How to Buy and Profit form Bank Foreclosures

A E BOOK EDITION How to Buy and Profit from Bank Foreclosures Expert Secrects Revealed in a Step-By-Step Guide E BOOK EDITION by Rob King Copyright 2005 All Rights Reserved How To Buy and Profit from Bank Foreclosures Expert Secrets Revealed in a Step-by-Step Guide E Book Edition Copyright 1994 - Rob King ALL RIGHTS RESERVED No part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher and the copyright holder. PREFACE Financial security derived the old fashioned way is a thing of the past. I remember quite clearly how my parents were able to buy a nice home, make improvements to the property, have two cars, provide for their family, save money for college educations, and take regular vacations—all on one income. Today, I earn twice what my parents made and can’t afford half of what they had. There are no more guarantees, no pension plans that can be counted on for life. There are no jobs or industries for that matter that will guarantee you financial security through the years. For the very first time in our history, a new generation of Americans does not expect to do as well as their parents did. The only industry I am aware of that continually produces larger than average profits is real estate. True, the industry is not the same as it was years ago. Nowadays you can’t just buy a home anywhere and expect it to quickly increase in value. Still, real estate will always appreciate in value. Bank foreclosed real estate is truly one of the greatest investment opportunities for the average person. Faddish opportunities come and go. Bank foreclosures are not fads. They are real life opportunities to save thousands of dollars on a home purchase and are available to anyone. Typically, you can save 15% - 25% off the market price of a home merely by purchasing a bank foreclosure. Savings of 40% - 50% are less frequent, but just as real. I’ve become disappointed with most of the books, tapes, workshops, seminars, etc., that I have collected on foreclosures. Most of everything written comes from one individual’s particular perspective. I think you should know all the methods of purchasing foreclosures and the ways you can reward yourself and your family by pursuing the opportunities available in the distressed real estate industry. I wrote How To Buy and Profit From Bank Foreclosures to deliver practical, useful real estate foreclosure information. No gimmicks, no seminars or courses... just the facts! If the plain truth about buying or investing in bank foreclosures is what you’re looking for, you’ve found it. This material will explain just what a “bank foreclosure” is, what the advantages are to buying bank foreclosures vs. government owned properties, how foreclosures occur and why, how to find foreclosures without getting ripped-off, and step-by-step methods of buying your first property. I am confident that you will find this information educational and useful, and that after having studied it, you will be that much closer to making your future a more profitable one. Rob King buying bank foreclosures vs. government owned properties, how foreclosures occur and why, how to find foreclosures without getting ripped-off, and step-by-step methods of buying your first property. I am confident that you will find this information educational and useful, and that after having studied it, you will be that much closer to making your future a more profitable one. Rob King ment is shown. You will see first-hand how the lenders, attorneys, brokers, defendants and institutions handled this unusual case. This case demonstrates everything one can expect when dealing with homeowners in foreclosure. Read the Guidebook at least once before reading the Case Study. Then go back and read the Guidebook again. Having read through all the material several times, you will be armed with all the information you need to start making profits from real estate foreclosures. Table of Contents Section 1 Chapter 1 Describing The Foreclosure Process..................................12 Basic Process Explained About Mortgages Trust Deeds Judicial vs. Non-Judicial Methods of Foreclosure Deficiency Judgments Deed in Lieu of Foreclosure Reinstatement Rights of Redemption Acquiring Foreclosures Summary How Foreclosures Occur...................................................... 25 The Most Common Reasons: Divorce Job Loss Health Matters The Economy Other Common Reasons Opportunities in Foreclosures............................................. 29 What is Distressed Property? Why Buy Distressed Real Estate? Advantages of Buying Foreclosures: Lower Purchase Price Lower Down Payments More for Less Motivated Seller Less Competition for Properties Motivated Lender Liens, Judgments and Encumbrances Better Terms Someone’s Loss Can be Anyone’s Gain Ownership or Investment? Chapter 2 Chapter 3 Disadvantages Foreclosure Investing: An Overview Chapter 4 How Many Foreclosed Properties?..................................... 36 Numbers of Foreclosures Understanding The Bank’s Position....................................40 The Bank’s Legal Obligations Other Influences The Bank’s Exposure What It Costs The Bank The Bank’s Motivation How To Locate Bank Foreclosures..................................... 46 Where to Look for Properties Where to Find Bank Foreclosures: The Banks Realtors Newspapers Legal Notices Real Estate Publications Foreclosure Reporting Services and Listing Publications The Courthouse On-Line Services Doing Your Homework, Researching Properties............... 73 Putting It All Together - The Big Picture Your Motivation The Seller’s Motivation The Team Concept Researching... Being A Good Detective Understanding The Basics Of Buying.................................79 Introduction to Buying The Three Basic Methods The Judicial Foreclosure Explained The Non-Judicial Foreclosure Explained Comparing the Processes Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Buying Pre-Foreclosures......................................................87 Investing Overview Proven Step-by-Step Methods: Locating Properties in Default Evaluating Selections Contacting the Homeowner Meeting the Homeowner Preparing Your Offer Presenting Your Offer The Purchase Contract Terms of the Agreement Ready, Set, Close! Chapter 10 Buying At The Auction..........................................................122 Investing Overview Disadvantages in Auction Buying Locating Sales and Auctions Evaluating Properties and Determine Profit Potential Inspecting the Property Calculate Your Profits Preparing for the Auction Attending the Auction Chapter 11 Buying Foreclosures Directly From the Banks.................. 132 Dispelling Some Myths Investing Overview Advantages Disadvantages Advantage or Disadvantage? How Lenders Dispose of Their Properties The Lender’s Asking Price How to Locate REQ’s Narrowing Your Selections Contacting the Bank Attitude and Approach Inspecting the Property Calculating Your Profits Making Your Offer Closing Chapter 12 Financing Your Purchase..................................................... 150 Before You Start Your Personal Credit Borrowing Your Money Partnerships Investors Other Sources Chapter 13 SeIIing Your Properties......................................................... 156 Strategy Overview Working with Brokers Selecting a Broker Pricing the Property for Resale Marketing Your Property Advertising Your Property: Newspapers Flyers Signs Final Checklist Presenting Your Property Qualifying Buyers Negotiating the Price Accepting an Offer Closing Chapter 14 The FHA, HUD, SBA... ETC!..................................................169 The Department of Housing and Urban Development (HUD) The Federal Housing Administration (FHA) The Veteran’s Administration (VA) The Small Business Administration (SBA) The Federal Deposit Insurance Corporation (FDIC) The Federal Savings & Loan Insurance Corporation (FSLIC) For More Information... Section 2 Workbook Checklists, Worksheets,Forms and Tables Property Evaluation Worksheet Property Owner Questionnaire Property Appraisal Worksheet Property Inspection Checklist Loan Analysis Worksheet Profit/Equity Calculation Worksheet 15 Year Interest Tables 30 Year Interest Tables Housing Cost Chart Monthly Payment Chart Section 3 Case Study Fleet Mortgage Corporation vs. Mrs. B., et al Chapter 1 - Describing The Foreclosure Process 1 CHAPTER Describing the Foreclosure Process “Buying real estate is not only the best way, the quickest way and the safest way, but the only way to become wealthy...” - Marshall Field GuideBook - 12 Chapter 1 - Describing The Foreclosure Process Describing The Foreclosure Process Basic Process Explained ORECLOSURE is a process of legal action taken by a lien holder or mortgage holder as set forth by state and local laws and a contractual obligation. This contractual obligation is spelled out in a mortgage or trust deed. The foreclosure action, pre-arranged in the contract, is taken when the terms of the contract are not met. This almost always means that the payments on the loan have not been made. The loan that was used to buy real estate is not being paid back and is considered in default. Default is defined as the nonperformance of a contractual or other kind of obligation, such as not making payments on a note. The contract (mortgage or trust deed) states that if the loan is not paid according to the agreement the one granting the loan is entitled to gain possession of that property in order to retrieve the money they lent for it. The ultimate goal of the foreclosing lender is to end the rights of possession of the property owner. Foreclosure then, is a process whereby the lender takes a property back from the borrower whose loan is in default in order to sell the property to pay off the loan. Sound complicated? Not really. A simple analogy can be drawn with the act of repossession. Example: When you buy a new car, most likely you will need an auto loan. This loan may come from your bank, credit union or even the bank or lending institution the auto dealership works with. In most states you get to drive the car off the lot, registered in your name and the name of the lender. Likewise, the title to the vehicle is in both names and held by the lender. When you pay off the loan, the title is sent to you, with only your name on it. You drive the car, clean it, repair and maintain it, but it isn't completely yours until the loan is paid off. Try not making your auto payments for three or four months and watch what happens. Most likely you will receive a series of letters from the lender, progressively getting a little more unfriendly. The lender may call to try to resolve the matter of late payments. Whether or not satisfactory arrangements are made to repair this situation, make no mistake about it: you are in default of your contractual obligation to make the timely payments of the loan as stipulated in the loan agreement. If the contract is not adhered to, the lender has the right to protect its interest in the agreement. The lender s exposure is secured by your signature on a promissory note and by the vehicle itself. According to most contracts or agreements of this nature, the lender will have the right to accelerate the loan, thereby making the full amount of the principal portion due and payable immediately, not just the portions or payments in arrears. Acceleration, commonly known as calling in the note or loan, is done so that the lender can avoid having to chase a borrower through cycles of being behind in payments and playing catch-up. Most lenders will work with you when you get behind in your regularly scheduled payments. If you F GuideBook - 13 Chapter 1 - Describing The Foreclosure Process fall far enough behind, show no ability to get caught-up in a reasonable length of time or are just generally uncooperative with the lender, the lender will most likely accelerate the loan. Banks and other lending institutions are not in the automobile business. Banks only make money on the interest they charge. If the loan is not performing, the lender is not profiting on its investment. Its profits come from the interest you pay on the loan. All banks are regulated. That means they have to perform within very specific guidelines and the laws of the land. Banks and other lending institutions are regulated to protect the public interest. Banks use your money to loan to others and invest. If the return (the interest) on the investment or loan the bank makes is not enough to cover its expenses and make a reasonable profit, then the bank is not running profitably. Who would want to deposit their hard earned dollars in a business that was not running profitably? Banking regulations are supposed to protect the consumer from fraud, misuse and misappropriation of the monies the consumer entrusts the bank with. Following is an example of the acceleration process: Let's say that you bought a $12,000 car. You put $2,000 down and you borrowed $10,000 at 9.50% interest for 36 months. Your monthly payments would be $320.33. If you make no payments whatsoever, the scenario would look like this: 30 Days 60 Days 90 Days 91 Days You Owe You Owe You Owe You Owe 320.33 640.66 plus late fees for 1 month 960.99 plus late fees for 2 months 10,000 plus late fees for 3 months plus interest for 3 months plus collection expenses At this point, if suitable arrangements cannot be made the lender will call in the loan, thereby making the full amount of the original $10,000 loan due and payable immediately. (Plus interest, late fees and other collection related expenses.) While all contracts and loan agreements vary, 90 days is typically all you get. If this happens and you still cannot satisfy the loan or make some satisfactory arrangements, remove your personal possessions from the vehicle, because the repo men will soon be on their way. About Mortgages Much is the same with real estate loan agreements and mortgages. When you secure a home loan from a bank you will deal with two of the most important documents you will sign in your life. The first is the promissory note. This outlines the terms and conditions of the GuideBook - 14 Chapter 1 - Describing The Foreclosure Process loan and your obligation to make the specified monthly payments to the bank. Technically speaking, the note is the signed document that acknowledges the existence of a debt and the promise to repay it. The second document is the mortgage contract. The mortgage contract is a pledge of security collateral for the debt. This legal instrument is created to give the mortgagee (lender) certain rights to the property in the event the mortgagor (borrower) fails to perform as agreed. The mortgage given to a bank is a lien against the property and not evidence of a debt. A mortgage simply pledges the property as security for the payment of the loan. There several types of mortgages, prepared for all kinds of situations. In some states, the contract actually transfers the property to the lender until the terms of the mortgage contract are met. In other states, the mortgage acts as a lien against the property. The borrower retains possession and use of the property, as long as the terms of the mortgage contract are met. Theodore J. Dallow, a recognized foreclosure expert and editor-in-chief of Foreclosures, a professional newsletter, points out the five basic covenants in a mortgage agreement: 1 that the borrower agrees to pay the principal mortgage debt. that the borrower will keep the property insured against fire for the benefit of the lender. that no building on the property will be removed or destroyed without the consent of the lender. the full amount of the principal portion of the loan will become due and payable, in the event that the borrower defaults on the payment of the “principal, interest, taxes or assessments.” that the borrower will agree to the appointment of a receiver, if foreclosure proceedings occur. 2 3 4 5 The contract states that the borrower will protect the property and pay the loan back. Additionally, it states that the lender will accelerate the loan if payments aren't made, and the borrower agrees to the foreclosure process should it become necessary. Remember, the lender is regulated and is using its customers money to provide loans. The lender must protect its depositors. By law and by contractual obligation, the lender must accelerate and/or foreclose. Trust Deeds This mortgage method of foreclosing on real estate is used in about half of the states in the nation. The other most popular method is the trust deed, or deed of trust. A deed of trust is also a legal instru- GuideBook - 15 Chapter 1 - Describing The Foreclosure Process ment and is used as a mortgage is used. The deed to the property is placed in trust with a third party, to assure payment of the loan and/or other stipulations of the loan agreement. There is also a difference in the titles of the parties involved. The lender is known as the beneficiary. The borrower is the trustor and the third party is known as the trustee. This trustee (third party) holds title to the property for the benefit of the lender (beneficiary) as collateral or security against the loan, in the event that the trustor (borrower) defaults on the loan. Both the deed of trust and the mortgage serve the same purpose: to secure the loan through title, repossession or foreclosure of the property; to gain control of the property and its assets and to remove the borrower from controlling or possessing the property. Both of these methods are known as security devices. figure 1 - 1 shows an example of a mortgage or note figure 1 - 2 shows an example of a deed of trust figures 1 - 3 are state by state tables showing the security devices used in each state (mortgage or deed of trust) Judicial vs. Non-Judicial Methods of Foreclosure The deed of trust is the security instrument most widely favored by banks and other lending institutions. All deeds of trust contain a power-of-sale clause. This clause allows the trustee (the third party) to advertise and sell the property, if the trustor defaults. The trustee (typically a title or trust company) does not require the authorization or prior approval of the courts to sell. Lenders favor this method of foreclosure because it is less expensive and less time consuming. The lender need not hire an attorney or involve the courts in any way. Ultimately, the lender fairs better in this non-judicial method. The other method of foreclosure is the judicial method, practiced in lien theory states. The lien theory dictates that the borrower pledges or hypothecates the property's title to the lender and that in case of default, the lender shall, through court proceedings, foreclose on the property and gain clear title. Hypothecation creates a lien on the property, as agreed to in the contract by both the lender and borrower. Whether a property is sold at a sale or auction, whether or not it goes through the foreclosure process, a lot of people have a lot of money at stake. There are very specific rules, regulations, laws and guidelines that dictate how these events will unfold. figure 1 - 4 illustrates the methods of foreclosure action, state by state. In the judicial method of foreclosure, the party petitioning the courts to begin foreclosure proceedings is not, by law, allowed to profit at the auction. If a bidder at the foreclosure sale successfully purchases the property for more than what the lender is owed (including the principal, interest for the late payments and other expenses as stipulated by the court) the overage, or the amount bid over the amount owed to the lender, is returned to the borrower. GuideBook - 16 Chapter 1 - Describing The Foreclosure Process figure 1 - 1 GuideBook - 17 Chapter 1 - Describing The Foreclosure Process figure 1 - 2 GuideBook - 18 Chapter 1 - Describing The Foreclosure Process Methods of Foreclosure Action by State (Security Devices) STATE INSTRUMENT STATE INSTRUMENT Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisianna Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Mortgage Deed of Trust Deed of Trust Mortgage/Deed of Trust Deed of Trust Deed of Trust Mortgage Mortgage Mortgage/Deed of Trust Mortgage Mortgage Mortgage Deed of Trust Deed of Trust Mortgage Mortgage Mortgage Mortgage/Deed of Trust Mortgage Mortgage Mortgage/Deed of Trust Mortgage Mortgage Mortgage Deed of Trust Deed of Trust Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Deed of Trust Deed of Trust Deed of Trust Mortgage Mortgage Deed of Trust Mortgage Mortgage Deed of Trust Mortgage Mortgage Deed of Trust Mortgage Mortgage Mortgage Mortgage Deed of Trust Deed of Trust Deed of Trust Mortgage Deed of Trust Deed of Trust Deed of Trust Mortgage Mortgage figure 1 - 3 GuideBook - 19 Chapter 1 - Describing The Foreclosure Process Methods of Foreclosure Action by State (Type) STATE INSTRUMENT STATE INSTRUMENT Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisianna Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Power of Sale Power of Sale Power of Sale Power of Sale Power of Sale Power of Sale Power of Sale Judicial Power of Sale Judicial Power of Sale Power of Sale Power of Sale Judicial Judicial Judicial Judicial Judicial Judicial Entry & Possession Power of Sale Power of Sale Power of Sale Power of Sale Power of Sale Power of Sale Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Judicial Judicial Power of Sale Power of Sale Judicial Judicial Judicial Power of Sale Judicial Judicial Judicial Power of Sale Judicial Power of Sale Judicial Power of Sale Power of Sale Power of Sale Judicial Strict Foreclosure Power of Sale Judicial Power of Sale Power of Sale Power of Sale figure 1 - 4 GuideBook - 20 Chapter 1 - Describing The Foreclosure Process The lender merely presents its lien, its court ordered judgment for the amount owed at the foreclosure sale and usually ends up with the property. Again however, if an investor bids more than the upset price the price stipulated in the foreclosure complaint then the amount paid at auction goes to satisfy the debt owed to the bank first, with the balance going to the property owner. Deficiency Judgments If a property at the foreclosure sale does not sell for the previously established price (i.e. the upset price), if it sells for less and does not cover the amount stipulated in the lien or judgment, the lender may, through court action, seek a deficiency judgment. A deficiency judgment is another lien filed against the borrower. This judgment is filed to force the borrower pay the amount not collected at the time of the sale. Webster's NewWorld Illustrated Encyclopedic Dictionary of Real Estate describes a deficiency judgment as: a judgment issued when the security for a loan is insufficient to satisfy the debt upon it's going into default. It is the awarding of the amount still due on a foreclosed mortgage, after applying the sum received for the sale of the property. The lender or bank filling a complaint with the courts for a deficiency judgment can only demand payment for the balance owed. The bank cannot file a complaint for more than that. Deed in Lieu of Foreclosure A Deed in lieu of foreclosure simply means that the defaulting borrower surrenders to the lender the deed or title to the property to avoid foreclosure. In order to avoid formal proceedings, the deed or title is conveyed (transferred) from the borrower to the lender. The property owner, knowing that he or she can no longer make the loan payments, gives up rather than continuing to struggle with it. That is why the deed in lieu procedure is known as a friendly foreclosure. Years ago, a property owner in trouble may have simply mailed the deed and the front door keys right to the lender. With all of the laws and regulations currently in place, however, this no longer happens. There are no clauses in a mortgage or trust deed that gives the borrower the right to just mail in the deed in exchange for terminating the foreclosure process. The lender has to agree to and accept this procedure; it is entirely their option. James I. Wiedermer, a certified real estate law specialist, states, The acceptance must be knowing, which requires an offer and an acceptance on both sides sufficient to meet traditional contract tests for offer and acceptance. There are several reasons why a lender might not accept the deed in lieu procedure. The main reason is that the lender would lose its ability to pursue the borrower for any deficiencies against the loan. Depending upon individual state laws, the lender may lose its right to sue the borrower or pursue legal action of any kind. In states where the foreclosure process moves quickly, the lenders will be less likely to accept a deed GuideBook - 21 Chapter 1 - Describing The Foreclosure Process in lieu. In states where the process can go on for years the lenders are generally more willing to go along. In states that use the judicial system of foreclosure, the lender can incur a lot of expenses. Accepting a deed in lieu allows the lender to sell the property and turn its loss into a profit. This can actually benefit the lender if there is enough equity in the property. It is estimated that 10% of all foreclosures may end this way. Reinstatement From the time the defaulting borrower is first officially notified until the time the property is sold at the sheriff's sale or auction, the borrower has an opportunity to cure the default. The loan can be reinstated and the foreclosure action ended. The borrower is required to pay all associated expenses, not just the back payments. In some states, the clerk of the courts, county recorder or other administrator must verify the sale was conducted appropriately before deed or title to the property can be transferred to the successful bidder. This verification process can take from 3 to 30 days, depending on state law. In the interim, a property owner could pay all expenses necessary and keep the property even though it has been sold at auction. Learn whether sales have to be verified in your state, how long the It is extremely process takes, and whether a loan can be reinstated after the sale but before final important to confirmation and transfer of the deed. learn what the Reinstatement can sometimes be confused with our next topic, redempredemption tion, as some state laws are vague in this regard. ! In many states, the borrower has a right of redemption. This right of redemption gives, by law, the homeowner a specified time period within which he or she may free their property from the foreclosure process by paying the debts and/or fees that caused the foreclosure action initially. These rights vary from state to state. Some states have no rights of redemption. Some states allow the homeowner to redeem their property up to two full years after the foreclosure action. A borrower may even be able to redeem the property well after it has been sold at the auction! period is for the state where you are interested in acquiring property. Rights of Redemption Acquiring Foreclosures The actual purchasing of a bank-foreclosed property can occur anywhere during the foreclosure process. While Chapters 9, 10 and 11 are devoted entirely to the methods used in successful foreclosure investing, it's important to get an understanding of the basics. Foreclosures can be purchased before the auction, while the homeowner is in default of the loan agreement but is still in possession and control of the property; at the auction, where the homeowner can bid on their own property, but usually no longer controls it; or after the auction, usually from the bank or GuideBook - 22 Chapter 1 - Describing The Foreclosure Process lending institution that initially forced the foreclosure. Buying a property before the auction process begins is buying a pre-foreclosure. This involves working with the homeowner and sometimes the lender as well. When purchasing a foreclosure at the auction or sheriff's sale, you bid and compete with the lender and other bidders for the property. If you buy a foreclosure after the auction process, the property is called an REO. REO is an acronym that stands for Real Estate Owned. (You may hear the term OREO, or Other Real Estate Owned. We've even seen ORE, for Owned Real Estate) Buying an REO from the lender or bank means that you will typically work with someone specially assigned to handle these properties. It may be an REO Officer or someone with a title like, Special Assets Manager, that works in the REO Department or Special Assets Division of the bank. There are great opportunities in all of the purchasing methods. Some methods require less time and effort, some may reap greater rewards. How you invest or partake in these opportunities is up to you. Summary So far, we have learned that the foreclosure process occurs when the homeowner, who originally borrowed money for the purchase of his/her house, goes into default and cannot live up to the obligations of the contract that came with the borrowed money. The laws regarding lending, borrowing, redeeming and foreclosing are developed at the state level, and therefore are different from state to state. These laws are developed to protect the interests of the lender, the borrower, and the public at large. The borrower (mortgagor or trustor) has to live up to the terms and conditions of the loan agreement and mortgage. If not, the lender (mortgagee) must begin to force foreclosure action. The deed of trust method of foreclosure is quicker, easier and less expensive overall, compared to the court-authorized and monitored judicial process. A power of sale clause, authorizing the sale of the property should the homeowner be in default, can be included in any agreement, mortgage or deed of trust. Rights of the lender and homeowner vary from state to state. So do the rights of redemption and the foreclosure process itself. Lenders prefer to work with delinquent borrowers. Foreclosing is the last thing the lender wants to do. It costs the lender time and money. The lender does not realize the intended profit from the loan if they have to foreclose and will most likely take a loss. While it is extremely rare, lenders may foreclose for any breach of the contracts, not just lack of payments. There are rare examples of lenders foreclosing because the property owner did not maintain the property according to what was agreed to in the contract. Opportunities for investing and purchasing foreclosures occur all through the foreclosure process. Barron’s Real Estate Handbook, 3rd Edition, defines foreclosure as: “...a termination of the equity of redemption of a mortgagor or the grantee in the property covered by the mortgage. Statutory foreclosure is effected without recourse to courts, but must conform to laws GuideBook - 23 Chapter 1 - Describing The Foreclosure Process (statutes). Judicial foreclosure submits the process to court supervision...” and foreclosure sale, as: “...the public sale of a mortgaged property following foreclosure of the loan secured by that property. Depending on the type of foreclosure proceeding, the sale may be administered by the courts (judicial foreclosure) or by an appointed trustee (statutory foreclosure). Proceeds of the sale are used to satisfy the claims of the mortgagee primarily, with any excess going to the mortgagor.” ! Make absolutely sure that you investigate and learn the various laws regarding foreclosure in the state in which you plan to invest GuideBook - 24 Chapter 2 - How do Foreclosures Occur and Why? 2 CHAPTER How do Foreclosures Occur and Why? “...one problem after another presents itself and in the solving of them we can find our greatest pleasure.” - Karl Menninger GuideBook - 25 Chapter 2 - How do Foreclosures Occur and Why? How Do Foreclosures Occur and Why? S REVIEWED in Chapter 1, foreclosures occur when borrowers can not live up to the demands of the original loan agreement. Therefore we can assume that most, if not all, foreclosures occur when payments aren't made as promised, and that the foreclosure process centers around finances or the lack thereof. While this may be summarily correct, it's much more important to the foreclosure investor to understand the reasons behind the financial trouble. In other words, why didn't the borrower make his or her payments? What caused the borrower to become delinquent or go into default? So, you may ask: Why do people fall behind in payments. How do they get into financial trouble? There are several reasons why borrowers fall behind, or just stop making their regularly scheduled payments. All foreclosure experts agree on the top five or six reasons even if they don t all agree on which of these reasons is most common today. A The Most Common ReasonsFor Foreclosure Action: Divorce A few short years ago, divorce was the number one reason for home loans going into default. Typically, the husband is the breadwinner in the family. If the wife is a homemaker (a profession in itself) there is only one income for the household. When a couple splits up, they both must reside somewhere. More likely than not, this requires two mortgage payments, or two monthly rental payments, or a combination of both. With only one income, it becomes close to impossible to support the two households. In most cases, the wife ends up with the house. Even with alimony and support payments, there may not be enough to meet all the monthly obligations. The husband can only contribute so much, because he must now support himself independently. Even in the most amiable divorce situations, there just is not enough money to go around in the one income scenario. In the dual income scenario, typically the couple is aggressive in their quest for a better standard of living. Not having anticipated divorce, they are used to living the style of life that two incomes can provide. Now comes the divorce and the beginning of two households. What the two incomes could achieve while sharing expenses is no longer possible when the two incomes are separated and required to support two households. Unfortunately, most divorces do not end up so civil. If the separation is a bitter one, tensions and emotions run at a fever pitch. People sometimes express their pain and anger by hurting others, even those they love, or in this case, used to love. This anger goes beyond the emotional to the irrational. In this scenario, it almost doesn't matter how many incomes there may be in the household, because this couple is embroiled in an emotional dispute. This obviously is a Lose/Lose situation. Emotions stand in the way of rational thought and behavior. GuideBook - 26 Chapter 2 - How do Foreclosures Occur and Why? Frequently, no payments are made on the house, the loan goes into default and the foreclosure process begins. This is also known as the If I can't have it... no one will syndrome. Job Loss This is perhaps the easiest reason to understand. When we lose our jobs, we lose our income. A person s regular monthly expenses do not disappear with the loss of a job. The average person who is out of work for an extended period of time experiences how quickly their cash reserves or savings are depleted. Yet, for some reason this always seems to surprise people. Here's a quick example of savings depletion and what is takes to get back on track: Let's say that your average take-home pay is $2,000 per month. Your regular expenses total $1,800 per month and every month you sock away $200 into your savings account, where your account balance is now $3,600. In just two months of unemployment, your savings account has a $0.00 balance, you have no income and the bills are due. Three months after your job loss, you become gainfully employed. That's surely good news. The bad news is: that by the time your first paychecks start rolling in, you are almost 30 days behind on your bills. Even at the same salary range with the extra $200 per month, it will take nine months to get current with all of your bills. Worse, it will take another year and a half to get your savings account back to the $3,600 balance. The total time from job loss to full recuperation is now 21 months! A simple example perhaps, but it clearly illustrates how quickly a person can get behind in their financial obligations. Health Matters We should all be well aware of the health care proposals and current congressional plans and debates designed to cure us of our national health care dilemma. Today, most Americans do not have or can not afford proper health insurance coverage. Over 28 million working Americans either do not have, or can not afford health insurance. Over 45 million Americans have no health insurance. Rising health care costs have put insurance premiums, as well as treatment costs, out of the range of many. Even a temporary, moderate illness can cost thousands. Many of us have experienced some type of health problem in our lives. If you have had an experience like this, you'll understand how expensive the doctor visits, treatments, hospital stays and medication costs can be. Extended medical problems can destroy a family's finances almost overnight. Additionally, an extended medical problem can lead to loss of part or all of one's income. Individually, these hardships or losses can be crippling. Together, they can be devastating. The Economy Just as our economy goes through cycles of highs and lows, so does the real estate market, as it is hevily influenced by interest rates, the unemployment rate and the general economic outlook. The tech bubble economy turned individuals into instant millionaires. The growth in computer tech- GuideBook - 27 Chapter 2 - How do Foreclosures Occur and Why? nology and internet sectors was astounding. Home ownership in America has risen to over 63%, the highest percentage in over thirty years. Mortgage interest rates are the lowest in over twenty years. Unemployment is at its lowest level in nearly thirty years. As a result, foreclosure inventory is also the lowest it has been in years. No question about it, the economy has a direct effect on the number of homes regionally and nationally. For the past few years, the economy has become the #1 foreclosure maker. Not just the economy itself, but the results of a cyclical economy coupled with a fast paced real estate market and the events that occur from this not-so dynamic duo. Real estate went through the roof in the late 80's. People bought homes at high interest rates, the economy was strong and confidence was high. This was natural because real estate was appreciating (increasing in value) at a fantastic rate and real estate made sense in terms of investing. Added to this was the relaxing of certain government restrictions regarding lending qualifications and procedures. This allowed lenders to grant even more real estate loans. Most of this new wave of loans was used for riskier real estate investments. In the down-turn of the economy, businesses large and small began down-sizing or closing, resulting in massive lay-offs and unemployment. The real estate market took a nose dive. There are global events that effect our nation's economy. Who can forget the oil embargo and the effect that it had on Houston, Texas, Denver, Colorado and other regions of the country? Today, the New England states have rebounded strongly and areas of California are white hot with activity. As a matter of fact, California is currently a perfect example of how changes in the economy and job loss together effect the numbers of residential foreclosures. A combination of global events and a weak national economy has created a down-sizing in the hightech, aerospace and defense industries. California lost over 500,000 jobs in the last few years with an unemployment rate of 8.6%. This is over 3 points higher than the national average, and not at all typical for California. After four years of job loss, increasing deficits and exporting of jobs, many think the current economy is mixed at best. Others see the record highs in home ownership, the low interest rates and high corporate profits as signs of a strong economy. This one will be debated for years to come. The Other Common Reasons Without going into lengthy detail, the balance of common factors leading to foreclosure are: living beyond one's means, relocation, death, financial mis-management, military service, business failure where an individual may use the equity in there home to finance a business project that fails, interest rates and balloon payments. GuideBook - 28 Chapter 3 - Opportunities in Foreclosure 3 CHAPTER Opportunities in Foreclosures “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate...” - Andrew Carnegie GuideBook - 29 Chapter 3 - Opportunities in Foreclosure Opportunities In Foreclosure HE term distressed is generally used to describe property that has some type of financial burden attached to it. This can be confusing, because the house doesn't make the mortgage payments, the owner does. Clearly then, the owner in financial trouble, ready to lose his or her property, should be the one distressed! Distressed is also a term loosely used to also indicate a run-down, broken-down, over-grown property usually in need of some repair. For the purposes of this material, we will use the term distressed to indicate that the property has a financial burden attached to it. This may be in foreclosure, a pre-foreclosure, an REO (bank owned property) or other. Distressed property comes in all sizes, shapes and forms. It may be a tract of land that a contractor was developing for an office park. Construction loans get called too, not just residential home loans. Single family homes, apartment buildings, gas stations, mansions, industrial complexes, warehouses, even vacant land are all subject to the foreclosure process. T What Is Distressed Property? Why Buy Distressed Real Estate? So, why buy distressed real estate? This is why: If real estate buying and investing, or the ownership of one's home represents the best opportunities for one to increase their personal wealth, financial security and personal well being, then buying this real estate at a substantial discount off the regular market price would be ideal. Remember, there are no industries, jobs or employers that can guarantee financial security for you and your family forever. Buying real estate at market prices today is not the same investment it used to be. Buying distressed property has numerous advantages over that of buying properties at regular retail prices. It doesn't matter what your particular purposes for buying these properties are. Whether you are buying to own a home, intend to rent the property for monthly income, or buying and selling the property for quick profits, there is no opportunity that will allow you this investing flexibility better than investing in distressed properties, namely, foreclosures. Advantages of Buying Foreclosures Lower Purchase Price The first and most obvious reason to buy real estate at a discount is for the cost savings. It is true that the purchase of a home is the most expensive purchase the average person will ever make. If you would go out of your way to clip food coupons to save money on food, or shop around care- GuideBook - 30 Chapter 3 - Opportunities in Foreclosure fully when buying a new car, or even going to a department store on a certain sale day to save 20% on an article of clothing, then wouldn't you want to save at least that much on your most expensive purchase ever? Of course you would. If you are in the market for a home that typically costs $75,000, you may be able to purchase this home for $45,000 to $60,000. A home that would normally cost $125,000 may sell for $80,000 to $100,000. Purchase price reductions of 20%-30% are very common. Savings of 50% or more are much less frequent, but they do happen! On average, the foreclosure investor looks to buy property at 20%-40% off market price. Some investors hold out for greater discounts and won't be interested in properties that won't yield at least 35%-50%. Some investors just look at their return on investment. Some foreclosure experts claim that you shouldn't waste your time with any property that cannot be purchased for at least 30%-40% off the market price. Ignore that. All real estate purchases the properties, the loans and agreements, the parties involved and their financial conditions are unique. There are very good deals in the foreclosure marketplace that can be bought for 10% to 20% lower than the market price. These can be very attractive to the first time investor or homebuyer. Don't let anyone tell you that you are wasting your time with a deal that only yields 10%-20%. How you invest is entirely up to you. Besides, you will soon learn that some deals are actually much more profitable than they initially appear. Some of the bigger, more experienced investors may overlook properties in this discount range. Yet, these properties can yield higher than average returns to the shrewd investor. It is very important that you research your properties very carefully. This will covered in detail in Chapters 9, 10 and 11. Additionally, as market conditions change from region to region, you may find that 10%-20% off the fair market value for a property is indeed a good deal. Finally, for investing purposes, the return on your investment will be more important than the actual retail savings. You may be able to get a 35% return on your money while buying a property that's only 15% below market value. Lower Down Payments The lower the purchase price of your new property, the lower down payment will be required at closing time. If a 10% down payment was required for the purchase of your new $150,000 home, you would need $15,000 for the down payment. If you purchased this new $150,000 home for only $112,500, then your 10% down payment would only be $11,250. Immediately, you have saved $3,750. More For Less Another advantage of buying foreclosures is getting more for less. Let's say that you have been able to save $11,250 for the down payment on a house. In the 10% down example, you could afford a house normally valued at $112,500. Buying a foreclosure or distressed property at 25% off, your savings can now buy you a $150,000 house. In essence, it's the lower down-payment theory in reverse. The point is that on a limited amount GuideBook - 31 Chapter 3 - Opportunities in Foreclosure allocated to your down payment, you can end up with more property for the same amount as a lower priced property by buying a foreclosure. This might allow you to have more total space than originally planned, maybe an extra bedroom or garage or even a pool. Maybe you'll end up with a larger house or even more land. Perhaps the savings from the lower down payment and the lower monthly mortgage payments will allow you to buy a house in a nicer neighborhood with better schools and services. Motivated Seller One of the most delicate components of the foreclosure process involves the homeowner being foreclosed on. This person is most likely in some kind of financial trouble. This can be for any one of the reasons we discussed in Chapter 2. The owner is in trouble and about to lose their home and the equity in it. A homeowner facing foreclosure contemplates losing not only the shelter he or she provides for their family and themselves but also the equity built up in the property, his financial credibility, and the possibility of getting a new mortgage or home loan. He may face the burden of relocating and the possibility of a deficiency judgment, which means he still owes the bank money after the foreclosure sale. The homeowner backed into a corner will often drastically economize, sell possessions, and even allow his automobile to be reposed before losing his home. Less Competition For Properties The label distressed sometimes has a negative connotation. Because of that, most people are not interested in a distressed property. Realtors don't push the fact that they have distressed properties or foreclosures in their inventories. Some don't advertise them at all. Motivated Lender The originator of the loan, whether a bank, credit union or similar entity, is a lending institution. They are not in the real estate business, nor do they care to be. When the homeowner fails to make the regular monthly payments, the loan is in default and the lender has to take action. The bank's role in the foreclosure process will be discussed further in Chapter 5. Liens, Judgments and Encumbrances There are three main methods to buying foreclosures. These methods will be explored in detail in Chapters 9, 10 and 11. Depending on the method of foreclosure investment strategy you use, you can take advantage of this information to make great profits. But you can also lose you shirt if you're not thorough and careful. It is essential that you learn everything you can about a property you want to invest in. See Chapters 7 and 8. It is extremely important to know whether or not a property has a lien attached to it, as well as the type and the amount. Many who have purchased properties from homeowners or at auction thinking they've made a great deal have found liens and judgments attached to the property that could eventually cost more GuideBook - 32 Chapter 3 - Opportunities in Foreclosure than the property is worth. When a homeowner is in default of the loan agreement, typically he or she is in default with one or more other agreements. This can include credit cards, car payments and second mortgages or other loans. You may end up with the property, but you may also end up with these other bills, if liens have been attached to the property. Some investors like to contact the homeowner in this default stage to try to acquire the property just prior to foreclosure by taking over the payments and working out deals with any lien holders there may be. Some liens or judgments may be so high that the discounted price of the property, combined with the lien, place the purchase price out of reach. Some investors prefer to deal with foreclosures only after the auction process. While there are advantages and disadvantages to this investing method, one distinct benefit is that of clear title. This means that there are no judgments, liens or encumbrances of any kind associated with the property. This allows for easier, less complicated real estate transactions. Better Terms All real estate transactions are unique and foreclosures happen for a variety of reasons. The story behind every foreclosure is different and the condition of the loan is as unique as the property is. As many reasons as there are for foreclosures, there are just as many reasons that the lender who has taken back the property will be willing to work with you. The lender who now holds title to a property can offer incentives, such as lower closing costs, reduced price, waive points charged when closing, or otherwise make a mortgage agreement a little more favorable to a distressed property buyer in an effort to sell the property quickly. Someone’s Loss Can Be Anyone’s Gain Things move in cycles. The sun rises somewhere in the world and sets somewhere else at the same time. Every day of the year, people are winning or making fortunes and others are losing theirs. It's a fact of life. I remember once admiring my friend's unusual coffee table. It doubled as a showcase for an impressive collection of antique glass paperweights. My friend told me that the case had a burglar alarm wired to it that sent a signal directly to the police department, and that the contents of the case were insured for over $1million! My friend was an auctioneer. When I asked him how he felt about making so much money from the misfortunes of others, he reminded me that he wasn't the cause of their misfortunes and that he was just one of those who facilitate the legal process. The auctioning or the selling of personal property and real estate is a trade, a profession, and someone's got to do it. Most distressed properties come on the market as a result of someone's misfortune. These properties are financially distressed as a result of job loss, or the economy, or divorce, etc. If it bothers you to think that you may be taking advantage of another's misfortune, remember that you GuideBook - 33 Chapter 3 - Opportunities in Foreclosure are not the cause of the misfortune and this is just an opportunity that has been created that is available to anyone. Also, consider this: If you buy a distressed property before it goes to auction, you can do a lot of good for the homeowner. For starters, you can make up the back payments when acquiring the property, thereby saving the homeowner's credit rating and allowing the homeowner to get another mortgage. You can give the homeowner some money to put down on a new house, or to be used as a deposit on a new dwelling when he or she signs over the property. You can also take some pride knowing that you have rescued a distressed property. By acquiring and maintaining the property, chances are that you will increase its value and property values in the neighborhood. At the very least, you will have stopped the depreciation of the property and surrounding neighborhood. If those weren't enough reasons, here's one more. By rescuing this distressed property, by acquiring it before the foreclosure sale, you will most likely also rescue the loan, thereby making the lender very happy. This should make you happy too, especially if this lender is the same place where you deposit your hard-earned money! That'ss right, you're helping the bank. Ownership or Investment? Whether you are buying your first home or your fifth office building, buying real estate at a discount provides one of the most solid wealth building opportunities available. If you rent currently or own a home and want to upgrade, buying foreclosures is the easiest way to save 10%, 20%, 30%, 40% or more off the regular price of a home. No matter which method of foreclosure investing you choose, you will immediately experience greater profits, or greater equity, or greater monthly income, merely by successfully investing in distressed real estate. Disadvantages The only disadvantage to foreclosure investing, is not investing. The opportunities are endless, the foreclosures numerous. If you truly want to succeed and profit from the buying and selling of foreclosed real estate, you can and you will. But, like any good opportunity, it is only as good as those who seize it. Thousands of people are making tens of thousands of dollars buying and selling distressed properties. The very successful ones work at it diligently. Foreclosure investing takes time, sometimes hard work, and always a strong desire to succeed. Like any other great opportunity, you must work at it. The great thing about investing in foreclosures is that it doesn't require any special training or education. Anyone can buy a foreclosure. Depending on your investment strategy, buying a foreclosed home can actually be easier than buying a regular home and you save money too! If you want to save a little on the purchase of one house, you can. If you want to buy and sell, buy and hold, or buy and rent, you can. The level of your personal involvement in profiting from bank foreclosures is entirely up to you. Whatever level you choose, if you're willing to put in the work, you can reap fantastic profits. GuideBook - 34 Chapter 3 - Opportunities in Foreclosure Foreclosure Investing: An Overview The opportunities associated with foreclosure investing occur due to state and local laws and regulations regarding real estate transactions. Obligations aren't met and action is taken. It's a process of law, and contractual obligation. The new foreclosure investor should not confuse this opportunity with the highly publicized no money down methods of real estate investing. Foreclosures occur. Investors profit. More and more investors are getting involved. However, opportunities will still exist because even though many people may be aware of these opportunities, they will not take advantage of them. Many more are not even aware that saving money on real estate this way is possible. In Chapters 9, 10 and 11, you will learn the various methods of successful foreclosure investing. For now, know that there are three main methods of investing and that within each of these methods, there are many people involved in the process. The bank or lender, the title or mortgage company and the homeowner are involved. Also the lawyer, realtor, sheriff, courthouse, lien holders, auctioneer, trustee, bidders, loan and REO officers, court clerks, reporting services and so on. Many people are interested in foreclosures, and there are many sources of listings (magazines, reports, journals, newsletters, printers, advertisers and distributors) to meet the demand. You can get the information online. There are many services that supply accurate courthouse information that you can access with your home computer. Not all investing methods work for everyone. Nor do all methods deliver the same results, for the same amount of effort. Likewise, local and state laws vary. Economic conditions vary from region to region. Foreclosures, investors, sellers, and banks will behave differently from region to region. Investing in distressed and foreclosed real estate is an industry. Fortunately for us, not everyone is aware of the amazing profits made from foreclosures. And of those who do, many do nothing about it. GuideBook - 35 Chapter 4 - How Many Foreclosed Properties? 4 CHAPTER How Many Foreclosed Properties? “Facts do not cease to exist because they are ignored.” - Aldous Huxley GuideBook - 36 Chapter 4 - How Many Foreclosed Properties? How Many Foreclosed Properties? ECLINING economies lead to job losses on a national scale, hence the quantity of foreclosures that were occurring when How To Buy and Profit From Bank Foreclosures was originally written in 1994. In 2005, however, at the time of revising this book, the U.S. has been experiencing a mixed economy and moderate unemployment rate for several years. Surprisingly, although the outlook is generally sunny, this doesn't necessarily indicate a downward trend in foreclosures. Let's look at a specific region of the country. A recent survey of recorded deeds by all mortgage lenders showed that 7,175 foreclosed home sales occurred in 1999 in the Florida counties of Miami-Dade, Broward and Palm Beach, a considerable jump over the 5,888 foreclosed home sales of 1998. (It should be pointed out that while these figures represent the South Florida area as a whole, distressed house sales in Palm Beach county actually showed an eight percent decrease, going from 1,785 in 1998 to 1,640 in 1999. Looking at the situation in terms of all the county's home resales, 7.6 percent were foreclosures in 1998 as opposed to 6.6 percent in 1999. This is down from a whopping high of 15.7 percent in 1992.) Why the recent general trend toward more foreclosures during a time of economic plenty? The most likely culprit is excessive consumer confidence, according to David Dabby of real estate research firm Integra/Appraisal & Economics Associates of Miami as quoted in the April 18, 2000 edition of The Palm Beach Post. People are spending beyond their limits, notwithstanding the prosperity, and a sizable percentage are running into trouble in a prosperous time. It should be taken into account that the foreclosure process itself can take up to a year or more to complete it's full cycle. Also, while some industries may be rebounding and optimism is strong, the number of new jobs may not come soon enough for those who have been desperately struggling to keep their property from the clutches of foreclosure. Foreclosures lag behind the national economy. Often, an individual who losses his job today will have the necessary funds to keep up with the mortgage payments for quite some time. After this individual can no longer make his or her regular payments, it may take 3 to 6 months to initiate the foreclosure procedure. Consequently, it may be a year or more before the property is actually available as a foreclosure. There are several other reasons for this as well, mostly due to the rights of redemption available to the homeowner and/or the shrewdness of the homeowner in being able to stall or delay the process. Still, despite the irony of prosperity contributing to the number of foreclosures in some areas, the overall trend nationwide has been positive. The Mortgage Bankers Association of America reports that mortgage delinquencies fell to 3.72 percent in the first quarter of 2000, a 28-year low. Times have definitely changed since this book was first published. Back then we reported that the number of foreclosures in California were running rampant, hitting a ten-year high in Ventura county. Today, reports indicate California is enjoying a four-year decline in foreclosures. Fear not, foreclosure buyers and investors, there will always be plenty of foreclosures available. Exactly how many foreclosures are on the market right now? It's difficult to say, partly because it's an ever-changing number. One respected author figures about one half of 1 percent of all households in D GuideBook - 37 Chapter 4 - How Many Foreclosed Properties? America are in foreclosure. We have read regional studies indicating that three-quarters of 1% of the nations properties are in foreclosure. A Spring 1993 article in The New York Times illustrated a survey by the Mortgage Bankers Association of America in which it listed the top ten states, in order of highest rate of residential mortgages in foreclosure. This was a quarterly survey of over 16 million mortgages nationwide. The study showed the following: 1 2 3 4 5 6 7 8 9 10 New Jersey Massachusetts Connecticut Maine New York New Hampshire Florida Arizona Oklahoma Pennsylvania This list of total foreclosures by state was similar to the survey of new foreclosures by state. This survey listed the percentage of mortgages just entering foreclosure in the last quarter, ranked by states with the sharpest increase in foreclosures for that period. The results of this survey were: 1 2 3 4 5 6 7 8 9 10 Arizona Connecticut Massachusetts New Jersey New Hampshire New York California Florida Texas South Carolina It is generally accepted that about 3/4 of 1% of all residential properties nationwide, may be in foreclosure. If you figure there may be 130 million households in the United States, as of this writing, then about 975,000 of them will be headed to auction. This 3/4 of 1% number is the number of properties that will complete the entire foreclosure process. This is not the percentage of loans in default. That number is generally about 3.75%, representing loans that are at least 30 days late. These statistics are readily available from the Mortgage Bankers Association and the Federal Deposit Insurance Corporation (FDIC). GuideBook - 38 Chapter 4 - How Many Foreclosed Properties? Needless to say, there are plenty of opportunities available in the foreclosure market place. There will be no shortage of residential foreclosures for at least several years. Even with the current strong economy, there will always be a certain number of loans that go into default, and thus there will always be foreclosed properties available. GuideBook - 39 Chapter 5 - Understanding the Bank’s Position 5 CHAPTER Understanding the Bank’s Position “A moment’s insight is sometimes worth a life’s experience” - Oliver Wendell Holmes, Sr. GuideBook - 40 Chapter 5 - Understanding the Bank’s Position Understanding The Bank’s Position O far, we have covered what a foreclosure is, how they occur, the opportunities associated with investing in foreclosures and just how abundant they are. If you are going to invest in bank foreclosed real estate you should understand why the bank does what it does. Why did the bank foreclose on Sam the homeowner, instead of allowing him more time to get caught up? How can Mary's bank give her another 6 months to work out a payment plan? S The Bank’s Legal Obligations Our federal government regulates all banks and lending institutions. Regulations are laws and rules designed to control and govern one's behavior. They are also designed to insure that all involved will conform to certain standards. The idea of foreclosing or repossessing one's home, conjures up the old fashioned images of a Snidely Whiplash type character. Some nasty looking guy in a black cape with a handle-bar mustache, waving a piece of paper around that will allow him to unmercifully throw you out on the street, homeless and broke. Modern laws don't allow for this type of behavior. All banks are chartered. Technically, a charter is a written document that authorizes the creation of a corporation or institution (such as a bank) that will be regulated by the authority granting the charter (usually a government or legislative body). Additionally, the charter stipulates the rights, privileges and purposes of the organization. Non-compliance with these stipulations can result in the loss of the organization's charter. Loss of a charter is like losing your license to do business. It's similar to owning a fast-food franchise. You can buy and own a McDonalds franchise. It will be your business, but you must run the business according to the rules set by the McDonalds Corporation. You must also sell/use their products and materials. The success of the entire chain depends on control and consistency. You would never be able to rename the Big Mac or sell soft drinks in containers labeled Shirley Johnson's Burger Palace. The success of these chains is built on recognition. Anywhere you go in the world, when you see a McDonalds sign you know immediately what to expect in terms of the product offered, the quality and the cost. The products don't vary from restaurant to restaurant Banks are regulated by federal agencies. They can be held highly accountable for problems in their performance to such agencies as: Department of Housing & Urban Development, The Justice Department, Comptroller of the Currency, the Internal Revenue Service, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board and the Federal Reserve, to name a few. Banks are constantly under the watchful eye of these agencies and have to perform accordingly. Only twenty years ago, we witnessed a rash of bank failures, a tremendous amount of bad real estate loans and the S&L crisis. The banks were under tremendous pressure from these agencies. Congress is turning up the heat through these agencies because there was a lot of concern regarding the use of our GuideBook - 41 Chapter 5 - Understanding the Bank’s Position tax dollars to bail out these failing banks. For the purposes of the bank's balance sheet, a bank-foreclosed property is a non-performing asset. A loan that was made is no longer earning interest and so is no longer profitable. Banks that have larger amounts of these non-performing assets make the governing federal agencies very nervous. After all, it is we, the taxpayers, which will hold accountable those who manage the agencies that manage the banks. How sensitive is this issue? How about $502,000,000,000 worth! This is the amount of money that you and I had to come up with to bail out the S&L crisis! Hey Joe... got an extra Five Hundred and Two Billion I can borrow? Other Influences In addition to those named above, there are other agencies that influence how the lender or bank will respond to a non-performing asset. In many cases, a mortgage company or lender will sell the mortgages they hold to larger mortgage investing pools. The lender then only services the loan. Servicing consists of collecting the payments, forwarding the payments and basically managing the account. For this, the lender receives a small fee. The lender or mortgage company may service the loan, but it is now owned by a different corporation or investing group that has ultimate control over that loan. A homeowner in default can (and should) visit his or her banker, explain the circumstances and what they intend to do about it. The homeowner's friendly and neighborly banker may appreciate the environment and grant additional time to make payments or make other arrangements to help the troubled borrower. Or the homeowner may go to their friendly banker to discuss the matter only to find that their loan has been sold to the ABC Corporation and the ABC Corporation, who now owns the loan, says that if payments are more than 90 days late, action will be taken! These corporations can set strict policies and procedures for action to be taken on non-performing assets that are serviced by a lender. The local lender will have to adhere to the guidelines set forth by the entity that owns the mortgage, thus making him appear a lot less friendly. The most popular of these larger investing groups are nicknamed Fannie Mae and Freddie Mac. These stand for the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). These agencies buy the mortgages from your bank or lender. Not surprisingly, there is a lot of confusion regarding the nature and purpose of these agencies or corporations. Fannie Mae for example, used to be, but is no longer a branch or the U.S. Department of Housing and Urban Development (HUD). Some of Fannie Mae's functions used to be that of management, liquidation and financing of the government's low-rent housing. These functions have now been assumed by the Government National Mortgage Association (also known as Ginnie Mae) (GNMA). Fannie Mae is a privately held corporation. As a private corporation, however, it is under the watchful eye of the Secretary of Housing and Urban Development. Our federal government regulates Fannie Mae, but it is not a federal agency. GuideBook - 42 Chapter 5 - Understanding the Bank’s Position Today, Fannie Mae's main purpose is to buy mortgages from mortgage companies, insurance companies, trust companies, banks, and savings and loans. Fannie Mae actually assists these lenders by freeing up more dollars to be used for new home loans. See Chapter 14 for more information on buying from these agencies. The Bank’s Exposure The main purpose of a bank (or any other lender for that matter) when lending money is to participate in and profit from a sound investment. The bank lends the money, the loan is paid back with interest and everybody's happy. It makes sense then, that banks would like to grant and approve as many home loans as possible. They do! The banks are happy to loan money for sound, secure investments like real estate. Yet, even these real estate investments must meet guidelines that are imposed to insure a safe and profitable loan for the bank. That's why those who need a loan from a bank, but have little or no assets or collateral, almost never get the loan, while those who have a lot of money or assets, usually have little or no problem. Banks are businesses, corporations driven to make profits. Because banks use our money, they cannot be too risky in their investing activities. Strict guidelines and procedures apply in the loan process. The banks are regulated and controlled to act accordingly. When bad investment decisions are made, it's a reflection on that lender's ability to make wise investment decisions. It's one thing to have an automotive plant that shuts down, leaving 3,000 unemployed in a town. Clearly, if these plant workers aren't gainfully employed within a reasonable amount of time, the massive job loss in the area will eventually lead to a larger than average amount of loans being foreclosed on. Originally, these were good investment decisions and anyone can clearly see that the lenders had good intentions, as did the borrowers. Federal regulators in this case may appreciate the regional condition and act accordingly. A single bank, however, in a growing community with 20 other profitable banks, whose foreclosure ratio or percentage of non-performing loans is greater than the norm, will stick out like a sore thumb. As we saw in the late 1980's, regulators had no problem coming in to a bank, seizing it and shutting it down while they decided on how to dispose of the bank's assets. One way the regulatory agencies monitor the banks is through mandatory quarterly reports. Bad investments create the bank's non-performing assets. This costs the bank even more than the loan amount itself, because now the bank has to incur additional expenses in collection and management of this troubled account. In real estate foreclosure, typically the lender can incur tremendous expenses in the repair, maintenance, collection and eventual sale of the property. As publicly traded companies, banks are accountable to shareholders. A bad balance sheet or an indication of financial or procedural mis-management can create nervousness amongst the shareholders. This can cause problems for the bank if the shareholders start taking action. The same holds true for the depositors. If my bank had a bad record, or if I kept reading about its trou- GuideBook - 43 Chapter 5 - Understanding the Bank’s Position bles in my daily newspaper, I'd think twice about keeping my money there. There has always been a negative stigma attached to a bank that forecloses on one of their neighbors. Part of this bad feeling about foreclosing bankers is historical. It probably started back in the days when unscrupulous lenders took advantage of homeowners and borrowers for power, greed, control and profit. Today there is a sea of laws created at national and state levels to prevent this type of behavior. What It Costs The Bank Once the bank gains possession of a property, it has entered into a Lose/Lose situation. The double loss results from a lack of income from the property (loan) and the expenses incurred in holding the property. Property taxes have to be paid to the appropriate authorities regardless of ownership or condition. The property has to be maintained, so as to not fall into disrepair. The home may have been damaged (intentionally or otherwise) by the homeowner or renters of the property. Now it becomes the obligation of the bank to repair the property to saleable condition. Maintenance and upkeep can be costly to the banker, especially if the property foreclosed on is outside the bank's normal business area. In such cases, the bank will most likely contract with an out-of-town management or maintenance company to provide landscaping, snow removal or other such services. Since it is virtually impossible for the lender to catch a flight every time an investor or buyer wants to see a property, the bank will work with property managers and realtors in the area where the property is located. This too costs the lender. To sell the property, the lender will most likely offer a local realtor a standard commission of 6%. Even if the property is local, the banker has to expend time, energy, manpower and real dollars to maintain the property. Banks with larger inventories of REOs often have whole departments dedicated to the management and sales of these properties. This can get very expensive for the bank. The Bank’s Motivation Banks stand to earn tremendous profits by investing wisely. Bad investments, as outlined above, can cost the bank everything. Clearly, it is in the bank's best interest to turn the non-performing assets into performing assets as quickly as possible. They may take any of the bad loans they have made and to try to convert them to a more profitable situation, or at the very least, attempt to reduce their losses. It's just a matter of managing the losses. The banks want to remove these negative figures from their records. By selling a foreclosed property, the bank can either work with the new homeowner by having him or her take over the existing loan or by creating a new and profitable loan. Taking over the loan in default and bringing it current removes the red ink from the bank's balance sheet. A new and profitable loan is obviously one for the plus side in the bank's portfolio. Either way, the bank has a very strong reason for wanting to dispose of their non-performers. Not wanting to look like the bad guys, banks have traditionally been very quiet about their foreclosures, almost GuideBook - 44 Chapter 5 - Understanding the Bank’s Position never advertising the fact that they had foreclosures in their possession. The bottom line is: the last thing the bank wants to do is foreclose on a non-performing home loan. Banks are like any other merchant selling goods and services: the product they sell is the home loan you want. The last thing the banker wants to hear from the customer is, What is your return policy? GuideBook - 45 Chapter 6 - How to Find Bank Foreclosures 6 CHAPTER How to Find Bank Foreclosures “If hard work were such a wonderful thing, surely the rich would have kept it all to themselves.” - Lane Kirkland GuideBook - 46 Chapter 6 - How to Find Bank Foreclosures How To Find Bank Foreclosed Properties N OW THAT you understand the basics of the real estate foreclosure industry, we will start exploring in more detail those areas that will affect your efforts most. How to save time, effort and a lot of money in locating bargain properties, requirements before getting started, understanding the big picture (including some tricks and traps) and how to buy bank foreclosures. Bargain real estate is a reality. There are countless opportunities associated with foreclosure investing. Investing opportunities appear all through the foreclosure process. There are different techniques you can utilize to find these bargain properties in their different phases of this process. As alluded to earlier, there are three fundamental phases of the foreclosure process. They are: the default phase, the sale or auction phase, and the REO (bank owned) phase. Think of these phases as before, during and after the auction. The method of locating foreclosures will vary depending upon the investing style you select. This investing style you develop (maybe one of them, or all three) will reflect the opportunities you are pursuing in one of the three phases of the foreclosure process. This chapter will break down all of the various methods for finding foreclosed real estate. We will also discuss how to apply these methods most effectively for the type of investing style you choose. Where To Look For Properties The most obvious place to start to look for properties is in your own neighborhood. If you intend to stay in the town, city or county you live in now, there should be little reason to look elsewhere. The advantages to shopping in your own backyard are that you may already be familiar with housing or real estate costs and the real estate market in general. You may already know friends or neighbors that are in the industry who can very useful to you. Even if you are not familiar with your local market and know no one locally in the industry, it is much easier to start and become familiar with your local market. It is also less expensive and more convenient for you. Getting started can be as easy as subscribing to your local daily newspaper and reviewing the Real Estate section. This allows you to get a handle on the market, housing prices and number of foreclosures in your area, as well as becoming familiar with those in the industry that may advertise goods and services that you may soon want. If you are relocating to a new area, start to gain as much information about the area you plan on living in as soon as possible. Research the area before you move. Subscribe to the local newspaper and have it mailed to you, call the local area Chamber of Commerce to get local information, contact Realtors and indicate that you are moving into the area, go to your local library and look up demographic information on your new locale. Demographic information provides a profile, a picture of what the area looks like in terms of pop- GuideBook - 47 Chapter 6 - How to Find Bank Foreclosures ulation characteristics. You can learn the population trends, ages, incomes, housing characteristics and more. This information is very useful in determining where you may want to live, or invest, in a new community. The U.S. Department of Commerce, Bureau of the Census, provides the most accurate and detailed demographic information available. They have the detailed information on just about anything you may want to know. However, census Bureau statistics can be overwhelming. To research a new area you may want to live in, check your local library for a publication titled, Places Rated Almanac. Published by Prentice Hall Travel, it is one of the best all around publications of its kind. This book rates 333 major metropolitan areas, by job markets, climate, safest and most dangerous neighborhoods, schools, museums and libraries, traffic laws, sports and recreation, even by SAT scores! There are many services on the Internet that provide accurate relocation and demographic information. The main objective here is to get familiar with the area in which you plan on doing your buying or investing. Even if you are not prepared to invest today, it will benefit you greatly to start collecting your information as soon as possible. Where To Find Bank Foreclosures Information on bank foreclosures is everywhere. The quality of the information varies as much as the properties themselves. There are pros and cons associated with all information retrieval methods. Some may better suit your particular needs than others. Some will serve your purpose better than others. The variations depend on your investing methodology and your personal preferences. The Banks A natural place to start locating bank owned properties is at the bank. You can start simply by contacting all of your local banks. There is a good chance that they have some REOs in their possession. If they do, they may direct you to their REO Officer or Special Assets Officer. This individual will have all of the current listings of the bank's REOs and is in the best position to assist you. A bank representative may tell you that the larger central office handles their REOs. Get the name and phone number of the person who is charge of all the REOs for that bank and it's smaller regional offices. Call this individual and explain that you are interested in purchasing a foreclosed property. Indicate that you are gathering information on properties in your special investment area or neighborhood and that you are interested in buying properties in that area. The bank representative might indicate that they currently have no properties in that area. That's okay. Ask to be put on a list of investors that are interested in buying REOs in that area. Make sure that you leave the REO Officer your name and number, so that you may be contacted. Be sure to follow up with that contact periodically. Sometimes they may forget or get too busy to contact all potential investors every time a new property becomes available. GuideBook - 48 Chapter 6 - How to Find Bank Foreclosures Most banks that have any substantial amount of foreclosures in their inventory work with realtors to aid them in the sales of these properties. Some banks work exclusively with one realtor or real estate agency. Ask for the name of the realtor that has the exclusive listings for that bank. The banker should be happy to provide you with this information. Complete this process by contacting all of the banks in your area. By the time you have completed this, you will have begun to get a handle on the number of properties available, as well as which banks have the largest inventories. Simultaneously, you have also contacted many realtors that may sell for the banks. You have now begun to get your name out there as well. When properties become available, these realtors may contact you. Once you have become a proven investor in these properties, the realtors will bend over backwards to contact you about new properties as they become available. Foreclosures are like a virus to the bank. Most of the time a virus is just a nuisance, but sometimes it can be life threatening. In the past, foreclosures were not discussed in public and certainly never advertised. Some banks today are lifting this veil of secrecy and have started advertising their REOs in an effort to sell them more quickly. The federal regulators don't seem to mind, because it's in everyone's best interest to sell these properties as quickly as possible. figure 6 - 1 shows an advertisement from a local Florida bank. Realtors There are several other reasons to work with a Realtor in your search for bargain properties. First and foremost, is simply that the realtor's job is to help the consumer buy and sell real estate. Realtors are professionals. They are equipped with the basic working knowledge of real estate transactions. Many Realtors become specialists in certain areas. These areas may be specific geographical areas (actual locations) or in specific types of real estate sales or practices. Some only sell commercial properties, like office complexes, warehouse space or retail strip centers. Some deal exclusively with the most expensive and most prized homes in a given area. There are Realtors that have experience in the foreclosure market. Likewise, there are many with no experience whatsoever. There are those Realtors that hate the whole concept of everyday people like you and me investing in foreclosures. Clearly, you won't get too far with these people. Nor would you want to. Some Realtors just have bad attitudes when it comes to these types of opportunities. When contacting Realtors, just like you did with the banks, be candid. Tell the realtor that you are interested in investing or buying foreclosures and ask him or her what they think about investing in distressed real estate. If they respond favorably, you may want to proceed. Doors will either start opening or closing with these calls. That's great! You should start right away separating the wheat from the chaff. Try to find and work with a Realtor that has expertise in your investing area. Typically, this person has been involved in several transactions in the neighborhood and can provide very useful insight GuideBook - 49 Chapter 6 - How to Find Bank Foreclosures figure 6 - 1 GuideBook - 50 Chapter 6 - How to Find Bank Foreclosures and information regarding the area. As you will soon learn, a Realtor can be very useful to you in the future. If you intend to buy and sell properties, this Realtor can help you sell your properties. With increased awareness of consumers investing in foreclosures, some Realtors have started advertising their properties and/or interest in working with foreclosure investors. These ads can be seen in many consumer related publications. figures 6 - 2, 6 - 3 and 6 - 4 show advertisements from real estate agents that have foreclosures for sale Good Realtors are professionals. They subscribe to and abide by certain codes of ethics regarding real estate transactions, their representation of buyers and/or sellers and the general conduct of one who participates in the industry. Realtors and real estate agents are salespersons. They make their living on the commissions they earn from selling real estate. I am reminded of the time when I was relocating to a new community and enlisted the aid of a Realtor to help me find a nice place to rent. Having detailed my housing requirements, this Realtor went about the search. After looking at a few places, I finally decided on one of them. Papers were drawn, everyone was happy. I gave notice at my current residence, packed, notified the movers, arranged time off from work for the move; everything was ready. Forty-eight hours prior to my scheduled move, the Realtor called to tell me that the homeowner had changed her mind, deciding to sell rather than rent. Both the Realtor and I began a frantic search for a new location. Within two days, I found a place, signed the papers and moved in. Three days later, the Realtor called, wanting to show me a place. I indicated that I had already found a place on my own and had moved in. She was curious as to my new location, so I told her. She was quite surprised and told me that it was the same community she lived in! I wondered why I had to find this place on my own, when I had a Realtor involved that lived in the same community. After all, she was the Realtor. Didn't she know what was available in her area? If that wasn't bad enough, she called back a half hour later to ask me if I would tell the rental office that she was the Realtor that originally showed me the location, so that she could receive a 5% finders fee paid by the rental community! (In some areas, a rental community may offer a 5% commission to those agents that bring in new renters) No, she didn't show me the community, and no, I didn't call the rental office on her behalf. If I did, she would have received $480 as a finder's fee. Doing her job properly, she could have earned that and more. The moral of this story is that Realtors are salespeople and everyone wants to make a quick buck. Be careful! Don't let a Realtor sell you what they want to sell you. Buy only what's right for you! Newspapers Newspapers can contain a bundle of information on foreclosed properties, or at the very least, a lot of collateral information. GuideBook - 51 Chapter 6 - How to Find Bank Foreclosures figure 6 - 2 GuideBook - 52 Chapter 6 - How to Find Bank Foreclosures figure 6 - 3 GuideBook - 53 Chapter 6 - How to Find Bank Foreclosures figure 6 - 4 GuideBook - 54 Chapter 6 - How to Find Bank Foreclosures Foreclosed properties may be advertised by the banks, Realtors or by a homeowner in default. In that case, the homeowner may be making a last ditch effort to sell his or her property before the property is auctioned off. You can find legal notices and private ads in newspapers. You may also find notices of auctions, HUD or IRS sales, and advertisements from Realtors or investors, even your future competitors. While you may not choose to get involved with HUD or IRS properties, it would be wise to get familiar with the lingo the terminology of the distressed real estate industry. Find the notices of auction and attend some that are convenient for you. Don't go to buy! Just go to see what goes on at the auction. See who attends, how many people attend, and how many bidders versus on-lookers. The real estate section of a good metropolitan newspaper typically contains articles or other newsworthy events that may affect your investing decisions. Ultimately, newspapers can be an excellent source of general real estate information. Check the newspapers in your special interest area. You may find, for a very small subscription fee, a world of daily information. ! figure 6 - 5 shows examples of foreclosure ads typically found in newspapers. It is essential to learn the laws in your state regarding the posting and/or advertising of foreclosure auctions or sales... and notices of default and trustees’ or sheriffs’ sales. etc. Legal Notices Legal notices can be found in most metropolitan daily newspapers. The names or titles on these notices vary, depending on the type of notice and the type of foreclosure process (judicial or non-judicial). Regardless of the type of notice is the fact that all foreclosure actions must be advertised to the public. (At this time, we are not aware of any state that does not require public notification). The types of notices vary, as do the dates or times when the notice must be published, as well as the type of newspaper that the notice must appear in. Depending on where you live, you may have available a daily or weekly Real Estate, Law or Business publication. Typically these are called reviews or journals. “Your Area’s” Real Estate Journal or “Your Area’s” Business Review would be two examples. Many of these publications specialize in reporting Notices of Default, New Foreclosure Case Filings, Notices of Foreclosure Sales, Trustees Sales, The content of these professional newspapers is generally excellent because the publisher is catering to the professions that use this information the most, like investors, bankers, lawyers and real estate agents. Some of these publications have additional online services for the real estate investor so that he or she may receive critical information faster than the average subscriber. This allows the investor to get a day or two jump on new properties entering the marketplace. GuideBook - 55 Chapter 6 - How to Find Bank Foreclosures figure 6 - 5 GuideBook - 56 Chapter 6 - How to Find Bank Foreclosures Here in South Florida, we are fortunate to have the Review newspapers. These are the Broward Daily Business Review, Miami Daily Business Review and the Palm Beach Daily Business Review. These Review publications are widely recognized as a source of quality information. The publishers offer a mailing label service. This service can greatly assist a foreclosure investor by providing ready-made address labels of delinquent borrowers, lenders and attorneys. Advertisements contained in the classified sections of these papers can be an excellent way to find those who participate in the industry. Lawyers, title companies, lenders, foreclosure research and reporting services, inspection services and investors like to advertise in these publications. These are the people you will need in the future. State laws vary on the publication requirements for foreclosure actions and sales. For example, Florida Statutes on Civil Practice and Procedure, Section 45.031.1 states: “Notice of sale shall be published once a week for 2 consecutive weeks in a newspaper of general circulation, as defined in chapter 50, published in the county where the sale is held. The second publication shall be at least 5 days before the sale. The notice shall contain: ! (a) (b) (c) (d) Most state laws are similar in that the notice must appear in a newspaper of general circulation or in the newspaper with the largest circulation. This common statute wasn't developed to insure the embarrassment of homeowners; it is intended to protect them. In the past, many less-than-ethical lenders would advertise the notice of action or sale in a publication with a very small circulation. This allowed the lender to comply with the regulations regarding advertising the notice, while trying to avoid tipping off the borrower that they were in trouble. Depending on the type of notice and its purpose, a borrower may never find out about past dues or late tax payments until it is too late! Today, most of these laws are written to provide the borrower with every reasonable opportunity to become aware of an existing or pending problem and to do something about it. figures 6 - 6 shows an example of foreclosure notices from the Palm Beach Daily Business Review, West Palm Beach, Florida. Begin to network with those in the industry today! A description of the property to be sold. The time and place of sale. A statement that the sale will be made pursuant to the order of final judgment. The name of the clerk making the sale. Real Estate Publications Real estate publications is a term we use for all of those free Homes Magazines that you see in your local supermarkets or in boxes at street corners. (This term does not apply to recognized, nationally distributed magazines such as Better Homes and Gardens or other similar magazines.) These real estate publications can be found in almost every single major metropolitan area of the GuideBook - 57 Chapter 6 - How to Find Bank Foreclosures figure 6 - 6 GuideBook - 58 Chapter 6 - How to Find Bank Foreclosures figure 6 - 6 GuideBook - 59 Chapter 6 - How to Find Bank Foreclosures figure 6 - 6 GuideBook - 60 Chapter 6 - How to Find Bank Foreclosures country, with some produced for rural areas as well. The main focus of these publications is to promote the local Realtors and the properties they have for sale. This usually applies to licensed real estate brokers, developers and related services only. The majority of Homes Magazines publishers are very conscientious about the type and quality of the services their advertisers promote. While they are not abundant in foreclosure information, more and more ads for foreclosure services have appeared in recent years as publishers have realized that the buying, selling and investing in foreclosed properties is here to stay. Ads from Realtors and foreclosure information providers fill these publications, today. The publishers have come to enjoy the revenue from the competing foreclosure listing services, and the Realtors enjoy the additional calls to their offices and cell phones. Be cautious when calling on a foreclosure listing company advertising in these publications. Today, most of them are the older-styled print publications and the rest seem to be the online services with questionable services and pricing. ! figure 6 - 7 shows an example of a local Realtor’s ad in a local “homes” type magazine. Make sure you thoroughly investigate any listing publication or reporting service before subscribing to or ordering their product! Two of the largest publishers of these real estate publications are: Homes & Land and The Real Estate Book. Both of these publishers offer full color, monthly magazines of homes and services, for over 400 regions in the country. If these publications are not distributed in your area, or if you are locating to a new area, call the publishers and they will send you a magazine for your area of interest at no charge. For a free copy of Homes & Land Magazine, call 1.800.277.7800 For a free copy of The Real Estate Book, call 1.800.841.3401 There are several hundred others of these real estate publications around the country. Some produced by smaller independent publishers, some that are produced by the local daily newspaper. They too, will promote local realtors and the local real estate market. Most of these publications will also contain other useful real estate advice or information. figure 6 - 8 shows an example of an ad in a real estate publication, from a foreclosure listing service. Foreclosure Reporting Services and Listing Publications Some of the best information on foreclosures can come from a Foreclosure Reporting Service. Some reporting services were actually born from those who did the original courthouse research for lawyers, title or search companies. Recognizing the demand for this information, they have expanded these reporting services, making the information available to the consumer. The infor- GuideBook - 61 Chapter 6 - How to Find Bank Foreclosures figure 6 - 7 GuideBook - 62 Chapter 6 - How to Find Bank Foreclosures figure 6 - 8 GuideBook - 63 Chapter 6 - How to Find Bank Foreclosures mation retrieved is usually very reliable; after all, professionals in the industry use it. However, the quality, type, price, and timeliness of the information offered by these services can vary greatly! There are several top-notch organizations that strive to deliver very accurate and timely information to their customers. These organizations know the value of this information. They understand the foreclosure investor and try to satisfy his or her informational needs. Unfortunately, there are too many publishers of foreclosure property listings that do a minimum of research, pay no attention to detail, deliver almost useless information, don't deliver the information in a timely manner and who generally don't understand the foreclosure investing concepts. These publishers are in the information business, not in the foreclosure business. The type of organization you purchase information from should depend on the type of information you need. This will all depend on your personal method of foreclosure investing. For example, if you enjoy purchasing foreclosures before the auction or actual sale of the property, you may want daily information on loans going into default, or complaints originally filed. Notices of Default (NOD) for instance, signal the beginning of a distressed property. The foreclosure process is just beginning and is ripe for the investor desiring to participate in this stage of the process. You may prefer going to the auctions to buy your properties. In this case, a reliable and accurate listing of Trustees Sales, Sheriff's Sales and foreclosure auction dates, with detailed property descriptions, would come in very handy. The most available and perhaps the most widely abused area of information reporting comes from those who publish lists of REOs. These are the properties that have been through the auction process and are now in possession of the banks or lenders. Some publishers claim that they are networked with over 3,000 to 4,000 banks around the country. That's complete garbage. There is no such national network. Some banks aren't even networked with their own branches! Quite often, a bank may not even be aware that one of their branches just obtained an REO. Since there is no national network or single source for bank foreclosures, specifically REOs, the only way a list publisher can obtain this information is directly from the banks. This means that the publisher has to contact each and every bank, and/or their branches, and request a current list of the properties they may have. The reason for the request is that the bank doesn't have to supply a list of foreclosures to anyone. There are no laws or regulations requiring the banks to do so. Banks maintain lists for their internal records, clients, realtors or others for the purpose of disposing of the properties. There is no standardized format for keeping or exchanging REO information. You may contact a bank and receive a professional looking computerized report of their current REO inventory or you may receive a hand written list of one or two properties, from the notepad of a secretary's desk, updated maybe 6 months ago. Anyone claiming to be networked with the banks is only trying to impress you. I always wondered: if there was such a network system in place, then how can it be that all of the foreclosure listing services that cover the state of New Jersey, for example, have a tremendous GuideBook - 64 Chapter 6 - How to Find Bank Foreclosures difference in the numbers of properties they list every month? One company recently told me this month's issue should have over 800 properties. A rival organization told me their current monthly issue contained over 2,500 properties for the same state. I once ordered a product from a national foreclosure reporting service after seeing their ad in a national daily newspaper. I ordered a list of foreclosures for the state of Florida. In the package, I received 75 pages containing over 5,000 properties. In my investment area there were 14 properties. Four of the properties were residential, three were commercial properties, and the rest unimproved land. One property was listed eleven times! The same property! The information was inconsistent. Some had addresses, some didn't, some had assessed values, and some didn't. This organization claimed to be networked with over 14,000 banks. Based on the fact that almost all of the properties on the list were RTC (a now-defunct government agency) properties, I had to assume that this organization subscribed to the RT database service of over 14,000 banks. C's Perhaps the worst part of the experience was that none of the four residential properties were even available. To gather data from the banks, some publishers hire teams of researchers. These people call and sometimes harass bank employees for lists of properties. Some banks update their information monthly, some weekly, some only as a new property becomes available. Bank After the list publisher receives the lists of REOs from the banks, the foreclosures information must be compiled. Properties no longer available should be occur every removed from the old list and newly available properties must be added. single day of By the time the research, compilation and printing is complete, a great the year... not deal of the information contained in the list will already be obsolete and no longer useful. just once a If you subscribe to a printed or hard copy monthly list publication or month! service, you should be aware that by the time you receive the information many of the choice properties on that list will already have been sold. The information contained in these lists is fairly similar from publisher to publisher. Most REO lists contain: the property address, property description, bank asking price, date of listing, numbers of bedroom and bathrooms, square footage (for commercial properties), and a contact name and phone number. You will not find: case numbers, lot and block descriptions, or plaintiffs and attorneys. The simple reason for this is that these properties have already been through the auction phase the foreclosure process. The sale is over and the property now belongs to the bank. We know of several list publishers that include VA, FHA, FDIC and SBA properties in their REO lists. While these properties indeed may have been taken back by a lender or a bank, working with and buying the properties from these agencies is quite a bit different than purchasing the property directly from the bank or property owner. See Chapter 14 In all fairness to the legitimate REO list publisher, it should be noted that the process involved for accumulating, sorting and properly distributing this information is difficult at best. Having to assemble this information in a handy format (structured by state, county, city, property type, price ! GuideBook - 65 Chapter 6 - How to Find Bank Foreclosures range, etc.) is a monumental task. The same is true for updating, deleting and modifying or changing descriptions, prices or contacts. It used to take an REO list publisher 8-12 weeks or more, to get this information to you. It was therefore inevitable that some of the information you received would have been outdated. Some of the properties were no doubt have been sold, or under contract. It is widely recognized that a list of REOs published monthly, will only be 70% - 80% complete or accurate. There are several good reasons to subscribing to a listing service. The first is that a reasonably good list of REOs can be delivered to your door with reasonably current foreclosure information for your area. You can quickly scan the list and note properties that may be of interest to you, thus eliminating a lot of wasted time in your search process. Merely drive by the property or properties that you re interested in for a quick evaluation, and/or call the contact listed with that property for more information and details. If you are interested in a four-bedroom/ three bath, split-level, with a two-car garage and a pool, in Bergen County, New Jersey, you merely scan the list for that type of housing description in the Bergen County section of your list. By yourself you would have to contact hundreds of banks, request their lists of foreclosures, wait to receive all of these lists, then sort them by county and property type. By the time you completed the process, a brand new Remember, list of fresh information could be at your door, making your search immeabecome an surably easier. expert at Before you subscribe however, there are some important considerations housing prices to bear in mind. and market Most REO list publishers produce a statewide product. In other words, a conditions list publisher in Florida may produce a monthly report of REO's for all 67 in your counties in Florida. While this is commendable, it is not necessarily useful investment to most REO buyers. area. You will Most Americans move to a new home in the same county they live in learn quicker, now, and at least half of those who do move to a different county move to a network faster, county adjacent to the one they live in now. The result is that almost 80% of establish more us move to the same or neighboring county we live in now. Most investors contacts, gain more experiprefer more localized information. ence and profit There are also national lists available. While some very large national sooner! investing groups may have a great deal of use for this information, the average foreclosure investor has no need or desire for lists of properties in all 50 states. Who can afford to jump on an airplane to inspect properties all over the country? Even if you could, why would you want to? Several publishers sell annual subscriptions. This can be okay for the full time investor. However, if you are only interested in buying a foreclosure to save on your new home (as many are), you may find this to be more than you need. Before you subscribe to a listing publication or reporting service, make sure they can sell you the type of information you need. Request a sample to be mailed or faxed to you. Don't expect this to be ! GuideBook - 66 Chapter 6 - How to Find Bank Foreclosures the entire list, just a sample. If it appears to have the type of information you need, you may wish to proceed. Forget those who will not send you a sample. Request additional information on the company you intend to do business with. If you are uncertain about an organization, call the Better Business Bureau, county, city, or Township Occupational Licensing Division, Consumer Affairs or Fraud Division, or the State's Attorney General's Office. Find out if there are any consumer complaints, how long the company has been in business, etc. There are some excellent services available. These services have at least two things in common. First, they understand the needs of their customers, foreclosures investors who need accurate and timely information. The second, and perhaps most important common denominator, is that the material produced is derived from courthouse records. There is no better source of pure real estate transaction information than the courthouse. These organizations have employees that visit the courthouse daily, or almost daily, for new and exact information directly from the source. The reports supplied by these companies will contain better quality information and more of it. Most of these organizations can also supply you with information on properties anywhere along the line in the foreclosure process. The following illustrations are ads from various foreclosure listing services. Some of these companies are no longer in business. Note that the advertisements are almost identical! The Courthouse The best source for all foreclosure information is at the county courthouse. All real estate transactions are recorded in the county where the property lies. All of this information is a matter of public record, and anyone can access the information without restriction. To search for information on a particular property, you must go to the courthouse in the county where the property lies. Courthouses are not networked. You can not for example, research a property in Nassau County, New York in the Suffolk County courthouse. Most county courthouses are large buildings filled with all types of official departments and offices. The experience can be a bit intimidating. Before trotting off to the courthouse, call and ask to be directed to the office or department that handles recordings of real estate transactions. This may be the Clerk of the Courts, County Clerk, the County Recorder's Office, etc. You can save some time and a lot of headaches by calling this department and asking the clerk where their office is in the courthouse, the hours the office is open, the best time to work with the clerk in assisting you to do your research, and believe it or not, how much it costs to make photocopies if there is a photocopy machine accessible. Whether you intend to buy foreclosures before the auction (working directly with the homeowner) or at auction, the information in the courthouse records will become invaluable. Finding information on pre-foreclosures for example, depends on the state where you are located and the security devices used in that state. In Title Theory states, that use the Trust Deed, you will be looking for Notices of Default. In Lien Theory states that utilize a standard mortgage as the security device, you will be looking for a Lis Pendens. Whether a Notice of Default or Lis Pendens, both are considered as notices, whereas a GuideBook - 67 Chapter 6 - How to Find Bank Foreclosures notice is an official communication that states that a party or parties intend to bring about some form of legal action. The Notice of Default is sent to the defaulting party or borrower (known as the Trustor) as a reminder that they are in default. A Lis Pendens is a recorded notice of the filing of a lawsuit. This official notice makes all aware, that there is a suit pending. The Notice of Default is used in the non-judicial foreclosure process, whereby the Beneficiary informs the Trustee that the Trustor has defaulted on his or her obligations and instructs the Trustee to begin foreclosing. The Lis Pendens is the official notification that the lender has filed a complaint, in court, to sue the Mortgagor (borrower) for failure to live up to the terms of the original loan agreements. In either case, these notices signal the beginning of the foreclosure process and are a matter of public record conveniently located at the county courthouse. The court clerk (or whatever title is used for this position) can be one of your best allies. You would do well to become friendly with this individual. Their assistance in helping you learn your way around the court records can be invaluable. Don't wait until you are ready to start buying to start learning the ins and outs of your local courthouse. Start today! While at the courthouse you can also access the Tax Collector's office. This office will be able to tell you if there are any unpaid or uncollected municipal or property taxes on the property you are interested in. Online Services There are several organizations that can provide you with all the information you will ever need right in the comfort of your own home or office through online services. Information will appear on your computer screen, just as if you were at the courthouse flipping through the tax rolls or any other documents. This information can be downloaded or printed as needed. The cost of these services is generally high, but retrieving information this way is ideal for the serious investor. There are thousands of websites dealing with foreclosures and scores of new foreclosure service providers. Many instant entrepreneurs offering all types of data. . Using the Internet Whether by bank, realtor, newspaper, magazine or listing service, the Internet is an obvious choice for locating foreclosed property listings and information. But first, you need to know some things about surfing the net as it relates to the foreclosure industry. GuideBook - 68 Chapter 6 - How to Find Bank Foreclosures Search for Services The Internet, while still young, is not what it used to be. It used to be that searches performed would return the most relevant results. In other words, if you searched for "shoelaces," you would get a page filled with web sites offering shoelaces and/or relevant shoelace information. It didn’t matter whether you used AltaVista, Excite, Yahoo!, whatever. Today, if you search for "foreclosures," on Google, MSN, AOL, Yahoo!, etc., you will get results that include some relevant, good quality sites, web sites that appear because they paid a lot of money to be placed there and web sites from operators who spam the search engines in order to gain higher placement without paying for it. Many of these sites therefore, are not necessarily offering the most relevant or best products and services, they either pay to be listed or cheat their way to the top of your search results. For example: ten years ago, there were very few businesses in the foreclosure data sector. Today, because of the Internet, there are thousands. Think about that. Is it possible that 1,000 expert services have been hiding all these years, or is it just a lot of people trying to make a buck with their laptops from their kitchen tables? I’m amazed too, that there are scores of previously unknown, 15 year expert authors and gurus. You know, the ones’ whose web sites go on for about 30 pages of scrolling, with text in yellow highlighting? The ones’ where the "special offer" expires on the very same date you visited the site? Generally, the web site operators have no track record, no industry recognition or verifiable history. Be careful of the "get rich quick" sites. Also, any web site that makes absurd claims, like "300% ROI Guaranteed," "100% Profit Guaranteed," "Banks Forced to Liquidate," etc. And never ever, use a site that either forces you or encourages you to provide your email address just to view a sample of their product. It’s too easy today, to have a web site built that copies information from legitimate providers, makes false claims then takes your information, or worse your money. That’s why all of these so-called experts have popped up out of nowhere. I urge you to check out any service you may be interested in. Remember the old saying, "If it looks too good to be true "). Comparison-shopping is easily performed on the net. I encourage you to shop around. Banks Online Just like looking through your phone book, you can search the net for banks that have foreclosures. The problem again, is that many banks do not post their foreclosed property inventory on their web sites, so your search results will probably return a lot of foreclosure-listing services, just like ours. Government Agencies Online Government agencies, such as HUD and the VA will post their foreclosed property information online. As a matter of fact, all government agencies having distressed property to sell, publish their GuideBook - 69 Chapter 6 - How to Find Bank Foreclosures information online. Examples are: HUD VA FDIC IRS www.hud.org www.va.gov http://www2.fdic.gov/drrore/ www.treas.gov/auctions/irs/real1.html It’s important to note that many of these agencies have changed methodologies as it pertains to property disposition. Many, like HUD and VA now use contractors to sell their properties. Therefore, their property listings can be found on the sites of those contractors responsible for selling the properties. These contractors often change, so I’m hesitant to list them here, however, you can’t go wrong by visiting the main government sites, or our very own site for government foreclosures: www.HUDForeclosures.com. This is a free consumer site containing listings of all government foreclosures and associated information. Look for this site to be available in early 2005. Realtors Online Realtors are just starting to use the power of the net properly. Most have sites built for them by their agencies, typically just a few pages. Others have developed more extensive sites with 3-D virtual tours of their properties. Some offer foreclosures through the lender’s they represent, and others will just have links to other foreclosure listings sites. And again, trying to find local Realtors that offer foreclosed property listings will generally return a page with foreclosure listing sites. Newspapers Online As mentioned earlier, there are newspapers of different sorts that will produce lists of foreclosed properties in their area. Either because they are business or financially targeted publications or because they are the official publication of record for that county’s foreclosure notices. If these publications have an online presence (a web site), it would most likely be more convenient to gather your data from them through the web site, versus searching for the paper or waiting for it to be delivered. Most today, will require you to subscribe either for free or for a fee. Real Estate Magazines Online Free real estate or "homes" magazines generally are online now. Searching specifically for foreclosures on these sites generally do not lead you to listings they publish, rather, you’d end up being sent to a foreclosure-listing site they’ve partnered with. This is not a good online source for foreclosure data. GuideBook - 70 Chapter 6 - How to Find Bank Foreclosures Foreclosure Listing Services Online Here’s where it gets tricky. Earlier in this chapter we discussed the various offerings from foreclosure listing providers providing data in printed formats. Finding good foreclosure listing sites online can be very frustrating. For starters, there are very few operators that actually do their own research or display their own listings. Many sites are affiliates of larger sites and they just move you from their site to the parent-listing site. Affiliate Web Sites Affiliates of listing sites are not, in themselves, listing sites. They just partner with others. This doesn’t necessarily mean it’s a bad thing; after all, we have over 150 affiliate partners that send traffic to our sites. It just means that the affiliate is not an original producer of the information you seek. On the other hand, some affiliates are just in it for a quick buck. These sites will make outrageous claims and promises, then send you to another site to find the information you seek. (For the record, we don’t partner with these types of operators because we’d never be involved in consumer-deceptive practices.) Some of these sites make money by capturing your personal information, like your email address. They sell your information. We call these "lead gen," or lead generation sites. Try to avoid giving your email address to any organization in exchange for viewing samples of their data. Why do we say sample data? Because most sites like ours, derive revenue from membership fees for access to the data. Before you become a member, our sites show you all the data in your area so that you can make an intelligent decision as to whether or not you feel the service may be of value but we would never ask you for an email address or any other personal information during this evaluation. If you have to input your email address just to view the sample data, like on the sites described above, then it’s more likely than not that the operator of that site doesn’t care about the data, or whether or not you join the service. He only cares that he has your email address so that he can sell it to someone else. Data Quality and Quantity In an attempt to impress you, many site operators boast "Over 300,000 Properties," "700,000 Properties," even "Over 1 Million Listings." As researched in Chapter 4, there may be about 850,000 to 900,000 properties that will go to auction annually. If a site claims to have over 1 million listings, what they are really saying is that they have old, stale data. No serious investor wants to look at sold property listings from 6, 9, or 12 months ago. These properties are sold quickly. It’s very likely thatmost of the data would therefore be useless. No single web site operator has access to every single foreclosed property in the United States at all times. Not even us. Here are some examples: A visit to foreclosurefreesearch (also foreclosure.com, realestateforeclosures.net, ffs.cc, and others) shows REO properties (post-foreclosures) over 99 days old. Further, the site was filled with FSBO (For Sale By Owner) listings to puff up the amount of properties offered. Why in the world would you pay to view old listings and more particularly, why pay for GuideBook - 71 Chapter 6 - How to Find Bank Foreclosures FSBO listings? A visit to realtytrac (also bankhomesdirect) showed pre-foreclosure (pre-auction) listings that were almost a full year old. A visit to foreclosureworld (also foreclosureschool, foreclosuretown, iforeclosure, foreclosurescenter, and others) showed a huge database of listings once you could find them. The database was filled with descriptions like, "homeowner in bankruptcy." Unless you want to make this a specialty, you wouldn’t want to deal with bankruptcy issues while trying to purchase a foreclosure. Here are the numbers: At 900,000 foreclosures per year, you would have approximately 75,000 actions taken per month. This would include; Lis Pendens, Notices of Default, Foreclosure Complaints filed, etc. If a foreclosure listing company only published this pre-foreclosure data, and displayed 60 days worth at a time (a reasonable amount), they would display about 150,000 listings on average. This would have to be every single foreclosure filing in the United States. If they display 700,000 properties, they are displaying 10.7 months worth at a time. A listing site offering bank foreclosures and government foreclosed homes, like our sites, would also display the same amount of properties as used in the example above. In comparison, we currently publish about 15,000 foreclosures (post-auction) per week. That’s about 60,000 listings per month, 720,000 listings annually and no data is more than 60 days old. GuideBook - 72 Chapter 7 - Doing your Homework: Researching Properties 7 CHAPTER Doing your Homework: Researching Properties “Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth...” - Theodore Roosevelt GuideBook - 73 Chapter 7 - Doing your Homework: Researching Properties Doing Your Homework: Researching Properties T Getting ready to buy HE BUYING and selling of distressed real estate the business of foreclosure investing is an industry. It's an industry because of the size, types and numbers of people, organizations and federal agencies involved. Anyone wishing to invest in bank foreclosures is strongly advised to learn as much as they can about the industry. Read books, newspapers and magazines, talk with those involved in the industry. Start immediately. Before diving into the pool of foreclosure investing, you should check the depth of the water, the temperature of the water, and make sure that the diving board is secure. The depth, in this case, is the size of the industry, the availability of properties and the ease with which one can participate. The temperature, is your investing area and the manner in which you decide to invest or participate. The diving board represents your personal motivation, goals and expectations. The world of foreclosure investing is expanding. There are more properties than ever before, and more and more people getting involved. Even if the numbers of foreclosures starts declining in the next several years, there will still be enough to go around. The number of people investing in foreclosures continues to increase, as more and more see this as an excellent opportunity to increase their wealth. There is no shallow end to this pool not in the foreseeable future anyway. Get Started Today How do you know the water temperature? Stick your toe in and find out, ask someone already in the pool, or do both and judge for yourself. Carefully select an investing area and become an expert at property types and values in this area. Is your investing area reasonably active? Is there at least a normal level of real estate transactions taking place in this area? Is it growing, stagnant or idle? Does this area contain a sufficient quantity of properties of potential interest? Do these properties match the types of properties you want to invest in? Are there others investing in your area? (Some of these people will be competitively seeking the same properties you are. If they aren't, the properties may not be worth seeking in the first place. You can learn a lot from those who have more experience.) If you want to buy and sell foreclosures for quick profits, make sure the area you search contains properties that have mass appeal, properties that will sell quickly to the average property buyer. If you want to buy and hold the property for future gains, you may want to search an area that shows promise for strong and steady growth. If you will be renting properties to tenants, the monthly rent will have to cover your costs and then some. Make sure that the area you invest in can bring you a decent return on your investment, as well as be in a rental price range that is affordable and attractive to the average renter. GuideBook - 74 Chapter 7 - Doing your Homework: Researching Properties If you are buying your very first home, upgrading, or for whatever reason changing your residence, location may be your first consideration. You may want to live closer or further from your job. Schools and other services should be considered as well. Read the real estate section of your local newspaper and get familiar with your area. Pick up and read the real estate publications. Talk to people in the industry. Drive by the area and notice for sale by owner and realtors' signs. Go to your library and get more information. Go to auctions and observe. Go to the courthouse and dig. Network with people. Ask questions. Foreclosure investing is a never-ending learning process. Conditions, as well as laws, change constantly. Don'tt get too excited or discouraged about things you may hear. Someone may tell you that This neighborhood is declining and That area shows no promise. This could be an investor trying to discourage you from investing in his or her area. It could be someone without real knowledge of the area. Be a good detective. Ask questions and do your homework. Between what you have discovered, what you've read, and what has been said, you will begin to judge for yourself, the potential of an investing or search area. Open your mind to the possibilities of a particular area. Most people you talk to will answer your questions from their own experiences. This is only natural, because it is unlikely that one could speak about a subject that they have no education or experience in. The experience a person describes to you may have no bearing whatsoever on what you are trying to accomplish. If so, move on. After a while, you will begin to recognize those that are more consistently correct in their evaluations. A shrewd entrepreneur recognizes opportunities where others do not. Before you jump into the pool, you should always check to make sure that the diving board is securely fastened and in proper working order so you don't injure yourself. Check your diving board your motivation and goals. Know why you want to invest in foreclosures. Is it to make millions of dollars? To supplement your current income? To buy a house cheap? How you decide to invest is up to you. You can buy before, at, or after the auction. You can hold, rent, sell, or flip a property as you see fit. You can invest part time or full time. You can invest only once in your life, or as a steady diet. You can save money buying your first home. You can save money buying homes for the rest of your life. You can buy residential properties like single family homes or condos, you can buy commercial properties like office buildings or retail centers, you can buy raw land, and even drilling rights, in foreclosure. No one can tell you what is right for you. Only you know. You must decide what you want to achieve and plan a pathway toward that achievement. If you were to take a road trip from California to Virginia, you would most likely utilize a road map to show you which way to go. Consider this your wealth building road trip. You decide where you want to go, how far you want to go and how long you want to stay there. It's all up to you. Your Motivation To be successful in this industry, you must be motivated enough to plan your activities, do the research, pursue sellers, negotiate with lenders, acquire and possibly flip properties, and receive your just reward. GuideBook - 75 Chapter 7 - Doing your Homework: Researching Properties Foreclosure investing is not just another get-rich-quick-scheme. Ordinary people do get richer investing in foreclosures. You can get a lot richer, a lot quicker that most other investing opportunities, but you must work at it. You must apply yourself. My company receives scores of get-rich-quick opportunities, weekly. Mail “Your reward will that reads, Earn $60,000 a month, part time, from you home. If these opporcome... it’s just a tunities really did exist, in the manner they were presented, we would all be doing whatever it takes to earn this income part time from our homes! question of how So far, the only people I see getting rich are the ones selling you the inforand when” mation. Besides, if you could make so much money so easily, why would you tell the whole world about it? Why not keep it for yourself? - Todd Rundgren The opportunities in foreclosure investing are real. Many are making fortunes everyday. If you have a strong desire to get involved in this industry, but lack the motivation get the motivation. Do whatever it takes to push yourself in the right direction. Don't make excuses. Just do it! You may need help to get motivated. There are good books, tape programs, seminars and professionals that can assist you. You may want to try a classic. Think and Grow Rich, by Napoleon Hill, has helped millions to see the light at the end of this tunnel. The Seller’s Motivation Perhaps the single biggest key to opening the lock of profitable foreclosure investing is the seller. The seller, whether the homeowner or the lender, is motivated. They are motivated to correct a bad situation. The homeowner is trying to save him or herself the possibility of financial ruin, the loss of their home, social embarrassment, a bad credit rating, and at the very least, some dignity and self esteem. The lender has a bad loan on the books and wants to remove this sore spot as quickly as possible. Either way, the seller is motivated. This is key, because without this motivation, the profitable opportunities for investors would not exist. It is this motivation that creates more and different opportunities in the foreclosure process. The more motivated the seller is, the better potential there is for larger profits, less out of pocket expenses and carrying costs, and fewer delays in the transferring of the property. If the banks didn't in some way make the REOs attractive to the buyers, there would be no need to seek REOs from the banks. When dealing with homeowners and lenders, the more motivated they are, the better opportunity there is for you. A homeowner recently in default may feel that he or she has plenty of time to work things out and may not be responsive to foreclosure investors. Likewise, a lender that has just acquired a new and desirable foreclosure may not be in such a hurry to give it away. A stressed out homeowner, just days away from the auction block, should be very motivated and may jump on any reasonable offer. The same holds true for the lender. The longer the lender has the property on their books, the more it costs them and the faster they want to dump it. It is up to you to discover what the motivating factors may be regarding the properties you are interested in. Try to find out what the story is behind the foreclosure of the property. GuideBook - 76 Chapter 7 - Doing your Homework: Researching Properties The Team Concept Because the buying and selling of real estate, foreclosures or otherwise, is a sometimes complicated process and so many parties are typically involved, it makes perfect sense to start to get to know these parties. Lenders, lawyers, title companies, inspectors or appraisers, repairmen, realtors, insurance companies and court clerks are all connected and intertwined in this industry. Not only does it make sense to get to know these people, it makes even more sense to have these individuals assisting you in your efforts. Why not have some of these people on your team? An experienced foreclosure investor will have established relationships with these people. Put together a team of professionals in the industry. Consider these team players as your aids or advisors. How do you do this? By talking to people, asking questions and listening carefully to their answers. You are about to embark on a new venture. This venture requires knowledge and assistance from others in the industry. But not everyone in the real estate and related industries support the concept of investing in foreclosures. Choose people for your team carefully. As these people will be your advisors, make sure that these advisors have the knowledge and skills necessary to assist you. Also make sure that these people have strong positive attitudes regarding foreclosure investing. These are the people that will help you the most. You will need to research courthouse records. Don't make an enemy of the court clerk. Make him or her your friend. You will need to do title searches or have Occupancy and Encumbrance reports done on properties. (More about that later.) You will need people on your team that can do this for you quickly and inexpensively. You may need a handyman. A person that can be on call to give you repair estimates or make repairs efficiently, on short notice. A real estate broker has may have a great deal of experience in your investment area. If you want to sell the properties you buy in foreclosure, a realtor can be the best way to go. In exchange for the realtor bringing you information about foreclosures in your area, neighborhood comparison values, and assisting you in other ways, you can give the realtor an exclusive on the properties you want sold or rented. A good real estate attorney is a must. The laws regarding foreclosures vary from state to state. Laws also change or get modified from time to time. It is essential to know or be properly advised on the foreclosure laws in your state. At the very least, you want to make sure that you are represented properly in any real estate transaction. Start putting your team together right away. Don't wait until you are ready to buy. The more networking you can do, the more people you meet and talk with, the better. Researching... Be A Good Detective Many first time foreclosure investors have learned that researching property and loan information correctly is absolutely essential. Often, they learned the hard way. There are various potential hazards in bank-foreclosed real estate. There are liens and other devices that can complicate the investing process. A lien is a charge against the property for payment of a debt. The charge makes the property security for the debt. Liens are also known as clouds or encumbrances on or against the title of the property. A GuideBook - 77 Chapter 7 - Doing your Homework: Researching Properties homeowner, or even lender, for that matter, does not have clear title to a property with a lien on it. If you buy a foreclosure from a homeowner who doesn't disclose the fact that there is a lien on the property, you would be responsible for the payment of that debt. If you don't order an O&E report, or do any kind of title search, you can get into big trouble. Many enthusiastic beginners have purchased foreclosures at auctions only to find that liens or encumbrances have made a good deal into a disaster. You wouldn't want to order a title search on every property that comes along. It's too much work and much too expensive. Reports can cost from $150 to $500 or more. An O&E Report (also known as a Pencil or Simple Search) is a report that indicates the Ownership & Encumbrances associated with a property. While it does not give you the full picture, it can provide you with some specific information you need. This may help you to decide to pursue the property or drop it. The cost for this kind of report is usually between $50 and $100. A small investment, considering it can help make or save you thousands of dollars. These reports should not be used alone. O&E reports do not disclose any tax or municipal information that may be important. Full title searches disclose all of the legal and pertinent information that both buyers and sellers must be aware of when closing the deal. Select the properties that meet your investment criteria and pursue them. Once you have significantly narrowed your choices and determined your best opportunities, go to the courthouse and research and verify all pertinent information. Many real estate transactions have not been completed successfully because information pertaining to the owner or property was incorrect. You can use information from reporting services to initiate your search, locate properties, call contacts for more information, etc. But never rely solely on this information when getting ready to do business. The courts only recognize the information contained in the courthouse records. If a case number, loan number or amount, exact name or names of borrowers, or property address is listed incorrectly, the deal could become null and void. Relying on outside or second hand information can be dangerous. Many people are involved in the recording of real estate transactions. Therefore, it is not unusual that errors in recording information will occur. It's been said that as much as 10% of the recorded information in a typical county's records may be incorrect. Always double-check the information regarding property you're interested in. Cross-reference the homeowner's information with the attorney's information, with the courthouse information, and the lender's information. Save yourself hardships from homeowners, lenders, lien holders, tax collectors and so on, by taking the time to review all of the documentation very carefully. GuideBook - 78 Chapter 8 - Fundamentals of Foreclosure Buying 8 CHAPTER Fundamentals of Foreclosure Buying “Oh, the times! Oh, the customs!” - Cicero GuideBook - 79 Chapter 8 - Fundamentals of Foreclosure Buying Fundamentals of Foreclosure Buying B Introduction To Buying EFORE getting started, it is essential that you bear in mind ten key factors regarding the purchase of foreclosures: First, all homeowners and lenders are different. No two are alike. Just like people's fingerprints, all properties and their histories are different. Second, don't get carried away with your first prospective deal. There are thousands of deals on the market. There will always be plenty of foreclosures available and you don't have to buy the first one you see. Third, don't bid on, or pay anyone any amount, until you are absolutely sure that the outcome will be in your favor, and that all possible difficulties have been removed. Fourth, make sure you have assembled your team of expert advisors to assist you in your ventures. Do not enter into any contract or arrangement until you have the endorsement or the opinion of your advisors. Later, as you acquire more experience, you will gain the ability to handle these transactions more independently. Fifth, make sure you know the laws pertaining to foreclosures in your state. At the very least, make sure you have a competent attorney on your team, one the can fully explain the laws and advise you accordingly. Sixth, do your research properly and don't take short cuts. Mistakes in the recording or researching of documents can result in the loss of the deal or cash, or both. Seventh, be professional. Never, ever misrepresent yourself to a homeowner or lender, and never take advantage of a homeowner in default. Eighth, become an expert in your area. It is too difficult and unproductive to try to cover the world. Ninth, determine what investing style best suits your needs or abilities, then practice and perfect your style for maximum profits. Tenth, learn as much as you can about the real estate industry in your area, collect pertinent materials, read books, and stay in touch with your team of advisors. There are endless opportunities in foreclosures. Each different situation provides new and different opportunities. Whether you choose to buy and sell properties for a living or get involved on a casual basis, you can buy property at a discount, property that can be sold quickly for large profits, property that will appreciate well, or rent well, or possibly a combination or all of the above. Make no mistake about it; any of the aforementioned investments will increase your personal wealth. You will be buying property at a discount. As is with everything we buy, if the purchase price or regular price is discounted, there must be a reason why. This reason will help to determine the price of the property, its condition, or both. If this property could have been sold at full market price it probably would have. Discover the history of all properties you are interested in. Expect to hear and see unusual events or occurrences that led to the original default. You will be dealing with lenders, lien holders and/or homeowners. You will be engaged in legal, real GuideBook - 80 Chapter 8 - Fundamentals of Foreclosure Buying estate transactions that require attention to detail. Pay attention to the details. The techniques for profitable investing are described in the next chapters. These techniques represent proven profit making methods used by the professionals in the industry. It would be unwise to stray too far from the investing guidelines contained in this publication. As each situation you encounter will be different, you should maintain enough flexibility of thought and dollars in yours offers. I encourage you to be creative but not too creative! Stick to the basics, especially at first. These are tried and true methods. Learn from the mistakes of others who are now professionals, and who do this everyday. Read these chapters (and the rest of this publication if necessary) over and over again, until you can start to see yourself getting involved. See yourself going to the courthouse or working with brokers and title companies. See yourself negotiating with homeowners and lenders. See yourself at the courthouse steps participating in an auction. See yourself negotiating with a broker or banker. See yourself doing this part time or full time. Start to get comfortable with the terminology and the concept of buying real estate at a discount. The Three Basic Methods The three phases of the foreclosure process produce three different sets of investing opportunities. The default or pre-foreclosure phase provides you with an opportunity to buy the property from the homeowner before the property goes to auction. The auction or sale phase allows you to bid at the time the property is auctioned off. After the auction, or the REO phase, you can work with realtors and sometimes, directly with lender, to get attractive properties at discounted prices. All of the three investing opportunities have advantages and disadvantages, depending on whom you talk to. These advantages and disadvantages depend heavily upon your capabilities, desires and willingness to take risks. By following the suggestions in this guidebook, you will minimize your risks. The Judicial Foreclosure Explained In the judicial foreclosure process, the lender must file a complaint intent to bring legal action against the delinquent borrower. The lender must provide evidence to the court that the borrower is in default of his or her agreement to make regular payments on the property loan. The mortgage stipulates that if the conditions of the loan agreement aren't met, the lender shall have the right to begin the foreclosure process. This is the common method in lien theory states. The lien theory dictates that the mortgage contract itself pledges the title of the property in question to the lender. While the lender does not actually hold the title to the property, it is assumed to be the titleholder by virtue of this mortgage contract until the terms of the contract have been completed. Because the judicial process is a legal process, the lender must petition the court to allow the lender to foreclose on the property. Most states' courts have developed systems to deal with foreclosure complaints, without resorting GuideBook - 81 Chapter 8 - Fundamentals of Foreclosure Buying to jury trials. While a jury trial is possible, it rarely ever happens. Many of the judicial foreclosure states use a Summary Judgment Hearing. This is where the judge can decide in favor of the plaintiff (the lender), if there is no opposition from the defendant (the borrower). In other states, the lender pleads with the court to summons the borrower to appear in court and show proof that the lender is incorrect and that the foreclosure should not be granted. If the borrower cannot show good cause, or fails to appear according to the summons, the judge can decide in favor of the lender and allow the foreclosure procedure to continue. Laws vary from state to state. The time frames involved in the process vary greatly. The time the lender allows the borrower to be in default, the time within which the property owner may have a right to redeem the property, the time it takes the courts to process all of the necessary actions and hearings can all be different, depending on the state. A typical judicial foreclosure proceeds in this manner: When a loan is in default, the lender will send the borrower a Notice of Intent to Foreclose. This notice informs the homeowner that the loan is in default and that the lender intends to take action if the problem is not cured. This notice will contain the amounts due. This notice is not a public notice. If the process continues, the lender (who is also now the plaintiff, files a Complaint of Foreclosure and Other Relief or a Motion to Foreclose Mortgage, at the county courthouse. Next is the Lis Pendens, which by law, is the legal recording of the warning notices sent to any interested parties. Interested parties are those who may have some claim against the property or its ownership. The attorney for the plaintiff (lender) will order a title search. This is performed to identify any interested parties. When officially served, the Lis Pendens informs the interested party that there is legal action pending that might affect them. This notice is served as a summons, by the court, and delivered by the sheriff. As you will see in the case study, in Section 2 of this publication, those served had 20 days to respond. The Lis Pendens is of critical importance for many reasons. It signals the beginning of the foreclosure process. It states that a suit was brought about by the plaintiff against the defendant(s) regarding a particular contract (loan, deed or mortgage) and that relief is sought in a manner as to foreclose on the contract (mortgage) held by the plaintiff against the property which is security for the debt as entitled by law. The Lis Pendens identifies the plaintiff, the defendant(s), and typically contains the following: 1 that this is an action to foreclose on a mortgage. 2 the date of the promissory note and mortgage 3 where this mortgage was recorded in the official public records 4 that the plaintiff is the holder of the mortgage 5 that a default has occurred 6 that the plaintiff (lender) declares the full amount due and payable 7 the principle amount due and other expenses 8 any expenses paid by plaintiff to protect its interest 9 all conditions have been met, to accelerate the note 10 identifies legal title of borrower(s) 11 for collection purposes, the plaintiff has hired an attorney and is obliged to pay for said GuideBook - 82 Chapter 8 - Fundamentals of Foreclosure Buying services 12 that other defendants may have some claim on the property (these claims identified by title search, are shown with: the names of the defendants, date filed, amount of claim, case or file number and location of recording in the public records) 13 that the plaintiff seeks a judgment to foreclose the mortgage and that if the proceeds of the sale do not cover the amount sought that a deficiency judgment be pursued. A copy of the original mortgage and/or note is usually attached. The Lis Pendens is an official court document and is a matter of public record. This is the first opportunity for the general public, or foreclosure investor, to become aware of this distressed property. The Lis Pendens acts as a general announcement. As you will see in the Case Study, the defendants had 20 days to respond to the summons. This is the case in Palm Beach County, Florida. Remember to check the laws in your state and county. The lender (plaintiff) now petitions the court, as it is entitled to by law, to enter a Summary Judgment of Foreclosure and for Attorney's Fees. A Notice of Hearing is sent to all interested parties for the Summary Judgment. This notice informs the parties that the plaintiff wants the court to decide in its favor and to recoup the associated attorney's fees. The actual Motion for Summary Judgment and Request for Attorney's Fees will be attached. The Motion states that the plaintiff can proceed in this manner as a matter of law, cites state laws supporting the action, the ability to foreclose to secure a debt, the lender's rights of acceleration, status of the lien, and a statement that shows that evidence is provided of the loan, the mortgage... as well as the defaults thereon and the balance due. Other related documents may include a copy of a Certificate of Service that indicates that all interested parties have been notified that the plaintiff has filed the motion for Summary Judgment. A Summary Judgment of Foreclosure is ordered, adjudged and decreed. This decree indicates that the court acknowledges the plaintiff'srights under the law, terms of the documents and devices in question, that the plaintiff has provided competent evidence of said allegations, that the mortgage does indeed constitute a valid lien, that the court recognizes and grants the requested attorney's fees, a final judgment amount, the property's legal description, notice that the court clerk shall sell the property at a specific date and time, and the address and location of sale if the amounts as previously outlined are not paid. The balance of this sometimes-lengthy document contains information and instructions for the distribution of the proceeds of the sale. The Summary Judgment or Final Judgment is the green light that signals the beginning of the end. By order of the judge, the court will sell the property, typically via the Sheriff, if the debt is not satisfied. Since the court clerk has the duty of supervising the auctioning or the property, the court must send a Notice of Sale to all interested parties. The Notice of Sale indicates that pursuant to the Final Judgment of Foreclosure, the sheriff will sell the property at a specific time and place. The date and time of the sale, are as originally stipulated in the Final Judgment. Typically the place is the courthouse steps. In addition to the Notice of Sale, a copy of the Summary or Final Judgment is usually attached. If there is still no satisfaction, the property will be sold at the courthouse steps as outlined, to the highest bidder. Except for states that allow the homeowner a right of redemption, the homeowner will have just GuideBook - 83 Chapter 8 - Fundamentals of Foreclosure Buying lost all control, ownership rights and interest in their property. The Non-Judicial Foreclosure Explained In the lien theory states, the judicial foreclosure process is applied as previously outlined. In title theory, however, the non-judicial foreclosure action is used. The security instrument used in this case is the Deed of Trust, instead of a mortgage. This Deed differs from a standard mortgage contract in that the borrower (Trustor) conveys his or her title to the property to the Trustee (neutral 3rd party), who becomes the legal title holder of the property until the Trustor has completed the terms and obligations of the note with the lender (Beneficiary). The major difference between the judicial and non-judicial methods of foreclosure is obvious. The judicial method you just learned about involves the courts the judicial branch of government. The non-judicial method does not. Court approval to foreclose on a property is not required because the method of foreclosure is stipulated and agreed upon, when the original loan agreement is made. This agreement, a Trust Deed, pre-authorizes the sale of the borrower's property if a default in the original agreement should occur. The Power of Sale clause found in all Trust Deeds authorizes the Trustee to sell the property upon notification from the Beneficiary that the loan is in default. Remember, the Trust Deed or Deed of Trust, employs a three party system: the Beneficiary (lender), the Trustor (borrower) and the Trustee (third party). A typical non-judicial foreclosure proceeds in this manner: In this system of foreclosure, the lender attempts to recover the debt through a Trustee's Sale. This is as authorized in the Trust Deed. Most, but not all states use the Deed of Trust in the non-judicial method. The Trustee has the power and authority to sell the property, should the borrower go into default. The lender notifies the Trustee of the default and instructs the Trustee to start the process of foreclosure. (All lenders policies differ, mortgages or deeds of trust notwithstanding. The number of days late, number of payments behind or dollar amounts owed, will have different effects on different lenders. The length of time varies from lender to lender as to when they issue the Notice of Default and to when the Trustee sale is scheduled. Local and state laws also affect the time frames associated with this process). The Trustee prepares a Notice of Default, and files it with the County Clerk, Clerk of the Courts, or County Recorder. The Trustee files this notice in the county where the property lies. This notice signals the beginning of public notice that a loan is in default and that foreclosure action has begun. The notice is delivered, served or mailed to the property owner. The notice may be posted in a public place and on the property itself. The Trustee prepares the Notice of Default. Typically, the notice includes the following information: the date of the notice the name of the Trustor (borrower) the address of the Trustor the name of the Beneficiary (lender) GuideBook - 84 Chapter 8 - Fundamentals of Foreclosure Buying the name of the Trustee the original loan amount and date the amount in default, including all other charges the legal description of the property (optional) Similar to the mortgage, the Deed of Trust accelerates the loan. The homeowner in default is granted time to cure the problem. This is called the reinstatement period or redemption period. The reinstatement period will vary from state to state. Remember to check your local laws. The reinstatement period is indicated in the Notice of Default. It is usually 60 - 90 days, but laws vary. This period could be as little as 15 days and usually starts from the day the notice was recorded. Notices of Default are worded very simply and very severely. A sample of the language used, is: IMPORTANT NOTICE: IF YOUR PROPERTY IS IN FORECLOSURE BECAUSE YOU ARE BEHIND IN YOUR PAYMENTS, IT MAY BE SOLD WITHOUT ANY COURT ACTION. If the default is not cured within the allotted reinstatement period, a Notice of Sale or Notice of Trustee's Sale is recorded like the Notice of Default. This notice is distributed and advertised according to the laws of the land, prior to the Trustee's sale. This notice states that the Trustor is in default and that the property will be sold at a public sale, at a specific time and place, to the highest bidder for the property as described to satisfy an obligation by the Trustor for said amount to the Beneficiary, as stipulated in the power of sale clause in the Trust Deed and that the Notice of Default (and Election to Sell) was duly recorded in the proper county office in said volumes on said date. If the problem still has not been resolved, the property is sold at auction. The time between the posting or recording of the notice of Trustee's sale to the date of the actual sale varies according to law. In both the judicial and non-judicial foreclosure processes, the notices of default, notices of sale, foreclosure complaints and foreclosure sales are advertised in newspapers. There are few if any states that do not require the public advertising of these notices. In both of the foreclosure processes described, the emphasis was on showing the process in action and does not take into account the efforts made on behalf of the lender or borrower to resolve the matter. This is important to point out, because as you are now aware, foreclosing on a defaulting loan is absolutely the last thing the lender wants to do. Attempts will be made, on both sides, to avoid foreclosure. Comparing The Processes There are other significant differences between the two systems. The judicial system example outlined above is an extremely simplified example. Things can get a lot more complicated. The main reason is that the court system is involved. You can clearly see in the two examples that the judicial method GuideBook - 85 Chapter 8 - Fundamentals of Foreclosure Buying is more complex and time consuming. The non-judicial example is also simplified. Comparing apples to apples, you can see why lenders prefer the non-judicial system. Attorneys need not be involved, nor are there any lengthy court preparations or pleadings. The Trustee merely records the documents and prior approval from a judge is not necessary. This system is much more efficient and from beginning to end is much faster and less expensive, especially for the lender. Another major difference affects the rights of the homeowner in foreclosure and the impact these rights have on the lender and the foreclosure investor. This big difference is the right of redemption by the homeowner. In several states, the homeowner has a right, by law, to redeem his or her property after it has been sold at auction. This redemption period can last anywhere from a couple of weeks in some states to a year or more in others. This right is more or less a trade-off for the lender's right to bring a deficiency judgment suit if necessary. The mortgage contract (and state laws) allows the lender, to sue the borrower for the balance of the amount owed if the total amount was not collected at the auction. This stipulation is contained in most mortgages. In the non-judicial system utilizing the Trust Deed as the security instrument for the loan, the property owner retains no rights of redemption after the property has been sold at the Trustee's sale. However, the Beneficiary no longer has the ability to pursue the property owner for a deficiency judgment or any other matter. GuideBook - 86 Chapter 9 - Buying Pre-Foreclosures 9 CHAPTER Buying Pre-Foreclosures “Nothing astonishes men so much as common sense and plain dealing.” - Ralph Waldo Emerson GuideBook - 87 Chapter 9 - Buying Pre-Foreclosures Buying Pre-Foreclosures ANY AUTHORS and experts disagree about the advantages and disadvantages of this foreclosure investing method. Some don't see enough reward, some think it's too risky and some practice this technique and this technique only! Make no mistake, foreclosure investing can be risky. You can lose money. It is your job to make sure that you don't. The way to do this is through diligence in your work and following the basic guidelines. We believe that buying pre-foreclosures is one of the best ways to invest in distressed real estate. Reduce your risk by learning as much as you can about what you are trying to achieve. Buying this publication was a very wise decision, because in this chapter you will learn how to invest profitably with minimum risk. Most of the dollar amounts you can earn in pre-foreclosures may be low to moderate, but there are also many high profit-yielding properties you can cash in on. Many investors build their entire operation around this investing concept and you will soon see how many have achieved great successes. This is perhaps the best investing method if you plan on buying and selling several properties, or for investing on a full time basis. M Investing Overview When a loan goes into default and a property faces foreclosure, both the lender and the borrower enter into a Lose/Lose situation. Typically, neither makes out well at the auction. The homeowner has lost his or her property and may be sued for a deficiency. The lender has a bad loan and an unwanted piece of real estate possibly in need of repair and has to incur expenses to maintain and eventually sell the property. Further, the lender probably won't get all it's money due at the auction and will have to pursue the homeowner for the balance, even though the lender is already certain that the homeowner can't afford that either. Both the homeowner and the lender may try to do anything they can to prevent the foreclosure. This is the key principal behind profitable investing in this arena. Both the lender and the homeowner are motivated to cure a problem. This creates windows of opportunities for the informed investor. The experienced foreclosure investor converts this Lose/Lose situation, into a Win/Win situation. Technically speaking, this would actually be a Win/Win/Win situation. With this method, the homeowner is helped out of trouble (Win #1), the lender's problems are satisfied (Win #2), and the investor makes something for him or herself (Win #3). The way to help the lender and the borrower is to get involved in this situation and workout a satisfactory agreement for both parties. At the same time you are insuring a favorable return for your efforts. If a homeowner is in serious default of their home loan, there's no doubt that they have many other serious financial problems. The house payment is usually the last to start falling behind. Auto repossessions, for example, will usually occur before one lets go of their home. The homeowner needs to be rescued. So does the loan. The homeowner is about to lose their home; they have no money and nowhere to go. The loan needs to be brought current or cured in some other fashion, if not, the homeowner's credit worthiness will surely be destroyed. If there is enough equity in the property, there is the potential to work out an arrangement that satisfies all parties and allows you the investor to profit handsomely. That's what pre-foreclosure investing is all about: Buying the equity in the property, working out arrangements with the lender and the homeowner, possibly repairing the property and then selling it for a profit. GuideBook - 88 Chapter 9 - Buying Pre-Foreclosures The amount of profit that can be earned depends entirely on the amount of equity in the property, any monies paid to the homeowner, any monies paid to the lender, any and all repair costs, amounts for any other mortgages or liens paid, the costs of transferring titles and closing costs and the costs associated with holding and reselling the property. This may sound complicated, but after having gone through a few exercises, you'll find the concept rather simple. To insure a successful purchase, sale and ultimate profit from the property, the pre-foreclosure investor follows these basic guidelines: 1. Locate loans in default, evaluate selections and narrow choices to pursue. 2. Contact homeowner, inspect property, evaluate homeowner’s needs. 3. Determine potential sale price and profits. 4. Negotiate with the property owner and the lender to arrange workout. 5. Close on property, repair property, and sell for profit. Investors in pre-foreclosures often obtain properties with little or no money down, making this an attractive investing method. Other benefits include the fact that with some practice, you should be able to flip these properties in a short period of time. By doing this, and reducing the amount of time your hold the property, you incur less costs, which will ultimately increase your profits when you do sell. Properties in states like California, which practice the non-judicial method of foreclosure with a trust deed, go through the process much more quickly than that of the mortgage and judicial method. Because the foreclosure process is quicker, the homeowner has less time to react or work out their problem. The clock starts ticking quickly and loudly. The homeowner is under a good deal of pressure to resolve their problems. Time then, is on your side, not on the homeowner's Remember to be patient. Disadvantages include that of hidden problems and expenses associated with the property and the frequently irrational behavior of homeowners in distress. Additional expenses associated with this method involve the researching of property information and the costs or trade-offs for your team members and advisors. Proven Step by Step Methods There are several risks associated with pre-foreclosure investing. By recognizing these hazards and paying careful attention to detail, you will learn how to avoid them. This method represents perhaps the best of all investing opportunities, if you want to consistently average 20% - 40% discounts off the price market price of the property you buy. Because you will buy a property before the auction or sale date, you must acquire the relevant information as quickly as possible. You re up against a time limit - the property will soon be sold. While there are some exceptions to the rules, the following is generally true: Judicial or Lien Theory states use mortgages as the security device for the loan. The first public notice of foreclosure in these states (for public notice purposes) will be a Complaint or Lis Pendens. Non-judicial or Title Theory states use trust deeds (deed of trust). Therefore, the first public notice of fore- GuideBook - 89 Chapter 9 - Buying Pre-Foreclosures closure in these states would be a Notice of Default. Step #1 Locating Properties in Default The Lis Pendens or Notice of Default are the first public notices indicating a default, so these are the documents you should seek first. The information contained in these documents indicates that an agreement is in default and that the loan will be foreclosed. You can access these notices in the county courthouse records, newspapers that routinely advertise public notices and services that report, list or maintain notice-related information. The Lis Pendens will contain the address of the property in question. The Notice of Default contains the legal description of the property. The legal description is not the property address. It is a method of identifying the property's boundaries and exact location, typically described as Lot, Block and Subdivision and is recorded in Map Books. To determine whether or not this property falls within your investment area, you must have the property's address. To find the property address from the legal description, ask for assistance at the courthouse on how to cross-reference the information and locate the exact address, or contact and utilize your teammates. Call the title company representative, your attorney or your Realtor. They should be able to provide this information for you quickly. If this property is in your investment area, proceed. Reminder: In SECTION 3 of this publication, you will find all of the necessary worksheets these to successfully analyze a property and confidently prepare your offer. techniques You will be using the PROPERTY EVALUATION WORKSHEET, PROPERare used by TY APPRAISAL WORKSHEET, PROPERTY OWNER QUESTIONNAIRE, the experts. LOAN ANALYSIS WORKSHEET, PROPERTY INSPECTION CHECKLIST and Read this the EQUITY/PROFIT CALCULATION WORKSHEET. information Start with your PROPERTY EVALUATION WORKSHEET. Fill out all the carefully and information you can from the Lis Pendens or Notice of Default. This form will help you to get the basic information, i.e., homeowner's name, address, phone, the amount do not deviate owed in default and the approximate value of the property. from these ! procedures. Step #2 Evaluate Selections and Determine Potential You know (according to the notices) how much is owed on the loan. Now you must determine the property value. By determining the property's value, you will also determine (initially) the gross profit potential. This gross profit is the difference between the property's market value price (what it would sell for today, in good condition) and the amount of the debt in default. This figure represents the known equity in the property. If the property is in your special investment area, you may already know it's average value. It is not necessary at this point to order an appraisal, just get a good ballpark figure. Read the newspapers, real estate publications, call your realtors, and get market values (comps) for comparable homes in the neighborhood. A good rule of thumb to follow is: get current prices on 3 homes in the neighborhood, comparable in size, style, age, construction, amenities, etc., to the home you are interested in buying. Take the 3 comparison prices, add them up and divide that number by 3, for an average market value. Make sure that these are sold prices, GuideBook - 90 Chapter 9 - Buying Pre-Foreclosures not asking prices. Also make sure to keep your comparisons timely. Avoid using data over 90 days old. Subtract the amount of default in the notice, from the average market value or a good ballpark figure to determine how much equity there currently is in the property. If there is little or no difference in the amount of the debt and the value of the property, forget it and move on! (A property valued at $100,000 with debts of $93,000 for example.) If there is a sizable difference between these two figures, then this property shows promise. There may be enough equity in the property to make a fantastic profit! (A property valued at $100,000 with a default debt of $55,000 for example.) ! ! You have identified a property in distress in your area that shows great potential. Now you must contact the homeowner and get your foot in the door. It is necessary to meet with the homeowner if you are to pursue this property further. To begin the process of converting the Lose/Lose situation, into a Win/Win/Win situation, you must continue to determine your profit potential, the homeowner s needs and your ability to satisfy the lender. To do this, you will need to meet with the homeowner so that you may discuss their situation, review any legal or financial documents, and inspect the property. Admittedly, contacting the homeowner in default is easier said than done. Remember, losing one's home is usually the last straw in a long financial downturn. The homeowner will have many creditors, lawyers and bill collectors coming after them. They are reluctant to answer the door, the phone, or the mail. You must, however, utilize those exact methods of trying to contact them! If you have had a financial hardship or have been in poor financial shape for any length of time, you will understand the homeowner's position. Homeowners facing foreclosure stand to lose everything. They are usually very worried and apprehensive, and with good reason. Irrational behavior is quite common. Warning: There are many out there that will try to take advantage of or manipulate the Consult an homeowner in distress. The homeowner is no doubt leery. In dealing with the homeattorney owner, you might be met with fear, anguish, skepticism or paranoia. Be prepared! familiar with (California has enacted legislation regarding the purchase of foreclosures and, more specifically, purchasing the equity of a loan in foreclosure. Civil Code section foreclosure 1695-1695.17 refers to those equity purchasers who use schemes to entice a homelaws and owner to sell his property for a small fraction of its value. Civil Code section 2945home equity 2945.11 makes reference to equity consultants. This section of the code refers to purchases those who would stop a foreclosure, reinstate a loan, or obtain various extensions in before you buy exchange for some type of compensation.) property from a Start with the mail. Send a letter to the homeowner in distress. Indicate that you homeowner! are a private investor and that you may be able to help the owner out or his or her bad situation. Follow up with more letters and phone calls. If all else fails, drive by the property, to see if you can make contact in person. Your goal is to meet the homeowner. Remember, if the homeowner is afraid to answer the door or the phone, your best chance for initial contact is by mail, where the homeowner can identify who is trying to contact them without having face to face con- Note: there are many investors who skip over Step #2. We strongly recommend that you do not! Step #3 Contacting The Homeowner GuideBook - 91 Chapter 9 - Buying Pre-Foreclosures tact or speak to that person on the phone. In the non-judicial system where the foreclosure clock moves swiftly, you should contact the homeowner as soon as possible. If you can't get your information from the courthouse, you may want to subscribe to a service that provides you with new defaults on a daily basis. In your letter, you must clearly indicate the benefits the homeowner will receive by meeting with you. Why, you ask? Simple. The homeowner is leery, in deep trouble and suspicious. Along comes a letter that indicates that their troubles may be over, if only they meet with you. Well, who are you and how can you help me? the homeowner will wonder. What'in it for me? is a question we have all been trained to ask ourselves and What's the catch? is the question we ask when something sounds to good to be true. To accomplish Win #1, you must have the homeowner's confidence in you. Do this by knowing what you're talking about and by presenting yourself in a non-threatening, professional manner. You must point out the benefits to the homeowner in a credible manner. You are here to help the homeowner and must convince him or her of that. The following sample letters are the actual letters the homeowner received, in our case study (Section #2) Note the various forms and styles of the mail sent and by whom. figure 9-1 is a fluorescent pink, non-descript offer of assistance figure 9-2 is a bright yellow postcard offering financing figure 9-3 is a letter from an investing group figure 9-4 is a flyer offering to abate the foreclosure process by a credit counseling service figure 9-5 is a follow-up letter from the same service, describing the benefits of debt consolidation figure 9-6 is a postcard ‘advertisement’ from an attorney indicating that a federal program may provide relief figure 9-7 is a letter from an attorney experienced in foreclosures, offering to investigate certain rights or defenses figure 9-8 is the resume of the attorney figure 9-9 is a letter from an attorney offering Chapter 13 as a possible solution figure 9-10 is information about the attorney, in advertisement form figure 9-11 from an attorney, is more detailed than the others and includes the Plaintiff’s Name and Case Number figure 9-12 is the “fact sheet” for the attorney, also indicated as an advertisement Note: None of the letters were from private citizens or investors! GuideBook - 92 Chapter 9 - Buying Pre-Foreclosures You will see that you are not the only one interested in this property. Your job then, is to break through this clutter of mail, and convince the homeowner that you have their best interest at heart and that you truly can help them. You can and must do a better job of reaching the homeowner than the people who mailed these samples. Expert investors know how to use direct mail techniques appropriately. They recognize the importance of connecting with the homeowner in distress. Proper techniques are also used to attract buyers of their newly acquired properties. The end result is more deals through more connections and faster turnarounds of the properties they hold. Bottom line? More profits, faster! The first impression you make on the homeowner, whether by mail or in person, is critical. You must start to establish credibility with the homeowner with your very first contact. Say What You Do... And Do What You Say Develop mailing techniques that will help you convince the homeowner to call you. Offer things of true importance to the homeowner to get their attention. Most homeowners will need to relocate. Some will need cash for relocating expenses. Some have debts to pay. Most people will be concerned about their credit worthiness, as the foreclosure is a default and it will appear on their credit reports. Knowing what concerns the homeowner gives you the tools to reach them more effectively than the sample letters shown. Indicate in your letters that you may be able to stop the foreclosure, save their credit rating, provide cash to pay bills, provide relocation expense money, etc. These items are of great concern to the defaulting homeowner, and you can use them to your advantage. Letters from individuals will stand out, if hand written or neatly typed on plain paper Do not use a company name or indicate that you are part of some large investing firm. This will only make the homeowner apprehensive. As the Marketing Manager for a national magazine publisher I had an opportunity to test market a new product geared toward apartment renters. The staff and I defined our target and purchased a mailing list of names of apartment renters that met our criteria. Debates began within the company as to the best way to mail these offers. The loudest argument was for the cheapest way. We argued for the most effective way. To end the debates and prove our points, we took 1,000 names from the list. We divided the 1,000 names into 3 groups of 334, 333 and 333 each. All 1,000 offers were mailed in plain white, #10 envelopes. All 1,000 envelopes contained the exact same letters and offers. Group #1 was addressed using the mailing labels we bought. The postage was affixed by way of an automatic postage-metering machine. Group #2 was also addressed by way of the labels, but instead of metering the envelopes, we applied unusual, oversized stamps by hand. Group #3 had the addresses hand written, with the unusual stamps applied by hand, with a little sticky note on the top of the letter that read, Bill, (person's name) I thought you might be interested in this. The response to our mailing was as follows: Of the 334 pieces mailed in Group #1, 9 people responded. In Group #2, 25 people responded and a whopping 41 people took us up on our offer from Group #3. Direct mail response typically ranges from one-half of 1%, to 2%. Our offer was very good and brought a GuideBook - 93 Chapter 9 - Buying Pre-Foreclosures figure 9 - 1 GuideBook - 94 Chapter 9 - Buying Pre-Foreclosures figure 9 - 2 GuideBook - 95 Chapter 9 - Buying Pre-Foreclosures figure 9 - 3 GuideBook - 96 Chapter 9 - Buying Pre-Foreclosures figure 9 - 4 GuideBook - 97 Chapter 9 - Buying Pre-Foreclosures figure 9 - 5 GuideBook - 98 Chapter 9 - Buying Pre-Foreclosures figure 9 - 6 GuideBook - 99 Chapter 9 - Buying Pre-Foreclosures figure 9 - 7 GuideBook - 100 Chapter 9 - Buying Pre-Foreclosures figure 9 - 8 GuideBook - 101 Chapter 9 - Buying Pre-Foreclosures figure 9 - 9 GuideBook - 102 Chapter 9 - Buying Pre-Foreclosures figure 9 - 10 GuideBook - 103 Chapter 9 - Buying Pre-Foreclosures figure 9 - 11 GuideBook - 104 Chapter 9 - Buying Pre-Foreclosures figure 9 - 12 GuideBook - 105 Chapter 9 - Buying Pre-Foreclosures higher than average response. The point, however, is that by being creative with our mailing we generated even higher returns. The more creative, the better the results! Our percentages of responses were 2.69%, 7.51% and 12.31% for the 3 Groups respectively. Group #3 pulled almost 5 times more than Group #1. The lesson learned is that cost isn't always your first consideration. What difference does cost make when you have no business? Put yourself in the homeowner's shoes. Would you have responded to the sample letters shown? Increase the number of connections you make by breaking through the maze of mailings that distressed homeowners receive. Your first letter should be non-threatening and simple. After all, the homeowner is probably getting quite a few threatening letters from bill collectors and attorneys. Be sincere and focused. State in your letter that you are interested in buying a home in the area. You have noticed that this house may be sold at auction. You have cash to buy a house and may be interested in this one. Invite the owner to call at his or her convenience. (Make sure your phone number appears on your letter) The wording used in your letters will vary. Develop a style that works for you. Follow up letters may include wording or offers that appeal even more to the homeowner. Maybe your letters will get more serious as you send your 2nd, 3rd or 4th letter. Where the foreclosure process moves quickly (3-4 months) you will want to send several letters as quickly as possible, perhaps twice a month. Follow up with phone calls. Your goal is to meet the property owner. Be professional and pleasant on the phone. Never misrepresent yourself or your intentions. You are here to help the homeowner. Be sincere and honest in your meetings with the owners. Indicate that in order for you to determine if you can help you will need to meet with the owner at the property location. Don't be pushy, but do indicate to the owner that your meeting will be much more productive and less time consuming if the owner will have all the pertinent documents regarding the default and the ownership of the property available when you arrive. Ask to see the mortgage and loan documents, insurance policies, etc. Not only does this give you the ability to research the loan and ownership information, it allows you to start putting the pieces together for your offer. Use the PROPERTY OWNER QUESTIONNAIRE to record the information. If you are to buy this property, you must uncover the loan information, ownership information, other liens or debts, the condition of the property, and the owner's needs. You should not try to conduct a full-length interview over the phone. Arrange a time and date to meet that is convenient for the owner. Remember this person will be angry, upset or otherwise distressed. Be calm, persistent and patient! Step #4 - Meeting the Homeowner Use common sense when meeting the homeowner. Some investors will want to impress the property owner's with fancy clothes, fancy jewelry and cars. This is supposed to convince the owner that the investor has the money to buy the property. I suggest you appear neat and clean, in casual but nice attire and lose the jewelry. Your taste might not be the same as others; most often it will not be. So, be as generic in appearance as possible. You may not turn everyone on, but you will hardly ever turn anybody off. Dress up or down accordingly and don't forget your WORKBOOK. GuideBook - 106 Chapter 9 - Buying Pre-Foreclosures Meet with the property owner to establish his or her needs for completing Win #1: finding out what the homeowner s needs are and try to satisfy those needs. Be sympathetic to the homeowner s dilemma, but don't get carried away. This is no time to get emotional with the homeowner. As a matter of fact, be sure to remove any emotions you may encounter within yourself when buying distressed real estate. Why? Because you will lose your edge, your ability to clearly see if this venture will meet your needs or be profitable. At the very least, you can erode your profit potential by getting involved. When investing in property for resale, your only interest is to see if you can get in and get out with a profit. This is not the home you want to live in, so don't think about it that way. Assess the homeowner s needs. Uncover the story (if you can) about the default. (If you've done your homework properly, you may already know more than the homeowner.) Ask questions! Find out exactly how much is owed. Are they going to move? Wait for a last minute loan from their uncle? Take the advice of the attorney who sent them an advertisement? You must try to answer these questions. Does the homeowner need cash? If so, for what? Is the homeowner in or about to declare bankruptcy? Record these notes in your PROPERTY OWNER QUESTIONNAIRE. This information will be the clay with which you mold and shape you offer to buy. Make no promises in this first meeting. Determine the homeowner's needs and take detailed notes. Next, you must review the loan documents. Take notes, copies if you can, of all the pertinent information in these documents and verify the names, addresses, amounts, dates, and condition of the loan agreements. Do the same with fire and insurance policies. Record the policy numbers, agents' names and addresses, etc. Record this information in your LOAN ANALYSIS WORKSHEET. Ask the owner if there are any other liens, mortgages, deeds, judgments or encumbrances on the property. Record that information as well. Reviewing, recording and verifying this information is necessary to begin formulating your strategy for Win #2, dealing with the lender and/or lien holders. A troubled homeowner may lie, forget or be unaware of other liens or judgments attached to the property. Get as much information as you can now, you will verify it later. To start formulating the profit potential in the property (Win #3), you will have to carefully inspect the property. The amount of damage to a property may inhibit your ability to buy and sell it profitably. Use the PROPERTY INSPECTION CHECKLIST. Do a thorough and careful inspection of the property. Make sure to turn on and off every light and faucet, open and close every door and window, test all showers and tubs, flush every toilet and observe. Carefully note all broken or damaged appliances, walls, doors, etc. Look for stains from leaks. Look under the kitchen cabinets. Look for worn or torn flooring or carpeting. Try to arrange the inspection of the property during the day. Indicate all damages on your worksheet! If you are inspecting the property with the owner, don't be bashful about pointing out the damage. If the house is a mess, most likely the owner is aware that it is in need of major repair. Take your time and itemize the damages. As you buy and sell more properties, you will start to get a feel for some of the more common damages and what it usually costs to repair them. You may want to buy a book on inspecting residential properties. Most of the books and manuals on home inspections are very good. Never comment on the condition of the property as a result of one's style of living. If the owner's are slobs, you will know, but it won't help you to remind them of it! You may want to ask the owner what he or she thinks the cost would be to repair the damage. Don't argue. Just ask questions and take notes! This part of your job is now complete. You now know the default amount, the property value, the proper- GuideBook - 107 Chapter 9 - Buying Pre-Foreclosures ty condition, the owner's needs, the names and addresses of any lien holders and the approximate amount of equity in the property. Advanced practitioners of this method will be able to make an offer to the homeowner at this point. If a preliminary title search has been done previously to verify all mortgages, lien holders and judgments, and if the investor brings a home repair cost estimating guide with them, or if they can determine the cost of repairing the damages, on the spot, they can assemble all of the information necessary to make an offer. They simply subtract the cost of repairing the property, from the average market price determined earlier to arrive at fair market value for that property. An even further advanced method is to enter into a contract with the homeowner, prior to acquiring any lien or judgment information, and making that contract subject to such information. With some experience, you should be able to make a preliminary determination at this point. You will be able to determine whether or not you should explore this opportunity further. How? To make a quick assessment of the profit potential, do the following: Add the amount of default as indicated on the notice, with any other liens or judgments revealed by the homeowner, (a figure you didn't have before meeting the homeowner) and the estimated costs of repairing the home to salable levels. If the total amount of these three items is equal to or greater than the average market price you calculated earlier, then this doesn't appear to be a good deal. At this point you would indicate to the homeowner that, much to your dismay, you don't believe that you can help them appropriately. Thank them for their time, wish them luck and leave. EXAMPLE: average market price 100,000 amount in default 55,000 amount of liens, etc. 22,500 estimated repairs cost 8,500 = estimated equity $14,000 At this point, you may still be interested, you may not. This all depends on your investing criteria and how much you want to make per deal. Some investors would pass on this deal. Others would be happy to work with this property. While there will be additional expenses associated with the property if you do buy it (holding costs until the property is repaired and sold... closing costs... perhaps a brokers' commission), the shrewd investor knows that there may be other hidden opportunities in the property. Ask the property owner what he or she thinks it's worth... and what they are willing to sell it for. Don't argue or negotiate at this point. Write those figures down in your notes. After completing the inspection and you have recorded all of the loan, default and insurance information, thank the homeowner for the tour. Tell them that you would like to make an offer on their house and that you will need a few days to prepare it. Thank them again and leave. Make no offer at this point and do not give the homeowner any money. Try to call the homeowners back as soon as possible, to set a time and date that you can come back to meet with them and make your offer, or make a future appointment with them before you leave. GuideBook - 108 Chapter 9 - Buying Pre-Foreclosures Step #5 - Preparing Your Offer Now you are ready to make your offer to the homeowner, right? WRONG! Experts vary on how they proceed from here, however most agree that you will want to verify all of the information you have now and investigate all other pertinent information to insure that you have uncovered any surprise obligations that will effect you later. You will want to investigate this deal further to remove any possible risks. To calculate your initial offer, you will want to verify that there are no other liens or encumbrances on the title. Call your teammate, the title company representative and request a preliminary title search or abstract. Check with the local tax collector to make sure that there are no taxes due on the property. (This may not show up in the preliminary title report or abstract) Make a list of the damages from your PROPERTY INSPECTION CHECKLIST and have another teammate, the handyman or contractor, price out the cost of repairs for the damages. Decide which things of most importance are in need of repair or replacement, and then use the COMMENTS section of the checklist to record repair or replacement amounts. Assemble and record all of this information in your EQUITY/PROFIT CALCULATION WORKSHEET to determine the ultimate potential of this property. We will use the following scenario to show the calculations: You have found (through court records, listing services, title companies, etc.) a Notice of Default or Lis Pendens indicating that a loan is in default. The amount of the default is $55,000. That is how much the borrower owes the lender. If you have failed to get comparable home values as outlined in Step #2, then now is the time to do so. Studying the comparable values, you determine that this property has an average value of $100,000. By subtracting the $55,000 in default, you would have $45,000 in gross equity in the property. That is one of the starting points (or finishing points, depending on how you look at things). In our earlier example, we determined that there was $8,500 worth of repairs necessary. Subtract the amount of repairs from the average property value for this comparable home ($100,000 - $8,500). This leaves $91,500. This figure represents the current maximum value of the property from the information you have so far. If you take the adjusted value of the property (after deducting for repairs) and subtract the amount listed in the Notice of Default or Lis Pendens, you will have a figure that represents your gross profit margin. ($91,500 - $55,000 = $36,500) While this looks like a handsome profit there are still more expenses associated with this purchase. A preliminary title search has to be performed to verify that there are no other liens or judgments attached to the property. If there are, collect the specific information, i.e. lien holders name, address, phone number, date filed, amount of lien, type of lien and its position. What is position? This is the order in which lien holders would be satisfied or paid in the event that they could be paid off. The mortgage holder is generally the first lien holder, (as in first mortgage) any additional mortgages (second mortgage) or liens, are addressed in the date order of filing or recording and are known as junior lien holders. The date the lien was filed (also known as perfected) determines its position in the order, not the amount of the lien. GuideBook - 109 Chapter 9 - Buying Pre-Foreclosures Using the property in our example, we found $22,500 in additional liens or encumbrances on the property. They were: Second Mortgage Mechanics Lien Mechanics Lien Total Other Liens 15,000 2,800 4,700 22,500 03/13/83 11/11/87 12/20/92 The liens were recorded in date order as listed above. Generally speaking, if the property in our example went to auction, the trustee or the courts would have already established the default amount, and have added all other additional charges. This would be the initial bid amount. (Also known as upset price because the successful bidder would have to upset or bid more than the amount of the default) The default amount in our example was $55,000, so the bidding starts there. The bidding continues and the property is eventually auctioned off for $71,300. In this scenario, the lender bringing foreclosure has been bought out for their $55,000. The balance of the proceeds of the sale get paid out in order or priority. That priority is the order (if any) in which others have filed their claims against the property. To finish this example, we find that of the $71,300 selling price, $55,000 has to be paid to the foreclosing lender. This leaves $16,300. The second mortgage holder gets paid his or her $15,000, leaving only $1,300 in net proceeds from the sale. There are two mechanic's liens on this property for work that was performed and never paid for. The contractor or tradesman recording their lien first is the one who gets paid off next, not necessarily the person with the lien of next highest amount. In this case, the lien for $2,800 would have to be satisfied next. However, the net proceeds of the sale at this point equal $1,300, and that's exactly all this lien holder can expect to receive. The balance of his or her $2,800 is lost forever and so is the other lien holder's claim for $4,700. If there are not enough proceeds left over from the sale to cover the lien holder's claims then that lien holder loses and receives nothing. Buying foreclosures at the auction is described in detail later in Chapter 10. This illustration is intended to help you understand the profit potential associated with lenders and lien holders. This example has been shown to help set you up for Win #2. By investigating other liens or clouds on the title of the property before making your offer, you not only make yourself aware of potential hazards (other lien holders that eventually foreclose on you, as the new owner of the property to which the lien is attached), you are now in a better position to negotiate with the homeowner because you have more of the necessary facts. If you felt the deal was not strong enough initially, you might find (and most often you will) that working with a lien holder can provide you with an additional source of profit. Here's how! In the illustration above, there was enough bid on the property to satisfy the first and second mortgage holders. There was some money left over to cover only part of the third party's lien and the fourth party got wiped out completely. This is very common. The more lien holders and/or the higher amount of liens against a property typically results in lien holders that lose everything with no chance whatsoever to recoup their losses. This is where you come in. In our continuing example we showed that after deducting for repairs, our prospective purchase was valued at $91,500. Subtracting the default debt of $55,000 we showed the gross equi- GuideBook - 110 Chapter 9 - Buying Pre-Foreclosures ty amount to be $36,500. Now, you have discovered $22,500 worth of liens on the property. If you had to pay them off, that would only leave $14,000. That's a big difference from the original projection. So, when would you rather find out about the liens? Now, when you are determining the profit potential of this home? Or later, just before you close? Again, this is for you to decide. We prefer now, and here's why. With only $14,000 left, we know that to close on the property we will have to pay for title insurance, appraisals, inspections, catch-up payments, transfer fees and costs, holding costs while we repair, then try to sell the property, with a host of miscellaneous expenses. If for example, these costs totaled $5,100, we would have only $8,900 left to work with. If we enlisted the assistance of a broker to help us sell the property, we would be obligated to pay a commission of $6,000. This gives us $11,100 in additional expenses. Now we only have $2,900 left to work with. (8,900 - 6,000 = 2,900) We know we have to offer the homeowner something for his or her home, but how much? Do you still want to be involved in a deal that will only produce $2,900? Is this worth your time, efforts, expenses and risks? Most lien holders should understand what they are doing when they filed the lien. Those filing liens do so because they are unable to collect on debt. They know that they may, or may never, collect their money. Those that don't know this need to be educated. You will contact these lien holders and let them know that you are interested in buying this property. Let them know that you are aware of the lien they have on the property. Let them know that you are aware of all liens and judgments on the property. Let the lien holder know that there are other liens, not just his or hers. By letting the lien holder know that there are other liens on the property, some of which may have been filed before his, you are further indicating that the likelihood of collecting their money at the auction will be greatly diminished. This will give the lien holder even more incentive to work with you! Indicate that you have met with the owner and you think you can work something out that may be favorable to all parties concerned. Make sure you clearly explain to the lien holder that you have inspected the property and that it has incurred $8,500 worth of damages that you will have to repair. You may suggest that, with closing costs and other judgments... well, maybe it's really not such a good deal. Explain to the lien holder that if something can be worked out, if they will accept a discounted amount for their lien, you think, no, you are sure you can make it work. If not, you will probably pass and take your chances at picking up the property at the auction, where the lien will be most likely wiped out anyway. Remind the lien holder that if the property goes to auction they will probably never see a dime. Try to explain this to those who don't understand this process. You won't always succeed, but you should always try. Remember, these are your profits we're talking about here! Start your negotiations with the lien holders at 25% of the original debt amount... and work up from there if you have to. Working with the lien holders is one of your biggest sources of profits! Try to meet with the lien holders. Show them itemized repair estimates from reputable contractors. Take pictures of the damage if you can. Document everything very carefully... this will only help your case. Take our example of $22,500 in liens on the property. If you could negotiate down to 60% of the total of all liens, you would have just made an additional $9,000! (22,500 - 60% or 13,500 = 9,000) Now, you would look at paying the lien holders $13,500 instead of $22,500. How does that shape your deal with the homeowner? In 9,000 new ways, that's how! Previously in our deal, we had only $2,900 left to work with. If you showed the homeowner that you are sincere about buying the property (show him or her your cost estimates, neatly and properly prepared in detail) GuideBook - 111 Chapter 9 - Buying Pre-Foreclosures he will see that after repairing the damages, paying all the debts, closing on the property and eventually reselling it, there is only $2,900 left. You can negotiate from there. Some would offer that exact amount to the homeowner, because all the costs are exposed and are well substantiated. Your profit in this case, comes from your negotiation with the lien holders, the $9,000. Not a bad return for a few days work! The whole picture at this point might look like this: average market price of home less: damages liens closing and catch-up payments and holding costs reselling expenses total expenses: $100,000 8,500 22,500 5,100 6,000 $42,100 Now, think about buying this property and reselling it. If it sells for $100,000 and you spent $42,100 to acquire it, you would have $57,900 in equity in the property. However, when you sell the property, you will pay off the note of $55,000, leaving you with a profit of only $2,900. Plus, you still haven't paid the homeowner anything yet! Many investors itemize and substantiate these expenses, then explain to the homeowner that after all of these reasonable expenses are accounted for, there is only $2,900 of equity left in the property. This is the exact amount the investor will offer the homeowner. Wait! If that's what you give the homeowner, where do your profits come from? Your profits have to be derived from those items that are expenses in the sample above. You may decide to repair the home only as necessary, to bring it up to code and standards. Negotiate with the lien holders to increase your profit margins. Negotiate with lenders for lower closing costs. Sell the house yourself and save on the broker's fees. You will incur expenses selling the property by yourself, for advertising, signs, flyers, etc. It may even take a little longer, costing you more to hold the property. These expenses, however, should be well worth the tradeoff for the $6,000. The point is that you may have passed on this opportunity, had you not discovered an additional $9,000 in profits available. Build your profits in up front, from the beginning, rather than fishing them out in the end. One investor we know lets the homeowner know about any deals negotiated with the lien holders. Why? Because this person has had success in telling the owner that, I've been able to work out an arrangement with all your creditors. You can sell your house with peace of mind, knowing that your credit rating has been protected, your debts are paid and you will have cash to start over with. This investor took the remaining equity, plus any negotiated deals, and split the remainder with the homeowner. Is that fair? Not only is it fair, but the homeowner and the investor both win! Could this investor have made more? Absolutely. Remember, you are taking risks and deserve the proper reward associated with taking those risks. GuideBook - 112 Chapter 9 - Buying Pre-Foreclosures You are also seizing an opportunity that was created at the expense of another. NEVER take unconscionable advantage of a homeowner in distress, but don't shortchange yourself either. Use your head when negotiating with lien holders. A new lien, for a small amount, on a high value property provides less negotiating room. Likewise, an older lien for a larger amount, on a property of lower value has a great chance of being negotiated down to the bone. This relates to the individual lien holders motivation and is a reminder to do your homework. Research thoroughly. How you arrive at your offer is up to you. Your job is to make sure that you satisfy the lender, the lien holders, the homeowner and yourself. In our example, the investor offered the homeowner the $2,900 of equity and an additional $1,000 as an incentive. This investor built in profit by negotiating with the lien holders, saving on the repair costs and selling the property by herself. The better you negotiate, the more money you earn. Of the $8,500 cost of repairs, you may decide that if you want to live in this property you will save a great deal of cash by making the repairs yourself. You may find paint, carpeting or other goods and services, for less money than the costs on the estimates. If you could repair this property to good condition for $6,500, then why wouldn't you want to keep the extra money? If you were to buy and sell the property, no doubt you will be working with your teammate, the realtor. If your realtor sells the property for you, he or she is entitled to their commission. This amount (typically 6%) would have to be deducted from the amount of equity in the property, ultimately, the amount you can offer the homeowner. Some investors increase their profit margins here. By showing the homeowner your calculations and worksheets, you can justify all of the normal expenses associated with buying and selling the property. After all, if you are to buy, close, repair, sell and close again, you will have to deduct all of these expenses from the gross profit margin in the property, to determine if there is enough left over for you. The seller's commission on our $100,000 house would be $6,000 or 6%. If you ended up selling the house by yourself or at a lower commission rate, you would have increased your profits by that amount. Is this deceptive practice? Not if you fully disclose these facts to the homeowner as required by state law. Some states have very strict laws regarding the purchase of the equity in one's home. California for example, has some of the strictest laws in the land regarding home equity purchases. We are currently unaware, however of any laws that state that you cannot do this. If there are no laws pertaining to this matter, then the only question is: Do you find this to be acceptable? Some states may have laws that affect the disclosure of information regarding these kinds of transactions. Personally, unless as required by law, I would not disclose my negotiations with any of the lien holders, or anyone else for that matter, to the homeowner. My goal is to help the homeowner, satisfy the lender and insure a profit for myself... for my time, my efforts, my expenses and my risks. Is there any more profit potential in this deal? you ask. You bet there is! It all depends on how creative you are! Say for example, in your meeting with the property owner, it was revealed that one of Ms. Jones' biggest concerns was paying back the debt to the department store where her fiance works. The debt is $1,500. You can negotiate around the $1,500 or maybe even offer to pay that debt in full. Some investors see this as an opportunity to reduce the amount of cash involved in purchasing the property. Suppose you have a charge account at the very same store. If you paid the balance in full using your charge account, you have eliminated paying out $1,500 in cash and the charge on your monthly statement would probably increase by $50 or so. If you are buying the property to resell, wouldn t it make more sense to pay $50 a month for the 3 months you GuideBook - 113 Chapter 9 - Buying Pre-Foreclosures own the property until it's sold, than the full $1,500? Sure it does. Many investors use their personal bank credit cards in this way. Consider tapping into a line of credit to reduce your cash outlay. Find out the needs of the homeowner, and then think about the best way to resolve their problems while structuring a deal that makes sense for you. To conclude our example and show you your actual profits, we will assume that the property you purchased has just been sold for the full value of $100,000. Here's how it works: Sale Price: Less: catch-up with lender negotiated liens paid off repairs completed closing costs net to seller brokers commission Total Expenses: $100,000 2,500 13,500 8,500 2,600 3,900 6,000 $37,000 When you sell the property for $100,000, you will pay off the existing note on the house for $55,000, leaving you with $45,000. You did, however, incur $37,000 worth of expenses in buying the property. This leaves $8,000 profit. (45,000 - 37,000 = 8,000) Originally, all of the profits came from the negotiations with the lien holders (9,000). The investor offered an additional $1,000 to help out the homeowner. Warning: Many Is this a good deal? That's up to you to decide. If this whole process took 6 weeks from start to finish and you continually repeated this process, at this rate you would states have have made 8,000 in 6 weeks or about $1,333 per week. That's about $69,333 per very specific year. laws regarding If you sold the property yourself and saved the 6,000, even with selling expenses “foreclosure of let's say $500, you would have made $13,500 on this deal. (6,000 - 500 = 5,500 + consulting” 8,000 = 13,500) and home That now equals $2250 per week or $117,000 per year. Now is it a good deal? equity This deal may have taken 6 - 8 weeks to complete, but might not have consumed more purchases. than 40 hours of your time. Seek Imagine, $13,500 for the equivalent of 1 weeks worth of effort - that's over $337 per hour! assistance Even more important perhaps, is the return on your investment. At an $8,000 proffrom a it, your $37,000 investment returned almost 22%! At the $13,500 profit example, your competent investment returned almost 37%! attorney. This entire example was presented to show you how the system works. Read it over again if necessary, until you really begin to understand the concept. This sample is not intended to show a good deal or a bad deal. What you earn is up to you. ! GuideBook - 114 Chapter 9 - Buying Pre-Foreclosures This in a nutshell, is the philosophy behind pre-foreclosure investing. Satisfy the homeowner, the lender and yourself. Create the Win/Win/Win scenario and you will be successful! The key to profitable pre-foreclosure investing is knowing where your profits come from. Accordingly, you should do the following: 1. Start with a property that has a higher amount of equity in it (older homes generally work better than newer homes). The larger the difference between the property value and default amount, the better. 2. If your are buying to resell, make sure you add every conceivable and legitimate expense associated with buying and reselling the property. 3. Complete a thorough inspection of the property and itemize every single expense or cost for repair, at retail, not at discounted prices 4. Negotiate with the lender. Depending on the amount of the loan, the length of default, other lien holders and the condition of the property. This lender may want to cash out or otherwise be willing to discount the amount of the loan, to get out of the deal. 5. Negotiate with the lien holders. As seen in the previous example, this can be one of your best sources of profits. 6. Negotiate with the homeowner. Why pay full price if you don’t have to? 7. Ask questions and listen to the answers the homeowners give you. you can help them without pulling all the cash out of your pockets? Are there ways 8. Be patient! Time is on your side, not the side of the homeowner. 9. Don’t be greedy. You might find that another investor has purchased the property you wanted because they were willing to pay the homeowner a little bit more than you were. (While you may not have lost anything here, you certainly haven’t gained anything either.) 10. Be creative. Is there something about this property you see that others do not? You may want to formulate your offer by asking the homeowner how much he or she wants for the property. After deducting all of the expenses we reviewed above... you may be able to meet the asking price. Perhaps you will present an offer, that would be the exact same amount the homeowner would net if the property were sold normally, with broker's fees and new financing. The net of the sale price minus the customary deductions is the net equity in the property that you will offer the homeowner. Remember, you have to negotiate your profits from there. Finally, if you saved the $5,500 by selling the property yourself... and were able to repair the house to a sal- GuideBook - 115 Chapter 9 - Buying Pre-Foreclosures able condition for half of the estimated repair costs, you would have made almost $18,000 on this deal! A 49% return on your investment! Perhaps the ultimate argument for the talk with the lenders and lien holder's first theory is the infamous due on sale clause. This is a clause or stipulation found in many deeds and mortgages whereby the lender shall have the right to demand the full amount of the loan due and payable immediately if for any reason the property is sold or ownership is transferred. It's just like the acceleration clauses found in the mortgage contract. If the lender is foreclosing on the homeowner and you buy the property, the lender could foreclose on you! There are some very advanced techniques used by the experts to combat this problem. Most investors however, prefer to know this information up front. They contact the lender before purchasing the property and work out a satisfactory arrangement. If your present your case to the lender appropriately and if the lender is satisfied with the arrangement, you should be successful at least 85% - 95% of the time. Lenders will want to work with you. Remember, it is to their advantage to sell the property or work out a suitable arrangement rather than going to auction, where they will typically lose money and incur additional expenses doing so. Step #6 - Presenting Your Offer Before presenting your offer to the homeowner, you must make absolutely certain that all of your forms and worksheets have been filled in completely and correctly. All loan documents and default notices should be compared and double-checked for accuracy. The same holds true for any preliminary title searches, appraisals and inspections. In your presentation to the homeowner, you will have to justify your offer through this documentation. Show the homeowner your PROPERTY INSPECTION CHECKLIST and the estimates for repairing the damage. Make sure you use a recognized, reliable contractor or handyman. Do not call your cousin Charlie for a quote. Show the homeowner your PROPERTY APPRAISAL WORKSHEET and LOAN ANALYSIS WORKSHEET. There is no harm in this if you have done your homework properly. It can only enhance your ability to show the homeowner that you do know what you're talking about and that your figures are accurate. Utilize reliable or well-known title companies, appraisers and attorneys. Always use reliable, well-known professionals in your work. Eliminate any possibility of having the homeowner become suspicious of devious activities. (For example, over-inflated repair estimates.) As you are already aware, there are several sharks swimming around the homeowner's property. Most of these sharks do not offer what you will offer the homeowner. You must clearly explain to the homeowner the benefits of working with you over the others. Skip Lombardo, a real estate developer, investor and author, points out the best defenses against these sharks: 1. Many attorneys are skilled in bankruptcy laws. By explaining the benefits of bankruptcy, they may persuade a homeowner down that path. Depending on the state you live in and the local laws you may not be able to stop the foreclosure and/or the mortgage lien may not be dissolved. Point out that a temporary, possible quick fix, is usually not worth the longer-term credit problems associated with bankruptcy. 2. Real estate agents may contact the homeowner in an attempt to gain a commission by selling the property of a very motivated homeowner. GuideBook - 116 Chapter 9 - Buying Pre-Foreclosures Point out to the homeowner that this benefits the realtor but does not address the homeowner's need to pay their debts. 3. Credit counseling and debt consolidation companies can be very useful for those who cannot control themselves financially. The best help these companies can provide however, usually comes long before the homeowner has gotten himself or herself this deep into trouble. If the reason for foreclosure stems from the economy, death, divorce or unemployment, there may be very little left for these companies to work with on your behalf. In order for these organizations to help you they have to work out satisfactory arrangements with those that you owe money to. If you have no money or no income, there is little if anything that counseling or consolidation can do to help. 4. There are lenders and groups of investors that will compete with you in your quest for this property. Lenders offering high interest, short-term loans offer only very short term fixes. The homeowner could never borrow enough to pay off all their debts; this shark won't lend that much. The bottom line results in a loan at very high interest rates, that eventually only burden the homeowner further by putting them into deeper trouble. Be prepared to show how you arrived at your figures. Carefully explain and make sure the homeowner understands that you will assume the loans on the property, you will pay the back payments to get the loan caught up, you will put cash in the homeowner's pocket, you will satisfy the judgments and liens against them and so on. (Do not promise all of this if you do not intend to deliver.) Make Once you have calculated your profits and determined your best approach, your sure you offer will take shape. You have listened to the homeowner's needs and developed an accurately offer that meets those needs. calculate your If you are competing against other offers, you may very well win the battle by profits before showing the homeowner clearly in your documentation that you numbers are very signing any real. Challenge and ask to examine an offer from another investor. Ask how that contracts! investor arrived at their figures. It's possible that the homeowner doesn't know. Show the homeowner the benefits of your offer and how you arrived at your figures. If a competitor's offer looks bogus or does not do as well for the homeowner, point this out! Ask the homeowner: How much cash goes into your pocket from this other offer? Don't be bashful. You have worked hard at trying to make a satisfactory arrangement for all parties concerned. You should be able to clearly explain and justify your calculations. If you have been reading closely, you will have recognized a reoccurring theme. That theme is credibility. You must establish credibility with the homeowner. It is not enough to be genuine in your intent, must demonstrate that this is so. Do this by being on time when you keep your appointments. Never say anything that isn't true. Don't make promises if you can't keep them. Talk about the facts and support them in your properly prepared documentation, which is supported by the industry professionals you used to acquire that information. Ultimately, you become believable by never giving anyone a reason to think that you are not believable! The process of getting the homeowner to say yes is often really a process of removing any possible no. By removing any negatives in your offer, you will get to yes much faster and much more often. Remember, we are all consumers. We are skeptical when we buy things. Your mind asks yourself a series of questions relating to any purchase. Do I need this? Do I want this? What are the benefits to me? Does it make me happy? Can I return it if I don't like it later? Your are in a dual role and should not confuse your objectives. You want to buy this property by selling ! GuideBook - 117 Chapter 9 - Buying Pre-Foreclosures your program to the homeowner. Just like the homeowner, we are all consumers. You want this homeowner to buy your services. Do everything you can to remove any negative aspects of your offer. Negotiation is part of any deal you may encounter in this industry. Certainly you will want to negotiate with the lender and the lien holders. You may find yourself in the position of wanting to negotiate with the homeowner. Learning the fundamentals of negotiation never hurt anyone. You don't, however, need the skills of a Donald Trump. There are several good books on the market to get you comfortable with the basics of negotiating. If you follow the methodology outlined above, you will greatly reduce the amount of negotiating skills required because the integrity of your research and your offer will speak for themselves. With your attorney, prepare an Equity Purchase or Real Estate Purchase Agreement. (This agreement should be well thought out. Use the guidelines indicated when developing a standard agreement form.) Call the homeowner and arrange a mutually convenient time to meet at the property. Be prepared to go over your offer in detail. Take the time to explain each and every benefit to the homeowner. Ask if he or she has any questions. If the homeowner accepts your offer, complete the Agreement with both sets of your signatures. If the homeowner wants to think about your offer, remind them that you will soon be buying a property in the area and that your offer can only be extended through the date you have indicated on the bottom of the offer. You may want to remind the property of the foreclosure sale date if it's getting close. Leave a copy of your offer with the homeowner, thank them and leave. If you cannot sign a contract with a homeowner in your second meeting, be sure to follow up on a regular basis. The better you market your services, the better chances you have of winning the deal. This property may be bailed out before the auction, maybe not. It's your job to follow up and find out. Step #7 - The Purchase Contract When the homeowner agrees to sell you the property you will both need to sign an Equity Purchase Agreement or a Real Estate Purchase and Sale Agreement. All parties recognized in the mortgage contract must sign the agreement. If the mortgage is in the names of the husband and wife, both must sign. Sign no contracts without prior approval of your attorney! Depending on the state you live in, you may have laws that stipulate the type and/or requirements of such a purchase and the contracts to be used to conduct these transactions. You may find a standard Equity Purchase Agreement in your local office supply store that meets state regulations. You may want to draft your own, with your attorney, and use it as your standard form. No book on purchasing foreclosures would be complete if it didn't emphasize the importance of knowing the laws regarding this subject matter as it pertains to your state. Californians may have it the hardest. The laws in this state are very specific. The penalties for non-compliance with these laws are severe. The Civil Codes in California specifically state that your contract must contain this or that, and that you must do that and this. These laws dictate that you use very specific wording in your agreements. Terms of the Agreement This is a critical part of your agreement. You must clearly, in very plain language, state the terms of the agreement. If problems arise later, your best defense will be the manner in which you provide your evidence. This GuideBook - 118 Chapter 9 - Buying Pre-Foreclosures is best done by keeping nothing less than perfect records and making your agreements perfectly clear. Your agreement will state the purchase price, the amount you will pay the seller (sometimes known as Net To Seller), the closing date you agree upon and the terms with which you will purchase the property. All investing experts agree that your purchase agreement must contain the following: 1. Always include a “Subject To” clause: an escape clause that allows you to bow out of the deal if, everything is not as originally agreed upon. This could be the condition of the property, amount or condition of the loans, unknown liens, termite or damage from pests, etc. Include a statement that allows you to show the property. If you are buying to resell, you will want to show and sell that property as quickly as possible. A clause that states that the property must appraise at a certain value. That the property must be vacant. All tenants and their belongings must be removed by a certain date. That the buyer and seller agree that the payments for the current loans on the property equal X amount. That the sale is subject to the conditions of the title and loans or encumbrances against the title. That the buyer shall pay for all the costs incurred at closing. And that the seller shall: a b c d e deed the property to the buyer authorize the buyer to record said deed at the appropriate time be aware that the buyer may resell the property be aware that the purchase price is below market value leave the premises in good condition and pay for damages incurred after the contract has been signed, and before the seller has left the premises agree to pay for any damages or repairs necessary, as discovered by termite and roof inspections vacate the premises on the date specified 2. 3. 4. 5. 6. 7. 8. f g 9. All net proceeds paid to the seller, will be paid at closing CAUTION! Many states require that you provide the seller with a Notice of Cancellation. In California for example, this notice is mandatory. This notice gives the homeowner a period of time, usually a few days, GuideBook - 119 Chapter 9 - Buying Pre-Foreclosures to back out of the deal should they decide to. This period is also known as the right to rescission period. These notices were developed to protect the homeowner from the unscrupulous home stealer. Use this notice to your advantage by showing the homeowner his or her rights under the law. They might not be aware that these laws exist. Continue to establish credibility all through the process. Show the homeowner that you are knowledgeable of, and in full compliance with, all local and state laws. How can they refuse? The homeowner must understand that they will receive their money at the time of closing and not before. Investors should remember to never pay the equity or amount agreed upon in the contract or any other amount or money to the seller. until the seller has completely vacated the premises. This information must be contained in your contract. Do not depend on verbal commitments or you will run into problems. Step #8 - Ready, Set, Close! Some investors will give the homeowner a good faith deposit upon the signing of the contract. This is optional and entirely up to you. Should you decide to leave a deposit with the seller keep it small, no more than $100. Call your attorney. Indicate that you have signed a contract with a seller and you will need assistance and/or representation for the closing of the deal. Start arranging your financing. If you are assuming the loan from the seller and have made prior arrangements with the lender make sure the lender can stop the foreclosure process before the sale date. The lender will want to be paid the past due amounts, at the very least. Make arrangements to do so. If you have previously negotiated with the lien holders, have your attorney coordinate a Release of Lien to be recorded at or before closing, if that's when the lien holder's will be paid or prior to closing. Order your certified property appraisals and inspections as required before closing. Have your attorney or title company assist you regarding closing requirements. Order your termite and roof inspections as required or as necessary. Have your attorney, title company or escrow agent (whoever is handling the closing) advise you on, and have ready, a Statement of Identity (verifies identity of the seller), an Assignment of Impound Account (to transfer funds held by lender for taxes, insurance, etc.) and any other documents necessary to successfully complete this transaction. From the seller you will need the deed to the property, the property and fire insurance policies, the title insurance policy, all loan and payment books and his or her signature on a Property Insurance Transfer document. Verify from the full title search, that there are no other liens or judgments against the property. If anything shows up in the title search, you can accept it, deal with it, negotiate it, or maybe best of all, forget it. You have that stipulation built into your Equity Purchase Agreement or Real Estate Purchase Agreement. If this clause is not in your agreement, you could run into trouble. Make sure it's there! Have your attorney, title company or escrow agent handle the closing. Coordinate escrow instructions with your attorney. The escrow agent will handle and transfer all funds and documents. The escrow agent has to follow the escrow instructions as indicated by the buyer and seller. Cover your bases. Consult your attorney. At closing, documents will be collected, signed and distributed. Debts will be paid, escrow, taxes and title fees will be paid, and the seller will be paid. You will then be the proud owner of a property that you purchased well below market value. If you decide to move in, you will be the envy of the neighborhood because you probably just spent 20% - GuideBook - 120 Chapter 9 - Buying Pre-Foreclosures 40% less for your house than the neighbors did. Remember, this isn t 20% - 40% off the price of a set of baseball cards. It's not 20% - 40% off the price of designer sheets from a department store sale. This is 20% - 40% off the price of a home. This is property. This is real estate! GuideBook - 121 Chapter 10 - Buying At The Auction 10 CHAPTER Buying At The Auction “The happiest time in any man’s life is when he is red-hot pursuit of a dollar, with a reasonable prospect of overtaking it.” - Josh Billings GuideBook - 122 Chapter 10 - Buying At The Auction Buying At The Auction IF YOU choose to purchase distressed properties when they are being auctioned off or sold, you will be buying at the courthouse steps, in the courthouse hallway or office, at the actual property site, or other location from the trustee, court clerk, sheriff, auctioneer, or referee. This is the second phase of the foreclosure investing process. The pre-foreclosure or default stage has passed. After proper notification and adherence to all contracts and laws, the property will now be sold to the highest bidder at a public sale. Buying at the auction provides perhaps the best opportunities to make tremendous profits on each and every purchase. Some of the highest profits in foreclosure investing are generated at these sales. The greatest opportunity to lose your money is also generated in this investing phase of the process. There are substantially more hazards associated with investing here than the other two styles combined! This opportunity is presented during the second part of the investing process, but make sure you understand that this is the end of the foreclosure process. Remember, the original intention of the foreclosing lender was to recoup its losses from a non-performing loan, secured by real estate. In order to do this, the lender had to initiate the process of foreclosure, which ended the rights of possession of the property owner. This sale is the final step in ending the property owner's rights and finally separating the property owner from the property. By this time, the property owner has most likely moved or has been evicted. The property may have been abandoned for some time, leaving it susceptible to mischief and vandalism. Typically, the lender and investors will show up at the auction. Occasionally, lien holders may also appear. Finally, there are spectators who come to see what an auction is all about. There may be several investors or just a few. Some of the greatest stories of fantastic rewards are those where there were few attendees at the auction. For example, adverse weather conditions and other unknown reasons may prevent an investor from showing up on time, or at all. In this case, you may find that you are the only bidder at the auction. A typical auction may be crowded with people, but perhaps only two or three of them actually intend to bid on the property. In the case of severe weather, the sale may not have been postponed, leaving the property available to whoever shows up to bid on it. The lender or its representative will show up to bid on the property, to protect its interest. The lender, either through the judicial or non-judicial method, has already established with the trustee or the courts, the amount of the debt claimed. This includes the principal amount of the debt, past due payments, interest, penalties, court and other legal costs, the costs of serving defendants and the costs of the public notifications or advertisements. Depending on the state and its laws, the lender may bid or merely present its claim (its judgment for the amount owed) to start the bidding process. The highest bidder at auction wins the property. The funds are distributed to the lender bringing the action first. Any other liens or judgments second (in order of the date the lien was recorded), and the remainder to the homeowner, if indeed there is a remainder. Most of the time there is no amount remaining. Most of the time the lender does not recoup the full amount owed. This is where, in states that use the judicial method of foreclosure, the lender can file an additional lawsuit and have the courts find a Deficiency Judgment in its favor. This suit is for the amount unrecovered by the lender at the sale; the difference between the amount owed by the property owner and the amount received at auction. GuideBook - 123 Chapter 10 - Buying At The Auction Remember, the last thing the lender wanted to do was to foreclose. Now, the last thing the lender needs is to have this property on their books. So now the lender is praying that the property will be sold at auction. Unfortunately for the lender, they end up with the property about 85% of the time. You've read the warnings about various laws throughout this publication. Now it's time for a few more. Some states set minimum bids for a property being sold at auction. The main reason is to protect the homeowner from unfair deficiency judgments. If, for example, our $100,000 home with a debt of $55,000 on it only brought $20,000 at auction, the homeowner could be sued for $35,000 in a deficiency judgment. This is unfair, because the homeowner had as much as $45,000 in equity in the property. If the highest bid was only $20,000 it doesn't mean the property is only worth $20,000, and it does not credit the homeowner appropriately for that property at regular market value. If the homeowner has paid $45,000 into the property, then gets sued and has to pay an additional $35,000, the now ex-property owner would have contributed $80,000 to a property that only had $55,000 worth of debts attached to it. Worst of all, they no longer own the home! The lender in this case is just looking for their $55,000 and is taking legal action to collect on that debt. You can see, however, the problems that this can cause the homeowner. It is for reasons similar to these that the laws are written. Jack P. Friedman and Jack C. Harris, a real estate consultant and a real estate research economist respectively, and authors both, note that in Texas for example, the courts demand that the lender provide evidence that the highest bid at the auction was at least 70% of the market value of the property being sold. If the highest bid is not at least 70% of the market value, the sale is declared inconclusive, and will be rescheduled. To avoid the hassle and expenses associated with rescheduling the sale, the lender will often bid the minimum amount (the 70%) and take the property. So, how could you ever buy an REO from a lender in Texas at 50% below the fair market value? The answer is: you can't. The lender, or any successful bidder for that matter, had to pay at least 70% of the fair market value. Investing Overview At the sale of the property, you will not be working or negotiating with the homeowner, lender and/or lien holders. You will be attending an auction performed by a neutral party. (Sheriff, trustee, etc.) There are very specific laws and requirements regarding the sale of property in foreclosure. Laws vary from state to state. Always consult your attorney before attending any auctions! Some of the same rules you use to buy pre-foreclosures you will use to buy at the auction. Some of these rules even apply to buying properties directly from the banks and other lenders. The basic concept of buying distressed properties does not vary from method to method. The basic concept is one of buying low and selling high. Your profits are made in between. At the very least you want to buy low and sell at, or just below, market value. It's important to try to envision the entire process of foreclosure investing. You are buying and selling properties. No matter how you invest, you should always be conscious of the fact that you are buying distressed or discounted real estate to be resold at a higher price. Your business is to make a profit. This can only be achieved when you buy properties with enough of a margin in them as to allow you a reasonable profit, after expenses. The common theme for all methods is to locate the opportunities, research them, pursue realistic opportunities, calculate your potential profits, determine whether or not to proceed, weigh the risks associated with GuideBook - 124 Chapter 10 - Buying At The Auction the investing style, eliminate any possible risks, consult with your advisors and then purchase the property. Even before attending the auction, you will have to locate, qualify, research and evaluate the properties you may want to bid on. You will also have to research the auction itself, to find out if there are any requirements, like minimum bids, payment methods and cancellations. You must calculate your potential profit before leaving your house, otherwise you could lose big. Disadvantages in Auction Buying Buying distressed properties at sales and auctions can be the most rewarding way to reap the benefits this industry has to offer. However, the dangers of this method are numerous. When buying at the auction, you will be competing with the lender for the property. You will also be competing against other investors. Before bidding on any properties at an auction you should go to a few to see what is like. Go early and observe. Some auctions proceed very quickly. Being just five minutes late could mean the loss of your opportunity to bid. Auctions are frequently postponed or canceled. After having done a lot of research on a property and making the appropriate plans, your big day may never come. It would be wise to call the day before the auction to verify the time and place. Find out if the auction scheduled for that day will take place as expected. Eleventh hour tactics may be employed by attorneys and desperate homeowners, causing the scheduled sale to be delayed. The right of redemption, available to property owners in some states, haunts investors at the sale. Can you imagine taking a lot of your time and effort to buy a property, going to the sale, being the successful bidder, arranging the financing, and repairing the property only to find that six months later the original owner has bought the property back? While you would probably get the money you paid for the property at auction back, you would have lost any additional money you put into it, as well as your time and effort. Financing is another big problem in this arena. You must check with those conducting the sale to find out how payment for the property is expected. Most of the time, you will find that a certified or cashier's check is required. This will be for the deposit you must put down to even qualify yourself as a buyer. The amount of this check will be at least 5%, and sometimes 10% of the purchase price. In some cases, it will be a set amount such as $1,000 or $5,000 or $10,000. The balance of the payment on the property will usually have to be paid almost immediately. While some states offer 30 or 60 days or more to pay, others require the full amount to be paid within days; sometimes only hours. That means if our $100,000 house with the $55,000 default sold at auction, not only is the deposit required the morning of the sale, but the balance of the $55,000 might have to be paid by 3:00 PM that afternoon. Depending on the state and local laws, if you fail to deliver the balance due by the time allotted you may end up losing your deposit! The large cash outlay is one of the single biggest deterrents to buying properties at auction. Another problem is that of the title. If you buy at the auction, you replace the homeowner's position in the property. If you bid more than the upset price and win the property, you also can win all the headaches the original homeowner had. This includes liens and judgments as well as tax problems. A novice auction buyer may be attracted to a $100,000 property that's being auctioned off for $10,000. The professional, on the other hand, knows that there is probably a hidden danger lurking in this property. If a second mortgage holder forecloses, it may appear to be the deal of a lifetime. A homeowner acquiring a second mortgage typically does so to make improvements on the property or to be used as loan for other pur- GuideBook - 125 Chapter 10 - Buying At The Auction poses. This second mortgage amount is usually much smaller than the first mortgage amount. You could bid the $10,000 and win the property, and then realize that there is a first mortgage of $80,000 and $15,000 worth of liens attached. This is obviously a losing proposition, but it happens all the time. Don't let it happen to you! Just because a property is being sold at auction, it doesn't mean that it is the first mortgage holder doing the foreclosing. If the holder of a third mortgage forecloses, it does not wipe out the obligations created by the first and second mortgage. Buying this property means that you have to take over those mortgages as well. The only way to guarantee that this is not a first mortgage foreclosing is through a full title search, which can cost $500 or more. Why a full title search instead of an O&E report, abstract or preliminary title search? The reason is simple. This is not a pre-foreclosure where you do preliminary research to be used in making a decision to pursue the property. This is sale day. The property will be sold today! Lien holders and others whom the property owner may owe will have their last chance to collect by filing a lien against the property. This can happen the day before the sale. Your abstract or prelim from the week before is now useless. With diligent and accurate courthouse research and a preliminary title report, you can get most of the current information regarding the property without the full title report. But you do run a much greater risk without it! If the lender was unsuccessful in evicting the tenants from the property, you may find yourself trying to accomplish the same. A good attorney can help the homeowner fight eviction for six months or more. You now have a property that you can't access. You are trying to rehab a property and sell it as quickly as possible. How easy will it be to sell a property that has a hostile tenant in it? And what of the property itself? Will it be damaged by the irate homeowner? You may not be able to inspect the property. In that case, how would you properly assess the damages or repairs needed to make the property salable? There may be land use problems associated with a property. This can be zoning problems or problems pertaining to toxic waste or land contamination. A good clue to the existence of problems like these is when the foreclosing lender either doesn't show up or bid at the auction. Why wouldn't the foreclosing lender bid on the property? It's simple: they don't want it. There are problems associated with the property that makes the lender decide to just bail out and take their losses. Another danger is that of the dreaded auction fever. If you feel it coming on, leave immediately while you still can afford to! Auction fever is what happens when excited bidders get caught up in the frenzy of the process itself. This process can be electrifying, and like electricity, it can be very dangerous. The atmosphere is such that people will continue to bid way past the regular market value of the property! Shills are also part of the auction process and should be watched for. A shill is a person hired by, and who works with, an auctioneer. This person is a plant who is sent out into the crowd under the guise of being a bidder. The shill helps build up the price of the merchandise. They bid like a buyer even though they have no intention of buying. It's a scam to bring up the price of the goods. Typically you don't find shills at real estate auctions, but it is a possibility if an auctioneer conducts the auction. There may be other types of shills at these auctions. They are actually regular investors. Regular groups of real estate investors meet at auctions almost like a private membership club. They have usually agreed on the selling price of the property in question and have already decided whose turn it is to buy the property. All of these arrangements may have been worked out in advance, over coffee that morning at the local diner. Does this mean that you cannot bid on the property? Of course not! As a member of the public at large, GuideBook - 126 Chapter 10 - Buying At The Auction you can bid on anything you want. A good deal, however, may be pre-arranged by these experienced professionals. Anyone coming in to bid on the property may have to deal with this group's experience head on. If the members of the group suspect that a novice is participating they may bid up the property so much that it will discourage the newcomer. Then, when the newcomer leaves, they withdraw their bids and purchase the property the way they originally intended to. Step #1 - Locating Sales and Auctions To find your properties, utilize the same sources you did before. Look in the newspapers for Foreclosure Sales, Sheriff's Sales, Trustee's Sales and auctions. Check the real estate publications that contain ads from auctioneers. Go to the courthouse and do your research. Find the Lis Pendens or Notice of Sale, whichever is applicable. In this case, the Notice of Sale will be more important than the Notice of Default. Talk with auctioneers, banks, lenders and others in the industry to find out about upcoming sales or auctions. Depending on where you live, you can also contact the Court Clerk or the Sheriff's Department for sale information. Step #2 - Evaluate Properties & Determine Potential Use the forms supplied in your WORKBOOK (SECTION 3) to perform the same type of research and evaluation of the property you would perform for any property, no matter how you buy it. Use the PROPERTY EVALUATION WORKSHEET to evaluate the default amounts and determine the estimated fair market value of the property. If the property is in your area, you may already know the average price. If not, do your research. Call real estate agents and get the asking price of homes in the area that are for sale. Consult with your advisors if necessary. Use the PROPERTY APPRAISAL WORKSHEET. Remember, you absolutely must know the average market price of the property before you even think about bidding on it! Have your title company representative do a preliminary title search (an abstract) on the property. If things appear to be okay, (not too many liens or encumbrances) you should proceed. If the property is loaded up with liens and judgments, forget that one and move on to another. Use the LOAN ANALYSIS WORKSHEET. Step #3 - Inspecting the Property Assuming all is well, you will want to inspect the property. This can be a problem, because many times you will not have the opportunity to do a physical inspection. This is another of the dangers in buying at the auction. If you have done your research properly, you will already have the property's address. Drive by if you can. Walk up to the house if you can (don't do this if the property is clearly occupied). See if you can see inside. If the property is available for inspection, make sure you have the right information regarding the dates and times you will be able to view the property. Take your time when inspecting the property. Some of your profits and your losses can be made or lost in property damage and repair. Use the PROPERTY INSPECTION WORKSHEET. GuideBook - 127 Chapter 10 - Buying At The Auction Step #4 - Calculate Your Profits Those of you who visit Las Vegas, Atlantic City or the Bahamas to participate in casino gambling will feel right at home with this investing method. But you must take the necessary precautions! Before you even enter the casino, you say to yourself, I may have $500 in my wallet but, I am not going to spend (lose) more than $300! That's my absolute limit! That's the exact same attitude you must have when buying at the auction. If you do not determine a pre-set spending limit you could be in for trouble. To calculate your potential profits, start with the price that you think you can sell the property for in good condition. Subtract the estimated costs of repairing the damage. From this figure, subtract the costs associated with holding the property. This figure (holding costs) is what it will cost you to make all the necessary loan, insurance and tax payments, while you are in possession of the property. Again, subtract from this number the closing costs when you sell your property and a 6% broker's commission if you intend to sell the property that way. (Many people use an average of 1% of the selling price to calculate the closing costs) This resulting figure is the amount you can expect to receive when you sell your property after all other expenses have been deducted. This is the net amount paid to you. An example would look like this: Your Sale Price less: repairs holding costs closing costs agent's commission Net To You After The Sale $100,000 8,500 2,325 1,000 6,000 $82,175 This figure is your starting point for the rest of your calculations. From your abstract property report, you found one lien for $13,500. Subtract that amount from the figure above. (82,175 - 13,500 = 68,675) From the final notices you will have the amount being foreclosed on, the default amount. Subtract that figure from you latest sub-total as well: Net To You After The Sale less: liens or judgments default amount Gross Profit Potential $82,175 13,500 55,000 $13,675 If you have had a full title search done just prior to the auction, remember to deduct those expenses as well. Doing a full title search prior to the auction is not absolutely necessary, but there is the risk that even if you pur- GuideBook - 128 Chapter 10 - Buying At The Auction chase the property, you will not receive clear title. A full and complete title search, while expensive, is one of the only ways to find out what you're up against. As expensive as it can be, it is the most affordable way to avoid disaster. You will not be negotiating with lien holders. They may be present to bid on the property to protect their interest, where you will be bidding against them! Many of you have heard that the auction process wipes out all lien holders. That depends on who is doing the foreclosing. Remember, if you buy a property at auction, the property goes from the homeowner to you, non-stop. The courts don't own it, and neither does the bank. You enjoy all the rights of ownership the previous owner had, debts and all! This is why it is so important to know what you are doing when buying at the sale. Once you have committed, there's no backing out. You cannot turn to the bank for help because they don't own the property and they never did. Likewise for the courts and the trustees. If any foreclosing is to be continued after you have purchased the property, it will be you doing the foreclosing. The bidding for this property will start at $55,000. You have pre-determined, that after having accounted for all known expenses, there is $13,675 of potential profit in the property. (That doesn't include saving on the repairs.) If you bid more than the upset amount of $55,000 and win the property, you stand to make an estimated profit of $13,675 (barring any unforeseen circumstance). So then, how much should you bid? Bid the lowest amount you can. If the sale starts at $55,000, bid $55,100. (You may be prohibited from bidding in $100 increments, but start there anyway.) Never bid more than you have to! If your bid of $55,100 wins the property, your estimated profits are the same less the extra $100. Bidding up the price in larger increments only erodes your profit potential. You cannot bid more than the default amount plus your profit potential amount. If you did, you may own the property, but there would be no profit in it for you. (55,000 + 13,675 = 68,675) This figure would equal the net amount you would have received after you sold the property. Clearly then, your minimum bid is the lowest amount you can bid over the $55,000, and the maximum you would bid would be any amount less than the amount you would receive when you sell the property. Your bidding range is $55,000 to $68,675. At the $68,675, we determined that you just break even with no profits. Well, that's no fun... and that's not why we're here! Determine the minimum profit you want to make. If it's $10,000, your maximum bid would then be $58,675. (68,675 - 10,000 = 58,675) If you settle for a $5,000 profit, your maximum bid could be $63,675. (68,675 - 5,000 = 63,675) It is not recommended that you settle for a small profit when buying at auction. Some of the highest profit producing buys come from the auction process. This is where the experienced investor can buy real estate at a 40% - 50% discount, if done properly. The risks are generally too great to make such a small profit. Calculate your potential profit before you even think about attending the auction. Other considerations in bidding are that of hidden expenses, whether repairs, liens or others. You may want to build in an extra reserve of $5,000 or $10,000 or more. If you do this and win the property, assuming that there are no additional expenses or hazards involved, you have just increased your profits by the amount of the reserve you built in. If the property will incur additional expenses, you have planned ahead and hopefully have them all covered. Use your EQUITY/PROFIT CALCULATION WORKSHEET. Fill in just those items that would be appropriate for buying at the auction. GuideBook - 129 Chapter 10 - Buying At The Auction Step #5 - Preparing for the Auction As indicated earlier, auctions and sales are frequently postponed or canceled. You should always call the Courthouse, Sheriff, or Trustee handling the sale, to verify that it will take place at the announced time and place. Find out what requirements there are for purchasing properties at the auction. What are the deposit requirements? When will the balance be due and in what form (certified funds, all cash, etc.)? Find out who is conducting the sale. A Trustee? An auctioneer? Make sure you have all of your financing arrangements set and in place before you attend the auction. Don't lose your deposit because you failed to come up with the balance when due! Step #6 - Attending the Auction Arrive early! If the sale is held at the property location, this may be your only opportunity to inspect the property. Determine if the sale is being conducted by an attorney, trustee, sheriff, or auctioneer. If an auctioneer is involved, you may want to be extra cautious in your bidding. You will be required to register as a bidder. This process separates the onlookers from those seriously intending to buy a property. Your proof of ability to purchase the property will be required at this time. This is the verification of deposit requirements. You may have to provide certified funds for the full amount you intend to bid! If you arrive late, you may lose your opportunity to register, eliminating yourself from the competition. After the reading of the complaint and the property description... the bidding will begin. Note who starts the bidding. If the lender does not bid, BEWARE! Whatever you do, do not bid more than the pre-determined limit you set, when you calculated your potential profits! In this foreclosure investing method, you are not trying to create a Win/Win/Win scenario. Just one Win is enough. However, it must be you that wins. Upon purchasing the property, you will receive a deed. The type of deed depends on who is conducting the auction and your state and local laws. Seek the advice of your title company people and your attorney. You will want to record that deed as soon as possible. Do this to avoid any further complications that may arise over the question of ownership. You will also want to acquire title insurance as soon as possible. Due to the nature of the transaction, this can sometimes be difficult. Title insurance will be your best defense against any potential actions against the property. Occasionally a long lost relative of the homeowner may appear claiming certain rights to the property. Defend yourself by taking the proper precautions. Look! Up in the sky! It's a bird... it's a plane... no it's... it's... ...just another piece of property. Think of all your real estate deals this way and you won't get hurt. Never get wrapped up in a property. Don't get emotional. Buy it or don't buy it. There are always plenty of properties on the market to choose from. Our best words of advice, if you feel that you must purchase properties this way, are to have a lot of cash behind you. Our second best wave of advice goes like this: 1. Research and learn as much as you can about auctions. GuideBook - 130 Chapter 10 - Buying At The Auction 2. Attend several auctions to get a feel for how they work. 3. Talk to those attending auctions, listen, watch and learn. 4. Follow the normal steps for calculating profits in a property; set a price that you would bid on for that property; go to the auction and observe; does the winning bid come close to yours? Repeat this process if necessary or until comfortable; if the sale price is always greatly different from your price... find out why 5. Never bid at an auction without proper financing pre-arranged. 6. Never bid at an auction without having first inspected the property. 7. Never bid at an auction without knowing the property’s value. 8. Never bid at an auction without having calculated your potential profits. 9. Never bid at an auction without having a title search done. 10. Never bid at an auction without the approval of your advisors. There are many experts that would advise the novice investor as follows: NEVER BID AT AN AUCTION! However, once you have acquired some experience buying and selling properties you may want to explore this method. The rewards are usually very good, sometimes unbelievable! Gain experience in other methods first, then try this one when you can afford to. GuideBook - 131 Chapter 11 - Buying Foreclosures Directly From The Bank 11 CHAPTER Buying Foreclosures Directly From The Bank “You can search high, you can search low, but there’s no better deal than an REO.” - Anonymous Investor GuideBook - 132 Chapter 11 - Buying Foreclosures Directly From The Bank Buying Foreclosures From The Banks ANY brand new investors want to buy foreclosures directly from the bank. The banks seem to have an mystique all their own. No one says they want to buy foreclosures from the credit unions or insurance companies or savings & loans or mortgage companies. The draw to the term banks is somewhat understandable; because that is where you normally borrow the money you use to buy your new house. However, too many people think that since you borrowed the money from the bank that the bank owns the property. Not true. Whether a deed of trust or a standard mortgage, when you buy your house the title is either held by a third party, or pledged as security for the loan, but the bank does not own the property. Banks are in the loan business, not the real estate business. You borrow money from the bank and give the mortgage to the bank. The mortgage is used to secure the property in the event that you default on the loan. In fact, unless you bought a bank foreclosure when you bought your home, your bank has never owned the property. There are several institutions that lend money for home loans. All of these institutions will eventually foreclose if you fail to meet the terms of the loan agreement. Therefore, all of these institutions will, at one time or another, have foreclosures on their books. Further, since a bank or lender will sometimes sell their mortgages to those in the secondary mortgage market, the original lender may only be servicing the loan. This means that the lender will collect the payments, possibly pay the taxes and insurance, and generally manage the account. If the property owner goes into default, the lender (who is servicing the loan) will initiate the foreclosure process on behalf of the institution they represent. So what is a bank foreclosure? Well, that's just a common term for an REO. An REO is the property the lender acquires at auction if no one bids higher than the default amount. This is the first time the bank (or other lender) actually owns the property. If you recall, CHAPTER 6 described the vast differences in the numbers of REOs listed by several different foreclosure reporting services. This is due in part to the fact that some of these organizations report only inventories from banks. Others, in an effort to beef up their publications, also list VA, FHA, SBA, FDIC, FSLIC and other institutional properties. Some even list foreclosures held by mortgage companies, insurance companies and home loan equity lenders. All of these properties, having been through the auction process and now in the hands of the lender, are REOs (Real Estate Owned). While it is common to think of these properties as bank foreclosures, no bank may actually have been involved. In fact, the title of this publication should be How to Buy and Profit from Lender's Foreclosures, and this chapter, Buying Foreclosures From The Lenders. For simplicity's sake, however, the titles shall remain. Calling an REO a bank foreclosure is a minor and harmless mistake. But another common mistake with larger implications for the investor is the commonly held belief that the lender who now owns the foreclosed property cannot profit on it. It has even been written that the lender may not, by law, make a profit on real estate. This is incorrect. When a lender forecloses on a non-performing loan, no matter which of the methods employed, the goal is M Dispelling Some Myths GuideBook - 133 Chapter 11 - Buying Foreclosures Directly From The Bank to recover the amount of the original loan plus late fees, penalties, interest, taxes paid, etc. The lender, depending on the state and the method, can only attempt to recover its losses, but in doing so, will add up every conceivable and allowable expense. This is the amount the lender claims is owed by the property owner and this is the maximum amount the lender can pursue in foreclosure. That's how most of the laws are written. After the foreclosure sale or auction though, it becomes a whole new ball game. The lender now owns the property, and as property owner it is entitled to do anything it wants with the property. It can now rent, sell or hold the property as it sees fit. The lender can sell the property for any amount it so chooses. The lender is no longer constrained by agreements and documents or laws and regulations concerning foreclosure actions. All lenders are in business to make money. Now that the lender owns a piece of real estate, why shouldn't it sell for the highest price it can get? The bottom line is: that while in foreclosure, the lender is not entitled to make a profit or take advantage of the property owner in any way. The lender may only try to recover its legitimate losses. But, after the lender has successfully acquired the property at auction, the lender can sell and make as much profit as it wants as they are entitled to by virtue of their lawful ownership. Finally, there's another common belief that all the banks in the nation are falling over backwards to give their properties away. Nothing could be further from the truth! Sure, there are more foreclosures on the market today than ever before. It is also true that these banks and other lending institutions are under pressure to dispose of these properties. But in no way are they under pressure to take big losses. Lenders will attempt to sell off these properties as quickly, efficiently, and profitably as possible. Real estate conditions vary from state to state and region to region. In some areas, banks may indeed be practically giving their properties away, while in others, foreclosed properties may be selling at or near market value. This business of foreclosures is not a new phenomenon to the lenders. They have learned the best ways to effectively manage these problems and have developed methods for their disposal. Additionally, few people realize that there are lot more foreclosures in the system, than they are aware of. Think about what would happen if every lender in America who had REOs dumped them all into the marketplace at once! If all of these properties could be had at 30% to 50% discounts it would devastate the real estate market, as we know it. Investing Overview Buying REOs from the banks or anyone else for that matter, is the most popular method of foreclosure investing. Remember, that these properties have been through the auction process and are now owned by a lending institution, whether a bank or not. In this third of the three investing opportunities, the foreclosure process, as we know it is over. Typically, the property owner was in default of the loan obligations and, for whatever reason, suitable arrangements that would have prevented the lender from pursuing and completing the foreclosure process were not made. At this point, the lender has had to protect its interest in the loan by removing the rights of possession of the property owner. This, as described in CHAPTER 1, is what foreclosing on real estate is all about. By ending the owner's rights to the property the lender is now in a position to actually sell the property. By selling the property, the lender is attempting to recoup its monetary losses created by the property owner when he or she failed to meet the obligations of the loan agreement. The mortgage and the Deed of Trust as you will GuideBook - 134 Chapter 11 - Buying Foreclosures Directly From The Bank recall, are the two most common security devices used by the lenders. These security devices allow the lender to pursue this course of action. When investing in pre-foreclosures the smart investor attempts to create the Win/Win/Win scenario. When buying at the auction, the emphasis is on creating a big Win for yourself while satisfying the auction requirements. When investing in or buying REOs, the wise investor focuses on creating a Win/Win situation: a Win for him or herself and a Win for the lender. Why a Win for the lender? Simple. That's who now owns the investment property you want to buy! The lender is now in possession of a property that it does not want. The objective is to help the lender remove this property from their inventory in such a manner as to simultaneously satisfy their requirements. Buying REOs is the most popular method of buying foreclosures. It is also the easiest and safest method. No matter which of the three investing methods you decide to utilize, clearly, you must create a winning investment for yourself. The only other requirements are those of the other party you may have to satisfy, whether the homeowner, the sheriff or the lender. With all three foreclosure investing methods there are actions or steps you will take to insure yourself a reasonable profit for your efforts and to prevent any problems. When buying an REO, you will still have to locate properties effectively, choose appropriate opportunities, inspect the property, calculate your profits and expenses, and negotiate your way to success. Advantages The advantages in buying REOs over the other two investing opportunities are numerous. Many investors are attracted to this method because of the ease with which one can participate. There is much less effort required to buying REOs. Since the foreclosure process is now over and the rights of the original homeowner have been legally and finally removed, chances are very good that the homeowner is long gone. Any liens or encumbrances (with the possible exception of tax or IRS liens) have probably been erased. Typically, it's the first mortgage holder that forecloses on the property. Being in the first position, the lender bids the amount of default at the sale and most of the time it gains possession of the property. In doing so, all other junior lien holders, second and third mortgages included, are wiped out. The lender now has clear title to the property. Now when you look toward purchasing a property, you don't have to worry about hidden problems and liens. When buying pre-foreclosures or properties at auctions, there may be delinquent state or municipal taxes due. It is your job to research these matters in an effort to make a profitable investment. When buying from the lender, these taxes will most likely have been paid. It's just that much less research or work that you have to do. The very nature of the fact that the property has officially changed hands means that the lender who bought the property at auction has probably done all of the necessary legal work involved to remove the complications surrounding this property. All of this saves you time and money, and reduces your investment risks. The ease of this investing method stems from the fact that many of the typical investing roadblocks have been removed. You probably won't have to worry about evicting tenants, doing title searches, negotiating with lien holders or doing extensive research. Investing in REOs is much less expensive than the other two foreclosure investing methods. The appeal is the same as the other methods: that of buying real estate below market value. However, the costs for you to get involved can be much less. In the pre-foreclosure methods we found that at times a good deal of cash can go GuideBook - 135 Chapter 11 - Buying Foreclosures Directly From The Bank along way. Cash to pay off the property owner, cash for repairs, cash to get caught up with the lender and cash to pay off lien holders. When you buy at the auction you need certified funds, (same as cash) in large amounts and essentially have to pay cash for your purchase. Rather than the standard 20% down usually required to buy a home the conventional way, you can get into an REO for much less. The lender, wanting to sell the property quickly, will work with investors to help them purchase the property. Chances are you can buy the property for very little down, or at the very least, a substantial discount from the normal down payment. The lender, being a lender, is in a position to create or structure an arrangement that can save the investor money in other areas as well. This includes waiving or reducing the points charged when closing, waiving the actual closing costs, and offering loans at competitive rates. Since risks run in proportion to rewards, buying REOs can be less rewarding, in terms of price discounts off fair market value. While you may be buying below market value, chances are you will find few 50% off deals. The down payment required may only be slightly less than average. You may be able to shave some points and somewhat reduce the closing costs. Yet, none of these reductions alone are fantastic savings. Robert Irwin, a real estate broker, investor, consultant and one of the most prolific authors in the field of real estate, tells us that while it may be possible to get better financing, a better price, or a lower down payment, it is the combination of the three that makes this a better than average opportunity. I like to think of it as one-stop shopping. Think of it as your local convenience store of bargain real estate. Renters and first time homebuyers can do very well in this arena. It makes sense because of the combination of overall lower costs. Disadvantages As mentioned before, there is generally much less risk associated with buying an REO. Therefore, it stands to reason that one can expect smaller profits. An investor in REOs should have no problem acquiring properties at 10%, 15% and maybe even 20% below the normal market price. Savings of 25% - 35% are harder to find. Savings of 40% - 50% do happen, but less frequently. Essentially you trade off the rewards in exchange for reducing your risks. If you were to buy a property in the default stage and closed before having a title search done, you risk having a lien holder or some other party pursuing you and your property for someone else's debts. The reward is small (you saved maybe $500 on the title search) but the risk is tremendous. (You are now being pressured to pay thousands of dollars in past dues, liens or judgments, for example.) Buying an REO means that the lender may have already performed and paid for title searches and appraisals. So while you may not have to perform these functions and incur the expenses, the lender most certainly did. You will end up paying for those services or functions somewhere in your final purchase price. The lender can and will pass those expenses on to you. As you are again reminded, all real estate transactions are unique. No two are alike. The conditions of the properties in REO inventories vary. Some may be heavily damaged, some in perfect condition. Occasionally, you will find lenders selling property as is. Expect little cooperation from the lender when it comes to repairing this property. If the property could have been easily and inexpensively repaired, the lender would have done it. Less often, but always a possibility, is the problem of tenant or homeowner eviction. For some reason, the GuideBook - 136 Chapter 11 - Buying Foreclosures Directly From The Bank lender may have a difficult time removing the occupants residing at the property. Depending on state and local laws, the eviction process can take quite some time. Another frustrating deterrent is the sometimes-lengthy process involved in buying from the lender. The auction can be over in five minutes, negotiating with homeowners and lien holders can take weeks, but sometimes buying REOs can take months. Working with large organizations like S&Ls and banks can involve different departments and committees that may slow the purchase process. Advantage... or Disadvantage? I have often wondered: If there are so many pre-foreclosure investors who rescue homeowners and properties before they go to auction, how come there are so many auctions? And if there are so many properties sold at the auctions, how come there are so many REOs? The questions really aren't about the how's and why's, or the numbers. We know how and why, and why foreclosures are so plentiful. (See CHAPTERS 2 & 4.) The underlying questions are: Why wasn't the property worth saving by the homeowner? Why didn't a pre-foreclosure investor buy it? Why didn't the property sell at auction? We know that it is very likely that several pre-foreclosure investors and others were interested in the property at one time or another, and probably tried to contact the defaulting property owner. We can also assume that there were some pretty shrewd investors at the auction. Yet the property did not sell there either. So, what's wrong with the property that no one seems to want? On the other hand, this just could be a case of an out of state property owner that, after several attempts, could not be contacted by the lender or investors. The property for sale at auction may have not encountered any bidders. Maybe due to poor weather or confusion in scheduling. Perhaps an investor attempted to purchase the property at the auction only to have his financing fall through. We also know that buying at the auction is difficult for those who do not have access to a lot of cash and that the lender ends up with the property about 85% of the time. This could be a horrible property to own...or it could be a jackpot, the 50% - 60% off, deal of a lifetime. Ultimately, all the questions boil down to: Why is this property still on the market, after so many opportunities to buy it a discount have come and gone? While this question will remain unanswered, there is one very clear statement about this industry that comes shining through: There are many more properties available in the foreclosure real estate market than there are investors buying them! How Lenders Dispose Of The Properties Depending upon the amount of foreclosures, size of the organization, and that organization's particular policies, foreclosures are typically sold by lenders through one of two channels. The first channel or direction the lender takes is to utilize a real estate agency. The lender, not being a real estate expert, will often work with brokers to sell their properties. The brokers will usually know of investors who want these kinds of properties and help the lender to make a quick and efficient match. The broker may mix these properties in with other properties they list for sale. A homebuyer may be shown properties that were foreclosed on and not know it. The second and most obvious method of selling foreclosures is for the lender to handle these transactions internally. Depending on the size and complexity of the REO situation, the lender may have one part time asso- GuideBook - 137 Chapter 11 - Buying Foreclosures Directly From The Bank ciate handling the affairs or an entire staff of REO Officers or Special Assets Managers, etc. If a real estate agent is used to sell the property, expect to pay more. The lender is obligated to pay the agent a seller's commission and may pass that cost onto you. If the property is sold directly by the lender you could encounter one of two extremes or absolutely anything in between! You may approach a squeamish banker in a small rural community that runs a small unassuming bank who is embarrassed and shy to talk about this problem on his books, and who may practically give the property away just to wash his hands of it. You may just as likely encounter a tough as nails REO Officer in a larger bank in a larger city who knows her market and who will make you kick and claw your way to discounts on her properties. The chances are in your favor that you will experience something in between. Just as the two examples above illustrate, lenders attitudes regarding foreclosures vary greatly as well. The Lender’s “Asking Price” Several factors go into determining what price the lender will ask for the property. The amount of the default that originally brought the foreclosure action is usually the first consideration. The lender, even after the foreclosure process has ended, is still trying to recoup its losses on a non-performing asset. Certainly then, the lender will consider the amount of the loss as the least amount it could sell the property for. Next come the expenses associated with bringing the foreclosure action: any legal fees, advertisements, recording and filing fees, etc. Until this point, that is all the foreclosing lender could hope to recover while in the foreclosure process. Now, however, the lender can add the costs of maintenance and upkeep on the property, as well as repairs made to the property and a broker's fee for selling the property. Also, because a lender is in a business driven to make money, they will consider the property type, the demand for that property type and the local market prices. If the property is a run-down shack on some obscure parcel of land by the swamps they may consider a very low sale price, even at a loss if necessary. A very clean 4 bedroom / 3 bath colonial or split-level, in a very desirable suburb however, would be a different story. Don't expect the lender to give this house away. They know they can get a good price for it; maybe even full market price. Step #1 - How To Locate REOs In locating REOs, you will utilize many of the same techniques you used to find your other investing opportunities. A Lis Pendens or Notice of Default might be useful, but is no longer necessary. You are no longer seeking to acquire property before the sale of the property. If you have copies of these documents for properties you are interested in, you may use them to locate the name and address of the lender or plaintiff. The Notice of Sale can still be useful even though you won't be buying at the sale. If you still have a copy of this notice for a property you may be interested in, you will know when the sale was scheduled. Start contacting the foreclosing lender after that sale date to see if the lender actually now owns the property. Remember, approximately 85% of all properties at the sale are taken over by the foreclosing lender. Don't count out the county courthouse just yet! Even though there may be easy ways to get REO infor- GuideBook - 138 Chapter 11 - Buying Foreclosures Directly From The Bank mation, the courthouse is and will always be most accurate source of real estate transactions. When the lender acquires the property at the auction, the deed will be recorded appropriately. This recording is a real estate transaction of public record, filed neatly in your county courthouse. Just look for the lender's name as the buyer. Newspapers that print all of the notices we reviewed in CHAPTER 6 are still good sources of information. Even those newspapers that print all real estate transactions in general. Just look at the names of the buyers in these transactions. If the buyer is your local bank, credit union, or insurance company, then oops! There it is! Newspapers may also contain ads from realtors and banks advertising REOs to investors. Real estate agents, as previously described, are an excellent source of foreclosure information. Indeed, many market the lenders' foreclosed properties. This is another good reason to have a good real estate agent as a teammate working with you! Real estate publications and homes magazines typically contain advertisement from brokers that specialize in investment properties. These publications often contain ads from foreclosure reporting or listing services. Foreclosure reporting services can be of great convenience to you, if you are unable to visit the courthouse. The information received from most of these publishers is sorted by state, county and city, then by property type. Utilize your teammates. Talk to your friends at the Title Company, etc. Finally, let us not forget the banks. Start by contacting banks that service your investing area. You can find them in the phone book. The yellow pages will usually have the entire list of banks in your area. This goes for credit unions, savings & loans and mortgage companies, as well. Your local library may have directories in the reference section that contain lists of banks, by region. One quality source of bank listings is Polk's Bank Directory. At almost $200 a copy, you wouldn't need to order it, just review it at the library. (Call 615.889.3350, for more information.) You can try to obtain lists of foreclosures from the banks, but don't hold your breath. Also, you shouldn't expect every bank to tell you that they have any foreclosures or REOs. Most of the time, the person you will speak with initially will have no idea what you are talking about. Be courteous and persistent. Ask to speak with the individual that handles the REOs. If that doesn't work ask for the Special Assets Division or Real Estate Owned Department. If the bank representative still doesn't understand your needs, politely ask to speak with a manager. Most banks prefer not to take calls requesting lists of foreclosures. Some may indeed indicate that they have no REOs, so as not to encourage investors calling for lists. That lender may be selling its REOs through brokers. Perhaps they work very closely with a few investors. It may be wiser, if you must search for lists from banks, to get the name of the individual in charge of that bank's REO department, and send him or her a friendly letter. Indicate that you are looking to buy a home in the ABC area of town, and that your price range $XXX,XXX. Ask the individual to send you any information they may have that meets those requirements. You may get a response, you may not. You may receive a list of that bank's property in the mail, or at least a letter indicating how the banks sell their properties, and a thanks for your interest. The point is that you will be better received if you are not just another pesky investor. Use what you learned in CHAPTER 6 to search for properties online, and use the PROPERTY EVALUATION WORKSHEET to collect the basic information required for selecting your properties. Step #2 - Narrow Selections Try to find properties that meet your investing criteria. Look for properties in or near your investment area. If you're looking for a new home for yourself, look for properties that meet the physical specifications of the GuideBook - 139 Chapter 11 - Buying Foreclosures Directly From The Bank home you want to buy, If the property is to be resold or rented, establish with your advisors properties and areas that lend themselves well to the average buying and renting public. Even though you will be buying properties at a discount, some cash will be required on your part. Therefore, you should also look for properties that fit your investing budget. Your next job is to determine whether or not these properties you are considering are true bargains. Do this by determining the property's average market price. For any investing method you consider, you must know the price you can get for the property when you sell it. You will also have to know how much you can expect to receive, after all of the closing and selling expenses have been deducted. Again, if this property is in your investment area, you should have a fair idea of how much this property is worth in good condition. Be consistent in your evaluations. Never try to compare the value of two properties in different conditions or states of disrepair. Always compare properties as valued in good condition. Use the PROPERTY APPRAISAL WORKSHEET. If you are unfamiliar with the average price of the homes in a certain area, call your advisors. A real estate agent, title company representative or even a contractor, can help you with prices. Look in the real estate section of the local daily newspaper. This section is often divided into categories that list homes for sale by different areas. Study the paper. Find properties in the same area that meet or come close to the property you are interested in to come up with a ballpark figure of the property's value. Do a drive by, if you can. Get in the car and visit the neighborhood. Try to get a look at the property. Look for the sale signs. Take names and phone numbers of real estate agents who may have properties for sale in the area. Having estimated the average market price of the property you seek, determine if indeed there is a bargain to be had. If you have received your information from a broker, bank list, or list service, and have the bank's asking price handy, you can make the simple deduction. Use the same techniques you would utilize if you were to buy a pre-foreclosure, or at the auction. Take your estimated average market price (the price you can sell the property for) and deduct the bank's asking price for the property. If the bank is asking $93,000 for a property worth $100,000, is this a good deal? In the world of foreclosure investing, not really. But, to the first time homebuyer it might be. If you saved $7,000 on the purchase of your new home, had closing costs waived ($1,000), had a reduced down payment (10%) and a lower interest rate, you might buy this house $100,000 home for as little as $9,300 down with very low monthly payments. Now is this still a bad deal? In this scenario you didn't steal the house from the bank, but there is probably no one else on your street that got such a good deal. Your neighbors probably paid $100,000 for the house, with 15% to 20% down, ($15,000 - $20,000) paid closing costs ($1,000 - $1,500) and have a higher monthly mortgage payment. This method of investing or buying can be great for those just starting out. An experienced investor looks for initial savings of at least 25% to 30%. Some of that percentage may get eaten up in compromises and negotiations, so start with enough room to negotiate. You may end up with a discount of only 15% to 20%, but that can work well for you too. Why is 15% to 20% good? Isn't that a small percentage? As we will discuss a little later, your ultimate goal is to invest wisely. A wise investor considers the return on their investment, not just the discount off the GuideBook - 140 Chapter 11 - Buying Foreclosures Directly From The Bank market price. If the bank's asking price is not indicated on the list you receive, you can call the bank or lookup the records at the courthouse. Remember, the Notices of Default & Sale, as well as the Lis Pendens will have the amount of the default or the amount being sued for contained in these documents. Knowing the default amount is less relevant when buying REOs than the other two methods. It would be very nice to know what the default amount was, but you won't be bidding or offering to purchase the equity of the property from the bank. Besides, if you are very happy with a deal you just made say 25% below the market price then what difference does the default amount make? Step #3 - Contacting The Bank If you have been unable to get the bank's asking price for the property, you will want to contact them. If you have the price and think that this property is worth pursuing, you will need to contact the bank officer in charge, to arrange for an inspection. Either way, it's time to make contact. How you make this contact is up to you, but there are some important lessons to be learned about this first meeting that will help make your investment opportunity much more fruitful. If the property is being sold through a real estate agent, you will need to contact that individual. There is a reason the bank chose this individual or organization to Never rely represent their properties. It is recommended that you do not try to avoid the real on casual estate agent by going directly to the bank. Most likely, they will just send you back estimates to the agent. ! A bad loan, non-performing asset or foreclosure can look bad on the banker's balance sheet. Banks have to report their earnings and losses. These losses can be a bad reflection on that bank's ability to make profitable loans. The banks are under the watchful eyes of state and federal agencies. Banks have to report to their stockholders. Therefore, a foreclosure to a bank is like a big pimple on its face! No, it is not the plague, just a pimple. While it is true that there are a lot of foreclosures currently available (which accounts for this industrial acne), the patient has been to the doctor and the medicine has been prescribed. Banks, as well as other organizations, have applied the medicine and sharpened their foreclosure management skills. Don't walk into the lobby of your local bank, meet the REO officer and point at the blemish! This would be considered rude behavior and may not get you past the lobby! The banks are aware of their problems and how to deal with them. You should be aware of this, and learn how to deal with the banks. The banks do want investors and others to take these properties off their hands, but they don't need you like you need them! Several dealings with arrogant investors can turn off your local REO officer. The unwelcome investors are self-important, rude and demanding. They think they are doing the bank a favor by offering to buy one of its properties. They usually have an attitude that would generally be considered offensive. I recently heard of one would-be investor, who demanded of an REO officer, Okay lady, how much you when calculating your final profits. Attitude and Approach GuideBook - 141 Chapter 11 - Buying Foreclosures Directly From The Bank got in the property!? The bank officer kept her composure, despite being tempted to throw the guy through the window. Many REO officers have years of experience behind them. Some have disposed of thousands of REOs. These people have reliable investors they can count on to help them move these properties. REO officers will be happy to work with you, if you have the right attitude. When working with an REO officer, don't demand to know how much money the bank has into the property. The numbers may reveal themselves as you work with the bank, if not, find out for yourself. Get the information from the courthouse records where the property transaction was recorded. Get the information from the legal papers and journals that print the information. Go to the auction and observe the bank's winning bid... but don't demand the information from the banker. Now that you have the bank's asking price for the property, you can determine whether or not you think this property is worth pursuing. Remember, you are contacting the bank to find out how much it wants for the property. You will also want to inspect the property and know what the appraised value is. Make sure that you indicate in your meeting with the banker, that you are interested in the property and will want to know what the appraised value is. Ask to get a copy of the most recent appraisal. Indicate to the banker that you would like to see the property. Arrange a time when the banker or other representative will be available to meet you at there. Step #4 - Inspecting The Property To further determine how good a deal this property may be, you will want to inspect it for damage and necessary repairs. If there is a good deal of damage, you will use the amount of calculated repairs, to negotiate with the bank. Use your PROPERTY INSPECTION CHECKLIST to inspect and evaluate the property. Just as you read in CHAPTERS 9 & 10, you will use the same techniques to inspect this property. Be very thorough in all your inspections. Never rush through the inspection. Every item you miss, you will have to repair and pay for later. This is especially important when it comes to dealing with the banks. When you inspect a property for a pre-foreclosure purchase you are making sure that you calculate your profits correctly in order to make a proper offer to the homeowner. Remember, this is some of where your profits come from. The same is true when inspecting a property that you intend to buy at the auction. The only difference here is that you are not negotiating with a homeowner; you are just trying to calculate your profits and to determine whether or not to bid on the property. The banks have gotten much sharper in disposing of their REOs. They now know what it takes to move them swiftly. This includes making allowance for repairs, or actually making the repairs themselves. The banks sometimes hire contractors to make repairs on their REOs. The banks, in business to make profits, will do the exact same thing you do when calculating their profits. It only makes sense that the bank repairs the property to a salable condition. This does not mean that every single repair will be made. Maybe the bank will only allow for, or make repairs that only include fresh coats of paint inside and outside, some flooring and a few minor fixes. The property now appears in good condition and is salable. In our example of a property that had an estimated $8,500 in repairs necessary, the bank may only acknowledge and repair $4,000 worth of the damages. The banks, having had to repair many properties, may work with a contractor that offers reduced rates in exchange for the work. You would then argue that this property has a full $8,500 worth of damages that need repaired and the banker counters with the fact that he or she can have the same work done for $4,000! GuideBook - 142 Chapter 11 - Buying Foreclosures Directly From The Bank Again, it is important to remember that the bank is in business to make money. They do not want the properties, nor do they want to spend a lot of money on the property while they do own them! In your inspections, you may very well come across properties that have already been repaired somewhat by the bank. Expect to have the cost of those repairs incurred by the bank passed on to you in the asking price. Remember, if the banker or real estate agent accompanies you make sure you verbally and physically point out all of the damages! Step #5 - Calculate Your Profits Use the EQUITY/PROFIT CALCULATION WORKSHEET to determine your profit potential. Do not, at this point, rely on your casually determined average market price. Make sure that you get the most current appraisal from the banker or real estate agent. This is not something you should have to pay for. Being the new owner of the property and in a position to sell the property, the bank should have a recent appraisal handy. Use only that portion of the EQUITY/PROFIT CALCULATION WORKSHEET that applies to this purchase. (You will not need to calculate lien or judgment amounts, for example.) In this case, we will use an example of a property valued at $150,000 with a bank asking price of $120,000. This represents a 20% discount off the average market price for a comparable property. Take the appraised value of the property and determine what you think you can sell the property for. Crossreference the appraised value with the asking prices of the comparable properties in the neighborhood you previously researched. Deduct the commissions and closing costs you would incur when you sell the property. EXAMPLE: Your Selling Price: Less: commissions closing costs Net to you After Sale: @ 6% @ 1% 9,000 1,500 $139,500 $150,000 From this amount, deduct the down payment for the purchase of the property, mortgage payments, insurance and taxes for the few months you will own the property and repairs if necessary. Net to you After Sale: Less: down payment @ 10 % holding costs @ $849 per month for 3 months repairs Net Proceeds: 12,000 2,547 3,800 $18,347 $139,500 GuideBook - 143 Chapter 11 - Buying Foreclosures Directly From The Bank In addition to these expenses, you now have a note of $108,000 that you owe to the bank. ($120,000 purchase price minus the 10% down payment of $12,000 = $108,000) The $18,347 it will cost to buy, repair and hold the property, coupled with the new note of $108,000, equals $126,347. Your total costs of $126,347 would now be deducted from the amount you will receive after selling the property at market price and deducting those expenses, which was $139,500. Your profit for this venture would be $13,153. Is this a good deal? you ask. The answer is yes! A profit of $13,153 is no laughing matter. More importantly however, is the return on your dollar investment. Add up every dollar you actually spent on this deal: commissions, closing costs, down payments, repairs and holding costs. This would add up to $28,847. $10,500 in selling and closing costs plus the $18,347 in payments and repairs. The $13,153 is the profit you made on your investment of $28,847, not the $150,000 property. Divide the $13,153 in profits by the $28,847 in expenses and you will see that your investment returned a profit of 46%! I ask you, where else can you find investments that return 46%? Try getting a 46% return on your investment anywhere else. You certainly will not get that kind of return on the money you deposit in your checking or savings account at the bank. Mutual funds, IRAs and Certificates of Deposit return a mere pittance, 2%, 3%, maybe as much as 5%. Now deduct the cost of inflation against the money you earned and you may have actually lost money if you keep it in one of these accounts. You may decide that $13,000 is not enough to make on a foreclosed property... good for you! You may believe that making $13,000 on one transaction is outstanding... good for you, too! Only you know what will make you happy. Only you know how much money you have to work with. If you do not have the funds to strike a killer deal, start with something smaller. Take the profits from your first investment and roll them over into the second. Everyone has to start somewhere. The important thing is getting started. The second most important thing is the return on your investment. The return on your investment is really the only true measure of a profitable deal. Whether buying pre-foreclosures, foreclosures at the auction, or REOs from the banks, your profits are directly effected by the length of time you hold the property (before reselling it), the amount of repairs you make, the amount required as a down payment and your purchase price versus the selling price. Okay, that moneymaking example was easy. What happens when the bank's asking price is close to, or at the regular market value of comparable properties? If the property offered by the bank is valued at $150,000 and the bank is asking $140,000, run the numbers as before and determine your profit potential. After selling the property at the $150,000 price previously established, we agreed that you would be left with $139,500. Now run the new figures to compute your profits. Net to you After Sale: Less: down payment @ 10 % holding costs @ 991 14,000 $139,500 GuideBook - 144 Chapter 11 - Buying Foreclosures Directly From The Bank per month for 3 months repairs Net Proceeds: 2,973 3,800 $20,773 (The figures in these examples are computed for a 30-year loan at 8.75% interest) Add every single expense associated with the property as before and you will have spent $31,273. Let's not forget the note you signed for the property, which is now $126,000. (140,000 - 14,000 down payment = 126,000) Your expenses of $31,273 and paying off the note of $126,000, now equals $157,273! The property was only valued at $150,000 and you lost $7,273. This property, at this price, represents a small savings for the homebuyer and a total loss for the foreclosure investor. The two biggest expenses associated with this purchase, are the down payment ($14,000) and the seller's commission ($9,000). If you could negotiate a 5% down payment with the bank, you would have saved $7,000. If you can sell the property by yourself, you would have saved an additional $9,000! To calculate whether or not a property is a good deal run the numbers. If you find a very desirable property with a bank asking price of near market value you will have to calculate your profit potential. If the end number is unattractive, re-calculate your numbers, so as to provide yourself with a desirable profit. This is the figure you will use to start your negotiations with the bank. For example: take the $140,000 bank asking price and try reducing it by 15%. ($140,000 X 0.15 = $21,000) Now run the numbers again to determine if the profit potential is strong enough for you to invest in. If it is not enough, re-calculate your numbers again at a 20% discount from the asking price. Continue with this process until you have reached a desirable profit for yourself. You will want to use this figure as your offer to the bank. If the price you are willing to pay is only 50% - 75% of what the asking price was, don't expect the bank to comply. In all of the foreclosure investing methods you have to seek out the profitable opportunities. If you can't find them, you have to create them. If you can't create them, find another property! If you are buying this property to hold and rent for a monthly income... you will look at the figures differently. If you could negotiate with the bank sufficiently to reduce your monthly payments and rent the property at an amount that exceeds your mortgage payments, insurance, taxes and maintenance, you would have created another winning situation for yourself. This in itself is one of the greatest attractions to owning real estate. In this situation, you have created a steady monthly income, established ownership and equity in a property, and hopefully own a property that will appreciate in value. Step #6 - Making Your Offer If you are working with a real estate agent representing the bank, you may have to do most of your negotiations with the agent. Your offer will most likely appear on a standard purchase and sales agreement, which will be chauffeured to the bank by the agent along with your check for a deposit. You might find it a bit more difficult to negotiate with the bank through the agent. The agent, who will earn GuideBook - 145 Chapter 11 - Buying Foreclosures Directly From The Bank a selling commission based on the selling price, will not just hand over the property without a fight. Try to get the agent working for you. In other words, remember to point out all the damage when doing your inspection with an agent present. This agent may eventually enlighten the REO officer with regard to the property's condition. This can only help your case. By being an expert in your area, you may be in a position to inform the agent that a similar property in the same neighborhood recently sold for only $137,800. Ultimately, your best bet is working directly with the bankers. The better the relationship you establish with these people, the better the opportunities you will find. You should submit a written offer for the property in question. This offer should be neatly typed and include: 1 2 3 4 5 6 7 8 9 10 a statement indicating intent to purchase real estate the property address legal description (optional) your offer - purchase price your financing terms your down payment terms closing dates other contingencies deposit your name, address and phone number figure 11 - 1 shows an example of an offer to purchase property As discussed earlier, the better your documentation and the better your presentation, the faster you have established much needed credibility. Remember that you are working with professionals. REO officers receive offers on properties regularly. Make sure your offer stands out if you want to get noticed. This does not mean that you should type your offer on fluorescent green paper, just a sharp, clean image will do. Your offer must start at the lowest price, or best terms, or both, that you think the bank will realistically entertain. In other words, make sure you leave room for negotiation and make sure your offer doesn't end up in the trashcan at the same time. If the REO officer has several offers on the same property, they will be less likely to consider an offer that would be way out of line. Some investors might shoot for the moon in the initial offer. That means that the investor wants to pay nothing down, get the lowest possible interest rates, pay no points or closing costs, ask the bank to finance the whole deal, cover the costs for repairs, and get the property at a discount, all at the same time. Depending on regional conditions, housing demands and a dozen other variables, this type of offer will either be considered or ignored. Today, chances are that this offer would go straight to the paper shredder. Many experts today agree on the following methodology. Start with an offer at or about 20% - 25% below the average market value for comparable properties. Perhaps in your initial offer, you leave out the terms. Let the bank officer consider your dollar offer only, at first. As this will be probably lower than what the bank would normally ask, the bank may counter your offer with a higher dollar amount and possibly throw in an attractive financing offer. Only you can determine if this is still a good deal. Re-calculate your numbers based on the bank's offer. Several experts recommend that you take the bank's offer of financing, and only give a little on the price. Let the bank counter again with a higher price, and an even more attractive financing offer. Again, except the GuideBook - 146 Chapter 11 - Buying Foreclosures Directly From The Bank figure 11 - 1 GuideBook - 147 Chapter 11 - Buying Foreclosures Directly From The Bank newer, better financing terms and still only give a little on the price. In the long run, you are still trying to accomplish the same goals: a lower selling price, lower closing costs and better terms. Utilizing the method above, you give the bank an opportunity to entertain a respectable offer. You may get lucky and have the bank counter with very favorable terms immediately, with only a slight increase in the selling price. Finally, you are opening negotiations with the bank in a non-threatening manner while stating your intent and showing that you respect the process. Respecting the bank's position will go a long way. To do that, you should understand the rules we've discussed in this chapter. The rules are the unwritten laws of mutual respect for both parties. Learn how to play by the bank's rules, as well as your own, and you will do well. Perhaps your offer will contain your purchase price, and a suggested outline of terms and conditions. This shows the bank that your offer is realistic (by the price), that you have given this property some consideration (by the supporting documentation), and that you understand and respect the rules of the game (by suggesting investor-like terms, while leaving some room to negotiate). Your best bet will always be to meet with the REO officer in person. Get to know these individuals and let them get to know you. In your meetings with bank representatives, make sure you have all of your facts neatly prepared and ready to present to them. Show the damages to the property and the estimated cost of repairs. You will be able to negotiate better with the facts in hand. You should also take notes. Listen to what the representative is telling. Try to As always, you must know read between the lines to discover how much you can actually get this property for. There may be a hidden price consideration, financing consideration or both. how much you Where do you start in your negotiations with the banks? When meeting with the can sell the REO officer, you may start with the offer that you developed, or you may simply ask property for the officer, what is the best price and the best terms you can offer me, for this propbefore you erty? You may like the answer you get. You may not. But at least it is a starting point buy it. for your negotiations. George Chelekis, a best-selling author on real estate opportunities, suggests the following: Since you know that the banks are under the watchful eyes of federal regulators and that the banks have to report their financial conditions to these regulators, find out when these reports are submitted. In other words, if banks report quarterly, find out when the quarterly report is due. If your offer arrives in the beginning of the quarter it may not get much attention. Up your offer a little and follow-up. If your offer still hasn t been accepted, increase your offer again, but by a smaller amount, and provide further evidence of your intent and ability to purchase the property. Do this by showing the REO officer a copy of your credit report, savings account statements and pay stubs. The point is to continue to motivate the bank into selling you the property and to do so by helping the banker to not have to report this liability on yet another quarterly financial statement. You should understand now, why buying foreclosures from the lenders is so popular. It is a much easier investing method. You should also be aware that the discounted amount of the property will not vary that much from the average market value for comparable properties. The discounts on the best properties are small at best. Which brings me back to CHAPTER 6, where we found so many publishers of REO lists advertising properties at 50% OFF! ! GuideBook - 148 Chapter 11 - Buying Foreclosures Directly From The Bank How can there be so many properties at 50% off? If there was that much equity in the property to begin with, wouldn't the homeowner have sold the property? Wouldn't a sharp pre-foreclosure investor have noticed this opportunity? Wouldn't this property have been sold at auction? If it was such a great property, wouldn't the bank get top dollar for it? I would have to think that if the bank was willing to sell me this property for 50% off the regular market price, that there is something about this property that I shouldn't want either! It would be wrong to say that you will never find a property offered by a bank at one half off the normal price. But, it would be equally as wrong to indicate that there are thousands of properties available at 50% off that the banks are just dying to give away. If this were true, we would only need to work for the next 120 - 180 days, then retire for life in great comfort. Do not get emotionally involved in the properties you want to buy, even if this property is for your own personal use. The banks go through properties like water through a sieve. The banks have no emotional attachment to the properties. Auctioneers, Trustees, Sheriffs, Insurance Companies and real estate agents have no emotional ties and neither should you. It's just another property. If you have ever brought your old car to an auto dealer, to trade on a new car, you will know recognize the scenario. There you are with the vehicle that has brought you good times and solid transportation for years. You know how well you took care of it and how much money you sunk into it. The dealer couldn't care less. The dealer only sees another hunk of steel that he can make a profit on. When the dealer offers you a ridiculously low price, you take objection. But what about the brand new tires I just bought? The dealer doesn't care. The vehicle is only worth so much, because the dealer has already calculated what he or she can sell it for! Like anyone should when buying at wholesale and selling at retail, you must know what you can sell for to determine your profits. Getting emotionally involved in a property can cause you to overpay for the property, thereby canceling out your wise investment. Step #7 - Closing When the bank accepts your offer, you will want to have all the necessary documents signed as quickly as possible. To avoid any further delays or problems that may arise from competitive offers, you will want to close as soon as your can. Make sure you are prepared to take over the property. You should prepare to make repairs to the property, evict tenants, get a certificate of occupancy if necessary, etc. Just because the bank has become the owner of the property, doesn't mean that the property has no problems, physical or otherwise. Utilize your advisors, do your research, investigate the properties, eliminate your risks and reap your rewards! GuideBook - 149 Chapter 12 - Financing Your Purchase 12 CHAPTER Financing Your Purchase “Happiness is a positive cash flow.” - Fred Adler GuideBook - 150 Chapter 12 - Financing Your Purchase Financing Your Investment U Before You Start NTIL YOU get the hang of it, foreclosure investing can be a bit tricky. Nothing however, is more difficult than trying to buy a property with no money. So many people want to invest in foreclosures but don't feel that they can come up with enough cash to buy one. This chapter offers some suggestions and tips for finding the money you need. We will also discuss some techniques the experts use to reduce their down payments and general cash outlay. There are many good books available on real estate investing and financing in your local bookstores. Flip through some of these publications to see if they meet your needs. Buy a book or two that you think will help. Why acquire additional material on financing? Because the subject is such that it requires additional information. This chapter would exceed the contents of this entire publication if we tried to cover all there is to know about financing here and now. Your main objective is to come up with enough cash to purchase a pre-foreclosure, a property at auction, or an REO. Your Personal Credit Your credit rating is probably the best source for your much needed cash. If you have a good credit rating and stable employment, you can probably qualify for a loan. Banks must qualify the buyer before lending any money. The bank needs to know that you will have the money necessary to pay back the loan. The banks also need to know that the property you intend to buy has enough value in it to support the loan. In other words, the sum of your down payment, your regular monthly mortgage payments and the value of the property should exceed the amount of the original loan. Let's clarify this a little further. Let's say you want to buy a house priced at $100,000. Let's also say that your down payment was 15% or $15,000. With your good credit and steady income, the bank will consider granting you a loan for the property. Their decision is based, in part, on the fact that the $15,000 received as the down payment, along with the property valued at $100,000, is more than the $85,000 loan the bank will lend you. Banks use sophisticated formulas to determine whether or not you can qualify for the loan. One such formula is the loan-to-value ratio (LTV). This is determined by dividing the loan amount by the propert 's appraised value. y The homeowner will have paid a down payment and is expected to make the regular loan payments. This, coupled with the value of the property, reduces the bank's risk in granting the loan. If the bank has to foreclose due to lack of payments, the value of the property should cover the loan balance. If this is true, then why do you need good credit? Can't the bank recoup its expenses or the loan balance as described above? The answer to the second question is yes, which is why the banks use these methods for determining loan qualifications. The only problem with this scenario is what we have described several times already: Banks are not in the real estate business. They are in the loan business. GuideBook - 151 Chapter 12 - Financing Your Purchase The banks want to make loans without having to be in the real estate business. This in itself is the answer to the first question. With your good credit the bank is still taking a risk, but statistically, granting loans to those who have good credit reduces the risk. This credit rating is an indicator a barometer if you will of the borrower's ability to make the regular scheduled payments. While a good credit rating cannot predict whether or not a borrower will actually make all of his or her payments on a timely basis, it does indicate that this person's payments for other loans or charges have been paid appropriately. So, before going out and exposing your credit rating, it would be wise to get a copy of your personal credit report and check it out for yourself. You are entitled to know what the credit reporting agencies are reporting about you according to The Fair Credit Reporting Act of 1971. This Act was established to protect the rights of the consumer against fraudulent and unfair credit reporting practices. Since you are entitled to challenge any incorrect information in these reports, you may be able to erase any negative information. Occasionally, items may appear on your report that have nothing to do with you or your life whatsoever! I recently sent for copies of my personal credit report from one of the three big agencies, only to discover that one of my past employers was an oil company in Oklahoma! The fact of the matter is, I have never worked for an oil company and I have never lived or worked in Oklahoma. I've never even been to Oklahoma! Small blemishes on your credit report, whether valid or not, can remain on your report for years. It is up to you to verify and correct any problems reflected on your personal credit report. Call these reporting services and request a copy of your report. There will probably be a small fee for this report, but it's worth it. The three major credit-reporting services are TRW, Trans Union and Equifax. Check your local phone books for these organizations. If you live in a rural area that may not have these companies listed in the local directories... go to your local library. Most libraries will have telephone books for larger metropolitan areas. Continue your search there. Borrowing Your Money If you are using your own money, try to find sources for cash that won't cost you a lot. In other words, borrow. The objective is to reduce the actual amount of hard cash you have to shell out to acquire the property. Loans and lines of credit can be established in many forms. Most credit card companies offer lines of credit. This enables you to virtually charge your cash purchase and defer the cost. Some credit cards will allow $5,000 or $10,000 or more in cash advances. Some investors tap into several of their credit cards to come up with the necessary funds to purchase a property. You might consider a commercial finance company such as Beneficial Finance or Household Finance. After checking your credit rating, they may be able to provide you with a personal loan for the amount you need. Often you can qualify rather easily. These loans can be for any purpose, however, it would be wiser to indicate that you are seeking a personal loan or a debt consolidation loan rather than a foreclosure investment loan. The cost may be as low as $30 for every one thousand you borrow, or as high as $60 per thousand. The point is that you buy your foreclosed property with this cash, instead of your own. By doing so you will create a new personal obligation, but if managed correctly, for only a short time. Let's say you want to buy a pre-foreclosure. After calculating all the costs involved, you figure you GuideBook - 152 Chapter 12 - Financing Your Purchase need $15,000 to satisfy the lender, lien holders and homeowner, and to repair, hold and sell this property for 4 months. A loan of this nature may cost you $450 a month in principle and interest payments. The $450, multiplied by the number of months you own the property, (4) is the amount of cash you actually put into the property. In this case the total cash outlay is $1,800. After the property is sold you will want to pay off the loan, thereby maintaining your good credit and providing yourself with the opportunity to borrow again when another good deal comes along. You will have paid some extra money in interest charges for the length of time that you borrowed the money perhaps several hundred dollars however, that cost is insignificant compared to the challenge of coming up with the $15,000 in cash. If you are a homeowner, consider a home equity loan. You might want to refinance your property or even sell it. Seek out alternative sources. With a decent credit rating you should be able to borrow somewhere. Some of the experts remind us that we all have hidden assets; things that we own that are worth something. If you have personal possessions that are worth selling and you don't mind parting with these possessions, this may be an option to consider. Collections, artwork, jewelry, stocks and bonds, even personal electronic equipment and furniture, are offered as possible cash raising alternatives. The author and publisher do not recommend that you exploit your borrowing capabilities to the point of jeopardizing your assets and/or over burdening your liabilities, nor is it recommended that you try to raise cash in such a manner that you may regret! If you are confident enough in what you are doing and the opportunities before you, you may want to talk to a friend or relative about borrowing the money you need. Explain what you are doing and why you would like their help. Offer to share some of the profits for their investment and risk. If cash is not available from a friend or relative, consider asking a relative to co-sign a loan for you. Their credit may be strong enough for the lender to grant the loan, without either of you putting any cash up front. Partnerships Partnerships, like marriages, can be great or they can be a problem. In a good partnership arrangement, typically one partner will find, investigate, research and prepare to buy the property. The other partner is the money partner. This second person has the cash to invest but doesn't want to do all the work. If you can find yourself a good money partner, you may be all set. The arrangements you establish with your partner are strictly between you. Make sure however, that the cost of the partnership does not exceed what would be considered a good return on your investment, even considering this partnership arrangement. You can create partnerships with your friends, relatives or co-workers. If $15,000 was required to purchase a property that would return 100% (another $15,000) in 120 days, wouldn't it be easier for three people to come up with $5,000 each, rather than you coming up with the full $15,000? Everyone involved will take a risk, but it is a much lower risk. Likewise, everyone involved would profit, but only by onethird of the dollar amount. Everyone's return on investment however, is still 100%. ($5,000 invested, $10,000 returned) You may find that one or more of your teammates your advisors will want to become partners with you after you've proven yourself a wise investor. GuideBook - 153 Chapter 12 - Financing Your Purchase Investors Check your local daily metropolitan newspaper. In the classified ads section, you should find a category for people who want to lend money. Typically, this section will be called "Money To Lend", or something similar. There you should find several sources that will be interested in lending you money. Contact these individuals and find out what kind of lending they do. Some may only lend in large amounts. Some may only lend with strong collateral, such as your house. Shop around, compare terms and interest rates, and see what's out there. You can attract investors by placing a small ad in that same newspaper. You will probably find a category called "Money Wanted" in that same classified ads section of the paper. Look the ads over. See what they have in common. The ads are written the way they appear for a reason. What kind of return is being offered in the ad? Call a couple of the numbers in the ads. Pretend you are an investor. Pretend you have money to lend. By reversing your role temporarily, playing the role of an investor, you will ask the person requesting the money: How much money is being requested? For how long? At what interest rate? And for what purpose? How is the money to be used? How will the borrower secure the debt? You will find that some people have ready, carefully thought out plans and some have no idea whatsoever. Don't be the person that has no idea how they are going to use the funds they want to borrow! The fastest way to turn off an investor is by being an amateur. The fastest way to succeed with an investor is to have your facts and details ready. Let this individual know that you want to borrow money for a quick and highly profitable return. Convince the investor that you know what you are doing the same way you did with the banks and other lenders. Have your documentation ready and be prepared to back up your investment strategy with this documentation. Offer a competitive return for the investor's efforts. Chances are good that you will receive many calls from your ad. Don't waste your time and money by being unprepared. Shop around, know what the competition offers, place your ad and win the confidence of the investor. Other Sources There may be other sources of money you can tap into. Most states have a Homebuyer's Program. They go under several different names, such as This State's Housing Finance Program, This State's Housing Authority, or This State's Residential Financing or Housing Development Agency. These agencies assist first time homebuyers and low-income homebuyers. These agencies also like to help those that are willing to buy properties in low income or distressed areas. GuideBook - 154 Chapter 12 - Financing Your Purchase The biggest benefits from working with these agencies are the low interest rates charged, (usually a few points below average) and the low down payment required. (Usually under 5%) These agencies may even have programs that will benefit the investor whether or not this is a first time home purchase. Consult your phone book for listings of state agencies. GuideBook - 155 Chapter 13 - Selling Your Properties 13 CHAPTER Selling Your Properties “Say no... then negotiate.” - Anonymous GuideBook - 156 Chapter 13 - Selling Your Properties Selling Your Properties Strategy Overview HE COMPLETION of the foreclosure buying process is achieved when you purchase your first property. The end of the foreclosure investing process is only complete when you have then sold the property you just bought. It is now time to reap the rewards of your hard work. In order to receive the money you earned, you must sell the property. In the calculations we used in the examples in this book, we referred to holding costs. These are the costs associated with your ownership of the property from the time you buy it to the time you sell it. Typically, you will have to pay the mortgage payments, plus any property taxes, insurances and homeowner's or condo association fees. Therefore, the longer you hold onto the property, the more it will cost you in monthly fees. Your objective is to sell the property as quickly as possible in order to reduce your holding costs. Most foreclosure investing experts agree that you must begin to market your property immediately. You will recall that in CHAPTER 9, that a good Home Equity Yours is Purchase Agreement contains a statement that allows the buyer to show the property. This clause is written into the agreement so that the investor/buyer can show the not the only property to his or her buyers even before the investor/buyer has ever taken possesproperty for sion of the property. This investor is lining up potential buyers for the property as a sale in the matter of the entire process. The idea of selling the property has been incorporated area. You will into the entire investing concept. That is why you also calculate what you can sell be competing the property for even before you buy it. against other The concept of buying and selling quickly is known as "flipping". In essence, home sellers you flip the property over to another buyer quickly; so as to reduce the amount of and other time and money it costs you to hold the property. properties! The only danger involved in showing the property very early is that the property may not be in good condition yet. If the property has not been repaired to an acceptable level the would-be buyer might be turned off by what he or she sees. Most people do not have good imaginations. They cannot envision what the property will look like in good condition. The only thing they really see is the broken window, holes in the carpet and the chipped tiles in the bathroom. These are the only images these buyers would see in their heads when they think of your property. You can spend all day describing what the property will look like when you are done repairing it, and still not make the sale. Depending upon the type of property you are selling and to whom, you may want to wait until most of the repairs have been completed before inviting in potential buyers. Try not to waste too much of your time or advertising dollars attracting customers for your property until the property is ready to be shown. The experts follow these basic guidelines for selling their properties quickly: T ! GuideBook - 157 Chapter 13 - Selling Your Properties 1. Buy the property right. 2. Hold the property for no more than 3 - 4 months. 3. Price the property to sell. 4. Present the property in good condition. 5. Aggressively market the property. 6. Start marketing your property as soon as possible. Working With Brokers Whether or not you decide to use a real estate agent or broker to help you sell your property is entirely up to you. In CHAPTERS 9, 10 and 11 we discussed how to buy these properties and how to calculate your profit potential. Some of these calculations included the future cost of selling your property through a broker. For this, you should have allowed an average of 6%. Ultimately, costs should determine whether you use a broker or not. Not just the cost of the broker's commission, but the cost of holding onto a property for too long and the cost of not being able to sell a property with low demand. Single-family homes are typically in high demand. A nice property in a nice neighborhood should sell quickly. An office building in the industrial section of town will be harder to sell. Brokers can be especially useful when selling a difficult property or a fixer upper. The broker should be aware of buyers and investors who are interested in these types of properties. If you feel that you might be stuck with a property that does not show good promise for resale, consider enlisting the aid of a broker. You will have to pay the broker a fee, but you may be able to negotiate down the percentage paid. Discontinue the repairs and let the broker sell it as is. Your asking price will have to be reduced because of the condition of the property. The trade off for these losses is the reduced holding costs you incur by having the property sold by a professional, and the money you saved by not making the planned repairs. We hope this never happens to you, but if it does, calculate the cost of using a broker against the cost of holding the property for 6 - 12 months. If you must take a loss, keep it small! Selecting A Broker It is advisable to have a good real estate broker as one of your teammates. If you don't have one, you will need to find one. Having a clear understanding of what you intend to do, interview brokers and discuss your plans with them. As we discussed in CHAPTER 7, you will want to work with those who appreciate and want to participate in your investment activities. Follow these basic guidelines when selecting a broker: GuideBook - 158 Chapter 13 - Selling Your Properties 1. Always work with a broker that has a good local reputation. 2. Select a broker familiar with your area. 3. Select a broker that will aggressively market your property. 4. Ask how soon they expect to show the property. 5. Ask what price you can expect to sell for. Remember, Realtors, real estate agents and brokers are salespersons. They make their living on a sales commission charged when they sell a property. In order to have an opportunity to sell the property, this real estate salesperson has to convince you that he or she can indeed sell the property quickly and for the amount you want to get. This sometimes leads to an inflated selling price, quoted by the broker. Part of your decision in selecting a broker should be based on the following: 1. Make sure that the broker will let you sign a short term contract (3 months) that states a minimum amount the property can be sold for. 2. Do not sign any contract that gives the broker exclusive rights to advertise and promote your property. * 3. Make sure the broker will list your property in the MLS listing service. 4. Your ability to negotiate selling commissions. * Most brokers will not want to sign an agreement, in which they are not the exclusive listing agent. That’s okay. Your goal is to negotiate a “listing agreement” with the broker, that allows him or her an exclusive “broker’s” listing, while allowing you to market your property simultaneously. Pricing The Property For Resale Hopefully, you will have a solid idea of how much the property is worth and what it can be sold for, before you buy it. Consider the repairs you actually make to the property versus the repairs you originally scheduled to make. If the amount differs, add or subtract that amount from your original projections. You may decide to adjust your asking price accordingly. Consult with your teammates or your broker to determine a fair asking price. Compare the prices of houses in the area and consider size, type, condition, age and amenities of comparable properties. As you have just bought the property, you should spend some time getting familiar with it and the surrounding properties. Find out if there is anything special about your property that may justify a higher price. Likewise, find out if there are any problems that might make the property attract lower offers. You should adjust your asking price accordingly. GuideBook - 159 Chapter 13 - Selling Your Properties Remember to add or subtract any additional fees or expenses you may have incurred while repairing and holding the property. Your best hope for selling your property quickly will be to price it attractively. Everybody wants to get a deal on a piece of property. So before you buy, consider how much money you will make on that property if you sold it 3%, 5% or even 10% below the market value. Does this sound crazy? Not really. If you pick up a bargain property at 20% below market value and flip it for 7% below market value, you can still make a bundle! If this property had a market value of $150,000, you would have bought it for $120,000 and sold it for $139,500. That leaves you with a profit of $19,500! If there is little or no interest in your property, try reducing the price. Reduce the price in small increments. Remember, the longer you hold it, the more it's costing you. Don't give the property away; just reduce the price enough to make it appealing and to cover your expenses. Finally, remember that buying a property involves negotiation. Make sure you leave enough room in your asking price to anticipate these price negotiations. Whether or not you have chosen to use a broker when selling your properties, you still must learn how to sell these properties by yourself. How else will you know if the broker is doing a good job? Clearly, you can't if you don't know what is involved. Besides, if the broker doesn't do a good job, who are you going to turn to? This is your It is not necessary, but it is very helpful to plan your purchases and sales around property. the highest property selling seasons. For example, the spring and the fall months are Ultimately, much better times to sell your properties. People are anxious to move after a long, only you know cold winter. People are also motivated to move or buy a new property in early fall. what it should Here, their goal is to get into their new home before the new school season starts or be sold for. It before winter sets in. In the summer, many people are on vacation or otherwise away is up to you to from their home. In the winter it is difficult to relocate. get it sold! Expect to take 3 - 4 months to sell your property from start to finish. Consider this again when calculating your holding costs. Marketing your property is relatively simple. The idea is to target those people who may be interested in your property, getting the information to them, and then closing the sale when you have made the right match. Before you actually start advertising your property, you should make sure that it is ready to sell. This includes presenting the property in such a way that it becomes appealing to the prospective buyer. Assuming your have completed your basic repairs, look around to see if anything in the property looks offensive. If it does, remove it. There are several small and inexpensive things you can do to a property to enhance its image and its salability without spending a lot of money. If the address numbers on the house are old, faded or rusted, put new ones on. This shouldn't cost more than a few dollars. Consider changing the doorknobs inside the property. Again, for a few bucks each, you could have brand new, shiny brass doorknobs. If the porcelain sinks or tubs are chipped, you can touch them up with porcelain touch-up paint that will match that fixtures color exactly. Again, this may cost a dollar or two. You may want to consider inexpensive blinds for windows that have no covering on them. Try to present this property in its most favorable light. Remove anything that may be objectionable. If you are re-painting the interior, consider using an off-white flat paint. This is also known as eggshell white, Navajo ! Marketing Your Property GuideBook - 160 Chapter 13 - Selling Your Properties white or antique white. It doesn't matter that you prefer green, blue or yellow. You are not selling this property to yourself. You should prepare the property in a way that will attract the average homebuyer, and most people prefer the off-white. That is why off-white paint is the number one selling interior paint color. Always use light, neutral colors when painting. Look around the property. See what else you can do to make the property more appealing without spending a lot of money. You would be surprised how an $11.99 light fixture can change the entire look of a dining room, for example. Think like the professionals think. When you go to look for an apartment or new home the agent or broker may show you a model apartment or house. This model, you will notice, is typically dressed up with fresh flowers on the living room coffee table, places set at the kitchen or dining room table, perhaps even some plants carefully placed. Make your property look like a nice place to live. Prospective buyers will try to imagine themselves living in it. Help them to see how nice it will be by presenting your property in that fashion. Advertising Your Property Your basic advertising starts with the classified section of your daily newspaper. Place your ads in the local daily newspaper, not a weekly shopper type of publication. You will want your ad to appear on Saturday or Sunday; whichever is the biggest of the real estate advertising days. Check with the newspaper first. Typically, Sunday is the best day for your ad to appear. Your ad will be competing with several hundred other classified ads on the same page. It is essential to make your ad stand out. To place a classified ad, call the newspaper and ask for the classified advertising department. Indicate that you would like to run a home for sale ad in this weekend's paper. A good ad taker, (the person who you will dictate your ad to at the newspaper; sometimes also known as an "Advisor") will be able to help you with your wording. As you tell the ad taker what you want to say in your ad, they will be able to advise you on the length of the ad, the cost of the ad, which section it will appear under, when it will appear, and so on. Ask the ad taker to help you make your ad stand out above the rest. Request that the headline be printed in italics, or a bold typeface. This may not be available. See if you can have the headline printed in a larger size so as to catch the attention of your would-be homebuyer. A larger type size will cost more because it adds more space to your ad. The ad taker should be able to help you in utilizing the standard abbreviations used in real estate sales. Do not make up your own. Most people will not know what you are trying to say and may pass on your ad altogether. Ask the ad taker what other devices they may utilize to enhance your ad. Some may offer fancy borders around your ad or graphics to be incorporated in the ad. You will pay a little extra for these items but it may be worth it. Keep your ads short and simple, and make sure you include the following: 1. The price of the property. 2. The area the property is in (not the actual street address). GuideBook - 161 Chapter 13 - Selling Your Properties 3. Any special amenities that are unique and make the property more salable. 4. The number of bedrooms and baths. 5. That this property is for sale by the owner. 6. And a phone number where you can be reached. By including the area of town the property is in and the price, you will have indicated to the prospective buyer that this property is a good deal. Most serious shoppers will have a good idea what certain properties are worth in certain neighborhoods. If your property is priced well, you should get lots of calls. If you put the street address in the ad you run the risk of a buyer driving by the property to see it first hand. It is preferable to have the buyer call you so that you can describe the best features of the property that you did not advertise in the paper. Then meet with the buyer at the property if they are still interested. If a buyer can drive by your property you eliminate any possibility of personally selling to him. An indication that a property is being sold by the owner automatically creates an image of cost savings. The owner is most likely selling the property by him or herself to avoid paying the broker's fees. These savings can be passed onto the buyer. Flyers Another inexpensive way to advertise your property is with flyers. Flyers can be created and distributed quite reasonably and often create some excitement regarding the property being sold. Creating a flyer is easy. If you own or have access to a computer with a word processor you can create professional looking materials very quickly. If not, you can use markers, stencils or paste-on lettering to create a good flyer. Once complete, consider using a quick print shop to make a hundred or so photocopies of your flyer. Try to use colored paper when reproducing your flyer so it will stand out better. But don't go overboard. Try to avoid fluorescent greens, yellows, oranges, reds and pinks. While these extremely bright colors will attract attention, the print on these colored backgrounds can be difficult to read and sometimes actually offend the reader. Distribute your flyers around the neighborhood. Distribute flyers where the people most likely to buy your property will see them. Leave several flyers, perhaps small stacks, in grocery stores, convenience stores, beauty parlors, sandwich shops and lobbies of office buildings. Don't forget schools and churches. Get creative. Wouldn't it be great if you could leave stacks of your flyers in the rental offices of apartment complexes? Surely these complexes are great targets for homebuyers. If this is impossible (and you can bet it will be in most cases) consider the common areas of the apartment complex. How about the laundry rooms, exercise rooms, pools, garage areas or mailboxes? Flyers should also be sent to all of the local real estate offices in your community. Real estate agents always know people looking for properties. You have now enlisted the aid of the real estate professionals to help market your property without signing any contracts. If a broker should bring you a buyer that you want to sell the property to, the broker will have to understand that it will be the buyer who pays his or her commission and not you. After all, that's why you are selling the property by yourself: to save the commission expenses. GuideBook - 162 Chapter 13 - Selling Your Properties At the same time, you should not be "penny wise and pound foolish." If a broker cannot get enough from the buyer, it may be wise to offer to cover some of the expense to make the deal go through quickly. In other words, if you negotiate to pay the broker $3,000 on a property that will bring you $23,000, it may be worth paying just to get your $20,000 right away. This is entirely up to you. Remember to calculate how much profit potential there is in the property and your desired return on your investment. Try using your newspaper ads and flyers to announce an open house. The open house concept works well for several reasons. First and most obvious, is that the prospective buyer gets to see the property. The second is that many people have a hard time when they meet face to face as buyer and seller. It is similar to the showdown you might experience when buying a new car. There you are eyeing a beauty on the showroom floor, while a salesperson is lurking around behind you. You know that the salesperson is there and he knows that you know that he is there. It makes for an uncomfortable atmosphere. When buyers come to an open house they are there amongst many other buyers, thereby reducing the pressure of being singled out. Open houses can create a fun, party like atmosphere. It's a gathering! Enhance this party-like atmosphere with a plate of cookies or a few dishes of candy, etc. Indicate in your flyers or ads the date, time and location of the open house. Sunday between 12pm - 4pm is usually an ideal day and time to hold your open house. Make sure your flyers have the exact street address when advertising an open house. Let the people know how to get to your property. It may be a good idea to draw a small map indicating how to get there. Be prepared early. Some buyers will want to get a jump on the others. If your open house is scheduled for 12:00pm - 4:00pm, be ready to show it by 11:00am or 11:30am. figures 13 - 1 and 13 - 2 are samples “open house” and “home for sale” flyers Signs Make sure you put a yard sign on the property. Ask your teammate the real estate agent about getting a sign or go to your local home improvement store and buy one. Make certain that your phone number appears on the sign. Use signs to help prospective buyers find your property. When conducting an open house, tack signs up on the corners or intersections that are immediately adjacent to the street your property is on. Use consistent sizes and colors when making these posters. Make them large enough and tack them high enough to be seen from a car driving down that street. Some real estate agents and developers use helium balloons to attract attention to the property. You can also attach them to the poster or signs to draw more attention to them. Final Checklist Prospective buyers will have many questions. Be prepared to answer those questions. How much will it cost per month to support a home of this price? How much will closing costs be? Utilize your teammates. Work with your broker, attorney and title company representative to derive these figures. Work with a bank representative to determine how much they would lend a qualified buyer and at what interest rate. Prepare another flyer or fact sheet that includes all of the pertinent information about your property. This GuideBook - 163 Chapter 13 - Selling Your Properties OPEN HOUSE SUNDAY - APRIL 18TH 12:00 PM - 4:00 PM 12345 Elm Street Boca Raton Charming 4 Bedroom / 2 Bath located in Boca West. Convenient to schools, shopping, church and just minutes from the mall and Downtown Boca Raton. Newly redcorated with all new flooring... new paint inside and out.... bathroom lighting fixtures and newly remodeled kitchen. Call Today for more Information! (561) 555-1234 figure 13 - 1 GuideBook - 164 Chapter 13 - Selling Your Properties HOME FOR SALE Charming 4 Bedroom / 2 Bath located in Boca West. Convenient to schools, shopping, church and just minutes from the mall and Downtown Boca Raton. Newly redcorated with all new flooring... new paint inside and out.... bathroom lighting fixtures and newly remodeled kitchen. 12345 Elm Street Boca Raton $89,900 (Appraised at $95,000) Call Today! (561) 555-1234 figure 13 - 2 GuideBook - 165 Chapter 13 - Selling Your Properties would be similar to the flyer you distributed announcing the sale of your property, except you will want to add more details regarding the price, terms, loan information, perhaps even a map of the local area showing the proximity to schools and/or other services. Distribute this fact sheet to all that come to your open house and to those who you show the property to individually. Prepare, for your records, a list of the names, addresses and phone numbers of all those who came to see the property. If you are conducting an open house, you may leave a guest book near the front door for people to sign. Use this list to follow up on prospects a few days after the open house. Ask if the prospect has any other questions you can answer. Presenting Your Property One of the most important things you can do to insure a successful showing is to present your property in the best fashion possible. Your repairs should be complete. All painting, stripping or wallpapering should be done. Make sure that your property has been thoroughly cleaned inside and out. This doesn't mean a quick dusting! Be certain to scrub the kitchen and bathrooms and make sure they have that nice clean smell. Vacuum, scrub, clean, polish or wax all floors as necessary. Polish all brass or chrome fixtures. Remove any garbage or debris from both inside and outside the property. Open all window shades and curtains during the day and turn on all the lights when showing the property at night. Rearrange the furniture (if you have furniture in the property) to provide a more open look. Remove any clutter. Make sure the exterior of the property is ready as well. Prune the trees, shrubs or bushes as necessary. Cut the grass and clean it up. Do not leave piles of debris on the grounds. Look at your property from the street. See if you can see what a prospective buyer might see. If it isn't a pretty sight... correct it! Go over your property with a fine toothcomb. Make sure your property is in the best condition it can be in. Qualifying Buyers If marketed properly, you will find many interested people calling you or showing up at your open house. However, not all of these people are really in a position to buy your property. Chances are that many will not be able to qualify for a loan. Your job then, is to pre-qualify these individuals. By pre-qualifying, you separate those who have the ability to buy... from those who do not. This is important, because you could spend a lot of time and energy with a prospect only to find that the sale will not go through. Why waste your time? To pre-qualify a buyer, you will have to ask him or her some fairly straightforward questions. Ask your more serious prospects: 1. If they now own or rent? 2. Are either or both currently employed? 3. How are his/her or both credit ratings? GuideBook - 166 Chapter 13 - Selling Your Properties 4. Do they have funds for the down payment? 5. Can he/she or they afford this property? 6. Are they using a broker? 7. Are they working with any lenders? Negotiating The Price Expect anything to happen when showing the property. You may have an interested party, who wants to discuss price right away. Indicate what your asking price is for the property. It might be best not to enter into verbal negotiations over the price of the property at this stage. Indicate to the prospect that all legitimate offers will be entertained and ask the prospect to make an offer. This should be a written offer. Ask your attorney for help in preparing standard offer forms that you can hand out to your prospects. You may be able to find forms like these in an office supply store or local stationery store. You already know how much you want for the property and you also know that most people will want to negotiate down the price of your property. Be prepared for this. Accepting An Offer When you receive the offer you want, you will want to get an earnest money deposit from the buyer. This deposit shows the buyer's intent to purchase your property at a specific price and under certain conditions. This is why the deposit should accompany an earnest money agreement. It is this agreement that will spell out the details of the proposed transaction. Again, seek the advice of your attorney in drafting an earnest money agreement. This agreement should include the following: 1. The price of the property. 2. The down payment. 3. The ending balance due from the buyer. 4. How the balance will be paid. 5. Date of closing. 6. Date of possession (if different from closing). 7. That financing arrangements will be applied for within 72 hours. 8. Other contingencies. GuideBook - 167 Chapter 13 - Selling Your Properties Closing Upon receipt of the earnest money deposit and agreement... you will begin the "closing" process. This can be confusing and sometimes a bit frustrating due to delays from various parties. This is where you will utilize your teammates the most. You will need your title company representative or attorney to begin an escrow account. Escrow, is where the paper work and monies are held by a third party (usually an escrow company) to assist and process in a professional manner, the transaction. The escrow agent will handle most of the details of this transaction. Remember however, this is your property and your deal. Never rely on anyone to do your work for you. Stay on top of the escrow agent... find out what's going on. Stay in touch with your attorney and have him or her stay in touch with the escrow agent. Find out if there are any problems that may delay the closing. Be flexible enough in your asking price and the terms of the sale and you will come out a winner! GuideBook - 168 Chapter 14 - The FHA, HUD, SBA...ETC. 14 CHAPTER The FHA, HUD, SBA...ETC. “A billion here, a billion there, and pretty soon you’re talking big money.” - Everett M. Dirkson GuideBook - 169 Chapter 14 - The FHA, HUD, SBA...ETC. The FHA, HUD, SBA... ETC.! S mentioned in the Introduct ion, this publication focuses on buying distressed properties from the property owner, the lender, or at the auction when the property is between the two parties. This involves the lending institution that granted the loan to the property owner, which can be a bank, insurance company, mortgage company, credit union or any institution that grants loans and accepts mortgages. These properties are commonly called bank foreclosures. No publication pertaining to the foreclosure investing industry would be complete without a discussion of those government agencies that also play a role in foreclosures. The properties owned, managed, and sometimes sold directly by these agencies are commonly called government foreclosures. The following describes who they are, what they do, how to contact them, how to buy properties from them, the advantages, and, in abbreviated form, the disadvantages of working with these agencies. A HUD The United States Department of Housing and Urban Development The Department of Housing and Urban Development is a federal agency. It was originally established to manage federal housing and community development programs. HUD properties are sold to the public when an FHA (SEE FHA) insured mortgage loan has gone into default and has been foreclosed. HUD pays the original lender the amount of the loan due and additional expenses. HUD then resells the property, usually through a private contractor. HUD homes can be of lower to moderate value-typically blue collar type of residences-and are usually in better overall shape than the average VA properties. You can find HUD properties by calling a local real estate agent, looking in the newspaper for HUD Property Sales, calling HUD directly at their Hud Homes Hotline number (800.767.4483), or going to www.hud.com on the internet. You can also check your local phone book for HUD registered real estate brokers. If you're interested specifically in multifamily property (mostly rental housing properties containing five or more units) you can get on a mailing list by writing to: HUD Multifamily Project Sales Dept. HMPDP P.O. Box 25367 Richmond, VA 23260 Phone (NOT toll-free): 804.786.9765 The red tape involved in buying HUD properties can be frustrating. Offers are accepted periodically by sealed bid only. You will need the help of a HUD representative or HUD registered real estate broker to conduct any transaction. Deposits required may be as low as $500 or as high as 10% of the bid amount. Terms and conditions vary from state to state. Drive by and inspect, if possible, any properties you may be interested in. HUD properties are first offered only to what are referred to as owner occupant purchasers, that is, those who wish to buy a home as their primary residence. Following this priority period-usually 10 days-the property GuideBook - 170 Chapter 14 - The FHA, HUD, SBA...ETC. becomes available to everyone, including investors. All HUD home purchases must be financed through a conventional mortgage lender. HUD does not finance the purchase of its properties. FHA Federal Housing Administration The Federal Housing Administration was created under HUD to assist home buyers in achieving their dreams. Low to moderate income families and first time home buyers are assisted by the FHA, through the offering of lower down payments and lower than average interest rates. Originally established in 1934 under the National Housing Act, the FHA was granted the authority to insure mortgage loans made by private lenders. The FHA issues an insurance policy, the premium for which is paid by the borrower. They work with approved FHA lenders only and do not grant loans. The FHA insures that a loan granted under its terms will be paid in full to the lender should a default occur. The lender who may not have granted the loan initially is secure knowing it is insured by the federal government. This allows lenders to grant loans they might otherwise not consider. If an FHA loan goes into default, the FHA steps in, pays the lender and conveys title of the property to HUD. This property is now like any other REO. FHA loans are made more liberally. There is less qualifying and the deals are much better. All FHA loans used to be assumable, making them even more attractive. Some of these benefits have changed. Today, you may have to qualify to assume an FHA mortgage. The advantages to FHA properties are the lower than average down payments and relative ease of assumability. Discounts are not fantastic. Because these properties are owned by the federal government they are widely advertised, unlike bank owned properties. The FHA is not under the same pressure the banks are under to dispose of its properties. There are no depositors or shareholders pressuring them the way there would be in a corporation. VA The U.S. Department of Veteran Affairs The Department of Veteran Affairs, originally called the Veteran Administration, was established just after World War II. The VA originated as part of the Servicemen's Readjustment Act. This act authorized the VA to guarantee a certain percentage of loans to eligible military veterans, from qualified lenders. If a veteran with a VA loan goes into default, the original lender will start the foreclosure process. The VA, who guaranteed the loan, steps in and buys the property from the lender. This is done during the foreclosure process, before the auction. To locate VA properties, check with your local real estate broker. VA properties are sold through approved real estate brokers. You can also search for VA properties on the internet by going to http://homeloans.va.gov/pmoffice.htm. There you will find a chart compiling contact information for local VA Property Management offices around the country. Bids are accepted from the public. Properties are sold as is, or, like some FHA properties, may have been repaired and brought back to good condition. The VA prefers not to make loans, but it will in certain cases. As with FHA properties, the VA prefers to make these loans to those who will occupy the property. Also like FHA properties, the VA tries not to give its properties away. Both of these agencies are sensitive GuideBook - 171 Chapter 14 - The FHA, HUD, SBA...ETC. to dumping discounted properties. Because of this, properties are offered very close to market value. Similar to the FHA, the VA probably has tens of thousands of properties available. Consult a good real estate broker for more information. SBA The Small Business Administration The Small Business Administration was founded in 1953. Its purpose is to advise, counsel and assist America's small businesses. The SBA will either grant loans directly to small businesses or guarantee the loans businesses borrow from the lenders. Traditionally, these loans are made at low interest rates. The SBA will loan or guarantee a business loan for a multitude of reasons and purchases. Often, these loans are for commercial real estate. Similar in action to the VA, when the lender forecloses on a mortgage loan guaranteed by the SBA, the SBA will buy the property from the lender. The SBA does not sell its properties directly. Auctioneers are usually employed to dispose of them. Bargain properties are found in raw land and commercial properties. There are very few residential properties available. SBA properties may be hard to find. You will have to consult the phone directory and contact your local SBA office or an auctioneer for more information. A better alternative for those with internet access is to go to http://app1.sba.gov/pfsales/dsp_search.html. This is a search page that enables you to find SBA property based on numerous criteria, such as location, price range, etc. FDIC The Federal Deposit Insurance Corporation & FSLIC The Federal Savings and Loan Insurance Corporation The FDIC was established in 1933 as a public corporation. Wait, we have also found that the FDIC and the FSLIC were established in 1934 as federal agencies. Which are they? Both the FDIC and the FSLIC were created as bank insurance corporations. The role of these corporations was to collect and set aside insurance premiums from member banks in order to insure the banks depositors 'from loss. If an FDIC or FSLIC member bank failed, the depositor's funds would have been paid back by the federal government. During the Great Depression, consumers who feared for the safety of their deposits made runs on the banks and eventually wiped them out. The banks, not having enough in cash reserves, were devastated. So were thousands of depositors who could not get their money out. The FSLIC did for the Savings & Loans what the FDIC did for the banks. The FSLIC became insolvent in the late 1980's, and its responsibilities were transferred to the FDIC. When a bank or similar institution fails, the FDIC takes over and tries to arrange a takeover by another institution, or arranges a merger with a stronger lending institution. If the FDIC closes a bank and takes it over, it must sell the assets of the bank. The FDIC has a Board of Directors just like a corporation. The three board members consist of the Comptroller of the Currency and two Presidential appointees. The best answer we have heard to the question, GuideBook - 172 Chapter 14 - The FHA, HUD, SBA...ETC. "What is the FDIC?" is, "It's an independent agency within the executive branch of the government. FDIC properties are sold directly through brokers and at auctions. Contact your local broker for more information or look up The Federal Deposit Insurance Corporation in your local phone book or at the library. You can also view the FDIC's real estate sales website at www.fdic.gov/buying/owned/index.html. If you can obtain lists of FDIC properties, use them to search for properties as you would with a REO list. Do drive-bys, take notes, arrange inspections, and so on. It has been said that FDIC properties can be had at 10% to 25% off the market price. There may be some financing available through the FDIC. Conditions vary and the requirements may seem unattractive. Like the FHA, VA and SBA, the FDIC tries to sell its properties at or near market value. GuideBook - 173