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| Fore Closure |
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A foreclosure is a legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. In simpler terms, a bank loans money to a borrower (the homebuyer) and secures the house as collateral. The mortgage becomes what is called a lien on the property. That house can’t be sold with a clear title until that lien is paid.
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| The Foreclosure Process |
Typically, the borrower must be 90 days behind in order for the lender to the start the foreclosure process. When this happens, the borrower now owes the lender 3 months of payments plus interest. The lender, under the terms of the original agreement, has the right to call the balance of the loan due immediately. This starts the foreclosure process. The lender files a paper called lis pendens. This serves as a notice that the borrower has defaulted on their loan and the lender is going to foreclose on the property.
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If the borrower does not pay the lender the money, the house will go to public auction and will be sold to the highest 3 bidder. If at that point it is not sold at auction, the bank will then take the property back and most often go through the process of listing the property with an agent as an REO or banked owned Real Estate. Thus there are 4 different ways you can make money in the foreclosure process:.
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| They are: |
- Preforeclosures
- Foreclosure Auctions or Sheriffs Auctions
- REO’s or Bank Owned Real Estate
- Short Sales
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| Many of the programs out in the market generally focus on one area of the foreclosure process, but we will talk about each of the 4 areas and their advantages and disadvantages. Depending on what resources you have to work with, you will find certain strategies work better based on your flexibility. One of the great things about changing market conditions and increasing interest rates is that it is creating incredible opportunities to make a lot of money in foreclosures over the next few years!. |
| You can create significant cash flow, quick cash, and long term growth through foreclosures making it an excellent strategy to take advantage of!. |
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| Preforeclosures |
The preforeclosure is the time period from which the bank gives notice of default (lis pendens) to the time the house sells at auction. Preforeclosure is usually the most profitable period of the foreclosure process. This is the best place to start and where we will emphasize the most information!.
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When a borrower falls behind in payments for a sustained period, the bank will record legal notice that the borrower is in default. This starts the entire foreclosure process. Leads on foreclosures are the names and addresses of defaulting homeowners. You are going to implement a powerful marketing campaign geared to those who are in preforeclosure in order to generate leads. These are a series of mailings sent to a defaulting homeowner over a period of time. When a lender gives notice of default, it is recorded. Start by contacting your Realtor or check our Foreclosure section.
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| Note: You want to make sure the foreclosure is on the first mortgage. Depending on the details included you may be able to determine if there is a 2nd mortgage by the timeline or if there was a refinance. You can also research the records at the register of deeds department or through a formal title search done by a title company. If there are 2 addresses on file get both and mail two pieces of your information to this defaulter, so you can double your chances of reaching them. |
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| Putting Together a Marketing Campaign |
One of the first things you need to do is create a well-organized database from the beginning so your mail campaign can operate efficiently. Remember, work smarter, not harder.
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Note: Keep a file of the old names and records as they will come in very useful if you choose to pursue the property later in the foreclosure process.
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Note: When you send your letters make sure you use your address as the return address, so that you receive any un-deliverables or forwarding addresses.
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| Create Win-Win Scenarios |
| As you are sending out letters and other material it is important to understand what the homeowner is going through. They are likely facing some serious financial dilemmas and there could be different factors also involved, including loss of employment, divorce, etc. You have to understand that these people need help, you need to do everything you can to make sure you create a win-win situation. You need to be sensitive and sincere. They need to know you are actually there to help and not just preying on their misfortune. This one principle alone will exponentially increase your success with your marketing, mailers, conversations and negotiations. A homeowner will do everything in their power to save their house. If they are behind on their mortgage payment, you are guaranteed that they are behind on all their other bills as well. Another thing to remember is they most likely they have not paid their smaller bills like utilities, credit cards, insurance, etc. Since the homeowner is in a serious financial bind, they are probably getting mail and letters from their creditors and possibly other investors so it is important that what you send stands out and presents your image properly.. |
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| Knocking Doors |
| Many investors are too intimidated to knock on doors. This can be an advantage for you if you are willing to do it, for you probably will have little competition. This is also another reason it is important to have sincere attitude to help them. Many times they will be very reserved and a defaulting homeowner may be more trust worthy of someone who is not just in it for the money. |
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| Making Phone Calls |
| This generally is not as effective as mailings because a lot of defaulting homeowners will not answer their phone; however, for someone who does not have the resources to start a direct mail campaign, it is an option for getting started. Once you have the homeowner’s name, you can do a reverse name to phone search online on a website like www.anywho.com or call 411. This is proven to be a good way to get phone numbers. Next call the homeowner and tell them you are interested in helping them out of their predicament. Much like knocking on doors, this is a numbers game. If you call enough homeowners, you are bound to reach some. If you knew that making each call on average netted you 500-1000$ based on how many calls you made to get to the next deal, would you do it? This is the way to perceive it because that is what it actually comes down to! |
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| When Sending Mailing and Postcards |
In some areas many homeowners who are on any of these lists will receive a lot of mail from creditors and people like you. Thus, you need to make your message stand out. You need to be sensitive to their situation, meaning don’t send out postcards that say “STOP FORECLOSURE” or other embarrassing phrases. You need to make sure they know you are there to help prevent them from losing the home to foreclosure.
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| Managing Responses and Meeting the Homeowner |
When you receive responses from your campaigns make sure you are prepared. It is good to have the calls come to a mobile phone so you can talk with them when they call. You will find many people are intimidated about leaving messages and even if you have caller ID and call them back you may get a negative response.
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When you get calls, be prepared with organized questions you will ask.
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| Here is a list of some of the questions you may want to ask: |
- Is your house presently listed for sale?
- If yes, how much is it listed for and how did you arrive at the price?
- When is the last time you had an appraisal?
- How much do you owe on your first mortgage, is there a 2nd mortgage?
- Are you behind on your taxes?
- Are their any other liens or judgments on the property?
- Is the house in good condition or does it need repairs?
- Are you the sole owner of the property?
- Are you living in the house, or is it rented or vacant?
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Be courteous, never pushy. Let them know that in order to determine whether or not you can help him, you will need to meet with him at the property. Make sure he understands that the meeting will be more productive and less time consuming if he will have the loan, mortgage and insurance documents available, as well as the foreclosure notices. Make sure whoever is involved in making the decision is present at the meeting such as both husband and wife, otherwise you will likely waste your valuable time.
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| When you meet with the homeowner it is crucial that you set the tone for the meeting. It is natural for homeowners to think their property is worth more than it actually is. Before you start to review all the legal documents you need to inspect the property. As you do this, address issues or repairs that need to be done and remain strictly objective.Successful negotiating and persuasion comes through preparation and experience. Confidence is of utmost importance. The more you prepare for your meeting with the homeowner, the better off you will be. Try to think of questions and objections that the homeowner might ask and be prepared in advance with answers. |
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| Putting Together the Deal |
As you go through all the repairs, costs, back taxes, etc. you will begin to determine what the house is worth to you as an investor. You also need to determine how much you want to make on the deal and how you can help the homeowner. It is essential that you have the cushion you need to make money depending the strategy you will apply. This is also why it is critical that you develop effective negotiation and persuasion skills. It is crucial to get the house at the right price!
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| Below is a good rule of thumb to follow: (For more on determining fair market value and repairs see Determining Fair Market Value in the main course). |
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| For Regular Transactions: |
| ARV(After Repair Value) X 70% - repairs= Your Maximum Allowable Offer. (Never pay more than this) |
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| For Assignments: |
ARV(After Repair Value) X 65% - repairs= Your Maximum Allowable Offer.
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| Be creative and remember you can give the homeowners their equity in forms other than just cash. If a homeowner is about to lose their house, whether it be via auction or selling to you before auction, they are going to need a new place to live. You will be surprised how few homeowners have taken the time to think about this and plan accordingly. This may be an avenue to pursue. If they have no job or place to live, and no car, they may be in a huge dilemma. You can change everything for them in one moment and give them a new feeling of hope. |
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| Foreclosure Auctions or Sheriffs Auctions |
If the property does make it through the foreclosure process, and it goes to auction, this will be a second opportunity to purchase the house. One very important thing to understand is that auctions are not for the beginning real estate investor. This is the most risky time to purchase foreclosed property though it can yield major profits. What happens at an auction is generally very similar in all states. Some states will auction the property in a courtroom and others will literally auction the property on the courthouse steps. Most likely there will be a representative from the bank that is foreclosing, and there will be some investors present, and others just interested in what is happening.
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One reason auctions are risky is you often need to come up with the balance of funds in a matter of days, sometimes 24 hours. You also will need a cashier’s check which will vary from county to county, but it is typically thousands of dollars in order to bid. If you are the high bidder and for any reason you are unable to obtain funds for the balance of the high bid amount, you might forfeit your deposit.
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| Another reason county auctions are risky is you generally can’t see the inside of the house prior to the auction. So in essence, you are buying the house sight unseen. You better be well prepared to buy a property as-is and be ready to spend the money for the worse case scenario to fix the property. This isn’t always the case but it is very important to understand! |
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| REO’s or Bank Owned Real Estate |
We are now ready to talk about the final step of the foreclosure process. The borrower has defaulted on his or her loan. The lender has sent notice to the borrower and the public that the borrower is in default.
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The home has gone to public auction. The original mortgagee (bank) has bought the house back at auction. The borrower has exhausted his redemption period and a sheriff’s deed was issued to the lender. This property is now bank owned or REO (Real Estate Owned).
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| There are always thousands of bank owned properties throughout the country at any given time. Banks are in the business of lending money and do not want these properties. These properties have probably already cost the bank a significant amount of money through fees, interests, and time that they can’t get back. |
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| Finding REO’s |
| Many times, you will find that there are certain agents that handle most of the REO properties. You can find them through networking with real estate agents and others on your Power Team. Introduce yourself to these agents and let them know that you are a qualified buyer with interest in REO properties. You can potentially form a very lucrative and beneficial relationship. Remember there is money for them to make as well, being the agent. You can also find them on the internet through the MLS. |
| One of the most effective tools you will have once you have been working through the entire foreclosure process for a while is using the information you have collected during preforeclosures that are now REO’s. By having this information, you want to know how much the bank is into the property for and how much “wiggle” room there really is. When it comes to purchasing anything that is negotiable, it is always extremely helpful to know what the seller has paid for the property. Now that you have a system in place you can use this technique over and over again to give you a huge edge over the competition. Few, if any, will be as well prepared as you are when new REO’s come on the market. You will be in an excellent position to move quickly on the opportunities, have the inside information for more negotiating power, ultimately getting you the best properties at the best prices. |
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| Short Sales |
A short sale is yet another opportunity to make money during the foreclosure process. This is a situation where a person about to go in foreclosure has no equity on the property because of a first and second mortgage on it. In a foreclosure, typically the second mortgage ends up getting wiped out, so that mortgage holder gets nothing. From your perspective, why would you want to buy a property with no equity? Well, if you cold get the second mortgage discounted, or "shorted", you will have plenty of room to work with.
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In a short sale, you contact the loss mitigation department of the bank or mortgage company that holds the mortgage and you explain to them that the house is not worth what the combination of the two mortgages is. In many cases, the house will need to be repaired or rehabbed, and is not in good condition. Why will the bank take less than the amount due on the note? Banks don't want excess inventory and bad loans on their books; therefore, if they see an opportunity where they can sell the property without a huge loss, they will do it.
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Lenders also know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished with the hassle.
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The best properties to perform a short sale on are the houses that need lots of work and repairs because lenders will give you a bigger discount. Properties that are over leveraged are also prime candidates. Most beginining investors who see a house over leveraged with an upside-down mortgage may think there is no hope the property. On the other hand, this is a great opportunity for the savvy investor. Properties with large 2nd mortgages are also treated as gold because the 2nd mortgage is wiped out at the foreclosure auction. Lenders who have a 2nd or 3rd mortgage position would rather have something than nothing.
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One of the critical steps in the short sale process is getting the deed. So why would we want to get the deed from the homeowner? All too often, homeowners change their minds, or want to back out of deals because they are scared, or they want to renegotiate. Without the deed, they can back out even after you have spent hours working on their property. When the homeowner signs you over the deed, you now control the property and you can go to work by calling the bank. There is a certain process you need to follow when you call the bank. You want to tell the lender you represent the homeowner and would like to request the short sale packet. When the packet arrives it will explain exactly what you need to do to accomplish the short sale properly.
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The lender will usually request a hardship letter in the package. A hardship letter is telling the lender why the homeowners are not making their mortgage payments. Sometimes they will request bank statement, pay stubs, income statements, and so on. Be prepared to send them everything they ask for because if you don't it will not be accepted. They will almost always ask for a HUD-1 and a real estate purchase and sales agreement. Send everything the lender asks for back ASAP. It usually takes 13 weeks or more to get an answer back from the lender, so you can't afford to wait.
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Next in the short sale process is the BPO. This stands for Brokers Price Opinion. A real estate agent will come out and give their opinion on what the house is worth. The key to short sales is the BPO. You want to try everything you can to influence the BPO to come in as low as you can. The lower the better. It takes a few times to get good at this, but once you do, I guarantee you will try to get short sales on every real estate foreclosure you encounter. Ways of influencing a low BPO include using the high repair estimate and being very thorough with those repairs.
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Working with the seller will be a little different. You will have to explain to them that they don’t have equity but you might be able to save them from foreclosure. You can ask them, “What if I were able to buy from the lender and negotiate a price low enough where I can still make this work for me and buy the property all cash. You wont see any of the cash because you don't have any equity, but it would save a foreclosure from being on your credit... Is that something we should talk about? Some people don't care about their credit, but perhaps you do” Sign it up at a purchase price that you want. For example. In this property you could sign it up for $140,000. You may be thinking you can’t buy it for $140,000 because they owe $200,000. This is where you negotiate with the bank for a short sale. Make the contract subject to your ability to get the 2nd and 1st mortgage holders to accept a short sale for the money they're owed.
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There are two ways to approach the bank:
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"Hi, I'm an investor in the area who buys notes that are in distress. I see that you have a $75K mortgage on the property at 1234 street that is in default. I don't know if it makes any sense for us to talk about me giving you a cash payment in the next 14 days, or the next 21 days to buy that note. In return, I am going to get as much money from that owner as possible."
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"I am an investor. I see that you have a house that's going into foreclosure. If it does go into foreclosure you probably won’t get anything, because after looking at comparables I cant see how it would sell for more than $130- $140K, plus it looks like it needs anywhere from $7-$15 thousand in repairs. If it goes into foreclosure - it's probably going to be bought by an investor. Now, I cant pay a lot for it because I need to make a profit, but what if I were to give you, I don't know $5000 for what you're owed, or maybe even a little more and I can get it to you as cash in the next 21 days. Is that something we should talk about? Or would you rather just go ahead and foreclose?"
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| In order to contact the Loss Mitigation Department who handles these foreclosures, you're going to need the following: |
- Authorization to Release Information form signed by the seller
- Purchase contract between you and the seller 3) Support documents that support a LOW value
- Comparables and documents that support the low value (Use the Property Summary sheet included in the forms)
- Ugly pictures of the house in poor condition
- Contractors estimates (choose the more expensive contractors)
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If they won't accept $5000, go into further negotiations. "Hmm, you tell me, what's the lowest price you would be willing to accept, knowing that if it's too much I won’t be able to buy, and you will have to foreclose." You may end up with a $10,000 2nd mortgage. At this point, you have:
$130,000 1st + $10,000 2nd = $140,000
The house will sell for $200,000 which gives you $60,000 in equity.
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| Now you have the flexibility to assign the property, fix and flip it or hold it for cash flow. Adding this to your tool belt of strategies will give you yet another edge on making money in real estate! |
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| Tips and Pitfalls to Avoid |
- Never lease option a home to a homeowner who you have helped out of foreclosure. Though in theory it seems nice, it is now actually illegal in some states. Research your local laws but regardless, this is not a strategy to use!
- Don’t assume that the balances owed on the property, according to the homeowner, are accurate. Always make your offer contingent upon a satisfactory title search. This way if there is less equity in the home than you expect you can walk from the deal.
- It is not recommended that you purchase a property at an auction if you are a novice investor. In the event you do, you must be certain that the foreclosure is on the first mortgage! In the event that it is the second mortgage that is foreclosing, you are buying the property subject to the first mortgage. This can be determined through the county clerk’s office or through a title search.
- When doing a short sale, it is critical to get the deed from the homeowner right from the beginning. Otherwise, they could back out at any time, even if you have spent countless hours working on their property. When the homeowner signs you over the deed, then you can go to work by calling the bank.
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 How to Buy Home  How to Sell Home |
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