or ownership of the
property?
Do any unrecorded mortgages, deed of trust loans or promissory notes
exist that have been pledged as collateral?
Your lawyer can help you draw up the specific language of these questions.
To end this chapter, I’ve provided you with a sample purchase agreement to give
you an idea of what one looks like. It’s shown on the next page.
Once the purchase agreement is signed and witnessed, it’s time to enjoy the
fruits of all your hard work by closing the sale. That’s the subject of the next
chapter.
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STANDARD PURCHASE AND SALES AGREEMENT
THE STATE OF _________________________
COUNTY OF ___________________________
1. BY THIS AGREEMENT AND CONTRACT
_______________________________________________ hereinafter
called SELLER
hereby sells and agrees to convey unto
_______________________________________________ hereinafter
called Buyer, the following described property: Lying and situated in
____________________ County and Address:
___________________________________________________________
_____
2. PURCHASE PRICE:Buyer agrees to pay Seller and Seller agrees to accept
________________________________________________________
($____________________________) in cash at closing for the Property. Buyer
has paid to Seller an earnest money deposit of $_______________, which shall
be credited to Buyer at the closing of this Agreement. Property taxes shall be
prorated as of the date of closing.
3. TITLE: Seller warrants that Seller has good, clear and marketable title to the
Property, subject only to property taxes and any easements and restrictions of
record. Seller will convey title to Buyer with a General Warranty Deed.
Buyer will inspect title to the Property and Seller will satisfy any encumbrances
other than those listed above.
4. CLOSING AND POSSESSION: This Agreement will be closed on or before
______________ and be extended as necessary to complete all paperwork
required. Time is of the essence of this Agreement.
5. CLOSING COST: Buyer will have Buyer's attorney, at Buyer’s expense, prepare
all required documents to complete this Agreement.
6. INSPECTION: This Agreement is subject to an inspection of the Property and
approval by Buyer and/or his associates after acceptance of this Agreement by
Seller. Buyer will buy the Property in its present "As-Is" condition.
Special Provisions:
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________________________________________________________________
________________________________________________________________
____________________________
Executed in duplicate this ________________ day of
___________________20_______
SELLER ___________________________ BUYER
________________________________
___________________________________
____________________________________
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Step 9: Closing the Sale
Closing the sale can be the most exciting part of the entire process of a pre-
foreclosure sale. However, it can also be the most frustrating since unexpected
obstacles can pop up (unrevealed law suits, etc.).
Also, title and escrow agents are looking out for their interests, not yours, and
may not be used to dealing with private investors. Since they normally work with
banks and conventional lenders, they may regard you with some suspicion. In
addition, they may simply not understand an ―unconventional‖ transaction outside
their experience.
So, to keep them under control, just remember their clearly defined role in the
closing process; their only responsibilities are to make sure that all closing
documents are properly signed and that the proceeds from the sale are
distributed. Legally, they can’t provide advice in the accounting, financial, and
legal areas. They also can’t act as negotiators or mediators between the
transaction parties. In effect, during the closing process, treat them with courtesy
but don’t let them treat you badly.
Of course, a good way to make sure the closing process is handled smoothly and
effectively is to have your board-certified attorney present. This is an absolute
necessity. Unless you’re an attorney experienced in real estate law, never
attempt to do a closing by yourself! As I stated earlier, the attorney should be
experienced and knowledgeable about your state real estate laws and
regulations. He or she should also understand specific foreclosure laws as well
as the subject of liens, judgment liens, and other legal actions that can affect the
closing process.
Below are some other important tips on closing the sale.
The Real Estate Settlement Procedures Act (RESPA)
RESPA is a 1974 federal law that was enacted to prevent con artists from
preying upon the property-buying public, and you should know its provisions. It’s
enforced by HUD (The Department of Housing and Urban Development). As
HUD’s website states:
“RESPA is about closing costs and settlement procedures. RESPA
requires that consumers receive disclosures at various times in the
transaction and outlaws kickbacks that increase the cost of settlement
services. RESPA is a HUD consumer protection statute designed to help
homebuyers be better shoppers in the home buying process, and is
enforced by HUD. “
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You can find out more about RESPA at
http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm
In addition, RESPA allows buyers and sellers to review their HUD I Settlement
Statement twenty-four hours in advance of the scheduled closing date. So, be
sure to review the statement carefully to check for any errors or overcharges.
Check, Double-Check, and Then Check Again!
One mistake made by novice investors is the failure to double-check all
documents for mistakes and/or omissions. So, before you get to the scheduled
closing date, sit down and review all forms carefully—loan documents, title
transfer documents, closing documents, etc. Look for mathematical errors,
transposed number and letters, and mistakes in spelling or typing. Of course,
your lawyer should review these documents carefully as well.
Use the 365-Day Proration Method for Property Taxes
The pro rata (in proportion) method simply means that the seller and the buyer
pay property taxes in proportion to an assumed 365-day year. In other words,
they pay in proportion to their possession of the property for that year. Here’s an
example: Assume the seller of a pre-foreclosure property had a property tax bill
of $2,775 and owned the property for 234 days. The seller’s prorated portion of
the tax is calculated as follows:
$2,775 ÷ 365 = $7.60 per day X 234 days = $1,778.40
If you were the buyer of this property, you would be responsible for the remaining
amount of property taxes for that year or:
$2,775 – 1, 778.40 = $996.60
Sometimes, however, the property taxes can’t be figured immediately. If that’s
the case, be sure to put a stipulation in the contract that any proration will be
adjusted when the property tax bill is finally received.
Have All Utility Meters Read
The day before closing, have all utility meters read by the appropriate utility
companies so the seller can pay his or her appropriate share. Also, remember to
notify the utilities that the property is now under new ownership. That way, you
won’t get billed for utility services provided to the previous owner.
Conduct a Final Inspection
On closing day, walk around the property and inspect it to see if any changes
have taken place that could negatively affect its value: e.g., standing water,
condemnation/code violation notices, pest infestations, etc. This last-minute
check can prevent any unpleasant surprises from popping up in the future.
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Record the Deed
After the signing of all papers, go to the appropriate office (county clerk, etc.) for
your state and have the deed recorded. If lenders and subordinate lien holders
require payment, then send them cashier’s checks after recording of the deed so
all transactions are complete, and you know you have the property fully in your
hands.
And now that you have possession of the pre-foreclosure property, it’s time for
the next step—fixing it up so it has maximum appeal for potential buyers. That’s
the subject of the next chapter.
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Step 10: Maximizing Property Value and Appeal
Once you’ve closed the deal, your job isn’t done. It’s time for ―beautification‖ of
the property so you can make it appealing to potential buyers. After all, you want
to make a maximum profit, and an unappealing property definitely won’t do that
for you!
―Curb appeal‖ is the term used in real estate for an attractive property. In other
words, when potential buyers first see the property, you want them to think
―Wow! (or as close to ―Wow!‖ as possible). You want them to say to themselves,
―This is a property I could live in.‖
Another benefit of curb appeal is that, in the case of vacant properties, it lessens
the chance that vandals will damage or, in the case of arsonists, destroy it
completely. It’s a cheap deterrent!
A third benefit is that good curb appeal increases the resale value of the
property--and the return on your investment! So, maximizing curb appeal is a
cost-effective means of turning a bigger profit.
Be clear that maximizing appeal of a property isn’t a major rehabilitation on your
part—or it shouldn’t be. After all, if you’ve done proper due diligence, you’ll have
found a property that requires a minimum of repairs and beautification. So, all
your efforts should be directed at clean-up and cosmetic improvements. This
shouldn’t cost you much money. Depending on the size of the property, costs
may range from $500 to $2,000.
At the end of the chapter, I’ve provided you with a basic checklist of items to be
accomplished in order to maximize a property’s appeal. Feel free to use it as-is
or modify it meet your specific needs.
In order to keep your costs to a minimum, I recommend that you budget right
from the beginning. Also, keep a checklist of expenses so you have a clear and
definite idea of the outlay of your money. You can make up your own form easily
or use the example I’ve provided at the end of the chapter.
If you’re a person who’d rather spend time acquiring properties than cleaning
them up, I recommend you hire the services of a semi-professional to do the
clean up. It’s often the case that you can find a local, retired person who’s
looking for part-time work. Of course, ask around first to find out which
individuals have great reputations for doing quality work at cost-effective prices.
As you gain experience and knowledge, you’ll be able to select the best and use
their services on a regular basis, creating a win-win situation for both of you.
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Another option is to use professional contractors. But be careful in your
selection. There are incompetents and scam artists in this field. So, to avoid
them and make sure you get quality work, follow these guidelines:
Require a copy of the contractor’s general liability insurance certificate.
Talk to the insurer to make sure the policy is valid and current.
Verify with the local Better Business Bureau that there is no history of
complaints against the contractor.
Request a minimum of three verifiable customer references. Talk to each
reference and ask how they were treated by the contractor and if they
would hire him or her again. Remember, a reputable company will want
you to check the references because they know it means more business
and more word of mouth advertising.
Always get written estimates.
Make it a requirement that everyone involved in the clean up signs your
state’s version of a release of lien upon final payment.*
*In most states, any service provider who provides a service, labor or materials for
the improvement of real property has a right to file a lien against the property’s title
for non-payment. Moreover, you’re still financially responsible if even you do pay a
contractor for a job and he or she fails to pay the subcontractors who supplied the
labor and the materials. So, if you lack legal proof that everyone involved was paid
in full, you could end up with the short end of the financial stick. Therefore, always,
always have legal proof that everyone has been paid in full.
Of course, you should always do an inspection of the cleaned-up property before
you make final payment to a contractor to make sure all work has been done to
your satisfaction. If items haven’t been done, note them and require that they be
corrected before payment is made.
More Tips
Use the following tips to make sure your ―curb appeal‖ efforts are on time, on
target, and within cost estimates.
Establish a budget and stick to it. Before you begin any clean-up,
repairs, etc., work up a budget to make sure you don’t spend too much
and cut into your profit potential. Use the budget to figure your total cost
and try to stay as close to that figure as possible. You can use the web
sites I mentioned earlier in the book to estimate costs:
o Building Cost Calculator http://building-cost.net/
o Construction Cost Calculator http://www.get-a-quote.net/
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o Construction Material Calculators
http://www.constructionwork.com/resources.php
Supervise the work. In the beginning, it’s cheaper and better for you to
supervise the work done by contractors to make sure you get quality
results. However, as you grow and gain multiple properties, then you’ll
need to hire a trusted person to do the supervision for you. At that level,
your goal should be to focus on the big picture of increasing overall
income, not spending time and energy on supervision.
Set a work schedule. You want your acquired pre-foreclosure property
back on the market as soon as possible, so set a date for completion of all
the work. Inform contractors of that date and hold them accountable for
meeting it.
Clean, clean, clean—as I mentioned earlier, you want potential
customers to be attracted to the property as soon as they see it. That’s
why you should always clean the exterior first. Depending on the part of
the country in which you live and the condition of exterior, this can include
a power wash of the siding, brick, stucco or other material. A good
cleaning also lets you see if there’s any rotten wood or other damaged
material that needs replacement.
Use quality paint—avoid the temptation to go with cheaper brands of
paint. A great exterior and interior paint job enhances the value of a
property in a potential buyer’s eyes so it’s well worth a few more bucks per
gallon.
Hire a professional carpet cleaning service—particularly in the
beginning of your career, you may be tempted to rent a carpet cleaning
machine and do it yourself. While this may work for carpet that’s in good
shape, it won’t work for carpet that’s really filthy and smelly. The rental
machines are just not strong enough to do the job. Also, it may not be a
wise investment of your time. Why should you be cleaning carpets when
you could be out looking for more profitable properties? So, I recommend
you hire a professional carpet cleaning service. However, make sure it’s a
reputable one. As with other providers, ask for a written estimate before
you hire a company.
Get rid of any odors in the property—a bad smell in a home will turn
potential buyers off fast so be sure to eliminate odors in any pre-
foreclosure property you obtain. A simple way to eliminate mild odors is to
open the house up (depending on the weather) and let nature do the work.
With stronger smells, you’ll need to use an industrial-strength odor
eliminator. There are many such products on the market.
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Repair before buying—keep your costs low by repairing as many items
as possible; e.g., sidewalks, driveways, mailboxes, doors, windows,
lighting, kitchen cabinets, landscaping, etc. If an item isn’t fixable, then
spend the money to replace it.
As you can see from this chapter, maximizing the appeal of a property is
mainly a matter of common sense—common sense that can often result in
increased profit on a deal. So, my advice is to pay careful attention to this
area and then enjoy the rewards!
In the next chapter, we’ll look at another way of increasing the return on
investment—how to market and re-sell pre-foreclosure properties in order to
achieve maximum profits.
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Property Appeal Checklist
___ Carpet cleaning, if necessary.
___ Mow grass.
___ Paint exterior/interior, if necessary.
___ Pressure wash exterior of house/building.
___ Pressure wash sidewalks, drive ways, etc
___ Remove brush, weeds, dead trees, etc.
___ Remove trash from grounds and building.
___ Thoroughly clean the house/building.
___ Trim trees, hedges, etc.
Other:
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
___ ________________________________________________
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Property Cleanup—Cost Worksheet
Date Cost of Materials Cost of Other Items Total Cost
Labor
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Step 11: Achieving Maximum Profit
In order to achieve maximum profit on a pre-foreclosure property, you have to
market it well so you can sell it quickly, ideally within one to two months. This is
a key step, and one you should pursue aggressively. Once you’ve cleaned up a
property, you just can’t put a For Sale sign up in the yard and expect buyers to
come flocking. They have to know what and where the property is before they
can take a look at it. There are several guidelines you can follow to market your
newly acquired property.
Marketing Guideline 1: Target Your Market
The worst mistake you can make in marketing is to advertise willy-nilly, hoping
this ―shotgun‖ method will bring buyers in. The best approach to take is to aim all
your efforts at a market appropriate for the particular property. For example, if
the property is close to a college or university, then you’d likely target professors,
administrators or employees of that institution of higher learning. You could
advertise in university publications, send direct mail to the target audience, post
flyers, etc. Or, if the property is near a commercial/industrial park with many
corporate employees, then you’d want to target that audience. Many
corporations offer relocation services for their employees so you could contact
them, advertise in local newspapers, etc. With this targeted marketing strategy,
you automatically have an audience interested in your property.
Marketing Guideline 2: Determine the Property’s Resale Value
Earlier in the book, I discussed the comparison method of determining value; that
is, find the value of several homes in the neighborhood that are comparable in
value to your property. You can do this by requesting listings from real estate
agents or doing an online search for the neighborhood properties. Once you’ve
done this, you’ll have a good idea of your property’s resale value and can set the
price accordingly. Some investors price their foreclosure properties slightly
below the market value to increase its appeal as a bargain; others price their
properties at market value and throw in amenities to increase appeal. Whichever
approach you use, be sure to include the cost of your time and efforts for the
acquiring the property, increasing its curb appeal, and marketing it.
Marketing Guideline 3: Create a Property Information Sheet
Your property information sheet should contain all the necessary contact
information and details about the property such as the following:
Your name, telephone number, e-mail address, web site address, etc.
The address of the property
A good photograph of the property, if possible.
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A description of the property (i.e., the year it was built, architectural style,
construction type, square footage, number of bedrooms and bathrooms,
garage, basement, etc.)
A description of the HVAC system
A description of any of the ―amenities‖ (e.g., swimming pool, patios, decks,
great landscaping, fences, etc.)
Asking price, sales terms, loan information
I recommend that you think of a property information sheet as more than a
recitation of the property’s features. Think of it as a sales document that clearly
describes the benefits of the property. For example, you can describe the living
room as ―spacious with a great view of the park.‖ Or, you can describe the
heating or AC system as ―fully modern and energy-saving.‖ Don’t forget to
describe the neighborhood as well. For example, if the property is close to a
college or university, add ―Located within easy walking distance of XYZ
University on a lovely tree-shaded low-traffic street.‖ In short, your property
information sheet should paint an inviting picture for any potential buyers.
Marketing Guideline 4: Use That Great Tool—the Internet
Why restrict your marketing effort to local or regional markets? Now, you can go
global by using the Internet! Many foreign investors seek out American real
estate. Also, potential buyers like military personnel and corporate employees
are often transferred from one location to another, and they use the Internet to
find places to live. You can tap into global market in three ways:
Create a web page—you can create your own ―properties for sale‖ web
page if you have the knowledge. If you don’t, hire a professional to create
one for you. Just make sure that it loads fast. Slow-loading web pages
cause viewers to get impatient and move on quickly to other sites, and
that could mean business lost. The pages should include photographs
(interior and exterior) of the property, its location, directions to the
property, the site plan, features (and benefits!), the sale price, terms,
appointment information, etc. Maps for your web pages can be found at
online mapping services like:
o Google (http://maps.google.com/)
o MapQuest (http://maps.google.com/)
o Yahoo (http://maps.yahoo.com/)
Use online ads—there are many web sites on which you can advertise
your properties. Do a Google search to find out which ones fit your
objectives and budget best. I recommend two sites:
o Craigslist.com
o Backpage.com
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Use URL forwarding---this is an inexpensive service you can include on
your web page. It allows you to have your property for sale domain name
forwarded to a specific web page on your web site. The benefit is that it
eliminates the necessity of having to build an entirely new web site for
your property sale domain name.
Marketing Guideline 5: Use Traditional Marketing/Advertising
Methods
Remember, good marketing doesn’t limit itself to just one method; instead, it
uses a mix of methods. That’s because there’s so much marketing and
advertising out there, it creates ―noise.‖ That is, today’s customers are
bombarded with so much advertising, it can be difficult to make yourself visible if
you simply limit yourself to one method. So, be sure to include traditional
methods in your mix like the following:
For Sale Signs
It definitely pays to have a For Sale sign placed in a highly visible spot on the
property. For bargain properties, you may want to use handwritten signs to
attract attention to the fact that they are bargains. In the sign’s message, be sure
to include your telephone number. A typical sign might look like this:
Home for Sale
$0 Down
Call (123) 456-7890 Now!
Classified Ads
You can place ads in your local daily and weekly newspapers to reach a larger
local audience. Depending on the particular situation, you can include
information beyond the phone number and email address; e.g., if you’re willing to
finance, the amount of money required for a down payment, total down payment,
etc. A reader will be able to quickly read the ad and know if they’re qualified or
not qualified. So, in effect, your ad pre-qualifies buyers and reduces calls from
non-qualified buyers. Finally, don’t forget to have your ad placed in the
newspaper’s online classification section as well.
Telephone Answering System
Why not use your answering system as a marketing device when you’re not
available? Record a message describing the property, directions to find the
location, the sale price and terms, and any other pertinent information. It could
be something similar to this:
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Hi, you’ve reached John Smith, Inc. Thanks for calling. We have a great
home for sale at 12345 Maple Street in Jordan, (state). It’s a two-story
Tudor-style home with durable, low-maintenance stucco construction. It
has two bedrooms and two thorough modern bathrooms. The total living
space is 1,800 square feet. All appliances and HVAC are modern as well,
so utility costs are low. Fully carpeted. Two-car garage and big lot—90 ft.
by 130 ft. with a fenced-in back yard and garden and tool shed…..This
home is priced low for a quick sale at $150,000. If you have pre-approval
for a mortgage loan by a state-approved lender in the $130,000 range,
then call (xxx) xxx-xxxx and leave a message to arrange a viewing….
Marketing Guideline 6: Use Real Estate Brokers
The key here is to a have a participating broker agreement that allows you to pay
a sales commission only if that broker’s registered prospect buys the foreclosure
property. Don’t sign an exclusive listing agreement; this will only tie the property
up and limit your opportunities to sell. Work with an experienced full-time broker
who’s handled foreclosures before. It’s a waste of time and effort to work with
―newbies‖ or part-time amateurs.
Now that I’ve covered the basic guidelines for marketing, let’s turn to the subject
of pre-qualifying buyers. This is an extremely important part of your sales effort
because you don’t want to waste value time and money on people who can’t
afford the property.
Pre-Qualify Your Buyers!
Nothing is more annoying than working with prospects and then finding out
they’re not qualified to purchase the property. But, if you do this, you have no
one but yourself to blame because you haven’t put enough effort into pre-
qualifying them! The best way to pre-qualify callers is to be direct: Ask them if
they have enough cash on hand for the down payment. Ask them if they can
afford the monthly down payment. Ask them for their credit rating. Ask them if
they can close on the property within 30 days. If the answer is no to any one of
these questions or their credit rating doesn’t meet your standards, then they’re
not qualified. Inform them politely of this fact and move on to the next prospect.
Another way to pre-qualify buyers is work with lenders. Build good relationships
with several local lenders so you have a variety of loan programs to work with.
That way, when you run into potential buyers who need financing, you can send
them to one of the lenders. He or she will then let you know if these buyers are
qualified or not.
Alternatives to Selling Directly to Buyers
One alternative strategy is to sell your purchase agreements on pre-foreclosure
properties to other investors. These are individuals who are looking for
properties to rent to create ongoing income. Or they may be looking to resell
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such properties for profit. Often, these are professionals (doctors, lawyers, etc.)
who work with wholesalers to find investment properties.
For you, this strategy can mean quick turnarounds and quick profits. It also
means low startup capital as well as less risk since you’ll be limiting your
investment to the earnest money deposit and the charge for a title report. Of
course, work only with honest individuals who have the financial wherewithal and
good credit ratings to ensure that the deal will go through.
Another alternative is to assign or sell your purchase agreement to third parties.
In effect, this transfers the ownership of the agreement through ―assignment.‖
What this means is that you’ve sold your exclusive right to purchase the
contracted property for a specific price within a defined period of time. With this
alternative, you can also turn a quick profit.
Additional Information
I’ve saved the unpleasant fact of taxes for the last. Here’s what you need to
know about taxes on the sale of pre-foreclosure properties: Follow the Internal
Revenue Service (IRS) guidelines to minimize those taxes. It’s best to hire a tax
professional to handle the IRS’ complicated rules and to avoid being labeled as a
real estate dealer rather than an investor.
In general, you should know that if you re-sell a pre-foreclosure property within
one year (12 months) of the purchase date, your profit will be taxed as ordinary
income. Of course, you can reduce that tax by deducting many costs—repair
costs, cost of purchasing the property, insurance costs, real estate taxes paid,
cost of reselling the property, mortgage interest paid, etc.
To gain knowledge on IRS rules and regulations and download forms, go to their
web site at http://www.irs.gov/app/picklist/list/publicationsNoticesPdf.html. On
that site, the IRS lists all publications, and you can scroll through that list to find
the ones you need. I recommend Publication 537: Installment Sales; Publication
550: Investment Income and Expenses; and Publication 946: How to Depreciate
Property. To navigate through other tax information, go the IRS’ home page at
http://www.irs.gov/index.html.
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A Word on Short Sales
I like short sales and teach a course in it. You can go to
http://www.dodeals.com/preforeclosureprofits to learn more about this subject.
At this point, perhaps you’re wondering why I haven’t mentioned them previously
in the book. The reason I left the subject of short sales until now is that while
they can be profitable, they’re not as common as other techniques and more
complicated to carry out. Below, I’ll describe what short sales are and provide
the basics of such transactions. In order to get in-depth information, go to the
link mentioned above.
What Is a Short Sale?
Simply put, a short sale occurs in a situation when a home owner’s debt on the
property is greater than the amount for which the property can be sold. This
means the lenders are willing to accept less than the total amount due. Here’s
an example: Assume a homeowner has an unpaid loan balance of $120,000, but
the property will only sell for $100,000. The lender accepts that $100,000 as full
payment, which is obviously ―short‖ of the full $120,000 payment.
Since lenders aren’t in business to lose money, you can imagine that they’re
reluctant to do short sales and will often only do them as a last resort. It can
make more financial sense for them to go through with a foreclosure.
Why Is a Short Sale More Complicated?
A short sale is a complicated process due to the fact that so many factors are
involved: e.g., the loan mitigation policies of the lender and third-party investors;
the financial condition of the same; financial condition of the borrower; the
property’s as-is value; the cost to ―repair‖ the property to put it into saleable
condition and market it, etc. In addition, approval for short sale must come from
the investor who actually owns the loan. Moreover, if the lender is a government-
sponsored institution like Fannie Mae or Freddie Mac, approval can take a long
time, given the nature of federal-type bureaucracies.
When Will Lenders Accept a Short Sale?
Sometimes, homeowners experience a devastating illness like cancer that eats
up all their financial resources. Other times, homeowners are military personnel
who are called up to active duty for extended periods of time and lack the income
to continue mortgage payments. There are many other instances all of which fall
under the ―hardship‖ category—disabling, permanent injuries; financial
insolvency; convictions; lack of employment due to economic conditions beyond
the homeowner’s control, etc. In these instances, lenders are willing to consider
a short sale.
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How Do I Know If A Property Qualifies for a Short Sale?
In order to know if a property qualifies, you’ll need to gain knowledge. First,
know the lender’s loss mitigation policy. What’s their record on dealing with short
sales? If it’s seldom or never, a short sale is not worth your time. Second, know
the number of liens recorded against the property title and the total amount of
money in those liens. Third, know the borrower’s present financial condition.
Fourth, know the type of loan that’s in default and its current status. Fifth, know
both the property’s as-is market value and its as-repaired value. Sixth, and
finally, be aware of the state of the local economy and the current real estate
market conditions. Analyze all this information to determine if a short sale is
worth pursuing.
How Do I Pursue a Short Sale?
Let’s assume you’ve done your analysis and want to pursue a short sale. The
first order of business is to have the homeowner sign an authorization to release
the loan information. Next, you have to have cash on hand; that’s right, all short
sales are cash transactions. So, you’d better have cash available and verifiable
proof that you possess the money.
Keep in mind that short sales cannot be made to relatives, family members, or
close friends of the homeowner. In real estate terms, this is called an ―arm’s
length transaction.‖ If a short sale transaction is completed and a lender later
finds out that, say, the homeowner’s brother bought the property, then that lender
can file a lawsuit to have the sale overturned.
Another obstacle to a short sale is the property owners themselves. They can’t
receive any of the money from a short payoff sale. After all, why should they be
rewarded for financial irresponsibility? So, there’s little incentive for them to do a
short sale. There’s also another negative; the debt that’s canceled by the short
sale payoff of a mortgage or deed of trust is subject to federal income tax as
ordinary earned income. This is not true of a bankruptcy or insolvency.
How Is a Short Sale Property Appraised to Determine Its Value?
It’s done through the process of ―broker’s price opinion‖ (BPO). These are oral or
written appraisals done by real estate licensees licensed to do such actions.
Lenders use BPOs to determine two things: a property’s as-is value and its as-
repaired value.
How Do I Start the Short Sale Process?
Follow these steps:
Contact the homeowner who’s in foreclosure.
Determine the homeowner’s financial condition.
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Determine the condition of the property.
If both financial and property condition are suitable, ask the homeowner to
give you written authorization to communicate with the loan loss mitigation
department of the appropriate lender.
Contact the decision-maker in the loan loss mitigation department of the
lender and send him or her a copy of the written authorization.
Call the decision-maker to discuss the short sale and ask the decision-
maker to send the appropriate short-sale documents to the homeowner.
Have the homeowner gather all documentation to provide support for
financial hardship case.
Obtain repair cost estimates from a minimum of three licensed home
improvement contractors.
Do a comparable value study by assessing the value of three similar
neighborhood properties sold in the last six months.
Return the short sale proposal to the lender’s decision-maker. (See
example of proposal letter at the end of the chapter.) It should include a
signed purchase agreement for a percentage less than the amount owed
to the lender; e.g., 20%, 30%, 40% less, etc. Include a HUD 1 Settlement
Statement in your proposal. You can download the HUD forms at
http://www.hudclips.org/forms/.
The lender’s decision-maker reviews your proposal and orders a BPO to
determine the property’s as-is and as-repaired values.
The decision-maker either accepts your proposal or rejects it.
If the decision-maker thinks a short sale is appropriate, he or she will like
make a counteroffer.
You accept or reject the counteroffer.
If you accept the counteroffer, you close on the transaction within 30 days.
Other Information on Short Sales
Be aware that different federal agencies have different terminologies and
regulations for short sales.
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HUD (Federal Housing Administration)
To HUD, short sales are known as pre-foreclosure sales. Only loss mitigation
lenders approved by HUD are authorized to approve such sales on FHA-insured
loans. For a property to qualify for a pre-foreclosure sale, the following standards
must be met:
The property securing the default loan must be owner-occupied.
The loan must be a minimum of 90 days in arrears.
The borrower must have a bona fide financial hardship.
The borrower has to receive counseling from a HUD-approved agency.
You can get the latest information on HUD pre-foreclosure sales at the following
website: http://www.hudclips.org/sub_nonhud/html/pdfforms/05-18ml.doc.
DVA (Department of Veterans’ Affairs)
The DVA terminology for short sales is ―compromise sales.‖ According to the
DVA website, the borrower must meet the following conditions:
If your property cannot be sold for an amount which is equal to or greater than
the amount owed, VA may pay a "compromise claim" for the difference in order
to help you go through with the sale. Compromise sales are approved if the
sales contract meets several criteria and results in a savings to the agency, over
the costs of foreclosure. An additional advantage is that the property is not
acquired by the VA and the owner avoids a foreclosure and resultant damage to
their credit rating. If a compromise contract is accepted, you may be released
from all further liability or you may, in some instances, be asked to repay the
Government for the loss.
In order to be considered for our compromise sale program you must submit a
signed contract equal to fair market value. Any contract should state the words
"pending VA approval of a compromise sale." All closing costs should be
reasonable and customary. You should submit this contract along with the
appropriate forms to VA, if your lender is not already pre-qualified to review these
contracts on our behalf…. You may also contact your lenders Loss Mitigation
Department or the VA, regarding this program
You can find out more information at the DVA’s web page at
http://www.vba.va.gov/ro/Roanoke/rlc/lsc.html.
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Example of Short Sale Proposal Cover Letter
Date
Name of Lender Decision-Maker
Loan Loss Mitigation Department
Lender Name & Address
(Reference Loan Number on property in default)
Dear Mr. Smith,
Enclosed please find my proposal for a short sale payoff for Loan Number
(number, name of property owner, address of property).
My proposal is as follows:
The as-is sale price for the property is between $100,000 and $103,000.
This price is based on the recent sale of comparable properties within the
same area as the property in foreclosure. See attached listing of
comparable properties.
I estimate it will cost between $15,000 and $23,000 to restore the property
to a marketable resale condition. This estimate is based on repair cost
estimates from three licensed home repair contractors.
The borrower is in insolvency.
Within the past three years, property values in the neighborhood
surrounding the foreclosure property have fallen by over 15%.
I have the funds on hand to close on the property purchase within twenty-four
hours’ notice.
I would enjoy talking with you regarding this proposal. Please call me at (xxx)
xxx-xxxx) or email me at investor@hotmail.com. I’d be happy to answer any
questions you have.
Sincerely,
(Name)
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Conclusion
The biggest difference between my successful students and 97% of other
investors out there is that my students take the first step and ―just do it.‖ They
then make necessary tweaks as they go along. Most investors never take their
first step.
So, my advice is to take all the information and tools I’ve provided you in this
book and then just…
GO OUT AND DO IT!
There’s no substitute for getting out in the field and applying the techniques I’ve
shown you. Action is the key! And action leads to great profits!
So, don’t delay--take that first step and success will be yours. To enhance that
success, I recommend you log on to the Internet and go to the following sites.
To get your pre-preforeclosure leads today, go to
www.dodeals.com/preforeclosureleads
To learn about Short Sales & other advanced investing strategies, go to
www.dodeals.com/preforeclosureprofits
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