Making big $$$ in pre-foreclosure properties is just simply one of the most profitable ways to consistently make money in real estate today. The popularity in recent years of investors taking over payments of mortgages on “pretty houses” has grown exponentially as well as other services and individuals keying into those opportunities. Now more than ever we have more pre-foreclosures services right at the fingertips of investors to take advantage of. If a company or individual has not already set up shop at your local tax assessor’s office selling pre-foreclosure information, then it’s probably not far away. The fact of the matter is that information in real estate, and especially pre-foreclosures, is the key that makes it so profitable for more real estate investors each day. Accessing that pre-foreclosure information correctly and then implementing your marketing plan to reach those pre-foreclosure leads in simplicity is one technique that many investors literally live off of daily…..and quite well I might add!
Before we go much further it’s almost an insult in one paragraph to describe why taking over properties “Subject-To” existing financing is so profitable. Just on the front end it is worth mentioning that structured correctly you as an investor can make yourself almost “bulletproof” from a liability prospective. With mortgages in recent years there are just some absolutely fabulous interest rates that are obscenely low from a “traditional” investor financing perspective. I mean who can’t make properties cash-flow with 6-8% interest rates? After locating the deals, then it’s mostly a matter of then evaluating how much cash (if any) it will take to:
* Pay off owner’s equity making it worth their while - note that sometimes no money is required and a matter of offering debt relief.
* Repairs needed if any to get property in A-1 shape for owner financing specials on tenant/buyer prospects.
Catch Up the Mortgage Payments to Be Current
The great aspect of taking over properties “Subject-To” existing financing is that the three items listed above does NOT mean you must have a large cash reserve to make these deals profitable for you. The standard rule in real estate of “using other people’s money” is so applicable here. That money may come from your future tenant/buyers, partners, or yes even your cash reserves for the time being. Even if you have to float the deal with your own cash reserves, if the deal is negotiated correctly then all your money can be recouped once the right tenant/buyer is realized for the property. There are simply a number of ways to get your pre-foreclosure leads by either developing your own personal leads or simply just buying the information that is readily available in your area. My emphasis here lies in this one question I want to ask you:
“Once you get a pre-foreclosure lead, how are you going to turn that into big money?”
If you had to hesitate even a moment or you just don’t have a clue what to do with that lead once you get it, then hopefully by the end of reading this you will be more equipped. This is not only to have a game-plan of where you are going with your real estate business, but to develop the vehicle of how to get your message effectively to your target marketing turning the "potential" into "profitable"!
Moving on, now let’s say you have an address and name on a property in foreclosure, so what now? What is your plan to talk to that seller or rather how are you going to get that phone ringing off the hook getting them to talk to you? Well, that is the question to answer and this is exactly what this article is entirely about. Call it what you want: Attack Plan, Method of Operation, Game-Plan, Standard Operating Procedure, Plan of Operation, etc. The end result is the same as you must know how to get that seller talking to you as soon as possible because time is of the essence in dealing in pre-foreclosures.
From this point on let’s just call it your "game-plan" but let’s define this one technique that will work for you: Direct Mail! I don’t know how to emphasize it more because direct mail in pre-foreclosure is an absolute lethal weapon to have. Sure there are many ways to get into direct contact with the seller and some are more effective than others and I’ve tried many:
Going Directly to Properties and Knocking on the Door to Talk to Sellers
Accessing the seller’s phone numbers by reverse CD directories of property address….at this point in pre-foreclosure a seller may have changed phone number or implemented other features to block calls because they are probably getting bombarded by creditors to pay up.
Leaving Flyers on Doors, Cars, or Mailbox
Playing detective a bit here finding out their work place or work phone number to contact them directly there.
Do you know what has been my experience contacting individuals in pre-foreclosure with the above listed approaches? You’re harassing them! You can lead a horse to water, but you simply can’t make it drink. What I mean is that until the individual in foreclosure is receptive to deal with their problem then you will have a hard time progressing on that property turning it into a profitable deal. Sure, I’ve been able to finally track down an individual to make a deal happen but it can all too often be just exhaustive and time-consuming.
Direct mail is my most preferable approach to getting those pre-foreclosure leads calling me! I assimilate my pre-foreclosure information personally and do buy from other sources also. When I get that information all I’m really concerned about is the name and address of owner. Sure you’ll get all sorts of information about the property being in foreclosure like outstanding mortgage balance, payments behind, lender on mortgage, etc. I just don’t need all that information because until that seller is contacting me, then they are not in the motivated category making it worth my while.
My approach is to use direct mail to get the individual in foreclosure talking to me. The foreclosure information if you’re buying it from a foreclosure source is obviously available to others. So yes there is some competition out there and to distinguish yourself from others and getting the individual to contact you will need some creativity. That creativity for me comes in the content and frequency of my marketing message.
All things are relative to the time of the pre-foreclosure information once you receive it but here is my game-plan that pays dividends for me month after month. My basic approach is mailing to the individual in pre-foreclosure with a total of two letters and two postcards. The seller will receive an alternating letter/postcard each week until all are mailed. The vast majority of leads I will hear absolutely nothing back from, but it just takes one deal to make it all worthwhile.
My message is alternating and “incremental” in style. I’ll list here the body/text of the letters and postcards to give you an idea. Make no doubt that you can tweak your message in many different ways but here are just some examples for you to think about:
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Letter #1 (Week #1)
Do you need to sell your house and F-A-S-T! I buy houses that others simply won't consider because of one reason: I Get Personally Involved. Others just don't take the time to listen how to meet your needs because everyone's situation is unique from the next person.
I am an investor and do expect to make a profit so if you need all cash and retail value for your house, then simply do not call me. However, if you have some flexibility and need a resolution quickly so you can quit putting your entire life on hold then give me a call. No obligation, fees, commissions. I just want to buy your house!
Postcard #2 (Week #2)
If you are looking for someone to possibly buy your house, then don't call me! However, if you want to already consider your house sold, then start packing your bags so you can get on with your life.
There is a variety of ways I can buy your house and it doesn't have to be a complicated process. In fact I can close in little as 48 hours or as long as……..you name when! Give me a call and I'll explain in plain English how the solution to your problems is a phone call away.
Letter #2 (Week #3)
Life can bring on many circumstances to deal with and unfortunately some of those are not pleasant to work through. Selling your house can be the exact type stress you need relief from and that is what I specialize in. I buy houses no matter what the situation so people can simply make a difficult decision easy, and just move on in life.
If no obligations, fees, or commissions has an appeal to you then give me a call. I would be happy to meet with you face-to-face and discuss the opportunities available to you so I can buy your house. I hope to hear from you soon.
Postcard #2 (Week #4)
Well, I can certainly understand if you do not want to sell that property for now. There may come a time down the line that you may decide to do something with it. I would only ask that you keep this card and that way you can give me a call when you're ready
Thanks for taking the time to listen to my offer to purchase just in case you know where to reach me if you decide to sell. Don't hesitate to give me a call if you have any questions and I do hope to hear back from you soon.
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You can see by the above listed examples that my message is incremental and differing in nature. It’s just rare for the pre-foreclosure seller to call you on that first letter or postcard. You just have to put yourself in the “shoes” of the seller and know that if they are in pre-foreclosure then they are probably getting a LOT of mail from creditors. The possibility of the pre-foreclosure seller throwing some or all of your direct mail away is a given! Just know that now and expect it. However, all it takes is one phone call and one deal to see your next big payday dealing in pre-foreclosures.
A Couple of Points in Wrapping Up Here:
On all your letters, stamp on the outside in red ink, “I Want To Buy This House!”. You can buy stamps like this at Office Depot or Staples costing you about $25. You write in the script you want and mail it to them with the custom stamp coming back to you in a couple of weeks. Before that potential foreclosure seller throws away your letter, they will at least read that red stamped message on the outside. I can’t tell you how many people have commented to me on that one technique was the reason they took the time to open my letter and thus call me.
Best success in direct mailing to pre-foreclosures is that you simply must mail to them more than once. I don’t have the time or patience to mark on my calendar or day planner when to write the next letter or postcard and that is where my custom direct mail software comes in. It knows the date I enter a contact and automatically calculates when the next scheduled mailing of letters and postcards due. I just have to remember to print my letter/postcards at least once a week and just keep pumping the leads into my database.
Thursday, April 30, 2009
Making a Short Sale Counteroffer
Although some of your initial offers will be accepted, you must also be prepared if the lender rejects your offer. Just because your first offer is denied does not mean that the deal is dead. This is now the perfect opportunity to learn precisely what you have to do in order to close the short sale.
The first thing you will want to do before making another offer is find out from the lender exactly why the first offer was rejected. Here are several key factors that may result in your offer being rejected.
* They will not net the required amount needed to justify accepting your short sale offer. Simply speaking, your offer was too low!
* The lender is adamant that they can do better waiting for a better offer or foreclosing on the property.
* They do not agree with the terms of your contract or net sheet.
* The loan is government insured and therefore they are protected against a foreclosure.
* The investors of the loan are asking for more money to close out the loan.
* You tick the loss mitigations rep off so bad that the last thing they want to do is help you.
* The hardship was not proven enough to persuade the lender to accept a short sale.
* The lender would like to explore alternative payment options with the homeowner instead of doing a short sale.
* Your offer was much lower than what the BPO assessed the house for. This is another example of your offer being too low.
These are just some of the reasons you may get from the lender for your short sale being rejected but the main thing to remember is that you must at least probe and find the exact reason why. I can confidently say that the main reason your short sale offer will be rejected will be because the offer is too low. Remember, the lender’s number one priority when doing a short sale is how much money they will net. The best way to find out how much the lender needs to net is to just ask! Once you identify the right loss mitigations rep you can simply ask:
"How much do you need to net if we agreed to a reasonable short sale offer?” Will the lender tell you how much? That is to be determined after you ask the question. The point is that you will never find out unless you throw it out there. Even if you don’t find out initially, the next best time to ask is prior to the counteroffer. You want to start and maintain a constructive dialogue with the loss mitigations rep where you are constantly probing for information that will determine what your best offer will be.
When I do short sales, I mainly develop my initial offer based on how much equity or profit I want to make with each deal. However, from time to time when I’m preparing a counteroffer I use a formula to help me come up with the most accurate guess on what I think the lender is willing to accept. If used correctly, this formula alone will more than pay for the price of this course 1000 fold.
Here it is…
Step 1: I take the estimated or actual BPO amount or the value of the house, based on the comps then multiply that number by 85%.
Example:
$175,000 (Estimated BPO value) X 85% = $148.750
Step 2: I then take the number I got and multiply it by 92%
Example:
$148,750 X 92% = $136,850
If this were an actual deal, I would use this final number or something close to give me my counteroffer amount. Although I have reason to believe that the lenders use a similar formula when they determine the amount they are willing to accept on a short sale, I cannot say that this is exactly it.
I do know that this formula does two things.
It gives me a calculated number to use for my initial offer or counteroffer.
It allows me to breakdown to the lender how I came up with my offer.
Be resilient yet realistic when making your counteroffers. Understand that it may not stop with the first counteroffer. You may have to counteroffer a 3rd or 4th time just to get the amount down to where the lender feels comfortable to accept. At times it may only be hundreds of dollars that you are negotiating. If you are game for a strategic a methodical approach to negotiating your offers you can always use my 3 step approach to getting your offer accepted.
Step 1: The first offer will be used to get the number that you and the lender are negotiating down to tens of thousands.
Step 2: The first counteroffer will be used to either close the deal or get the number that you and the lender are negotiating within thousands.
Step 3: The second counteroffer will be used to either close the deal or get the number that you and the lender are negotiating within hundreds. Usually at this point, the lender is the most flexible and the loss is obviously not as great.
Another thing to consider when determining your counteroffer is if in fact it even makes sense to offer one. Sometimes the lender is non-negotiable and will only accept what they will accept. Period! If this is the case does it make sense to continue trying to persuade someone who is not willing to work with you? You have to make that decision on a case by case basis. The most important thing to remember when making your counteroffer is that the deal has to make sense for you. I’ve seen investors get their short sale accepted but fail to agree to an amount that is highly profitable.
Like I mentioned, I cannot determine the value of your time and effort. That is something that you must decide, but I can say that short sales are big money deals and if you are making offers that do not put a lot of money in your pocket you are probably leaving it on the table for someone else to enjoy.
The first thing you will want to do before making another offer is find out from the lender exactly why the first offer was rejected. Here are several key factors that may result in your offer being rejected.
* They will not net the required amount needed to justify accepting your short sale offer. Simply speaking, your offer was too low!
* The lender is adamant that they can do better waiting for a better offer or foreclosing on the property.
* They do not agree with the terms of your contract or net sheet.
* The loan is government insured and therefore they are protected against a foreclosure.
* The investors of the loan are asking for more money to close out the loan.
* You tick the loss mitigations rep off so bad that the last thing they want to do is help you.
* The hardship was not proven enough to persuade the lender to accept a short sale.
* The lender would like to explore alternative payment options with the homeowner instead of doing a short sale.
* Your offer was much lower than what the BPO assessed the house for. This is another example of your offer being too low.
These are just some of the reasons you may get from the lender for your short sale being rejected but the main thing to remember is that you must at least probe and find the exact reason why. I can confidently say that the main reason your short sale offer will be rejected will be because the offer is too low. Remember, the lender’s number one priority when doing a short sale is how much money they will net. The best way to find out how much the lender needs to net is to just ask! Once you identify the right loss mitigations rep you can simply ask:
"How much do you need to net if we agreed to a reasonable short sale offer?” Will the lender tell you how much? That is to be determined after you ask the question. The point is that you will never find out unless you throw it out there. Even if you don’t find out initially, the next best time to ask is prior to the counteroffer. You want to start and maintain a constructive dialogue with the loss mitigations rep where you are constantly probing for information that will determine what your best offer will be.
When I do short sales, I mainly develop my initial offer based on how much equity or profit I want to make with each deal. However, from time to time when I’m preparing a counteroffer I use a formula to help me come up with the most accurate guess on what I think the lender is willing to accept. If used correctly, this formula alone will more than pay for the price of this course 1000 fold.
Here it is…
Step 1: I take the estimated or actual BPO amount or the value of the house, based on the comps then multiply that number by 85%.
Example:
$175,000 (Estimated BPO value) X 85% = $148.750
Step 2: I then take the number I got and multiply it by 92%
Example:
$148,750 X 92% = $136,850
If this were an actual deal, I would use this final number or something close to give me my counteroffer amount. Although I have reason to believe that the lenders use a similar formula when they determine the amount they are willing to accept on a short sale, I cannot say that this is exactly it.
I do know that this formula does two things.
It gives me a calculated number to use for my initial offer or counteroffer.
It allows me to breakdown to the lender how I came up with my offer.
Be resilient yet realistic when making your counteroffers. Understand that it may not stop with the first counteroffer. You may have to counteroffer a 3rd or 4th time just to get the amount down to where the lender feels comfortable to accept. At times it may only be hundreds of dollars that you are negotiating. If you are game for a strategic a methodical approach to negotiating your offers you can always use my 3 step approach to getting your offer accepted.
Step 1: The first offer will be used to get the number that you and the lender are negotiating down to tens of thousands.
Step 2: The first counteroffer will be used to either close the deal or get the number that you and the lender are negotiating within thousands.
Step 3: The second counteroffer will be used to either close the deal or get the number that you and the lender are negotiating within hundreds. Usually at this point, the lender is the most flexible and the loss is obviously not as great.
Another thing to consider when determining your counteroffer is if in fact it even makes sense to offer one. Sometimes the lender is non-negotiable and will only accept what they will accept. Period! If this is the case does it make sense to continue trying to persuade someone who is not willing to work with you? You have to make that decision on a case by case basis. The most important thing to remember when making your counteroffer is that the deal has to make sense for you. I’ve seen investors get their short sale accepted but fail to agree to an amount that is highly profitable.
Like I mentioned, I cannot determine the value of your time and effort. That is something that you must decide, but I can say that short sales are big money deals and if you are making offers that do not put a lot of money in your pocket you are probably leaving it on the table for someone else to enjoy.
Loss Mitigation: Friend or Foe
It is virtually impossible to complete a successful short sale without dealing with the loss mitigation department at the bank. So, how does one deal with loss mitigation successfully? Hopefully I can shed some light on that today.
For those of you who are new to investing, you might be wondering what a short sale is. Good question. A short sale is getting the bank to accept less that what is owed as payment in full. For example: You find a homeowner in distress who owes $100,000 on a property that is worth $100,000. What do you do? Most investors walk away unless they know how to short sale. Using my “short sale secrets”, you get the bank to accept $55,000 as payment in full. You now have equity in a deal that had none, the homeowners are ecstatic as they can move on with their lives, and the bank has a defaulted loan off its books. Short sales are win/win for everyone.
Once you have your homeowner under control and your short sale package together, you are ready to deal with loss mitigation. When making the initial phone call to the bank, ask for the loss mitigation department. Some customer service reps may say that the bank does not have a loss mitigation department. Keep trying. Ask if the bank has a work-out department, foreclosure department, short sale department, loan modification department, or reinstatement department. The reason I ask for different departments is many times a new person is working the customer service phone and may have no clue what you actually want. By using a term they are familiar with, you will eventually get to the right person.
You have loss mitigation on the phone; it’s time to get to work. This person will make or break your deal so be very nice. Your initial conversation should go something like this: “Hi, my name is your name here and I am calling on behalf of Bob and Sally Smith (your distressed homeowners). I have an “authorization to release information” form I’d like to fax to you. What is your fax number? (Stay on the phone while the rep retrieves the form from the fax machine) Great, I’ll send it right over. – the rep gets the authorization and returns - As you know Bob an Sally are in foreclosure. I recently met them and they seem like sweet folks.
When I found out about Bob and Sally’s dilemma, I said I’d try to help. They would like to sell their property and move on with their lives. I own several rentals in the area and am willing to purchase Bob and Sally’s property. However, we have a big problem. I called a real estate agent friend of mine and ask her to run comps for me. Based on her comps and based on what I know about the area, Bob and Sally owe much more than their property is worth. As I said, I’m willing to help them out of foreclosure as well as helping you get a defaulted loan off your books, but I can’t possibly pay the mortgage balance. Will you entertain some sort of short payoff or something along those lines? Great! What do you need from me?”
As you can see in my conversation, I do not come across as a professional investor out to make a killing on the banks loss. Many investors chose to present themselves that way. I have much more success as a friend trying to help poor Bob and Sally. Use whichever approach makes you feel most comfortable. However, don’t lie to get the deal. I did recently just meet Bob and Sally, I do have rentals, I do have a real estate agent friend, and I am willing to purchase Bob and Sally’s property. In your conversations with loss mitigation, be certain to refer to your distressed homeowners by name as often as possible. This makes them seem more real to the rep. I am trying to get a banker to make an emotional decision as well as a business one.
Once you build rapport with the loss mitigation rep, send your short sale package. I call my reps at least once a day to follow-up. Always ask the rep how the day is going, how the weather is where they are, how the kids are, and so on. You want the rep to look forward to your calls, not dread them. Find out who makes the actual decision, how long it typically takes, how long the rep can give you to close once your deal is accepted, etc. With a helpful attitude from you, your loss mitigation rep will push your deal through quickly.
Once your deal is accepted, get it in writing immediately. Find your buyer or arrange financing and get the deal closed. You don’t want anything to happen between the acceptance and the closing to make you lose your deal. Once the deal is closed, send the rep flowers or a gift basket and write a letter to the reps boss. The rep will remember you and the next time you call about a short sale, the rep will be more than willing to help you again. Loss mitigation: Friend or foe? I say friend!
For those of you who are new to investing, you might be wondering what a short sale is. Good question. A short sale is getting the bank to accept less that what is owed as payment in full. For example: You find a homeowner in distress who owes $100,000 on a property that is worth $100,000. What do you do? Most investors walk away unless they know how to short sale. Using my “short sale secrets”, you get the bank to accept $55,000 as payment in full. You now have equity in a deal that had none, the homeowners are ecstatic as they can move on with their lives, and the bank has a defaulted loan off its books. Short sales are win/win for everyone.
Once you have your homeowner under control and your short sale package together, you are ready to deal with loss mitigation. When making the initial phone call to the bank, ask for the loss mitigation department. Some customer service reps may say that the bank does not have a loss mitigation department. Keep trying. Ask if the bank has a work-out department, foreclosure department, short sale department, loan modification department, or reinstatement department. The reason I ask for different departments is many times a new person is working the customer service phone and may have no clue what you actually want. By using a term they are familiar with, you will eventually get to the right person.
You have loss mitigation on the phone; it’s time to get to work. This person will make or break your deal so be very nice. Your initial conversation should go something like this: “Hi, my name is your name here and I am calling on behalf of Bob and Sally Smith (your distressed homeowners). I have an “authorization to release information” form I’d like to fax to you. What is your fax number? (Stay on the phone while the rep retrieves the form from the fax machine) Great, I’ll send it right over. – the rep gets the authorization and returns - As you know Bob an Sally are in foreclosure. I recently met them and they seem like sweet folks.
When I found out about Bob and Sally’s dilemma, I said I’d try to help. They would like to sell their property and move on with their lives. I own several rentals in the area and am willing to purchase Bob and Sally’s property. However, we have a big problem. I called a real estate agent friend of mine and ask her to run comps for me. Based on her comps and based on what I know about the area, Bob and Sally owe much more than their property is worth. As I said, I’m willing to help them out of foreclosure as well as helping you get a defaulted loan off your books, but I can’t possibly pay the mortgage balance. Will you entertain some sort of short payoff or something along those lines? Great! What do you need from me?”
As you can see in my conversation, I do not come across as a professional investor out to make a killing on the banks loss. Many investors chose to present themselves that way. I have much more success as a friend trying to help poor Bob and Sally. Use whichever approach makes you feel most comfortable. However, don’t lie to get the deal. I did recently just meet Bob and Sally, I do have rentals, I do have a real estate agent friend, and I am willing to purchase Bob and Sally’s property. In your conversations with loss mitigation, be certain to refer to your distressed homeowners by name as often as possible. This makes them seem more real to the rep. I am trying to get a banker to make an emotional decision as well as a business one.
Once you build rapport with the loss mitigation rep, send your short sale package. I call my reps at least once a day to follow-up. Always ask the rep how the day is going, how the weather is where they are, how the kids are, and so on. You want the rep to look forward to your calls, not dread them. Find out who makes the actual decision, how long it typically takes, how long the rep can give you to close once your deal is accepted, etc. With a helpful attitude from you, your loss mitigation rep will push your deal through quickly.
Once your deal is accepted, get it in writing immediately. Find your buyer or arrange financing and get the deal closed. You don’t want anything to happen between the acceptance and the closing to make you lose your deal. Once the deal is closed, send the rep flowers or a gift basket and write a letter to the reps boss. The rep will remember you and the next time you call about a short sale, the rep will be more than willing to help you again. Loss mitigation: Friend or foe? I say friend!
Let's Get Started - Your First Phone Call From The Homeowner
Now that you have a general understanding of a short sale and you are fully operational it’s time to secure your first deal. Assuming you have either done some form of advertising, made direct contact through a foreclosure listing, or by word of mouth, you are now ready to get started. If your phone does not ring immediately don’t panic. Sometimes homeowners will hold on to your number until they feel like there is nothing that they can do on their own. When it finally does ring you will respond along these lines: “Good Morning, Real Estate, how can I help you?” or “Good Afternoon, John speaking!” Avoid greetings such as, “Good Morning, Thank you for calling ABC Real Estate Company!”
Some people that call are a bit skeptical and by mentioning your company name they become more concerned with whom you are rather than how you can help them. The proper response to anyone that asks for more information or references would be, “I’m a private investor that specializes in obtaining properties pre-foreclosure. If your property qualifies then I may be able to take your property off your hands and help you avoid any further damage to your credit.” You want to eliminate the perception that you are a huge company with lots of offices and employees.
Besides, someone that has a potential foreclosure hanging over their head most likely will feel more comfortable speaking with an individual rather than a corporation. You are someone with a possible solution to their problem, get straight to the point and do not waste anytime attempting to justify your service offering. If it is not right for that individual then move on to the next. Don’t get me wrong; don’t be rude or obnoxious because you will have some people that won’t go any further until they feel comfortable with who’s on the other line.
What I’m saying is if you feel that someone is being difficult although they are the one with the problem, then you have to decide whether or not it is worth your time. I have had people call me that gave me a hard time at first but after I met with them face to face and explained how I can help, they immediately warmed up.
Once the ice is broken then it’s time to take down some personal information. Try not to sound like you are reading from a script but rather hold a conversation and get your questions answered in that manner. (Go to the back of the book and review the property profile sheet). Use this form every time you get a prospect on the phone. Make sure that you fill the form out completely, this will give you all of the information you need to start your initial qualification. If the homeowner is facing a possible foreclosure they will often let you know that they are behind on their payments or have received calls or letters from their lenders. You let the person know that you may be able to work with their lender to delay or even prevent the foreclosure. Ask to set up appointment to see the property ASAP.
I usually ask to come and take a look at the property the same day. If you don’t, they may speak with another investor. If you can’t meet with them the same day ask them to please not speak with anyone else until you can sit down face to face with them. Often, homeowners will agree to your request and be very open minded when you meet with them.
Some people that call are a bit skeptical and by mentioning your company name they become more concerned with whom you are rather than how you can help them. The proper response to anyone that asks for more information or references would be, “I’m a private investor that specializes in obtaining properties pre-foreclosure. If your property qualifies then I may be able to take your property off your hands and help you avoid any further damage to your credit.” You want to eliminate the perception that you are a huge company with lots of offices and employees.
Besides, someone that has a potential foreclosure hanging over their head most likely will feel more comfortable speaking with an individual rather than a corporation. You are someone with a possible solution to their problem, get straight to the point and do not waste anytime attempting to justify your service offering. If it is not right for that individual then move on to the next. Don’t get me wrong; don’t be rude or obnoxious because you will have some people that won’t go any further until they feel comfortable with who’s on the other line.
What I’m saying is if you feel that someone is being difficult although they are the one with the problem, then you have to decide whether or not it is worth your time. I have had people call me that gave me a hard time at first but after I met with them face to face and explained how I can help, they immediately warmed up.
Once the ice is broken then it’s time to take down some personal information. Try not to sound like you are reading from a script but rather hold a conversation and get your questions answered in that manner. (Go to the back of the book and review the property profile sheet). Use this form every time you get a prospect on the phone. Make sure that you fill the form out completely, this will give you all of the information you need to start your initial qualification. If the homeowner is facing a possible foreclosure they will often let you know that they are behind on their payments or have received calls or letters from their lenders. You let the person know that you may be able to work with their lender to delay or even prevent the foreclosure. Ask to set up appointment to see the property ASAP.
I usually ask to come and take a look at the property the same day. If you don’t, they may speak with another investor. If you can’t meet with them the same day ask them to please not speak with anyone else until you can sit down face to face with them. Often, homeowners will agree to your request and be very open minded when you meet with them.
How to Negotiate a Successful Short Sale
Anyone who has ever profited from doing a short sale has also without a doubt had one or two rejected at some point. Guess what? It is just the nature of the beast…As with all types of sales you’re playing a numbers game.
There are very few investors who truly know how to successfully negotiate a Short Sale. We find that most investors have the perception that all that is necessary is to submit an offer and wait for the bank to give you an answer. If all goes well the offer will be accepted but in many cases it’s not that simple. That’s why a strategic plan is necessary. A strategic plan means making the deal go your way by persuading the lender to agree with your offer.
There are several steps that will ensure your success when negotiating with lenders:
First of all, you must be able to determine if you indeed have a short sale opportunity on your hands. Many investors are under the misconception that every homeowner facing foreclosure is a good short sale candidate. This could not be any further from the truth. One of the most common mistakes made by investors is attempting to fit a square peg into a round hole. Not all deals are good short sale opportunities. You must know the difference between a good and a bad deal. Period! You’ll have to analyze the deal and develop an excellent plan of attack if you want to truly master the art of the Short Sale.
Second, you must not take no for an answer. No can never be the final chapter to your negotiation. If the lender says no you must ask yourself why. There must be a reason. Why did they say no? Is there anyone else I can speak with? Was my offer to low? How does the lender determine their bottom dollar? What else can I do? What was the BPO amount? These are just a few of the questions that need to be addressed each time you are met with some resistance from the lender.
We’d like to share an awesome deal that one of our students closed recently. His name is Thomas Stockman.
Thomas got a call off of one of his signs from a gentleman that had two properties in foreclosure. The two properties were on the same street and were bought as rental homes within the last year. Consequently, they were also financed by the same mortgage company. One property had a mortgage balance of approximately $150,000 and was in need of several thousand dollars worth of repairs. The other had a mortgage balance of $156,000 and was currently being rented for $1,100 per month. Both properties had very little equity but the neighborhood had been very active over the last 9 months. After qualifying the two potential deals he decided to attempt short sales.
He contacted the bank and began the process. His offer on the first house was $89,900 and $95,800 on the second house. The bank rejected both and asked for higher offers. After several conversations and some additional documentation to justify his offer, Thomas was able to get both properties for a total of $60,000 below market value. Thomas rehabbed the first property for $3,500 and put it on the market for sale. Since the second property was already occupied by a tenant he decided to keep it. His mortgage is roughly $400 per month (interest only loan/taxes paid at year end) he makes $700 in monthly positive cash flow. Not bad for a beginner (wink).
This would have never happened if Thomas accepted NO from the bank. If he would have not known what pressure points to touch and how to counter without increasing the offer amount we would not be talking about these deals.
This type of outcome is customary when you are equipped with the necessary tools and know how to turn a “No” into a “Yes” just by slightly adjusting your approach. Thomas got two great properties with lots of equity and a constant cash flow, the homeowner avoided two foreclosures, and the bank was satisfied.
Remember, the next time you are putting together a short sale offer, be prepared and take control of the deal. Never take NO for an answer. Be proactive not reactive. Don’t just submit offers without having a game plan. Do yourself a favor and take advantage of the opportunity to make lots of money in an industry where great deals are hard to come by. We hope that you have learned something and are on your way to much success.
There are very few investors who truly know how to successfully negotiate a Short Sale. We find that most investors have the perception that all that is necessary is to submit an offer and wait for the bank to give you an answer. If all goes well the offer will be accepted but in many cases it’s not that simple. That’s why a strategic plan is necessary. A strategic plan means making the deal go your way by persuading the lender to agree with your offer.
There are several steps that will ensure your success when negotiating with lenders:
First of all, you must be able to determine if you indeed have a short sale opportunity on your hands. Many investors are under the misconception that every homeowner facing foreclosure is a good short sale candidate. This could not be any further from the truth. One of the most common mistakes made by investors is attempting to fit a square peg into a round hole. Not all deals are good short sale opportunities. You must know the difference between a good and a bad deal. Period! You’ll have to analyze the deal and develop an excellent plan of attack if you want to truly master the art of the Short Sale.
Second, you must not take no for an answer. No can never be the final chapter to your negotiation. If the lender says no you must ask yourself why. There must be a reason. Why did they say no? Is there anyone else I can speak with? Was my offer to low? How does the lender determine their bottom dollar? What else can I do? What was the BPO amount? These are just a few of the questions that need to be addressed each time you are met with some resistance from the lender.
We’d like to share an awesome deal that one of our students closed recently. His name is Thomas Stockman.
Thomas got a call off of one of his signs from a gentleman that had two properties in foreclosure. The two properties were on the same street and were bought as rental homes within the last year. Consequently, they were also financed by the same mortgage company. One property had a mortgage balance of approximately $150,000 and was in need of several thousand dollars worth of repairs. The other had a mortgage balance of $156,000 and was currently being rented for $1,100 per month. Both properties had very little equity but the neighborhood had been very active over the last 9 months. After qualifying the two potential deals he decided to attempt short sales.
He contacted the bank and began the process. His offer on the first house was $89,900 and $95,800 on the second house. The bank rejected both and asked for higher offers. After several conversations and some additional documentation to justify his offer, Thomas was able to get both properties for a total of $60,000 below market value. Thomas rehabbed the first property for $3,500 and put it on the market for sale. Since the second property was already occupied by a tenant he decided to keep it. His mortgage is roughly $400 per month (interest only loan/taxes paid at year end) he makes $700 in monthly positive cash flow. Not bad for a beginner (wink).
This would have never happened if Thomas accepted NO from the bank. If he would have not known what pressure points to touch and how to counter without increasing the offer amount we would not be talking about these deals.
This type of outcome is customary when you are equipped with the necessary tools and know how to turn a “No” into a “Yes” just by slightly adjusting your approach. Thomas got two great properties with lots of equity and a constant cash flow, the homeowner avoided two foreclosures, and the bank was satisfied.
Remember, the next time you are putting together a short sale offer, be prepared and take control of the deal. Never take NO for an answer. Be proactive not reactive. Don’t just submit offers without having a game plan. Do yourself a favor and take advantage of the opportunity to make lots of money in an industry where great deals are hard to come by. We hope that you have learned something and are on your way to much success.
How to Influence the BPO
Ok, so you've received the short sale requirements from the lender and you've made friends with the loss mitigation's rep that's assigned to your potential deal. Next, you are now ready for the lender to order a BPO on the property. Notice that I emphasize "you", this is because I don't want you to miss out on a key opportunity to influence the overall outcome of your short sale.
Although many investors are aware of the benefits of influencing the BPO, few know exactly how it's done. The BPO is the single most influential component that the lender considers when deciding how much they are willing to accept as a reasonable short sale offer. If your offer is not in the ballpark of the BPO it will most likely be rejected. Many investors give up at this point and assume that the lender is not willing to accept a short sale. It's not that the lender is not willing to accept a short sale, it's that the short sale offer does not come close to the amount of the BPO. It's just that simple. There is a big difference between a lender not accepting a short sale and a lender not accepting the offer.
What Exactly Is a BPO?
BPO stands for Broker's Price Opinion. All this means is that a real estate agent or broker will assess the property and give their professional opinion of it's value to the lender. The closer that number is to your offer the better. You want the BPO to be as low as possible. Listed below is a snap shot of a BPO requirement.
1.) Run comps and take pictures of the surrounding neighborhood, subdivision, or area.
2.) Inspect the overall condition of the home and estimate the cost of repair. Take pictures.
3.) Formulate their "opinion" of the property's value based on the information that was gathered.
4.) Submit a detailed report of their research to the lender.
Here Are 5 Necessary Steps to Influence the Broker's Price Opinion (BPO)
Step 1:
Before your package is submitted ask your loss mitigation's rep to order the BPO. Let them know that there is not a lockbox on the door and you have the only key. Give them the best number to reach you and have the agent doing the BPO call to set up an appointment. You must be present for the BPO.
Note: There are two types of BPO's:
1.) Full BPO - The agent does a full inspection of the home.
2.) Drive-By BPO - The agent only takes pictures of the outside and other homes in area.
Always request a full BPO. If a drive-by BPO is done, you will not have any one-on-one time with the agent, therefore eliminating any possibility of influencing the outcome.
Step 2:
Compile comps, estimated costs of repair, and any other relevant information that will justify a discount. If possible, visit the property prior to the BPO or at the least a half hour before the agent arrives. Make two lists for repair costs. One with all of the obvious repairs such as wall damage, carpet, paint, etc. The first list will be mostly cosmetic repairs. Make a second list of all repairs that the agent will not see with their naked eye (i.e.: roof and water damage, faulty plumbing or electrical fixtures, pests, mold, etc. This list will contain more serious problems. Be sure to have an itemized breakdown of the costs involved. Bring this information with you to the BPO appointment. Be prepared to explain in detail how you came up with your estimates.
Step 3:
Make sure if the house is occupied that the homeowner is not present during the BPO. You do not want the agent asking the homeowner any questions about the property or offering any unwanted information. All communication must be between you and the agent. Follow this rule each time and you will maintain leverage during your negotiation.
Step 4:
On the day of the appointment shadow the agent as he/she does their assessment. Bring a camera and take pictures of every room in the house. The agent will only take a limited amount of pictures and may miss something important. As you are walking throughout the house, point out the most important repairs only. Take notes and make them aware of other homes in the area that are comparable to your offer. Share with the agent the information about the house that you've compiled. Doing these things will help establish you as a well-prepared professional and help you earn respect with the agent.
Step 5:
Before the BPO is complete, ask the agent if they have a ballpark estimate in their head. They will most likely tell you that the numbers will be determined once they complete their report. At this time, ask when they will be finished and if you can give them a call at a specific time to get their final numbers. Note: The agent works for the lender and more than likely they will inform you that their report is proprietary to the lender. You have to feel that person out and see if they may be willing to share that information with you. It doesn't hurt to ask more than once if necessary.
Let the agent know that you are very familiar with the neighborhood and tell them what you think the property is worth. The agent doing the BPO knows only what they have researched and what they discover once they actually see the property. You will be surprised as to how much your opinion matters. I like to call it YPO (Your Price Opinion). If the agent views you as someone who is educated about the property and the activity in the neighborhood, your opinion will be valued and taken into consideration when they make their report to the lender. Hopefully, I've helped shed some light on this most important area of short sale negotiations and that you are able to apply what you've read to your next deal.
Although many investors are aware of the benefits of influencing the BPO, few know exactly how it's done. The BPO is the single most influential component that the lender considers when deciding how much they are willing to accept as a reasonable short sale offer. If your offer is not in the ballpark of the BPO it will most likely be rejected. Many investors give up at this point and assume that the lender is not willing to accept a short sale. It's not that the lender is not willing to accept a short sale, it's that the short sale offer does not come close to the amount of the BPO. It's just that simple. There is a big difference between a lender not accepting a short sale and a lender not accepting the offer.
What Exactly Is a BPO?
BPO stands for Broker's Price Opinion. All this means is that a real estate agent or broker will assess the property and give their professional opinion of it's value to the lender. The closer that number is to your offer the better. You want the BPO to be as low as possible. Listed below is a snap shot of a BPO requirement.
1.) Run comps and take pictures of the surrounding neighborhood, subdivision, or area.
2.) Inspect the overall condition of the home and estimate the cost of repair. Take pictures.
3.) Formulate their "opinion" of the property's value based on the information that was gathered.
4.) Submit a detailed report of their research to the lender.
Here Are 5 Necessary Steps to Influence the Broker's Price Opinion (BPO)
Step 1:
Before your package is submitted ask your loss mitigation's rep to order the BPO. Let them know that there is not a lockbox on the door and you have the only key. Give them the best number to reach you and have the agent doing the BPO call to set up an appointment. You must be present for the BPO.
Note: There are two types of BPO's:
1.) Full BPO - The agent does a full inspection of the home.
2.) Drive-By BPO - The agent only takes pictures of the outside and other homes in area.
Always request a full BPO. If a drive-by BPO is done, you will not have any one-on-one time with the agent, therefore eliminating any possibility of influencing the outcome.
Step 2:
Compile comps, estimated costs of repair, and any other relevant information that will justify a discount. If possible, visit the property prior to the BPO or at the least a half hour before the agent arrives. Make two lists for repair costs. One with all of the obvious repairs such as wall damage, carpet, paint, etc. The first list will be mostly cosmetic repairs. Make a second list of all repairs that the agent will not see with their naked eye (i.e.: roof and water damage, faulty plumbing or electrical fixtures, pests, mold, etc. This list will contain more serious problems. Be sure to have an itemized breakdown of the costs involved. Bring this information with you to the BPO appointment. Be prepared to explain in detail how you came up with your estimates.
Step 3:
Make sure if the house is occupied that the homeowner is not present during the BPO. You do not want the agent asking the homeowner any questions about the property or offering any unwanted information. All communication must be between you and the agent. Follow this rule each time and you will maintain leverage during your negotiation.
Step 4:
On the day of the appointment shadow the agent as he/she does their assessment. Bring a camera and take pictures of every room in the house. The agent will only take a limited amount of pictures and may miss something important. As you are walking throughout the house, point out the most important repairs only. Take notes and make them aware of other homes in the area that are comparable to your offer. Share with the agent the information about the house that you've compiled. Doing these things will help establish you as a well-prepared professional and help you earn respect with the agent.
Step 5:
Before the BPO is complete, ask the agent if they have a ballpark estimate in their head. They will most likely tell you that the numbers will be determined once they complete their report. At this time, ask when they will be finished and if you can give them a call at a specific time to get their final numbers. Note: The agent works for the lender and more than likely they will inform you that their report is proprietary to the lender. You have to feel that person out and see if they may be willing to share that information with you. It doesn't hurt to ask more than once if necessary.
Let the agent know that you are very familiar with the neighborhood and tell them what you think the property is worth. The agent doing the BPO knows only what they have researched and what they discover once they actually see the property. You will be surprised as to how much your opinion matters. I like to call it YPO (Your Price Opinion). If the agent views you as someone who is educated about the property and the activity in the neighborhood, your opinion will be valued and taken into consideration when they make their report to the lender. Hopefully, I've helped shed some light on this most important area of short sale negotiations and that you are able to apply what you've read to your next deal.
Frequently Asked Short Sale Questions
When investors find out I specialize in short sales, they always have so many questions. Here are the answers to some of the most common. Hopefully, these answers will give you a better understanding of a short sale and how to do one.
Why Do The Banks Short Sale?
* The mortgage is in arrears or foreclosure.
* The property is in poor condition.
* The homeowner has hardships and cannot afford the payments.
* New homes in the area are being chosen over existing homes.
* The area or neighborhood has depreciated in value.
* The bank’s shareholders are concerned when there are too many defaulting
loans on the books.
* Some banks are required to prove a loss each month… let’s help them out.
* Some banks are required to have an amount equal to or up to six times the
retail value of each REO “on hand” – ouch, that hurts.
* An REO is a liability, not asset. Too many liabilities will cause any
business to go under if not dealt with quickly.
Can I Short Sale A Nice Property?
Absolutely! As you can see, banks short sale for many reasons other than the poor condition of the property.
What Steps Do I Take To Complete A Successful Short Sale?
A. Find a property owner in distress.
B. Put a deal together with the homeowner.
C. Have the homeowner sign an authorization to release form.
D. Fill out a sales contract for the amount you want to offer the bank and have the homeowner sign it.
E. Call the Loss Mitigation department at the bank.
F. Fax them your offer along with the following:
1. Your cover letter explaining why you can’t offer full price.
2. The sales contract.
3. Justifying comps of the area.
4. Pictures, if you have them.
5. A net sheet or closing statement (a sheet that shows the bank exactly
how much they will net after closing costs, taxes, etc. are paid).
6. A hardship letter from the homeowner that mentions the dreaded word….
bankruptcy.
7. Estimated list and cost of repairs, using retail repair prices that the
normal homeowner would pay for these items.
What Happens To The Homeowner's Credit?
When you negotiate a successful short sale, keep in mind that the agreed upon price is payment in full. However, the homeowners may still owe the difference between the mortgage balance and the discounted amount via a “deficiency judgment.” If granted, this judgment will affect the homeowners and their credit report just as any other judgment. You must get the bank to agree to accept “payment in full without pursuit of any deficiency judgment.”
In addition, you need to explain to the homeowners that the discounted amount (the difference between the mortgage balance and the short sale) may be declared as income on their income tax return by means of a “1099.” The homeowners can speak with their accountant for advice. Since the homeowners have been in such duress and probably haven’t made much income, a 1099 may not adversely affect them.
I hope this sheds some light on short sales. As you know, nine out of ten deals have no equity. To be successful in this business, trends call for you to be a short sale expert.
Why Do The Banks Short Sale?
* The mortgage is in arrears or foreclosure.
* The property is in poor condition.
* The homeowner has hardships and cannot afford the payments.
* New homes in the area are being chosen over existing homes.
* The area or neighborhood has depreciated in value.
* The bank’s shareholders are concerned when there are too many defaulting
loans on the books.
* Some banks are required to prove a loss each month… let’s help them out.
* Some banks are required to have an amount equal to or up to six times the
retail value of each REO “on hand” – ouch, that hurts.
* An REO is a liability, not asset. Too many liabilities will cause any
business to go under if not dealt with quickly.
Can I Short Sale A Nice Property?
Absolutely! As you can see, banks short sale for many reasons other than the poor condition of the property.
What Steps Do I Take To Complete A Successful Short Sale?
A. Find a property owner in distress.
B. Put a deal together with the homeowner.
C. Have the homeowner sign an authorization to release form.
D. Fill out a sales contract for the amount you want to offer the bank and have the homeowner sign it.
E. Call the Loss Mitigation department at the bank.
F. Fax them your offer along with the following:
1. Your cover letter explaining why you can’t offer full price.
2. The sales contract.
3. Justifying comps of the area.
4. Pictures, if you have them.
5. A net sheet or closing statement (a sheet that shows the bank exactly
how much they will net after closing costs, taxes, etc. are paid).
6. A hardship letter from the homeowner that mentions the dreaded word….
bankruptcy.
7. Estimated list and cost of repairs, using retail repair prices that the
normal homeowner would pay for these items.
What Happens To The Homeowner's Credit?
When you negotiate a successful short sale, keep in mind that the agreed upon price is payment in full. However, the homeowners may still owe the difference between the mortgage balance and the discounted amount via a “deficiency judgment.” If granted, this judgment will affect the homeowners and their credit report just as any other judgment. You must get the bank to agree to accept “payment in full without pursuit of any deficiency judgment.”
In addition, you need to explain to the homeowners that the discounted amount (the difference between the mortgage balance and the short sale) may be declared as income on their income tax return by means of a “1099.” The homeowners can speak with their accountant for advice. Since the homeowners have been in such duress and probably haven’t made much income, a 1099 may not adversely affect them.
I hope this sheds some light on short sales. As you know, nine out of ten deals have no equity. To be successful in this business, trends call for you to be a short sale expert.
Wednesday, April 29, 2009
Foreclosures Happen When Home Owners Fail to Read the Fine Print
With the press full of more bad news about defaulting homeowners and a rise in foreclosures, the question most people ask me is: “Jeff, how do people get into that state in the first place?”
Being a real estate expert who has seen foreclosures close up I can tell you that a foreclosure is never the result of a single incident. It’s never, for instance, a case of a little bad luck, the loss of a job, a car accident or some ill health. These are deplorable situations to occur, to be sure, but on their own they are never enough to take a homeowner who has purchased his dream property, down.
What usually happens is that homeowners who end up facing the dreaded prospect of a foreclosure have consistently boxed themselves in, closing their prospects and notching up debt through the consistent use of credit to finance debts. This is a case of “robbing Peter to pay Paul” and the scenario, all too familiar goes a little like this:
The homeowner boxed into a financial corner, rather than thinking of how he can reduce outgoings and perhaps downsize his lifestyle until his financial condition improves, he chooses to take out a second and maybe even a third mortgage and release equity stored up in the house.
Now there’s nothing wrong in doing anything like this. Equity stored up in a property could be released which means that it can, if used properly, save a house owner in trouble. The problem is that house owners forced to release the equity in their homes very rarely manage to use this facility properly. Feeling a certain sense of desperation, they leave it too late to shop around for credit, fail to look at the fine print and feel incapable of negotiating with the lender. As a result they get locked down into second mortgages which hit them with hefty interest rates after a brief honeymoon period which usually lasts between six months and a year.
The increased payments the homeowner then has to make put him back into the same situation he was in before he took out the loan. He then gets into a greater panic and is forced to take out another loan from an ever shrinking number of choices which leaves him in the worst possible financial bargaining state. Next is a story that’s pretty much foreclosed and inevitable.
The tragedy is that a little careful planning here could possibly have averted the worst as the fine print would have revealed it early enough for the homeowner to either avoid getting the loan or making an adjustment in order to meet the higher cost. So, the lesson is when it comes to credit, the fine print is all important.
Being a real estate expert who has seen foreclosures close up I can tell you that a foreclosure is never the result of a single incident. It’s never, for instance, a case of a little bad luck, the loss of a job, a car accident or some ill health. These are deplorable situations to occur, to be sure, but on their own they are never enough to take a homeowner who has purchased his dream property, down.
What usually happens is that homeowners who end up facing the dreaded prospect of a foreclosure have consistently boxed themselves in, closing their prospects and notching up debt through the consistent use of credit to finance debts. This is a case of “robbing Peter to pay Paul” and the scenario, all too familiar goes a little like this:
The homeowner boxed into a financial corner, rather than thinking of how he can reduce outgoings and perhaps downsize his lifestyle until his financial condition improves, he chooses to take out a second and maybe even a third mortgage and release equity stored up in the house.
Now there’s nothing wrong in doing anything like this. Equity stored up in a property could be released which means that it can, if used properly, save a house owner in trouble. The problem is that house owners forced to release the equity in their homes very rarely manage to use this facility properly. Feeling a certain sense of desperation, they leave it too late to shop around for credit, fail to look at the fine print and feel incapable of negotiating with the lender. As a result they get locked down into second mortgages which hit them with hefty interest rates after a brief honeymoon period which usually lasts between six months and a year.
The increased payments the homeowner then has to make put him back into the same situation he was in before he took out the loan. He then gets into a greater panic and is forced to take out another loan from an ever shrinking number of choices which leaves him in the worst possible financial bargaining state. Next is a story that’s pretty much foreclosed and inevitable.
The tragedy is that a little careful planning here could possibly have averted the worst as the fine print would have revealed it early enough for the homeowner to either avoid getting the loan or making an adjustment in order to meet the higher cost. So, the lesson is when it comes to credit, the fine print is all important.
Foreclosures Can Be A Good Thing Too
They say there’s never a cloud without a silver lining and it certainly would seem so where foreclosures are concerned. The fact that so many foreclosures are now hitting the market is a clear indication that a market correction mechanism is in operation in the world of property speculation and real estate and it is part of the market’s self-correcting ability to stabilise every time it overheats.
Let’s look at this process a little more closely so we understand it: Left unchecked here’s what can happen to the real estate market. Properties begin to increase in price and value. The growing value of those who have already bought a property allows them to sell on so they can then invest in a bigger, more expensive one.
Those who are already in expensive properties take out second and third mortgages, releasing the equity in their property and enjoying some of the finer things in life. So far, so good. But, left unchecked the increase in house prices begins to force a lock out and a lock down. Those looking to get their foot on the first rung of the property ladder are beginning to get locked out as house prices on starter homes also experience an increase.
With no new buyers coming into the market those who are in the middle ground and need to sell on so they can move up begin to experience a lock down as sales begin to drop and buyers become sparse in a market that has suddenly got not just too expensive for them but also one lacking in movement.
This, in turn affects the entire real estate economy which relies on new home buyers for its buoyancy. You begin now to see why foreclosures can be considered a good thing. By ‘hitting’ those who have bad credit foreclosures break the impasse of the lock down and the barrier of the lock out and release, in the real estate market, a fresh spate of properties which are affordable and can enable buyers to come in at a level they could not before.
This also mobilises the market as new buyers, generally, spend more than those upgrading or staying put, and it stimulates the economy which stimulates growth and jobs and begins to finance credit and homes and the whole cycle starts again.
Am I oversimplifying a little? Definitely yes and I am not for a moment making light of the personal tragedy for the aspiring home owner which is a foreclosure, but you can see how from a market mechanics point of view foreclosures are a necessary self-correcting mechanism which allows the real estate market to be truly self-sustaining.
Let’s look at this process a little more closely so we understand it: Left unchecked here’s what can happen to the real estate market. Properties begin to increase in price and value. The growing value of those who have already bought a property allows them to sell on so they can then invest in a bigger, more expensive one.
Those who are already in expensive properties take out second and third mortgages, releasing the equity in their property and enjoying some of the finer things in life. So far, so good. But, left unchecked the increase in house prices begins to force a lock out and a lock down. Those looking to get their foot on the first rung of the property ladder are beginning to get locked out as house prices on starter homes also experience an increase.
With no new buyers coming into the market those who are in the middle ground and need to sell on so they can move up begin to experience a lock down as sales begin to drop and buyers become sparse in a market that has suddenly got not just too expensive for them but also one lacking in movement.
This, in turn affects the entire real estate economy which relies on new home buyers for its buoyancy. You begin now to see why foreclosures can be considered a good thing. By ‘hitting’ those who have bad credit foreclosures break the impasse of the lock down and the barrier of the lock out and release, in the real estate market, a fresh spate of properties which are affordable and can enable buyers to come in at a level they could not before.
This also mobilises the market as new buyers, generally, spend more than those upgrading or staying put, and it stimulates the economy which stimulates growth and jobs and begins to finance credit and homes and the whole cycle starts again.
Am I oversimplifying a little? Definitely yes and I am not for a moment making light of the personal tragedy for the aspiring home owner which is a foreclosure, but you can see how from a market mechanics point of view foreclosures are a necessary self-correcting mechanism which allows the real estate market to be truly self-sustaining.
Explaining Foreclosure Options to the Homeowner
Understanding the different options a seller may be considering is important when negotiating with sellers. Below are the most common options that sellers may address with you if the sellers are either in default or anticipating being in default.
1. Reinstatement of Loan (Cure): This option is paying the lender everything that is owed in one lump sum to include missed payments, any late fees associated with these payments, foreclosure fees, legal fees and the principal owed during the delinquency. A cure may involve the seller curing or deeding it to the investor "subject to" the exisiting loans, who will cure. There is a risk to the homeowner that the lender may accelerate the loan because of the due-on-sale, and the homeowner no longer owns the property and has no recourse of the investor doesn't pay the loans.
2. Repayment Plan: This is a written agreement between the lender and the seller. These plans require higher payments than the regular monthly mortgage amount for a period of time until the loan is brought up-to-date.
3. Loan Modification: A loan modification involves changing one or more terms of a mortgage. Modifications can be considered to reduce the interest rate of the mortgage, change the mortgage product (from an adjustable rate to a fixed rate, for example), extend the term of the mortgage or capitalize delinquent payments (add delinquent payments to the mortgage balance-only available in extreme hardship situations). Modifications are NOT easily granted and there must be strong, justifiable reasons for the request.
4. Forbearance Agreement: The lender will allow you a period of time (3-6 months typically) of either low payments or no payments at all. Unless the loan term is extended (which happens rarely), the later payments generally will have to be higher than the original monthly mortgage payments until the loan is up-to-date.
5. Special Forbearance (FHA Loans only): Allows eligible borrowers to postpone monthly mortgage payments for a minimum of four months. While there is no limit on the maximum number of months, at no time may the agreement allow the delinquency to exceed the equivalent of 12 monthly PITI installments.
6. Deed-in-Lieu: A Deed in Lieu is an option in which a borrower voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL may not be accepted from borrowers who can financially make their payments. If a borrower qualifies for a DIL program they may be eligible for cash back from the lender as in the “Cash for Keys” program.
7. Cash Sale: The borrower sells the property, pays off his loan, and, depending on the equity, may net some cash out of the deal. The challenge, of course, is being able to sell it quickly enough, which most often requires a substantial drop in the price.
8. Short Sale: The borrower makes an agreement with the investor to sell it for less than is actually owed, subject to approval of the lien holders. This generally results in no cash to the homeowner, but will be better for the better for his credit than a completed foreclosure.
9. Refinance: The borrower may be able to refinance and get a new loan, but generally this is difficult because the borrower has little equity and poor credit. The new loan likely will have higher payments than the old loan.
10. Do Nothing: The worst choice for the seller, whose credit will be ruined, but he can stay in the house for several months for nothing, save up some cash, and move when the lender or the high bidder from the auction eventually evicts the homeowner.
Explain each of these choices, and be honest with the homeowner. In many cases, he will trust you for your candid explanations. You may lose a deal or two by offering the homeowner choices that are actually BETTER than your offer, but that's ok - always take the high road and you will have a long and properous business in real estate investing.
1. Reinstatement of Loan (Cure): This option is paying the lender everything that is owed in one lump sum to include missed payments, any late fees associated with these payments, foreclosure fees, legal fees and the principal owed during the delinquency. A cure may involve the seller curing or deeding it to the investor "subject to" the exisiting loans, who will cure. There is a risk to the homeowner that the lender may accelerate the loan because of the due-on-sale, and the homeowner no longer owns the property and has no recourse of the investor doesn't pay the loans.
2. Repayment Plan: This is a written agreement between the lender and the seller. These plans require higher payments than the regular monthly mortgage amount for a period of time until the loan is brought up-to-date.
3. Loan Modification: A loan modification involves changing one or more terms of a mortgage. Modifications can be considered to reduce the interest rate of the mortgage, change the mortgage product (from an adjustable rate to a fixed rate, for example), extend the term of the mortgage or capitalize delinquent payments (add delinquent payments to the mortgage balance-only available in extreme hardship situations). Modifications are NOT easily granted and there must be strong, justifiable reasons for the request.
4. Forbearance Agreement: The lender will allow you a period of time (3-6 months typically) of either low payments or no payments at all. Unless the loan term is extended (which happens rarely), the later payments generally will have to be higher than the original monthly mortgage payments until the loan is up-to-date.
5. Special Forbearance (FHA Loans only): Allows eligible borrowers to postpone monthly mortgage payments for a minimum of four months. While there is no limit on the maximum number of months, at no time may the agreement allow the delinquency to exceed the equivalent of 12 monthly PITI installments.
6. Deed-in-Lieu: A Deed in Lieu is an option in which a borrower voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL may not be accepted from borrowers who can financially make their payments. If a borrower qualifies for a DIL program they may be eligible for cash back from the lender as in the “Cash for Keys” program.
7. Cash Sale: The borrower sells the property, pays off his loan, and, depending on the equity, may net some cash out of the deal. The challenge, of course, is being able to sell it quickly enough, which most often requires a substantial drop in the price.
8. Short Sale: The borrower makes an agreement with the investor to sell it for less than is actually owed, subject to approval of the lien holders. This generally results in no cash to the homeowner, but will be better for the better for his credit than a completed foreclosure.
9. Refinance: The borrower may be able to refinance and get a new loan, but generally this is difficult because the borrower has little equity and poor credit. The new loan likely will have higher payments than the old loan.
10. Do Nothing: The worst choice for the seller, whose credit will be ruined, but he can stay in the house for several months for nothing, save up some cash, and move when the lender or the high bidder from the auction eventually evicts the homeowner.
Explain each of these choices, and be honest with the homeowner. In many cases, he will trust you for your candid explanations. You may lose a deal or two by offering the homeowner choices that are actually BETTER than your offer, but that's ok - always take the high road and you will have a long and properous business in real estate investing.
Cries of Fraud: An Ounce of Prevention is Worth 60 Megatons of Cure
The good old days of doing business on a handshake have gone so far away that the Hubble telescope couldn’t find them. Even at my tender age, I have witnessed enough legal action resulting from deals gone awry, sellers-turned-psycho, and downright skullduggery to make even the most hardened investor’s blood curdle. And the heat of the battle takes place, unfortunately, in one of the best arenas to make an honest living in: real estate—pre-foreclosure investing.
Who is to blame? Sometimes the seller, sometimes the investor. If I had to make a guess as to who causes the most problems, it would be sellers. Over the years, I have only heard of a handful of unscrupulous investors who tricked homeowners who thought they were getting a loan into signing a deed, forged documents, took over a loan and pocketed the rent payments, or something equally evil. Of course, these are the only incidents you hear about on the news. My guess is because “Fair and Honest Investor Buys House, Makes Profit” isn’t a very sexy headline.
The real concern, and the focus of this article, is sellers in default who either:
A) Lie about their property, its condition, their hardship story, etc, in a deliberate attempt to defraud an investor, or
B) Experience seller’s remorse after their problem is solved, and use false accusations that they actually believe in an attempt to undo what they agreed to.
Which do you think is the more common scenario? I don’t believe it’s A. Although the old expression “buyers are liars and sellers are worse” has some truth to it, I think that most sellers in default are honestly seeking a way to solve their problem through ethical means. And any untruths they do tell can be uncovered with the proper due diligence prior to purchase.
Therefore, I think that B is the more common scenario in which fraud is committed. And by “committed,” I mean “frantically slung as a weapon by the seller in a misguided attempt to undo a transaction that is perfectly legal by making you the scapegoat for their own selfishness, irrationality, and/or situational ethics.” This doesn’t make headlines, but it does make a frequent topic of conversation at local REIA meetings, where I have heard similar stories told ad nauseum.
Scenario B is far too common, but even more so when a pre-foreclosure investor does things that make them more likely to be accused of fraud. I have listed three unsafe scenarios below. I will preface them with a golden nugget of wisdom that I have gleaned from years of networking, news-watching, and personal experience, and then voice my opinion on the subject with more passion than Basic Instinct, Don Juan Demarco, and The Notebook combined.
“No matter how many times you explain how the deal will take place, how slowly you go over it, how many times they tell you they understand, or sign and initial a document that spells everything out in excruciating detail in 4th-grade English using size 16 font, sellers in pre-foreclosure will immediately create and believe their own memories of what they agreed to the very second that their payments are caught up.”
If you are not familiar with the concept of implanted memories, just remember the movie Total Recall and you’ll know exactly what I’m talking about (but with a little less violence). The unavoidable fact above must always be remembered, dealt with head-on, and used to guide your decisions when working with sellers who are behind in payments. And now for those three unsafe pre-foreclosure scenarios:
1) Asking them to sign blank documents – I think the wild, wild, western days of showing up at the seller’s house with a mobile notary and getting them to sign a deed and blank documents for any and every conceivable type of transaction (short sale,cash offer,subject-to, note, deed of trust, etc.) on their kitchen table are over. This shoot-first-ask-questions-later style of getting a deal done has "Six o’clock evening news scandal" written all over it.
While it may certainly be more convenient for the investor to get everything signed in advance and then figure out what kind of deal is possible later, and though the investor may truly have the seller’s best interests at heart, think of how it will appear to a judge when the seller says later in court, “He had me sign all these blank documents, and told me he’d take care of everything, and I didn’t know what I was doing…”
I don’t think we can afford to be so cavalier in our dealings — at least until pre-foreclosure investors cease to be perceived as vultures, guilty until proven innocent, which I calculate will happen approximately three times the length of time from now that hell will take to freeze over.
2) Letting the seller stay in the house – I cannot think of any kind of transaction so generous, so humane, so… hazardous. For starters, leasing the house back to the seller is a risky gamble (since, in my experience, 9 out of 10 of them will miss at least 2-3 rent payments per year, which, unless you have a money bin as bounteous and deep as Scrooge McDuck, will cause considerable damage to your cash flow).
If you give them an option to buy it back, you’re walking on thin ice. Because, if for some reason they are not able to buy it back again (missed payments, worsened credit, stricter lending environment, decreased property values, etc.), you will become the bad guy for daring to ask them to move out so you can finally recoup your investment, free up your funds, and thus avoid becoming broke, busted, and disgusted.
And if you lease back to a seller whose house you bought subject-to, put on your headgear and get ready to rumble. You might as well drive to the nearest courtroom and have a seat, because you’re going to go there soon anyway — ask me how I know this. It’s just too easy for a seller to wish they hadn’t sold their house so badly that they actually believe they still own it, or should own it. And, because so few attorneys know anything about subject-to deals, it won’t be hard for them to find one to put you in the hot seat.
3) Advancing funds prior to closing – Imagine meeting the kindest, sweetest, most innocent seller you’ve ever met. They’re in foreclosure through no fault of their own (illness, tragic accident, etc.) and have tried everything to fix their situation, with no success. You finally get in touch with them a day or two before the auction, and agree to save them from their pending disaster. But there is one problem — you won’t be able to close on time.
Maybe the title company can’t get the title search done fast enough, schedule you soon enough, your private lender is on vacation, or something. If you could just delay the auction one more day, you could conduct the closing and be the hero. But, of course, the only thing that will buy you the time to close is to reinstate the loan now, before the closing. The helpless seller’s credit, dignity, and financial future is in your hands. Do you do it?
Although it goes against every altruistic bone in my body, I would not advance any funds before closing even if it means they lose their house and I lose a deal. I promise you that if you do, you will, in all likelihood, witness a formerly sweet, rational, and grateful seller transform before your eyes faster than you can say Bilbo Baggins. Your funds will be tied up with no legal recourse other than to enforce your contract to buy, which will take more money and several months, in which time they may fall behind again and lose the house (and your money) to foreclosure.
Or, you could be sued after all you’ve done and be accused of taking advantage of the seller, even though your funds are being held hostage at their mercy. And even if you have them sign a note and deed of trust as security before reinstating their loan, you may be going into dangerous territory by breaking lending, licensing, and possibly usury laws. The potential downside makes it not worth the risk.
So the moral of the story is this — given the current legal climate, the fallen nature of sellers once their problems are solved, and the inherent financial risks, it is wise to avoid the three types of pre-foreclosure investment methods mentioned above. It’s not enough to be honest and do what you promise. It’s also not enough to have excellent documentation and CYA agreements. They can certainly help your case in a lawsuit, but don’t think for a minute they will actually prevent suits from arising to begin with. Instead, you have to avoid the very appearance of fraud, even if it means losing a few deals (which is infinitesimally better than losing a few lawsuits — or even winning them, for that matter).
Nothing is worse than a lawsuit, even when you win. It will cost you a teacher’s salary in legal fees (not to mention the legal fees of your private lender, if you used one and they are named in the suit) as well as tying up your invested funds and hostage profit for 1-2 years. That’s a 1-2-3 combination of knockout blows to your cash flow, and could put you out of business. And in bad economic times, litigation only increases because everybody needs money. Therefore, when it comes to protecting yourself from false accusation while investing in pre-foreclosures, an ounce of prevention is worth 60 megatons of cure.
Who is to blame? Sometimes the seller, sometimes the investor. If I had to make a guess as to who causes the most problems, it would be sellers. Over the years, I have only heard of a handful of unscrupulous investors who tricked homeowners who thought they were getting a loan into signing a deed, forged documents, took over a loan and pocketed the rent payments, or something equally evil. Of course, these are the only incidents you hear about on the news. My guess is because “Fair and Honest Investor Buys House, Makes Profit” isn’t a very sexy headline.
The real concern, and the focus of this article, is sellers in default who either:
A) Lie about their property, its condition, their hardship story, etc, in a deliberate attempt to defraud an investor, or
B) Experience seller’s remorse after their problem is solved, and use false accusations that they actually believe in an attempt to undo what they agreed to.
Which do you think is the more common scenario? I don’t believe it’s A. Although the old expression “buyers are liars and sellers are worse” has some truth to it, I think that most sellers in default are honestly seeking a way to solve their problem through ethical means. And any untruths they do tell can be uncovered with the proper due diligence prior to purchase.
Therefore, I think that B is the more common scenario in which fraud is committed. And by “committed,” I mean “frantically slung as a weapon by the seller in a misguided attempt to undo a transaction that is perfectly legal by making you the scapegoat for their own selfishness, irrationality, and/or situational ethics.” This doesn’t make headlines, but it does make a frequent topic of conversation at local REIA meetings, where I have heard similar stories told ad nauseum.
Scenario B is far too common, but even more so when a pre-foreclosure investor does things that make them more likely to be accused of fraud. I have listed three unsafe scenarios below. I will preface them with a golden nugget of wisdom that I have gleaned from years of networking, news-watching, and personal experience, and then voice my opinion on the subject with more passion than Basic Instinct, Don Juan Demarco, and The Notebook combined.
“No matter how many times you explain how the deal will take place, how slowly you go over it, how many times they tell you they understand, or sign and initial a document that spells everything out in excruciating detail in 4th-grade English using size 16 font, sellers in pre-foreclosure will immediately create and believe their own memories of what they agreed to the very second that their payments are caught up.”
If you are not familiar with the concept of implanted memories, just remember the movie Total Recall and you’ll know exactly what I’m talking about (but with a little less violence). The unavoidable fact above must always be remembered, dealt with head-on, and used to guide your decisions when working with sellers who are behind in payments. And now for those three unsafe pre-foreclosure scenarios:
1) Asking them to sign blank documents – I think the wild, wild, western days of showing up at the seller’s house with a mobile notary and getting them to sign a deed and blank documents for any and every conceivable type of transaction (short sale,cash offer,subject-to, note, deed of trust, etc.) on their kitchen table are over. This shoot-first-ask-questions-later style of getting a deal done has "Six o’clock evening news scandal" written all over it.
While it may certainly be more convenient for the investor to get everything signed in advance and then figure out what kind of deal is possible later, and though the investor may truly have the seller’s best interests at heart, think of how it will appear to a judge when the seller says later in court, “He had me sign all these blank documents, and told me he’d take care of everything, and I didn’t know what I was doing…”
I don’t think we can afford to be so cavalier in our dealings — at least until pre-foreclosure investors cease to be perceived as vultures, guilty until proven innocent, which I calculate will happen approximately three times the length of time from now that hell will take to freeze over.
2) Letting the seller stay in the house – I cannot think of any kind of transaction so generous, so humane, so… hazardous. For starters, leasing the house back to the seller is a risky gamble (since, in my experience, 9 out of 10 of them will miss at least 2-3 rent payments per year, which, unless you have a money bin as bounteous and deep as Scrooge McDuck, will cause considerable damage to your cash flow).
If you give them an option to buy it back, you’re walking on thin ice. Because, if for some reason they are not able to buy it back again (missed payments, worsened credit, stricter lending environment, decreased property values, etc.), you will become the bad guy for daring to ask them to move out so you can finally recoup your investment, free up your funds, and thus avoid becoming broke, busted, and disgusted.
And if you lease back to a seller whose house you bought subject-to, put on your headgear and get ready to rumble. You might as well drive to the nearest courtroom and have a seat, because you’re going to go there soon anyway — ask me how I know this. It’s just too easy for a seller to wish they hadn’t sold their house so badly that they actually believe they still own it, or should own it. And, because so few attorneys know anything about subject-to deals, it won’t be hard for them to find one to put you in the hot seat.
3) Advancing funds prior to closing – Imagine meeting the kindest, sweetest, most innocent seller you’ve ever met. They’re in foreclosure through no fault of their own (illness, tragic accident, etc.) and have tried everything to fix their situation, with no success. You finally get in touch with them a day or two before the auction, and agree to save them from their pending disaster. But there is one problem — you won’t be able to close on time.
Maybe the title company can’t get the title search done fast enough, schedule you soon enough, your private lender is on vacation, or something. If you could just delay the auction one more day, you could conduct the closing and be the hero. But, of course, the only thing that will buy you the time to close is to reinstate the loan now, before the closing. The helpless seller’s credit, dignity, and financial future is in your hands. Do you do it?
Although it goes against every altruistic bone in my body, I would not advance any funds before closing even if it means they lose their house and I lose a deal. I promise you that if you do, you will, in all likelihood, witness a formerly sweet, rational, and grateful seller transform before your eyes faster than you can say Bilbo Baggins. Your funds will be tied up with no legal recourse other than to enforce your contract to buy, which will take more money and several months, in which time they may fall behind again and lose the house (and your money) to foreclosure.
Or, you could be sued after all you’ve done and be accused of taking advantage of the seller, even though your funds are being held hostage at their mercy. And even if you have them sign a note and deed of trust as security before reinstating their loan, you may be going into dangerous territory by breaking lending, licensing, and possibly usury laws. The potential downside makes it not worth the risk.
So the moral of the story is this — given the current legal climate, the fallen nature of sellers once their problems are solved, and the inherent financial risks, it is wise to avoid the three types of pre-foreclosure investment methods mentioned above. It’s not enough to be honest and do what you promise. It’s also not enough to have excellent documentation and CYA agreements. They can certainly help your case in a lawsuit, but don’t think for a minute they will actually prevent suits from arising to begin with. Instead, you have to avoid the very appearance of fraud, even if it means losing a few deals (which is infinitesimally better than losing a few lawsuits — or even winning them, for that matter).
Nothing is worse than a lawsuit, even when you win. It will cost you a teacher’s salary in legal fees (not to mention the legal fees of your private lender, if you used one and they are named in the suit) as well as tying up your invested funds and hostage profit for 1-2 years. That’s a 1-2-3 combination of knockout blows to your cash flow, and could put you out of business. And in bad economic times, litigation only increases because everybody needs money. Therefore, when it comes to protecting yourself from false accusation while investing in pre-foreclosures, an ounce of prevention is worth 60 megatons of cure.
Buying at the Foreclosure Auction
Perhaps the most well-known method of obtaining foreclosure properties is buying them at the auction. The foreclosure auction is a live bidding process, just as you may have imagined. The auction is typically conducted at a public place, such as a courthouse. In some states, the county Sheriff or his deputy will conduct the sale. In other states, a referee appointed by the court will conduct the sale. Although the process is slightly different from state to state, the basic idea is the same – the property goes to the high bidder. The first bid will usually be made by a representative of the foreclosing lender. The lender can bid up the amount that is owed to him, without actually tendering money. If nobody else bids, the lender gets the property. In a majority of cases, nobody will show up but the auctioneer and the lender's representative. Thus, in most cases, the lender gets the property; the less equity in the property, the less people show up at the auction.
Buying at the auction is not for everyone, especially beginners with limited funds. You need cash, and lots of it, to buy properties at auction. If you have access to a large credit line or have a money partner, you can sometimes find real bargains at foreclosure auctions. Do not get too excited, though, because most properties either have too little equity for people to bother with, or have so much equity that a large crowd will show up to compete. Despite popular beliefs, a real steal at the auction is very unlikely.
Finding Out Where the Auction Is Held
The auctions for your city or county are usually published in a legal newspaper or the legal section of your local paper. You can also subscribe to information service providers that will fax, mail and/or email you this information on a regular basis. If you are following a particular property, contact the lender's attorney or the trustee for information about the sale date. Call the day before to make sure the auction has not been postponed or delayed by the lender or by the borrower filing for bankruptcy.
Before Going to the Auction
Before you even consider bidding at the auction, you need to do some homework. Remember that your bid at the auction is absolute; there is no backing out. Your due diligence in researching the property can be quite time-consuming, and chances are you will not get a huge bargain. Sounds discouraging? It is, but you should try it a few time to get a feel for the process. Choose a few neighborhoods that can familiarize yourself with and bid only on those properties.
Check the Condition of the Property
You need to drive by the property to find out what condition it is in. Good luck in trying to get inside, since the homeowner isn't likely to let you in. If people are living in the property, you can make the assumption (most of the time) that there is running water and electricity in the house. However, you must assume the house needs at least the basic cosmetic upgrades: carpet, paint, new appliances, new kitchen cabinets, new vanity in the bathrooms. If the house looks vacant, take a peek inside the windows. The less information you have about the inside, the more conservative you need to be with your fix-up estimates.
What to Bid?
Before you bid on the property, the most important factor you need to think about is what you intend to do with the property if you win the bid. Are you going to live in it? Fix and sell it for cash? Flip it "as is" to another investor? Finance it and rent it out? Each one of these strategies will change your maximum bid price. I would suggest that you take the most conservative approach, that is, ask yourself what price you would need to pay if you had to resell the property quickly. In other words, don't bid what you think will be the high bid, rather bid what you want to pay!
What You Need to Bring to the Auction
Contact the attorney, referee, sheriff, trustee or other official to determine how much money you need to bring to the auction. In most cases, you must bring a percentage of the winning bid price (usually 10%) in the form of certified funds, the balance being due in 30 days. In some states, the entire balance is due the day of the sale. Rather than bringing one certified check or money order, bring several smaller denominations, since it makes giving the deposit easier.
Tips for Buying at the Auction
You must arrive on time. Most auctions begin and end in a matter of minutes. If the auction is set for 10:00 am and you arrive at 10:05 am, you may be too late! If you are going to a county building, it will likely be in a part of the city which parking is a problem, so arrive extra early. Get a feel for the other bidders at the auction. It won't take you long to figure out who is a pro and who is a "looker". Even if you don't buy the property, make friends with the pros so you have someone to sell other properties to at a later time. Don't get in a bidding war! Many beginners get caught up in "bidding fever." Don't be one of them. Determine what you want to pay before you come to the auction, and don't bid any higher!
Buying at the auction is not for everyone, especially beginners with limited funds. You need cash, and lots of it, to buy properties at auction. If you have access to a large credit line or have a money partner, you can sometimes find real bargains at foreclosure auctions. Do not get too excited, though, because most properties either have too little equity for people to bother with, or have so much equity that a large crowd will show up to compete. Despite popular beliefs, a real steal at the auction is very unlikely.
Finding Out Where the Auction Is Held
The auctions for your city or county are usually published in a legal newspaper or the legal section of your local paper. You can also subscribe to information service providers that will fax, mail and/or email you this information on a regular basis. If you are following a particular property, contact the lender's attorney or the trustee for information about the sale date. Call the day before to make sure the auction has not been postponed or delayed by the lender or by the borrower filing for bankruptcy.
Before Going to the Auction
Before you even consider bidding at the auction, you need to do some homework. Remember that your bid at the auction is absolute; there is no backing out. Your due diligence in researching the property can be quite time-consuming, and chances are you will not get a huge bargain. Sounds discouraging? It is, but you should try it a few time to get a feel for the process. Choose a few neighborhoods that can familiarize yourself with and bid only on those properties.
Check the Condition of the Property
You need to drive by the property to find out what condition it is in. Good luck in trying to get inside, since the homeowner isn't likely to let you in. If people are living in the property, you can make the assumption (most of the time) that there is running water and electricity in the house. However, you must assume the house needs at least the basic cosmetic upgrades: carpet, paint, new appliances, new kitchen cabinets, new vanity in the bathrooms. If the house looks vacant, take a peek inside the windows. The less information you have about the inside, the more conservative you need to be with your fix-up estimates.
What to Bid?
Before you bid on the property, the most important factor you need to think about is what you intend to do with the property if you win the bid. Are you going to live in it? Fix and sell it for cash? Flip it "as is" to another investor? Finance it and rent it out? Each one of these strategies will change your maximum bid price. I would suggest that you take the most conservative approach, that is, ask yourself what price you would need to pay if you had to resell the property quickly. In other words, don't bid what you think will be the high bid, rather bid what you want to pay!
What You Need to Bring to the Auction
Contact the attorney, referee, sheriff, trustee or other official to determine how much money you need to bring to the auction. In most cases, you must bring a percentage of the winning bid price (usually 10%) in the form of certified funds, the balance being due in 30 days. In some states, the entire balance is due the day of the sale. Rather than bringing one certified check or money order, bring several smaller denominations, since it makes giving the deposit easier.
Tips for Buying at the Auction
You must arrive on time. Most auctions begin and end in a matter of minutes. If the auction is set for 10:00 am and you arrive at 10:05 am, you may be too late! If you are going to a county building, it will likely be in a part of the city which parking is a problem, so arrive extra early. Get a feel for the other bidders at the auction. It won't take you long to figure out who is a pro and who is a "looker". Even if you don't buy the property, make friends with the pros so you have someone to sell other properties to at a later time. Don't get in a bidding war! Many beginners get caught up in "bidding fever." Don't be one of them. Determine what you want to pay before you come to the auction, and don't bid any higher!
Buy A House - Get Thrown in Jail?
Over the past two years, a dozen states have passed foreclosure "protection" laws, and many states are following suit. Even in states where there are no specific foreclosure protection laws in place, there's plenty of power within the state Attorney General or County District Attorney's office to prosecute a real estate investor.
Here's some of the things you need to do to stay out of trouble:
GET ALL AGREEMENTS IN WRITING
Oral agreements are not good anymore, and they often lead to a dangerous "he said, she said". If you get a deed from an owner across a kitchen table, it is a legal transfer, but you should document everything first with a contract and/or set of good, clear disclosures. These disclosures include the fact that the owner is losing his property, his equity, and his right to any proceeds from the home. Although giving a deed should make this obvious, some people truly think that they are entitled to something more because they are still living in the house. Also, some investors do offer vague promises to sellers for a right to re-purchase the house at a later time, which can be misconstrued. Always document every agreement you have with the seller in writing.
EXPLAIN THINGS IN PLAIN ENGLISH
Even though you have a good written disclosure, it's no excuse for pushing papers under the seller's nose to sign without reading. Explain everything clearly to the seller so he understands the implications of the deal. If you are afraid of telling the truth, don't do the deal. The seller must go into the transaction with his eyes wide open. Imagine that the local news station was filming your deal and act accordingly.
DON'T OFFER THE SELLER A RIGHT TO REPURCHASE
Although you can offer the seller a lease-back with an option to re-purchase at a later time, this kind of arrangment rarely works out. Some state laws restrict this kind of agreement with a cap on the profit you can make on such a deal, which all but makes it impractical. Vis-a-vis these laws, a homeowner can claim such an arrangment was a "disguised" loan and get the property back by filign a lawsuit. Either way, it's generally a bad idea to leave the seller in the property. Make a fair deal, give him some cash, and get him to move on with his life.
COMPLY WITH FORECLOSURE PROTECTION LAWS
Know your state foreclosure protection laws, known as "foreclosure consultant" laws. Generally speaking, these laws requires a written contract with state-required disclosures and a rescission period, anywhere from three to ten days. The rescission gives the seller the right to cancel the agreement. It is recommended you give a seller a 3 day rescission even if the law does not require it. If the deal ever blows up and you are in court, it will go a long way for your credibility.
Here's some of the things you need to do to stay out of trouble:
GET ALL AGREEMENTS IN WRITING
Oral agreements are not good anymore, and they often lead to a dangerous "he said, she said". If you get a deed from an owner across a kitchen table, it is a legal transfer, but you should document everything first with a contract and/or set of good, clear disclosures. These disclosures include the fact that the owner is losing his property, his equity, and his right to any proceeds from the home. Although giving a deed should make this obvious, some people truly think that they are entitled to something more because they are still living in the house. Also, some investors do offer vague promises to sellers for a right to re-purchase the house at a later time, which can be misconstrued. Always document every agreement you have with the seller in writing.
EXPLAIN THINGS IN PLAIN ENGLISH
Even though you have a good written disclosure, it's no excuse for pushing papers under the seller's nose to sign without reading. Explain everything clearly to the seller so he understands the implications of the deal. If you are afraid of telling the truth, don't do the deal. The seller must go into the transaction with his eyes wide open. Imagine that the local news station was filming your deal and act accordingly.
DON'T OFFER THE SELLER A RIGHT TO REPURCHASE
Although you can offer the seller a lease-back with an option to re-purchase at a later time, this kind of arrangment rarely works out. Some state laws restrict this kind of agreement with a cap on the profit you can make on such a deal, which all but makes it impractical. Vis-a-vis these laws, a homeowner can claim such an arrangment was a "disguised" loan and get the property back by filign a lawsuit. Either way, it's generally a bad idea to leave the seller in the property. Make a fair deal, give him some cash, and get him to move on with his life.
COMPLY WITH FORECLOSURE PROTECTION LAWS
Know your state foreclosure protection laws, known as "foreclosure consultant" laws. Generally speaking, these laws requires a written contract with state-required disclosures and a rescission period, anywhere from three to ten days. The rescission gives the seller the right to cancel the agreement. It is recommended you give a seller a 3 day rescission even if the law does not require it. If the deal ever blows up and you are in court, it will go a long way for your credibility.
Building and Developing Your Buyers List
Before you begin prospecting for profitable short sale opportunities you must build and develop your buyers list. If you’ve studied my course then you have enough knowledge to locate and close as many short sales as you are willing to work for, but the most important piece of the puzzle is having buyers on hand waiting to buy your short sale deals.
When people hear the word “list”, one of the first things that come to mind is that hundreds of investors with deep pockets are needed to make a buyers list. Although having a large active list would be ideal, it’s not likely for most investors nor is it necessary. Your list should include both investors and traditional home buyers. In my first 24 months as a short sale investor my buyers list consisted of just a handful of investors and traditional buyers. A few were individual investors who were interested in acquiring 7-10 rental homes each and some were investors seeking wholesale deals. In addition, I had several first time homebuyers that I sold property to at huge discounts.
Within my first 9 months, I sold 4 properties to one investor and 8 to another. I kept 6 for myself that I either held as rental property or wholesaled within 6 months of purchasing them. My days were spent finding deals that fit mine and my buyer’s needs and speaking with potential buyers that I could add to my contact list. So in reality I worked for 3 clients (my 2 investors & myself). Yes, I started doing short sales mainly for the long term investment opportunity. Buying and holding is one of the best strategies to use if you want to acquire large amounts of equity with the least amount of adversity.
I share this story with you to say that a quality buyers list is not soley determined by the quantity of investors you have, but rather on how many “ready-to-buy” investors you have on hand. You will know your investors are willing and able when they’re being proactive and calling to see what you have available or when they are trying to grab the deal from you even before the ink dries.
Once you have a list that resembles something like this, you can now go out with confidence and find short sales that you will not only successfully negotiate but make a profit on as well. What’s the use doing all of the work to get a short sale accepted and not being able make a profit? Let me answer that for you, there is none! Building your buyers list now will reduce the possibility of your deals falling through due to not having an effective exit strategy.
How Do I Build a Buyers List?
The first thing you need to do is take out a sheet of paper and make a list of all of the people that you know. The people that you know are called your circle of influence. Unless you have been living under a rock your whole life, this exercise should take a while. The purpose of this brainstorming activity is so that you begin to build your list with people you have a relationship with. Those of you who are realtors have probably been taught this same strategy.
For example, think of people who you've spoken to recently that mentioned buying a house or investment property. Also, think about people you know who are risk takers. You should also focus on people you know that have lots of friends and associates. In other words, let your mind stretch as far as possible to come up with a large list of rough prospects. I know that I said that it is not necessary to have a large buyers list, however, it is helpful to start off with lots of prospects to give you the greatest amount of potential investors to begin working with.
The reason you will want to start off with you circle of influence is because many times the people who will buy or lead you to those that do will be someone you know. The two investors I spoke about earlier were both referred by former co-workers.
The next thing you need to do is print up a stack of Buyer Information Forms (this form is included along with the legal forms and documents disc in the course). Then, start speaking to the people on your list and use this form as a guide to gather necessary information. You do not have to ask the questions as they appear; instead ask the questions in a conversational form so it does not seem obvious that your questions are predetermined. Begin speaking to the people on your list that you feel the most comfortable with so that you can develop your flow. You can now keep a record on all of your prospects for easy access. The form will tell you what type of property your potential buyer is looking for, how soon they will be ready to purchase, their price range, are they looking for a residence or investment property, how they will fund the deal, and so forth.
After you've made contact with everyone on your circle of influence list, you will then need to expand your list to others outside of people that you know personally. I highly recommend joining a real estate investors club or at least another business networking organization. Many of the people that you meet at these types of settings will be looking for their next profitable investment. If you can offer other investors real estate deals at huge discounts with minimal risk, you'll attract a pool of reliable buyers with deep pockets just waiting to snatch your deals up.
Developing Your Buyers List
Once you have a list of potential buyers to start building your list it is now time for you to develop it. How do you develop your buyers list? Well, the first thing you will need to do is qualify each person on your list. You'll want to separate your buyers into three categories.
1. Hot - Your hot buyers are those investors who know exactly what type of property they want and have the immediate resources to close a deal within the next 15-30 days. They are risk takers. Many of these investors have in the business for a while.
2. Warm - Your warm buyers are those investors who have somewhat of an idea of what they want but may also be open to suggestions if you have something worthwhile. They are your moderate risk takers. These investors are also financially able to buy but may be 2-4 months away.
3. Cold - Your cold buyers are those investors who have an interest in investing but may not be sure what they are looking for and may not be willing to assume much risk. If an absolutely great deal comes along at the right time they may jump on it. However, they are probably 6 months to a year away from making a purchase.
Once you have compiled and categorized your list the very next thing you will want to do is begin locating short sale opportunities. Begin putting out signs, posting internet ads, using car magnets, and posting flyers to create your initial buzz. As a result of you doing these things consistently, you'll most likely get several calls from other investors inquiring about the deals that you have available. These investors should be added to your buyers list and categorized accordingly. Many of the investors that contact you will be "hot buyers". I have several buyers on my list that contacted me initially after reading one of my signs or internet ads.
Your list is a continuous process so you'll want to add new buyers and investors to your list on a daily to weekly basis. The more depth and qualified buyers you have for your short sale deals, the more money you will make. Do not make the mistake of going out and negotiating short sales without having a buyer or workable strategy to find one. Having buyers for your deals will make your job so much easier and give you the confidence and ability to put more deals in your funnel.
When people hear the word “list”, one of the first things that come to mind is that hundreds of investors with deep pockets are needed to make a buyers list. Although having a large active list would be ideal, it’s not likely for most investors nor is it necessary. Your list should include both investors and traditional home buyers. In my first 24 months as a short sale investor my buyers list consisted of just a handful of investors and traditional buyers. A few were individual investors who were interested in acquiring 7-10 rental homes each and some were investors seeking wholesale deals. In addition, I had several first time homebuyers that I sold property to at huge discounts.
Within my first 9 months, I sold 4 properties to one investor and 8 to another. I kept 6 for myself that I either held as rental property or wholesaled within 6 months of purchasing them. My days were spent finding deals that fit mine and my buyer’s needs and speaking with potential buyers that I could add to my contact list. So in reality I worked for 3 clients (my 2 investors & myself). Yes, I started doing short sales mainly for the long term investment opportunity. Buying and holding is one of the best strategies to use if you want to acquire large amounts of equity with the least amount of adversity.
I share this story with you to say that a quality buyers list is not soley determined by the quantity of investors you have, but rather on how many “ready-to-buy” investors you have on hand. You will know your investors are willing and able when they’re being proactive and calling to see what you have available or when they are trying to grab the deal from you even before the ink dries.
Once you have a list that resembles something like this, you can now go out with confidence and find short sales that you will not only successfully negotiate but make a profit on as well. What’s the use doing all of the work to get a short sale accepted and not being able make a profit? Let me answer that for you, there is none! Building your buyers list now will reduce the possibility of your deals falling through due to not having an effective exit strategy.
How Do I Build a Buyers List?
The first thing you need to do is take out a sheet of paper and make a list of all of the people that you know. The people that you know are called your circle of influence. Unless you have been living under a rock your whole life, this exercise should take a while. The purpose of this brainstorming activity is so that you begin to build your list with people you have a relationship with. Those of you who are realtors have probably been taught this same strategy.
For example, think of people who you've spoken to recently that mentioned buying a house or investment property. Also, think about people you know who are risk takers. You should also focus on people you know that have lots of friends and associates. In other words, let your mind stretch as far as possible to come up with a large list of rough prospects. I know that I said that it is not necessary to have a large buyers list, however, it is helpful to start off with lots of prospects to give you the greatest amount of potential investors to begin working with.
The reason you will want to start off with you circle of influence is because many times the people who will buy or lead you to those that do will be someone you know. The two investors I spoke about earlier were both referred by former co-workers.
The next thing you need to do is print up a stack of Buyer Information Forms (this form is included along with the legal forms and documents disc in the course). Then, start speaking to the people on your list and use this form as a guide to gather necessary information. You do not have to ask the questions as they appear; instead ask the questions in a conversational form so it does not seem obvious that your questions are predetermined. Begin speaking to the people on your list that you feel the most comfortable with so that you can develop your flow. You can now keep a record on all of your prospects for easy access. The form will tell you what type of property your potential buyer is looking for, how soon they will be ready to purchase, their price range, are they looking for a residence or investment property, how they will fund the deal, and so forth.
After you've made contact with everyone on your circle of influence list, you will then need to expand your list to others outside of people that you know personally. I highly recommend joining a real estate investors club or at least another business networking organization. Many of the people that you meet at these types of settings will be looking for their next profitable investment. If you can offer other investors real estate deals at huge discounts with minimal risk, you'll attract a pool of reliable buyers with deep pockets just waiting to snatch your deals up.
Developing Your Buyers List
Once you have a list of potential buyers to start building your list it is now time for you to develop it. How do you develop your buyers list? Well, the first thing you will need to do is qualify each person on your list. You'll want to separate your buyers into three categories.
1. Hot - Your hot buyers are those investors who know exactly what type of property they want and have the immediate resources to close a deal within the next 15-30 days. They are risk takers. Many of these investors have in the business for a while.
2. Warm - Your warm buyers are those investors who have somewhat of an idea of what they want but may also be open to suggestions if you have something worthwhile. They are your moderate risk takers. These investors are also financially able to buy but may be 2-4 months away.
3. Cold - Your cold buyers are those investors who have an interest in investing but may not be sure what they are looking for and may not be willing to assume much risk. If an absolutely great deal comes along at the right time they may jump on it. However, they are probably 6 months to a year away from making a purchase.
Once you have compiled and categorized your list the very next thing you will want to do is begin locating short sale opportunities. Begin putting out signs, posting internet ads, using car magnets, and posting flyers to create your initial buzz. As a result of you doing these things consistently, you'll most likely get several calls from other investors inquiring about the deals that you have available. These investors should be added to your buyers list and categorized accordingly. Many of the investors that contact you will be "hot buyers". I have several buyers on my list that contacted me initially after reading one of my signs or internet ads.
Your list is a continuous process so you'll want to add new buyers and investors to your list on a daily to weekly basis. The more depth and qualified buyers you have for your short sale deals, the more money you will make. Do not make the mistake of going out and negotiating short sales without having a buyer or workable strategy to find one. Having buyers for your deals will make your job so much easier and give you the confidence and ability to put more deals in your funnel.
Bank Said No to Short Sale, Now What?
I submitted a short sale and the bank said no, so what is my next step? Great question.
First of all, it’s important to realize that you’re only going to get 70% of your short sales accepted. That means that 30% of your deals will fall apart. If you submit ten short sales, you will close seven. Knowing your numbers going in will prepare you mentally when the bank does say no. Don’t take it personally; remember, it’s just a numbers game.
The bank may say no for several reasons: high BPO, an inexperienced loss mitigation rep, or possibly a foreclosure sale date that is just days away. One of the most common reasons the bank will say no is because the BPO came in too high and the bank feels the property is worth more than it actually is.
What is a BPO? It means “Broker’s Price Opinion.” When a short sale package is submitted, the bank will send a real estate agent or Broker to the property to judge its value. To insure a low BPO, we like to meet the agent at the property. We take the liberty of giving the agent our complete short sale package. We run comps for the agent, give copies of our pictures, our list of repairs, and walk the agent through the house room-by-room. We want to make the homeowner come to life by showing the agent the property, family pictures, and explain how a low BPO will insure a successful short sale thus giving the homeowner a chance to start over.
Usually, agents and appraisers are asked to value properties at the high end of the scale. Most homeowners trying to purchase a home need top value in order to qualify for the loan. Therefore, it is unusual to ask for low numbers. This is why we meet the agent at the property: to plead our case and ask for the lowest BPO possible.
Assuming the bank said no because of the BPO, our first step is to challenge it and request a second opinion. Our conversation with the loss mitigation rep goes something like this: “My friend is a real estate agent. She ran comps and says the person who did your BPO is crazy. My friend also says the numbers are way too high. She works this neighborhood and is certain about the property values. Does your agent specifically work this neighborhood?
If not, he might be steering you wrong. It would be a shame for your bank to take the property at the sheriff’s sale, only to lose money. Why don’t we do the right thing and schedule a second BPO. I’m sure if you choose someone who actually works this neighborhood, that person will agree with me that the property is only worth $___________. Your bank is not in the business of losing money, is it? I didn’t think so. When is the best time to schedule another BPO, today or tomorrow at 5:00?”
The purpose of your conversation is to make the bank question the first BPO. Banks are not in the business of losing money. An incorrect BPO will come back later to haunt the loss mitigation rep.
Once we schedule a second BPO, we do our magic again. We meet the new agent at the property and plead our case. We had a recent deal where the first BPO came in at $295,000 and the second one came in at $215,000. The property was realistically worth $450,000 with a $350,000 balance. We originally offered $199,000. The bank was firm at $300,000. With an $80,000 difference in the BPO’s, the bank lowered its number from $300,000 to $250,000 making the deal work. It was a sweet deal for us. The key was the second BPO.
If, after a second BPO, we still can’t get the bank to see it our way, we pass and move on to the next deal. Your new four letter word is: NEXT. If one deal doesn’t work out, move on. Remember, you will lose 30% of your short sales. This is why we advise our students to work at least ten short sales at the same time. Then when one does fall apart, you’ll have no problem saying ….NEXT!
First of all, it’s important to realize that you’re only going to get 70% of your short sales accepted. That means that 30% of your deals will fall apart. If you submit ten short sales, you will close seven. Knowing your numbers going in will prepare you mentally when the bank does say no. Don’t take it personally; remember, it’s just a numbers game.
The bank may say no for several reasons: high BPO, an inexperienced loss mitigation rep, or possibly a foreclosure sale date that is just days away. One of the most common reasons the bank will say no is because the BPO came in too high and the bank feels the property is worth more than it actually is.
What is a BPO? It means “Broker’s Price Opinion.” When a short sale package is submitted, the bank will send a real estate agent or Broker to the property to judge its value. To insure a low BPO, we like to meet the agent at the property. We take the liberty of giving the agent our complete short sale package. We run comps for the agent, give copies of our pictures, our list of repairs, and walk the agent through the house room-by-room. We want to make the homeowner come to life by showing the agent the property, family pictures, and explain how a low BPO will insure a successful short sale thus giving the homeowner a chance to start over.
Usually, agents and appraisers are asked to value properties at the high end of the scale. Most homeowners trying to purchase a home need top value in order to qualify for the loan. Therefore, it is unusual to ask for low numbers. This is why we meet the agent at the property: to plead our case and ask for the lowest BPO possible.
Assuming the bank said no because of the BPO, our first step is to challenge it and request a second opinion. Our conversation with the loss mitigation rep goes something like this: “My friend is a real estate agent. She ran comps and says the person who did your BPO is crazy. My friend also says the numbers are way too high. She works this neighborhood and is certain about the property values. Does your agent specifically work this neighborhood?
If not, he might be steering you wrong. It would be a shame for your bank to take the property at the sheriff’s sale, only to lose money. Why don’t we do the right thing and schedule a second BPO. I’m sure if you choose someone who actually works this neighborhood, that person will agree with me that the property is only worth $___________. Your bank is not in the business of losing money, is it? I didn’t think so. When is the best time to schedule another BPO, today or tomorrow at 5:00?”
The purpose of your conversation is to make the bank question the first BPO. Banks are not in the business of losing money. An incorrect BPO will come back later to haunt the loss mitigation rep.
Once we schedule a second BPO, we do our magic again. We meet the new agent at the property and plead our case. We had a recent deal where the first BPO came in at $295,000 and the second one came in at $215,000. The property was realistically worth $450,000 with a $350,000 balance. We originally offered $199,000. The bank was firm at $300,000. With an $80,000 difference in the BPO’s, the bank lowered its number from $300,000 to $250,000 making the deal work. It was a sweet deal for us. The key was the second BPO.
If, after a second BPO, we still can’t get the bank to see it our way, we pass and move on to the next deal. Your new four letter word is: NEXT. If one deal doesn’t work out, move on. Remember, you will lose 30% of your short sales. This is why we advise our students to work at least ten short sales at the same time. Then when one does fall apart, you’ll have no problem saying ….NEXT!
Tuesday, April 28, 2009
A Review of the National Consumer Law Center
The National Consumer Law Center recently published a report called "Dreams Foreclosed - The Rampant Theft of Americans’ Homes Through Equity-Stripping Foreclosure 'Rescue' Scams". It is being paraded around the media as an objective study of the foreclosure market and all the bad people who are taking advantage of homeowners. In the vein of a Michael Moore documentary, it is a poorly researched, one-sided editorial piece designed to push someone's agenda.
So who is the National Consumer Law Center and what exactly is their agenda? Here’s how they describe themselves: "The National Consumer Law Center (NCLC) is the nation’s consumer law expert, helping consumers, their advocates, and public policy makers use powerful and complex consumer laws on behalf of low-income and vulnerable Americans seeking economic justice."
That description paints a pretty picture, but their political leanings are quite obvious if you read between the lines. They take funding from radical left-wing billionaire George Soros to help illegal aliens continue to live illegally in the U.S. They also virulently fought the new Bankruptcy Reform law that stops deadbeats from abusing the bankruptcy system. Like many far-left organizations, they believe that corporate America is evil and the "little guy" is always innocent.
Now, if you are left-of-center politically, please don’t miss the point here - I’m not criticizing liberals. The NCLC is entitled to their opinion, so long as they make it clear that their "research papers" are just that - someone's opinion. It is academically dishonest to call a paper an "objective study" when the group sponsoring the study has a particular agenda that skews the conclusions. It would be like asking Rush Limbaugh to do an objective documentary on the Clintons.
New Laws Don't Always Help, They Sometimes Hurt
By passing new laws designed to "protect" the homeowner in foreclosure, it actually ends up hurting everyone in the long run. For example, a new law was passed in Maryland that requires a waiting period for any transaction involving a person in foreclosure. Similar laws are being considered in other states. Various intricate disclosures, rules and penalties written in these laws make it virtually impossible for a mortgage broker to help fund a new loan in fear of being punished.
Waiting periods do nothing more than shorten the time a homeowner has to solve his problem. If the homeowner in foreclosure is 10 days before the sale date and the law requires a 5-day waiting period, how does this help a deal get closed? The fact is, it hurts the homeowner by preventing a last minute loan or deal from being worked out that might help save the property from foreclosure.
Also, let's not forget that all of these ideas about new laws sound great when the real estate market is hot. When a local economy goes South, more and more people will be looking to dump their homes quickly and will not be able to do so because of these "consumer protection" laws.
The Court of Public Opinion
The NCLC and their friends at the media are playing a political war to sway public opinion about foreclosure investors. Certainly, there are some bad apples in every business, and the foreclosure business is no exception. But, to suggest that the vast majority of real estate investors that buy properties in foreclosure are bad people people is absurd.
Likewise, the media and the NCLC seem to feel that all of the foreclosure sellers are without blame. Everyone in foreclosure has something in common - they stopped paying their loan! Some people are a victim of bad circumstances, had excessive medical bills or ended up in a messy divorce. But, let’s not forget that the vast majority of people in foreclosure are simply financially irresponsible people who lived from paycheck to paycheck.
Furthermore, the NCLC blames the lenders for giving out too much money. Doesn't the borrower who got in over his head and lived beyond his means have any responsibility here? The NCLC and their kind are the same kind of lawyers who blame McDonalds for obesity, blame the cigarette companies for causing cancer and think class action lawsuits are the way to solve society's problems.
Of course, the NCLC doesn’t see it that way from their skewed political perspective. Here’s how the NCLC report begins: "In this report you'll read about those who target many thousands of good people, people often under serious stress, and shake all or most of the value out of what’s often their only major asset.”
Shall I get out the violin yet? What about the lenders who are losing money from the borrower who didn’t pay his loan? Let’s not forget that foreclosures cost lenders money, which is passed on to all their other borrowers. Increased costs means less profit for their shareholders, most of which are the pension funds and 401k's of ordinary working people. With Government insured loans, the taxpayer picks up the tab for people who don't pay their debt, live for free, then, with the help of lawyers like the NCLC, file bankruptcy and tie up the property for a year or more. Who's the victim here?
Value... What Value?
An interesting item worth noting again is the NCLC's statement on how investors "shake all or most of the value out of what’s often their only major asset". What value are they talking about here?
From personal experience in a lot of foreclosure transactions as an investor, attorney and manager of an escrow company, I can attest that the vast majority of deals involve a seller who has very little equity, has little emotional interest in his property and has already exhausted all other options, including trying to refinance or list the house for sale with a real estate broker. Most foreclosure sales often happen just before the foreclosure sale date when the homeowner wakes up to reality. So, when the NCLC suggests that an investor is "stealing" a seller's equity, it's a complete misunderstanding of the reality of the marketplace.
For example, let’s say a seller owes $170,000 on a house worth $200,000. The foreclosure sale date is one week away. An investor pays the seller a few thousand bucks for the deed to his property, then resells the property for a profit. The NCLC might scream, “but you’re stealing $30,000 in equity for just a few thousand dollars!” That’s a typical reaction from someone who doesn’t understand how the foreclosure business works.
In most cities, a $200,000 house takes a few months to sell. If the seller is late in the foreclosure process, there’s no time left, so he’d have to price the property around $170,000 or less to move it quickly. So, when someone says, “you’re paying 10 cents on the dollar for the seller’s equity”, that not really true - the seller in foreclosure really has no equity, since the impending sale date forces the seller to liquidate quickly.
In bankruptcy, the courts have routinely ruled that the borrower is only entitled to “reasonably equivalent value” in a foreclosure sale, not market value. These rulings reflect the fact that a property sold in distress is worth less than a property sold under normal circumstances. To the investor, the foreclosure property has equity, because the investor has the financial means to stop the foreclosure process, whereas the seller does not. The investor makes money because he has the solution, the seller does not.
Who's "Taking Advantage" of Whom?
The NCLC and the news media often paint the picture that foreclosure investors are "sharks" who take advantage of helpless sellers in bad circumstances. Admittedly, foreclosure investors make a profit here from other people’s bad circumstances - so what? Thousands of businesses make a profit from other people’s problems, including:
* Bankruptcy lawyers
* Class action lawyers
* Divorce lawyers
* Funeral parlors
* Pawn shops
* Doctors & Hospitals
Think about it this way: if you are bleeding and a doctor stitches up the wound to save your life, is his knowledge and expertise worth money? Or, will someone call that doctor a "thief" if the patient gets a $20,000 bill for the life-saving operation? The bottom line is that if someone is in foreclosure and about to lose their home, they should do whatever they can - make up back payments, negotiate with their lender, try to refinance or try to sell the home. When all options are exhausted, the only choice may be to sell to an investor cheap or let it go back to the bank. If an investor profits from the transaction, so what?
Of course, there’s another option the NCLC would suggest, as outlined in their various "consumer-law" publications: Hire an attorney to file a series of silly legal challenges to the validity of the bank’s loan disclosures. This will help delay the lender’s foreclosure process for several months. When the court denies all of your frivolous objections, you then file for bankruptcy and stay in the property for free for another six months. When the lender completes the foreclosure, the homeowner can stay a few more months until the lender gets around to evicting the former homeowner. If you really want to squeeze out a few more months of free rent, you file a bunch of technical objections to the lender’s eviction proceeding. So, instead of an investor profiting from the seller’s equity, we have attorneys and their clients who profit by bilking the lender. The NCLC attorneys call this "protecting the consumer’s rights". Most people would call it being a "deadbeat". You see how easy it is to spin the story in the other direction?
New Laws Giving Government More Power?
The problem is, the NCLC's media campaign is actually working. They've got the press parroting the same message and adding wild stories of how innocent homeowners lost their homes to unscrupulous investors. Don't get me wrong, these investors that are being reported are often people who did bad things. Getting a deed to a property under false pretenses is a crime - it's stealing. Investors who lie and mislead sellers in foreclosure give a bad name to everyone and they should be punished.
But, we don't need new laws to punish these bad people, since there are already laws on the books that are applicable (such as "grand larceny"). In addition, the Attorney General of your state already has broad powers under the Consumer Protection Acts to deal with this kind of activity. And, while we're on that topic, the Attorney Generals of many states are foaming at the mouth and sharpening their axes, too. Both Democrats and Republicans with political aspirations, these Elliot-Spitzer wannabe's are going after foreclosure investors to get a name for themselves. It looks real good on your resume when you run for Senator if you headed up a "special task force". But once the smoke clears, reasonable people know that you can't solve all the problems of financially irresponsible people by punishing foreclosure investors. Investors didn't cause the problem, they are just trying to help solve it, and (God forbid) make a buck!
The Whole Truth?
The NCLC report suggests that the vast majority of foreclosure transactions are bad for the homeowner and a result of investors that "prey" on them. What is not reported in the NCLC paper or the news media is that most foreclosure deals that blow up are generally the fault of the seller. Many of these sellers knew exactly what they were doing, but got "seller’s remorse" when they saw that someone else was making a profit. In most cases, the seller’s remorse comes about when another investor tells the seller he could have offered more for the property. When the homeowner demands more money and doesn’t get it, he hires an attorney to fight for his rights. The newspaper reporter doesn't tell you that side of the story - instead he interviews the plaintiff's attorney for the whole picture. In fact, this is exactly what the NCLC did in their research. I don’t recall any quotes in the report from the president of any real estate investment groups or authors.
I can tell you from personal experience that there are just as many sellers who lie and do not live up to their promises in foreclosure deals. Sellers often flake out, don't move out when they promise, neglect to tell you about liens on their property, and develop a "convenient" memory loss about the facts when they find an attorney. In one Colorado Springs case, the homeowner actually demanded his house back because he claimed he was drunk when he signed the papers. Don’t laugh - the news reporter spun it into a sad story about how alcoholism was to blame for the seller's financial problems, and how the investor should be ashamed for trying to get papers signed by a drunk man.
There are a whole lot of happy endings about investors who bought homes from foreclosure sellers who received cash, saved their credit and got on with their lives. If a seller is four payments in arrears, has exhausted all options and is facing foreclosure, he’ll lose everything and his credit will be ruined for a long time. Instead, if he deeds his house to an investor who makes up the back payments and negotiates a deal with the lender, his credit will be improved. And, if the seller gets a few bucks of the deal, he can move on with his life. The lender is thrilled, since the loan is no longer in default.
These stories happen all the time, but unfortunately they don’t make headlines in newspapers.
So who is the National Consumer Law Center and what exactly is their agenda? Here’s how they describe themselves: "The National Consumer Law Center (NCLC) is the nation’s consumer law expert, helping consumers, their advocates, and public policy makers use powerful and complex consumer laws on behalf of low-income and vulnerable Americans seeking economic justice."
That description paints a pretty picture, but their political leanings are quite obvious if you read between the lines. They take funding from radical left-wing billionaire George Soros to help illegal aliens continue to live illegally in the U.S. They also virulently fought the new Bankruptcy Reform law that stops deadbeats from abusing the bankruptcy system. Like many far-left organizations, they believe that corporate America is evil and the "little guy" is always innocent.
Now, if you are left-of-center politically, please don’t miss the point here - I’m not criticizing liberals. The NCLC is entitled to their opinion, so long as they make it clear that their "research papers" are just that - someone's opinion. It is academically dishonest to call a paper an "objective study" when the group sponsoring the study has a particular agenda that skews the conclusions. It would be like asking Rush Limbaugh to do an objective documentary on the Clintons.
New Laws Don't Always Help, They Sometimes Hurt
By passing new laws designed to "protect" the homeowner in foreclosure, it actually ends up hurting everyone in the long run. For example, a new law was passed in Maryland that requires a waiting period for any transaction involving a person in foreclosure. Similar laws are being considered in other states. Various intricate disclosures, rules and penalties written in these laws make it virtually impossible for a mortgage broker to help fund a new loan in fear of being punished.
Waiting periods do nothing more than shorten the time a homeowner has to solve his problem. If the homeowner in foreclosure is 10 days before the sale date and the law requires a 5-day waiting period, how does this help a deal get closed? The fact is, it hurts the homeowner by preventing a last minute loan or deal from being worked out that might help save the property from foreclosure.
Also, let's not forget that all of these ideas about new laws sound great when the real estate market is hot. When a local economy goes South, more and more people will be looking to dump their homes quickly and will not be able to do so because of these "consumer protection" laws.
The Court of Public Opinion
The NCLC and their friends at the media are playing a political war to sway public opinion about foreclosure investors. Certainly, there are some bad apples in every business, and the foreclosure business is no exception. But, to suggest that the vast majority of real estate investors that buy properties in foreclosure are bad people people is absurd.
Likewise, the media and the NCLC seem to feel that all of the foreclosure sellers are without blame. Everyone in foreclosure has something in common - they stopped paying their loan! Some people are a victim of bad circumstances, had excessive medical bills or ended up in a messy divorce. But, let’s not forget that the vast majority of people in foreclosure are simply financially irresponsible people who lived from paycheck to paycheck.
Furthermore, the NCLC blames the lenders for giving out too much money. Doesn't the borrower who got in over his head and lived beyond his means have any responsibility here? The NCLC and their kind are the same kind of lawyers who blame McDonalds for obesity, blame the cigarette companies for causing cancer and think class action lawsuits are the way to solve society's problems.
Of course, the NCLC doesn’t see it that way from their skewed political perspective. Here’s how the NCLC report begins: "In this report you'll read about those who target many thousands of good people, people often under serious stress, and shake all or most of the value out of what’s often their only major asset.”
Shall I get out the violin yet? What about the lenders who are losing money from the borrower who didn’t pay his loan? Let’s not forget that foreclosures cost lenders money, which is passed on to all their other borrowers. Increased costs means less profit for their shareholders, most of which are the pension funds and 401k's of ordinary working people. With Government insured loans, the taxpayer picks up the tab for people who don't pay their debt, live for free, then, with the help of lawyers like the NCLC, file bankruptcy and tie up the property for a year or more. Who's the victim here?
Value... What Value?
An interesting item worth noting again is the NCLC's statement on how investors "shake all or most of the value out of what’s often their only major asset". What value are they talking about here?
From personal experience in a lot of foreclosure transactions as an investor, attorney and manager of an escrow company, I can attest that the vast majority of deals involve a seller who has very little equity, has little emotional interest in his property and has already exhausted all other options, including trying to refinance or list the house for sale with a real estate broker. Most foreclosure sales often happen just before the foreclosure sale date when the homeowner wakes up to reality. So, when the NCLC suggests that an investor is "stealing" a seller's equity, it's a complete misunderstanding of the reality of the marketplace.
For example, let’s say a seller owes $170,000 on a house worth $200,000. The foreclosure sale date is one week away. An investor pays the seller a few thousand bucks for the deed to his property, then resells the property for a profit. The NCLC might scream, “but you’re stealing $30,000 in equity for just a few thousand dollars!” That’s a typical reaction from someone who doesn’t understand how the foreclosure business works.
In most cities, a $200,000 house takes a few months to sell. If the seller is late in the foreclosure process, there’s no time left, so he’d have to price the property around $170,000 or less to move it quickly. So, when someone says, “you’re paying 10 cents on the dollar for the seller’s equity”, that not really true - the seller in foreclosure really has no equity, since the impending sale date forces the seller to liquidate quickly.
In bankruptcy, the courts have routinely ruled that the borrower is only entitled to “reasonably equivalent value” in a foreclosure sale, not market value. These rulings reflect the fact that a property sold in distress is worth less than a property sold under normal circumstances. To the investor, the foreclosure property has equity, because the investor has the financial means to stop the foreclosure process, whereas the seller does not. The investor makes money because he has the solution, the seller does not.
Who's "Taking Advantage" of Whom?
The NCLC and the news media often paint the picture that foreclosure investors are "sharks" who take advantage of helpless sellers in bad circumstances. Admittedly, foreclosure investors make a profit here from other people’s bad circumstances - so what? Thousands of businesses make a profit from other people’s problems, including:
* Bankruptcy lawyers
* Class action lawyers
* Divorce lawyers
* Funeral parlors
* Pawn shops
* Doctors & Hospitals
Think about it this way: if you are bleeding and a doctor stitches up the wound to save your life, is his knowledge and expertise worth money? Or, will someone call that doctor a "thief" if the patient gets a $20,000 bill for the life-saving operation? The bottom line is that if someone is in foreclosure and about to lose their home, they should do whatever they can - make up back payments, negotiate with their lender, try to refinance or try to sell the home. When all options are exhausted, the only choice may be to sell to an investor cheap or let it go back to the bank. If an investor profits from the transaction, so what?
Of course, there’s another option the NCLC would suggest, as outlined in their various "consumer-law" publications: Hire an attorney to file a series of silly legal challenges to the validity of the bank’s loan disclosures. This will help delay the lender’s foreclosure process for several months. When the court denies all of your frivolous objections, you then file for bankruptcy and stay in the property for free for another six months. When the lender completes the foreclosure, the homeowner can stay a few more months until the lender gets around to evicting the former homeowner. If you really want to squeeze out a few more months of free rent, you file a bunch of technical objections to the lender’s eviction proceeding. So, instead of an investor profiting from the seller’s equity, we have attorneys and their clients who profit by bilking the lender. The NCLC attorneys call this "protecting the consumer’s rights". Most people would call it being a "deadbeat". You see how easy it is to spin the story in the other direction?
New Laws Giving Government More Power?
The problem is, the NCLC's media campaign is actually working. They've got the press parroting the same message and adding wild stories of how innocent homeowners lost their homes to unscrupulous investors. Don't get me wrong, these investors that are being reported are often people who did bad things. Getting a deed to a property under false pretenses is a crime - it's stealing. Investors who lie and mislead sellers in foreclosure give a bad name to everyone and they should be punished.
But, we don't need new laws to punish these bad people, since there are already laws on the books that are applicable (such as "grand larceny"). In addition, the Attorney General of your state already has broad powers under the Consumer Protection Acts to deal with this kind of activity. And, while we're on that topic, the Attorney Generals of many states are foaming at the mouth and sharpening their axes, too. Both Democrats and Republicans with political aspirations, these Elliot-Spitzer wannabe's are going after foreclosure investors to get a name for themselves. It looks real good on your resume when you run for Senator if you headed up a "special task force". But once the smoke clears, reasonable people know that you can't solve all the problems of financially irresponsible people by punishing foreclosure investors. Investors didn't cause the problem, they are just trying to help solve it, and (God forbid) make a buck!
The Whole Truth?
The NCLC report suggests that the vast majority of foreclosure transactions are bad for the homeowner and a result of investors that "prey" on them. What is not reported in the NCLC paper or the news media is that most foreclosure deals that blow up are generally the fault of the seller. Many of these sellers knew exactly what they were doing, but got "seller’s remorse" when they saw that someone else was making a profit. In most cases, the seller’s remorse comes about when another investor tells the seller he could have offered more for the property. When the homeowner demands more money and doesn’t get it, he hires an attorney to fight for his rights. The newspaper reporter doesn't tell you that side of the story - instead he interviews the plaintiff's attorney for the whole picture. In fact, this is exactly what the NCLC did in their research. I don’t recall any quotes in the report from the president of any real estate investment groups or authors.
I can tell you from personal experience that there are just as many sellers who lie and do not live up to their promises in foreclosure deals. Sellers often flake out, don't move out when they promise, neglect to tell you about liens on their property, and develop a "convenient" memory loss about the facts when they find an attorney. In one Colorado Springs case, the homeowner actually demanded his house back because he claimed he was drunk when he signed the papers. Don’t laugh - the news reporter spun it into a sad story about how alcoholism was to blame for the seller's financial problems, and how the investor should be ashamed for trying to get papers signed by a drunk man.
There are a whole lot of happy endings about investors who bought homes from foreclosure sellers who received cash, saved their credit and got on with their lives. If a seller is four payments in arrears, has exhausted all options and is facing foreclosure, he’ll lose everything and his credit will be ruined for a long time. Instead, if he deeds his house to an investor who makes up the back payments and negotiates a deal with the lender, his credit will be improved. And, if the seller gets a few bucks of the deal, he can move on with his life. The lender is thrilled, since the loan is no longer in default.
These stories happen all the time, but unfortunately they don’t make headlines in newspapers.
A Modest Proposal for Curing the Housing Crisis
Nine billion for IndyMac bank, 80 billion for Fannie and Freddie, 60 billion for AIG, hundreds of billions more for an RTC-type fix – as Everett Dirkson (former Senate leader) used to say, "A billion here, a billion there, and pretty soon you’re talking about real money!"
With the number and size of government bailouts increasing and with no end in sight, one has to wonder how will it end? Will the government ever get a handle on the deepening financial crisis?
While our political leaders seem to be running around plugging the leaking financial dike one hole at a time, many of us in real estate have been wondering why they don’t simply attack the problem at the source? After all, it’s pretty clear that the current financial difficulty is occurring as a direct result of the collapse of the housing market. Stabilize housing and the financial markets backing it should quickly come around.
Consider, rampant foreclosures are forcing prices ever lower in market after market across the country. This in turn causes financial institutions (both in the secondary market such as Fannie and Freddie and the derivative market such as AIG) who ultimately hold the mortgage paper on most of those foreclosed houses to see their asset’s lose value – hence, the drawdown of their capital and, ultimately, their failure and the government bailouts.
However, while spending billions to bail out financial institutions who hold watered down mortgage paper may temporarily shore up financial markets, it does nothing to cure the problem, which is falling housing prices caused by ever increasing foreclosures. It’s a bandaid, not a cure.
The right answer is to stop the foreclosures. If the foreclosures stop coming, then the housing market will have a chance to stabilize. Prices will level off. Home buyers confidence will return. And given the enormous hidden demand for housing, prices should even begin rising.
That will have the beneficial effect of making all the mortgage paper that financial institutions hold more valuable and will start turning the tide on the financial crisis.
So, how do we stop the foreclosures? That’s the point of this modest proposal:
Instead of spending hundreds of billions of dollars to shore up failing financial institutions, why not spend tens of billions of dollars to salvage failing borrowers? (Every $1 spent at the source of the problem should yield $10 of benefit at the other end of the financial chain.)
The cause of the problem is mainly that ARMs (adjustable rate mortgages) are resetting to higher interest rates and higher monthly payments that borrowers (who were ill-advised to borrow the money in the first place) cannot afford. That results in the cascade of foreclosures that’s sinking our financial system.
So instead of resetting the ARMs at higher rates and monthly payments, why not simply and arbitrarily rewrite all of those loans to keep those low teaser rates in place for an additional 5 years? For example, a borrower’s mortgage is resetting from 3.5 percent to 6.5 percent? He can’t make the payments.After 3 months of defaulted payments, let the government pay the difference for the lender to step in and automatically (without further threat of foreclosure or without concern if the borrower is an occupant or an investor) freeze the initial low rate (and the correspondingly low payment) at 3.5 percent for 5 years.
It’s not as outrageous as it sounds. Yes, it would cost the government billions to do this. But not as many billions as the government is already spending to bail out the tail-end of the system – financial institutions who hold the mortgage paper on foreclosed properties.
And it would have the enormous benefit of keeping people in their homes, stopping foreclosures, and stabilizing the market. But, many will certainly complain, it’s not fair! What about those millions of people who didn’t get in over their heads and take out risky loans? Their tax dollars would be going to save the financial necks of those borrowers who don’t deserve it. True, it isn’t fair. But, when the ship is going down do you stand around arguing about whose fault it is? Or do you start bailing water? We need a turn around. And soon.
This modest proposal would serve the same purpose as the CCC and WPA served during the Great Depression. It would restore confidence and stop the bleeding. And it could actually save the government money. Who knows it might actually save the government!
With the number and size of government bailouts increasing and with no end in sight, one has to wonder how will it end? Will the government ever get a handle on the deepening financial crisis?
While our political leaders seem to be running around plugging the leaking financial dike one hole at a time, many of us in real estate have been wondering why they don’t simply attack the problem at the source? After all, it’s pretty clear that the current financial difficulty is occurring as a direct result of the collapse of the housing market. Stabilize housing and the financial markets backing it should quickly come around.
Consider, rampant foreclosures are forcing prices ever lower in market after market across the country. This in turn causes financial institutions (both in the secondary market such as Fannie and Freddie and the derivative market such as AIG) who ultimately hold the mortgage paper on most of those foreclosed houses to see their asset’s lose value – hence, the drawdown of their capital and, ultimately, their failure and the government bailouts.
However, while spending billions to bail out financial institutions who hold watered down mortgage paper may temporarily shore up financial markets, it does nothing to cure the problem, which is falling housing prices caused by ever increasing foreclosures. It’s a bandaid, not a cure.
The right answer is to stop the foreclosures. If the foreclosures stop coming, then the housing market will have a chance to stabilize. Prices will level off. Home buyers confidence will return. And given the enormous hidden demand for housing, prices should even begin rising.
That will have the beneficial effect of making all the mortgage paper that financial institutions hold more valuable and will start turning the tide on the financial crisis.
So, how do we stop the foreclosures? That’s the point of this modest proposal:
Instead of spending hundreds of billions of dollars to shore up failing financial institutions, why not spend tens of billions of dollars to salvage failing borrowers? (Every $1 spent at the source of the problem should yield $10 of benefit at the other end of the financial chain.)
The cause of the problem is mainly that ARMs (adjustable rate mortgages) are resetting to higher interest rates and higher monthly payments that borrowers (who were ill-advised to borrow the money in the first place) cannot afford. That results in the cascade of foreclosures that’s sinking our financial system.
So instead of resetting the ARMs at higher rates and monthly payments, why not simply and arbitrarily rewrite all of those loans to keep those low teaser rates in place for an additional 5 years? For example, a borrower’s mortgage is resetting from 3.5 percent to 6.5 percent? He can’t make the payments.After 3 months of defaulted payments, let the government pay the difference for the lender to step in and automatically (without further threat of foreclosure or without concern if the borrower is an occupant or an investor) freeze the initial low rate (and the correspondingly low payment) at 3.5 percent for 5 years.
It’s not as outrageous as it sounds. Yes, it would cost the government billions to do this. But not as many billions as the government is already spending to bail out the tail-end of the system – financial institutions who hold the mortgage paper on foreclosed properties.
And it would have the enormous benefit of keeping people in their homes, stopping foreclosures, and stabilizing the market. But, many will certainly complain, it’s not fair! What about those millions of people who didn’t get in over their heads and take out risky loans? Their tax dollars would be going to save the financial necks of those borrowers who don’t deserve it. True, it isn’t fair. But, when the ship is going down do you stand around arguing about whose fault it is? Or do you start bailing water? We need a turn around. And soon.
This modest proposal would serve the same purpose as the CCC and WPA served during the Great Depression. It would restore confidence and stop the bleeding. And it could actually save the government money. Who knows it might actually save the government!
7 Big Reasons To Invest In Pre-Foreclosures
Looking for an "in" to real estate investing? Working a nine to five job swapping time for money can be incredibly dispiriting. After the futility of it all hits home, it's all you can do to limit the number of home business opportunities you investigate to twenty per week. One of the more compelling home business opportunities is real estate investing. Real estate investing is the perennial wealth builder, and the transition from working a job to achieving wealth through real estate investing is becoming increasingly well documented. You've probably thought about investing in real state yourself but you've not gone for it because you thought you needed tens of thousands in savings for a down payment, and perfect credit along with strong banking relationships.
Well, you can get all that together if you want. It doesn't hurt to have those resources. But it's not necessary to have a huge pile of cash and perfect credit to buy a house cheap and resell it for a profit. It's especially not necessary in the preforeclosure market. Preforeclosures are houses in the default phase of foreclosure; where the bank has filed initial foreclosure papers but the sheriff sale or trustee sale where the bank auctions off the property, or repossesses it if no-one buys at the auction, hasn't occurred yet. Buying during the preforeclosure period is one of the best ways for anyone to get involved in real estate investing. With little more than a few hundred dollars and some specialized knowledge you can buy a house at a substantial discount and resell it retail picking up a five figure profit check in the process.
Don't Believe It?
Well, let me give you seven reasons why it's true:
1.) When people are in default on their mortgage they have stopped making payments to the bank. So when you are negotiating with the seller, and the bank, right up until the point where you buy, no-one is making the payments. For novice investors worried about holding costs this is a huge advantage.
2.) Preforeclosures are a very well defined niche market. One of the most deadly mistakes rookie investors make is trying to be a jack-of-all-trades, going after any and everything they can lay their eyes on. The result of this lack of focus is they are soon back at their jobs. By being a very defined market, preforeclosures allow you to develop focused marketing campaigns and standardized processes to get deals completed and closed.
3.) One of the fundamentals of real estate investing is contacting and talking "only" to motivated sellers, and avoiding all the rest. Sellers in preforeclosure are some of the most motivated sellers you will find. Their world has been turned upside-down, they are about to lose their house, and their motivation is such that they just want out of the house and the bank off their back. By buying houses from people in preforeclosure, creating 30%+ equity spreads on houses often in good condition is not a difficult thing to do.
4.) Buying houses in preforeclosure enables you to create unusually large equity spreads. Recent economic uncertainty has caused a lot of foreclosures, and rising rates will cause more in coming years. If banks had to take back all of the properties that went into foreclosure the FDIC would shut them down. They know this, so they try not to take properties back they don't have to. By requesting the lender discount what is owed on their payoff, large spreads of equity can be created on houses that are totally "maxed out" with loans. This can't be done on loans not in default.
5.) Because lenders are under pressure to liquidate bad loans rather than take the property back, large discounts can be negotiated. After becoming familiar with the issues that cause lenders to discount, larger and larger discounts can be achieved as you hone your negotiating skills.
6.) If your plan is to buy and hold the property, having good enough credit and financials to get bank financing excludes a great many people from getting into real estate. On top of that, if you do get a bank loan, your financial exposure is at it's maximum when everything is in your own name and personally guaranteed. Buying houses in preforeclosure allows you to simply take over the existing financing already in place. No qualifying needed. You can take title to the property in a land trust, begin making payments on the existing mortgage(s), and still get all the tax advantages, appreciation, depreciation without any of the risk of being personally liable for the mortgage and the property.
7.) If you have ever bid at auction for property at the courthouse steps, you are only too aware of the competition breathing down your neck. Lots of mind games. The 40 thieves are talking trash to you trying to get you not to bid. If you are Larry Bird, no problem. Make sure you have $500K on your credit line though. However if you are not the 'Bird' and you don't pack half a mil' of credit, you can sneak in and avoid this NBA showdown by buying the house during the preforeclosure period... before the auction.
Make no mistake about it, there are many ways to make healthy profits in real estate investing. But when you look at how easy preforeclosure makes it to buy houses cheap and resell for five figure profit checks, all the while helping people out of agonizing life circumstances, it makes little sense to pursue real estate investing any other way.
Well, you can get all that together if you want. It doesn't hurt to have those resources. But it's not necessary to have a huge pile of cash and perfect credit to buy a house cheap and resell it for a profit. It's especially not necessary in the preforeclosure market. Preforeclosures are houses in the default phase of foreclosure; where the bank has filed initial foreclosure papers but the sheriff sale or trustee sale where the bank auctions off the property, or repossesses it if no-one buys at the auction, hasn't occurred yet. Buying during the preforeclosure period is one of the best ways for anyone to get involved in real estate investing. With little more than a few hundred dollars and some specialized knowledge you can buy a house at a substantial discount and resell it retail picking up a five figure profit check in the process.
Don't Believe It?
Well, let me give you seven reasons why it's true:
1.) When people are in default on their mortgage they have stopped making payments to the bank. So when you are negotiating with the seller, and the bank, right up until the point where you buy, no-one is making the payments. For novice investors worried about holding costs this is a huge advantage.
2.) Preforeclosures are a very well defined niche market. One of the most deadly mistakes rookie investors make is trying to be a jack-of-all-trades, going after any and everything they can lay their eyes on. The result of this lack of focus is they are soon back at their jobs. By being a very defined market, preforeclosures allow you to develop focused marketing campaigns and standardized processes to get deals completed and closed.
3.) One of the fundamentals of real estate investing is contacting and talking "only" to motivated sellers, and avoiding all the rest. Sellers in preforeclosure are some of the most motivated sellers you will find. Their world has been turned upside-down, they are about to lose their house, and their motivation is such that they just want out of the house and the bank off their back. By buying houses from people in preforeclosure, creating 30%+ equity spreads on houses often in good condition is not a difficult thing to do.
4.) Buying houses in preforeclosure enables you to create unusually large equity spreads. Recent economic uncertainty has caused a lot of foreclosures, and rising rates will cause more in coming years. If banks had to take back all of the properties that went into foreclosure the FDIC would shut them down. They know this, so they try not to take properties back they don't have to. By requesting the lender discount what is owed on their payoff, large spreads of equity can be created on houses that are totally "maxed out" with loans. This can't be done on loans not in default.
5.) Because lenders are under pressure to liquidate bad loans rather than take the property back, large discounts can be negotiated. After becoming familiar with the issues that cause lenders to discount, larger and larger discounts can be achieved as you hone your negotiating skills.
6.) If your plan is to buy and hold the property, having good enough credit and financials to get bank financing excludes a great many people from getting into real estate. On top of that, if you do get a bank loan, your financial exposure is at it's maximum when everything is in your own name and personally guaranteed. Buying houses in preforeclosure allows you to simply take over the existing financing already in place. No qualifying needed. You can take title to the property in a land trust, begin making payments on the existing mortgage(s), and still get all the tax advantages, appreciation, depreciation without any of the risk of being personally liable for the mortgage and the property.
7.) If you have ever bid at auction for property at the courthouse steps, you are only too aware of the competition breathing down your neck. Lots of mind games. The 40 thieves are talking trash to you trying to get you not to bid. If you are Larry Bird, no problem. Make sure you have $500K on your credit line though. However if you are not the 'Bird' and you don't pack half a mil' of credit, you can sneak in and avoid this NBA showdown by buying the house during the preforeclosure period... before the auction.
Make no mistake about it, there are many ways to make healthy profits in real estate investing. But when you look at how easy preforeclosure makes it to buy houses cheap and resell for five figure profit checks, all the while helping people out of agonizing life circumstances, it makes little sense to pursue real estate investing any other way.
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