Archive for November, 2007

Foreclosure Investing 101 – Pre-Foreclosure & Short Sale Investing – Part 2 of 8

One of the most popular ways you can buy a foreclosure property is in the Pre-foreclosure stage.  Buying properties in pre-foreclosure can be a very profitable segment of a real estate entrepreneur’s business!

The foreclosure process allows the lender to foreclose on any liens or encumbrances in order to take the property and become the legal owner of record, thus allowing the lender to resell the property and recover the original loan amount plus expenses associated with the foreclosure. The foreclosure process can be lengthy, but up until the public auction, the homeowner owns the property and has several options available.

It’s important to realize when talking about pre-foreclosures, we are talking about acquiring the property any time before the public auction sale.

Many people have the misconception that people buying homes in foreclosure are taking advantage of another person’s misfortune. This is simply not true. The lender made a loan in good faith and the borrower agreed to repay the loan. If the borrower does not make the required payments they have broken the agreement and the lender must protect their financial interests and may foreclose on the property as agreed to by all parties when the loan was originally made. Anytime there is a foreclosure, the borrower has broken the terms of the agreement and your involvement solves a problem the homeowner created.

When facing foreclosure, many homeowners bury their heads in the sand hoping it will just go away. No action by the owner ensures a foreclosure, losing the house, a severely damaged credit profile, and a loss of all equity in the home. When dealing with an owner in pre-foreclosure it is important to explain the benefits of avoiding foreclosure if possible:

1.   Protecting Their Credit Profile. Many times a person in foreclosure is overwhelmed with life-changing events happening and has multiple financial challenges. By working with an investor, it may be possible to stop the foreclosure and start rebuilding their credit profile or prevent their credit profile from getting worse. The foreclosure will come to pass, but in today’s credit-conscious society, a credit rating affects everything from buying a car to getting property insurance.

2.   Protect Equity. When a home is foreclosed all of the equity is lost. By working with an investor it may be possible to recover some of the equity and prevent the foreclosure.

3.   Rebuilding Their Life. The pressure and strain of a foreclosure affects all areas of a person’s life. Under such pressure it is not uncommon for people to become depressed, be unkind to loved ones, or make poor personal and business decisions. Stopping the foreclosure allows a person to remove an albatross from their neck and move on with life.

For the real estate investor there are many ways to financially profit and it can be a great feeling to help people move on with their lives. If not for investors, lenders would foreclose on most properties and the homeowners would lose all equity and have a foreclosure on their records. Investors provide the vital role of helping homeowners salvage some equity, can often help the homeowner’s credit, and help people start rebuilding their lives.

In order for an investor to be involved, there must be a profit, or there is no reason to be involved in the first place. When working with sellers, we let them know up front we expect to make a profit, and for us to make a profit we need to be able to stop the foreclosure.  By being direct, the seller understands our incentive and motivation and this helps establish trust and rapport. When dealing with pre-foreclosures there are three main ways to profit:

1.   Purchase Property From a Seller At A Discount. Many times, a seller is willing to sell the property well below market value because they recognize it is better to cut their losses and move on instead of hanging on and going down with the ship. If the seller has enough equity, we can structure a purchase where they receive cash at closing, the balance of their equity in payments, or a balloon payment due at a later date.

This can be a good option for sellers with enough equity. Unfortunately, in today’s society the majority of sellers owe close to the value of the property and when an we take into account acquisition costs, sales costs, holding costs, and repairs there is not enough equity in the property for an investor to make a profit.

2. Take Over The Loan And Make Up Back Payments. When a seller is in foreclosure it is possible to buy the house from the seller, take over the loan, and make up the back payments. The advantages for the seller are the foreclosure is stopped and the property is sold to an investor that will make the payments. A drawback for the seller is the loan remains in their name until paid off by the investor or a third party at a later date.

The process of buying a home and taking over a loan in another person’s name is commonly referred to as buying a property “subject to.” In such a transaction, the title of the property transfers to the new owner, but the loan remains in the seller’s name. Lending institutions frown on buying properties “subject to” and include a due on sale clause stating the lender can call the loan due upon a transfer of title. In practice, lenders rarely enforce a due on sale clause and are more interested in receiving timely payments then enforcing calling the loan due. Selling “subject to” is not without risks to the seller since the loan remains in their name and if payments are not made their credit can be affected at a later date. The benefits for the investor are acquiring a property with little money out-of-pocket, no loan costs or appraisal fees, and their credit is not affected or put at risk by the loan they are taking “subject to.” This is a powerful investing strategy unknown to most investors and one that should be used by ethical individuals. Like many powerful tools, it has the ability to be used for good or bad depending on the individual. When purchasing “subject to” there are documents that must be signed for the protection and understanding of all involved.

In today’s marketplace, where many borrowers with less than perfect credit bought there homes using sub-prime financing, there is less of an opportunity for the investor to buy properties “subject-to”.  Many homeowners have high loan-to-value ARM loans with high interest rates that make it unattractive for an investor to consider taking over the payments.

3. Discount The Loan(s) From The Lenders. Commonly referred to as a “Short Sale” this is nothing more than negotiating with the lenders to accept an amount less than they are currently owed. A fair question is why would lenders discount their loans? There are a couple of reasons. 1) Lenders do not want to own properties. If a borrower does not pay the loan, a lender’s recourse is to foreclose on the property and if the property is not bought at public auction they become the new owner of the property. Lenders are in the business of loaning money and when a loan is not being paid, it is considered a non-performing asset and affects their lending ratios. Also, as owner of the property, the bank is responsible for property taxes, insurance, association fees, Realtor commissions, and closing costs. 2) Cash now is better than cash later. Many times a bank would prefer the certainty of accepting a discount instead of the unknown holding costs, liability, and unknown sales price at a future date. The bank understands that a discounted offer today could net them more than a higher offer at a later date when considering the closing costs, Realtor fees, and lost opportunities of lending money based on their ratios.

While banks and lenders do have motivation to consider a short sale, successfully negotiating a short sale, often with multiple lenders on the same property, can be a complex and very time consuming endeavor. Experience is key to negotiating a successful short sale.

Distressed Property Owners Beware of Scam Artists

If you are a home owner and have recently had foreclosure proceedings or a Notice of Trustee Sale filed against you, you need to be aware that while there are several legitimate companies out there who can and will work for you and your interests, there are also scam and con artists who will prey on homeowners in trouble. 

Below are several simple rules to follow:

1. Never give anyone money up front.
2. Never sign a Quit Claim Deed or Warranty Deed.  These documents transfer title to your home to another party.  If your intention is to sell the home, an escrow, title company or attorney will prepare the closing documents according to instrtuctions from a fully executed purchase and sale agreement.
3. Always get the details of your transaction, along with any promises or guanantees in writing.
4. Beware of people offering you the opportunity to still live in the home and the possibility of purchasing the home back.  Sometimes the situation does present an opportunity for a seller to stay in the home and pay rent, but remember, if the deal sounds to good to be true, it probably is.

Weekly Foreclosure Auction Re-Cap

Last Friday’s (11-09-2007) auction featured several fantastic deals. I had selected 11 properties last Thursday for my weekly “hot sheet”. Here is a re-cap of what happened to those 11 properties. 

7 properties were postponed. Five were postponed to a date in December and two were postponed to dates later this month.

1 property reverted to the lender. 

3 properties were sold to a third party.  Below are pictures of those houses and how much they sold for.

If you are interested in purchasing properties at the foreclosure auction then visit Real Estate Investment Firm and click the link for investor register.

Foreclosure auction

Foreclosure Filings Skyrocket 100% in Third Quarter

The third quarter of 2007 saw a dramatic jump in the number of foreclosure filings when compared to the same quarter last year.  According to RealtyTrac, the number of properties entering foreclosure spiked almost 100% during the last quarter and increased 30% from last quarter.

All indications point to a continuation of this trend as well.  In March 2008, the highest level ever of sub prime ARM mortgages are scheduled to re-set which will increase mortgage payments for hundreds of thousands of homeowners.  Many can expect to see there payments increase as much as 25%.  If the homeowner cannot refinance to a more conventional loan product, many will not be able to make the new, higher payment and thus continue the cycle of foreclosure.

Foreclosure,mortgage default