Foreclosure Tutorial ebook[1]

RealtyStore.com Foreclosure Tutorial #1 Foreclosure Tutorial by www.RealtyStore.com Introduction: Foreclosure Tutorial Welcome to the RealtyStore Foreclosure Tutorial The purpose of this tutorial is to provide an overview of the foreclosure process and to help you get started in achieving your real estate dreams. Whether you are a first time buyer or a seasoned real estate professional, there is tremendous opportunity in purchasing undervalued foreclosure property. Your timing as a new member to Realtystore.com could not be better. The national foreclosure rate has continued to increase over the last several years and currently, more than 2 out of every 100 mortgage loans are in the foreclosure process. There is no doubt that the housing market is red-hot, as housing prices have skyrocketed across the country. The big problem is that housing affordability is declining which causes people to stretch their budgets. The rise of interest-only combined with higher consumer debt and changing bankruptcy laws are likely to cause foreclosures to rise dramatically in the very near future. Due to these market conditions, we believe the best opportunity to make money investing in foreclosures is about to occur. Unless you are already an experienced foreclosure investor, we recommend that you take advantage of the information presented in this tutorial. While it certainly will not make you an expert on the subject matter, it does provide an easy to understand overview of the foreclosure process and how to purchase these properties. There are few opportunities today that can be as lucrative and exciting as the hidden market of real estate foreclosures. We wish you the best of luck and hope to see you accomplish extraordinary success in your journey into foreclosure real estate. Remember…the harder you work the luckier you will get. We appreciate your feedback, so please let us know if there is anything we can do to improve the service Why Invest in Real Estate The Many Benefits of Investing in Real Estate With so many different investment options available today, what is it that attracts so many investors and ordinary homebuyers to real estate, whether the real estate market is UP or DOWN? One of the primary reasons is that real estate investing is relatively easy to understand. Real estate investing, like any business that resells a durable good, is essentially in the business of buying low and selling high. The simplicity of this concept and the amount of wealth that can be created is what attracts so many individuals into real estate. While buying low and selling high is the guiding principal to building real estate wealth, there are many other important benefits. Let's take a look at these benefits below. RealtyStore.com Foreclosure Tutorial #1 RealtyStore.com Foreclosure Tutorial #2 Price Appreciation: This is the most widely understood benefit of purchasing real estate. Price appreciation is generally the result of the basic principles of supply and demand. When the demand for housing increases faster than the supply of housing, home prices naturally increase. While housing prices regularly fluctuate from market to market there is one very interesting fact to remember. Since 1969, the first year the nation's average home sale prices were tracked by HUD, there has never been a year in the last 33 that the nation's average sales price has not risen. As the US population continues to grow, combined with the inherent limitations on land development, housing prices as a whole should continue to rise. Tax Savings: If you purchase a home as a primary residence there are significant tax advantages. One of the biggest incentives to owning a home is that the interest you pay on your mortgage is tax-deductible, up to a limit of $1 million. Additionally, you can claim property taxes you pay as an income tax deduction. Another major advantage of home ownership is that, in most cases, you don't have to pay taxes on any profit you make when you sell your home. There are also tax benefits with purchasing investment property. The key tax benefit with investment property is called depreciation. The property can actually be appreciating in value while you are depreciating the asset on your tax return. The result is a reduction in your current taxable income while not reducing actual income. Rental Income: Receiving positive cash flow from investment property is every entrepreneur's dream. To have positive cash flow, the rent derived from your tenants must cover all expenses including your mortgage, insurance and taxes. While there are any number of investments that may offer this benefit, few can produce as much income relative to the cash invested as real estate. Leverage: Simply stated, leverage is the use of borrowed funds to increase buying power. The most common example in real estate investing is a mortgage. Investors use a small percentage of cash as a down payment and finance the rest through a lender. As long as the interest rate at which they borrow is less than the rate of return on the investment, there is positive leverage. Now that you understand the key benefits of purchasing real estate, let's turn our attention to the foreclosure market, which presents some of the greatest buying opportunities available. Foreclosures Overview Explaining the Different Types of Foreclosures While most consumers are familiar with the term foreclosure, very few have a solid understanding of how the process works. The purpose of this chapter is to provide an easy to follow overview of the foreclosure process. Whether you are a first time homebuyer or a real estate investor, it is important that you have a complete understanding of the foreclosure process before you invest your money in this unique market. While different states require different foreclosure procedures, the basic process is the same for all states. RealtyStore.com Foreclosure Tutorial #2 RealtyStore.com Foreclosure Tutorial #3 Foreclosure: Foreclosure is the legal procedure that a lender initiates to reclaim ownership of property after the borrower fails to make payments according to the terms of a loan. The foreclosure procedure essentially terminates the rights that the borrower was granted through a mortgage or deed of trust. This process gives the lender the legal right to take the property title away from the borrower so the property can be sold and the lender can recapture its loan proceeds. Judicial and Non-Judicial: Depending on the specific state of the defaulted loan, the process will be either a judicial foreclosure or a non-judicial foreclosure. the key difference between these procedures is the length of time it takes a lender to foreclose on a defaulted loan. In a judicial procedure, it takes the lender approximately 12 - 18 months to foreclosure compared to only 4 - 12 weeks in a non-judicial procedure. States with judicial procedures issue legal instruments called mortgages while states with non-judicial procedures issue deeds of trust. The mortgage foreclosure process takes longer since a lender must initiate a judicial procedure through the courts to obtain a judgment allowing the foreclosure and sale. By contrast, a default on a trust deed does not require lengthy court action since the title remains with the lender until the loan is paid in full. Additionally, the lender has the power of sale which allows the trustee to sell the property more quickly and thus recover the lender's collateral in a timely manner. The procedural difference in mortgage and trust deed foreclosures is provided below. Trust Deed Foreclosure: There are three principal parties involved in a trust deed foreclosure. The three parties are (1) The lender. (2) The borrower (3) The trustee who is an independent third party holding title to the property until the loan is repaid in full. When the borrower fails to make the required payments on the loan, the trustee simply records a Notice of Default, sends a copy to the borrower, and after a specified holding period, a Notice of Trustee Sale is posted on the property. When searching for properties through Realtystore.com, properties with a Notice of Default are categorized as "Preforeclosures" and properties with a Notice of Trustee Sale are categorized as "Auction" properties. The Notice of Trustee Sale is advertised to the public for a required period and if the borrower does not bring the loan current, the property is auctioned to the public. Mortgage Foreclosure: A mortgage is a legal contract in which the borrower secures a loan by using the property as collateral. When the borrower fails to make payments, the lender is forced to take legal action to collect the amount due. The lender will typically send multiple notices to the borrower requesting information about the missed payments in an attempt to work with the borrower to bring the loan current. When these efforts fail, the lender will hire an attorney to initiate foreclosure. At this stage, the attorney will file several legal documents including a lis pendens which is a public notice indicating legal action is pending on the property. If the borrower fails to respond to the complaint, the attorney submits a report to the court with the facts of the RealtyStore.com Foreclosure Tutorial #3 RealtyStore.com Foreclosure Tutorial #4 case. The judge will then issue a Judgment of Foreclosure and Sale in favor of the lender. At this stage, an auction sale is advertised according to the local statutes. Opportunities to Purchase Foreclosures: You should now understand how a property ends up at auction through the foreclosure process. We will now turn our attention to purchasing foreclosures during the three different stages of the process. The three stages are as follows: (1) Before the Auction (Preforeclosures or Notice of Default properties) At this stage the owner has defaulted on his loan and in many cases would like to find alternatives to avoid foreclosure and the resulting damage to his credit history. (2) At the Auction (Auction or Notice of Trustee Sale properties) The property owner has defaulted on his loan and has been unable to bring the loan current. Unfortunately, at this stage the owner is out of time and the property will be sold at a public auction to the highest bidder. (3) After the Auction (REO, Bank Owned or Government Owned properties) If the minimum bid at an auction is not met, the ownership rights of the property are transferred to the lending institution that provided the loan. In general, banks are eager to sell these properties so they can get the money back on the defaulted loan and issue a new loan. Pre-Foreclosures Pre-Foreclosures - the First Stage of Foreclosures In this chapter we will review pre-foreclosures, which represent the first stage in the foreclosure process. In this phase, the homeowner has missed at least one payment and is now considered delinquent on the loan. A pre-foreclosure can also be referred to as a Notice of Default. or Lis Pendens , which is a formal warning sent to the borrower on a loan regarding the delinquent payment(s). A Notice of Default or Lis Pendens are essentially the same thing but just signify whether the loan is secured through a mortgage or deed of trust. Once the trustee files a Notice of Default it immediately becomes public record. Understanding Distressed Homeowners: To effectively help a homeowner in distress, it is important that you understand the psychology of the owner. In most cases, the owner is dealing with a negative event in his life that has caused him to fall behind in his mortgage payments. Often times it can be the result of divorce, illness, job loss or other monetary obligations that have grown unmanageable. Making matters worse, owners often fall into denial or procrastination, which undoubtedly makes the situation worse. Only once you understand the problem the homeowner is facing can you effectively help. Remember…you may very well be the last alternative for a homeowner who is facing inevitable foreclosure. Preventing further credit damage: While it is unlikely that a distressed homeowner has great credit, adding foreclosure to their credit history will have long-term consequences. RealtyStore.com Foreclosure Tutorial #4 RealtyStore.com Foreclosure Tutorial #5 Specifically, it will make buying another home or establishing other types of credit very challenging for a long period of time. Saving some equity: If you are able to pay the owner some amount above their mortgage balance, it may well be more than they would receive through an auction. The reason being that the owners' equity is often times completely offset by the expenses and fees incurred leading up to the auction. Deficiency Judgment: If the proceeds from the foreclosure sale are not enough to pay off the lender, then the borrower is liable for any deficiency. Depending on the particular state laws, a deficiency judgment that is not resolved can result in garnished wages, seized assets and potentially even federal income taxes. Negotiating With the Owner: The biggest challenge of buying real estate in preforeclosure is getting the attention of the homeowner. Since a Notice of Default is public record, other astute investors have probably contacted the owner as well. Many investors will simply write a letter or send a postcard indicating their interest in the property. Since there will always be competition for a good deal, we do not recommend this passive approach. Rather, we have found it more effective to speak directly with the owner either over the phone or in person. This is the best way to gain the confidence and trust of the owner who is the ultimate decision maker. In many cases, the best option for an owner in default is to sell the home and get relief from the pressures of financial distress. Unfortunately, many property owners make every effort to hang on to their property for as long as they can. However, with the auction date rapidly approaching the homeowner will likely be motivated to close a sale prior to the auction. As the owner continues to explore his options in the pre-foreclosure period, we recommend you keep in regular contact with him. Make sure he knows you will immediately buy the house as long as he is willing to accept your price. When speaking with a distressed homeowner, be courteous and demonstrate an understanding of the owner's dilemma. Further, we recommend taking a consultative approach with an objective of reaching a mutually beneficial agreement. By taking a consultative approach, you may ultimately help the owner through the problem while deriving no immediate benefit for yourself. While this may seem discouraging, you may still benefit from the relationship. It is not uncommon for a distressed homeowner to solve his problem only temporarily and ultimately to default on their mortgage again. Having helped the owner the first time, it is quite likely he will seek your counsel a second time. As more deals come your way, you will undoubtedly find yourself in front of several good investment opportunities. Property Analysis: Before you can make an offer on any type of real estate, you must do your homework. This includes a thorough analysis of the property including a detailed title search to ensure a clear title. Next, you should evaluate the loan-to-value ratio of the property. This ratio compares the balance of the mortgage to the value of the property. The difference between these two variables is the owner's equity or the potential gross profit in the deal. If there is little or no owner's equity in the property, we recommend you go no further. If there is little or no equity in the deal, it will be very difficult to create a true win-win situation with the owner. RealtyStore.com Foreclosure Tutorial #5 RealtyStore.com Foreclosure Tutorial #6 If you are buying the property to flip rather than as a primary residence, you must calculate all the costs to buy, carry, repair and sell the property. If there is still a reasonable amount of owner's equity after subtracting all necessary expenses, you have identified a good investment. So how much should you offer the homeowner? While every deal is different, a very reasonable approach is to split the remaining equity with the owner. This way both parties end up in positive positions. Closing the Deal: Before you sign any agreement with the owner, double check to ensure the title of the property is clear. Never release any money until your real estate attorney has assured you of a clean title. If everything checks out, you will both need to sign a Real Estate Purchase and Sale Agreement At this point, you will want to arrange your financing and ensure that the foreclosure process has been stopped. Assuming all goes well, it looks like you just bought some real estate at below market value. RealtyStore.com Foreclosure Tutorial #6