Cashing in on Pre-foreclosures and Short Sales

A Real Estate Investor's Guide to Making a Fortune Even in a Down Market

Chip Cummings

• Publisher: Wiley
• Year: 2009
• Print ISBN:
  9780470419816
• Edition: 1
• eBook ISBN:
  9780470463758
• Topic: Business
• Subtopic: Real Estate
• Index: Business

Cashing in on Pre-foreclosures and Short Sales shows investors exactly how to take advantage of what many are calling the best upcoming investment real estate market we have experienced in decades! Chip distinguishes the difference between good deals and bad deals, reveals just how easy it is to find, evaluate, and obtain foreclosure properties, tells how to negotiate a profitable transaction, and unveils the power of using short sales and other strategies to create a win-win situation for the investor, the seller, and the bank. Even first-time buyers looking to score a bargain on purchasing their own home will be armed with all the tools they need to confidently evaluate and pursue a profitable deal - and save thousands in the process. Cashing In on Pre-foreclosures and Short Sales incorporates quotes and advice from top industry professionals, as well as a healthy appendix packed with state and national foreclosure guidelines, including valuable contacts and websites, sample forms, checklists, and all the necessary tools you need to find, evaluate, secure and profit from foreclosure properties.

PART I

WHERE TO START

My philosophy has always been that the best place to start is right at the beginning.

Whether you are a true beginner in the world of foreclosure investing or an experienced professional, inside this book there are years and years of practical experiences, strategies, and street-smart insights designed to save you time and money and help you create your own personal fortune through investing in foreclosures. Also included are many expensive lessons learned from the “school of hard knocks” to illustrate what NOT to do!

To help make it easier for you to navigate, I have divided this book into three parts. Part I is designed for those just getting into the world of foreclosures for the first time. As I travel around the country, one of the biggest frustrations for most people I talk to is they simply don’t know where to begin. So to get you ready to become a foreclosure investor, I will start out by teaching you about the process, common terminology, opportunities, risks, and information about the foreclosure market.

We’ll also explore what you need to know about state laws and regulations, how to quickly evaluate a property, and where to find financing. Don’t skip the last two chapters, as we set you up to do the foreclosure business the right way, and look at how to build a team of professionals to help you create wealth.

Thanks for investing your time and money with me, and I promise to share all the details of how to create a personal fortune with pre-foreclosures and short sales. So if you’re ready, fasten your seatbelt and let’s get started!

CHAPTER 1

A Crash Course in Pre-foreclosures and Short Sales

Congratulations! You have taken an important step in securing your financial future, and I’m honored that you’ve decided to take it with me. I bought my first foreclosure property at the age of 19—and it was actually by mistake! Although I had a few fellow real estate brokers showing me the ropes, I didn’t know what I was doing, and had no formal training or education on foreclosure investing. At that time, there was no such thing.

Just like there are very few classes that teach our kids about credit and how to manage their finances, no one has set up a curriculum to teach you the ropes of evaluating, investing, and managing foreclosures. You learn by doing.

My goal is to shorten the learning curve for you. Right now, the entire foreclosure process may seem quite foreign, and even a bit secretive, but once you get into it, you’ll find that it’s actually quite simple!

People buy a home, then, for any number of reasons they stop making payments, and the lender has to take the home back. Pretty simple. Although there are a certainly a few more steps in between, that one sentence pretty much sums up the foreclosure process. The trick is learning how to make money between the steps. In this first chapter, I’ll take you through a crash course on the foreclosure process to help you start to identify where the real opportunities lie.

What Are Foreclosures?

The first thing you need is a clear understanding of what a foreclosure is. When you mention the word foreclosure, most people think of unfortunate people who got in over their heads and lost their property to the bank.

This is only partially accurate. While there is certainly an element of truth in this statement, the concept of foreclosures is actually bigger than that. There are many reasons why properties go through foreclosure, and it involves an entire process whose pieces can be broken down into three basic phases—pre-foreclosure, public auction, and post-auction.

What Are Pre-foreclosures?

As you will soon see, this is where the “real” money is made. I have purchased properties in all different steps of the process, but this is where your efforts will yield the greatest reward.

Pre-foreclosures simply defined is the time period between when a homeowner misses his or her first mortgage payment, and the date when the property is sold at public auction or a trustee’s sale.

What Are Short Sales?

During a foreclosure process, the lender will always lose money. Sometimes a great deal of it. With the advent of creative mortgages over the past several years, combined with a cycle of soft or declining real estate markets, some homeowners actually become “upside-down” in their property, that is to say, they can’t afford to sell. By the time they pay a real estate commission, all the costs and fees, as well as the debts associated with the property, they actually end up owing the lender money to in order to sell their home. In fact, according to RealtyTrac.com, a national foreclosure tracking service, as of the end of 2008, one out of every five homes that had a mortgage were upside-down. That’s 20 percent!

In these circumstances, many homeowners and lenders are faced with the difficult choice of the lesser of two evils. This effect is compounded when a property enters the foreclosure stage, as the payments and penalties start to add up quickly. Enter the short sale.

A short sale is where the lender agrees to accept full payment for the mortgage debt in an amount that is less than the homeowner actually owes. Most homeowners don’t know that this is even possible, and they certainly don’t know how to structure a short sale transaction. When the circumstances are right, you’ll be in a position to help.

Steps in the Foreclosure Process

Most people believe that the foreclosure process starts with a notice published in their local newspaper or at the courthouse. In reality, it starts way before that. It starts as soon as the homeowner misses a payment.

I mentioned the three phases of foreclosure, but in a typical foreclosure process, there are actually 16 steps. So you understand all the differences, and how to determine where the homeowner is in the progression, let’s take a quick look at each one:

1. The missed payment: For a variety of reasons, a payment is missed, and once a borrower gets behind, it is difficult to get caught up.

2. The payment reminder: Hoping that it’s just an oversight, the lender will send a gentle reminder to the borrower within the first 10 to 25 days.

3. No response: If the payment still hasn’t found its way to the lender, there will be a series of more strongly worded letters, followed by a few phone calls to the homeowner to find out what’s wrong.

4. Collection: If the lender and homeowner have not reached a resolution to get the payments caught up, usually by the sixtieth day of delinquency, the lender will turn the matter over to its internal collection department, or what’s known as the “loss mitigation” department.

5. Outside collection: Once the homeowner has missed three payments, the lender knows that the problem is serious, and the likelihood of them catching up is slim. Now 90 days past due, the matter is usually referred to outside attorneys to begin hounding the homeowner. They aren’t typically as nice as the lender’s own employees.

6. Work out: If the attorney can talk to the homeowner (the homeowner is probably getting really skilled at dodging phone calls), they will try and do a work-out, or loan modification to get the borrower back on track. This can include partial payments for a short period of time, payments added to the end of the loan, or any other of several scenarios based on the borrower’s situation. This is a mandatory step for most loans and can work great if the borrower can demonstrate that his circumstances are only temporary.

7. The Notice of Default: If a work-out arrangement cannot be agreed on, or if the borrower does not follow through on the arrangements, a Notice of Default will be posted through the local newspaper or legal news, and the foreclosure process officially begins.

8. Sheriff notification: At this point, the county sheriff ’s office receives the paperwork, and the attorney or trustee for the lender will set the opening bid. This amount represents the balance due on the loan, plus late fees, penalties, and costs.

9. Posting the property: The sheriff or a representative may visit the house and post a notice of foreclosure action, and inspect the property. If the property appears to be abandoned, the court may decide to expedite the process. In all states, a notice must be posted on the property. At this point, the homeowner can still redeem the property and reinstate the loan by paying the delinquent amount, plus any fees and costs incurred.

10. Bid adjustment: Just before the date of the public foreclosure auction, the lender will adjust the bid up or down slightly based on a final accounting of the loan and delinquency costs.

11. Auction day: If the homeowner has not somehow gotten his act together, the property is auctioned off to the highest bidder, or is liquidated to pay off the lender. This is usually an anticlimactic event, except for the homeowner. This is the day he or she really starts to lose the property.

12. Hammer time: When the hammer comes down (the motion of the auctioneer to indicate the final bid), the lender or an investor wins the bidding for the property. Sometimes the sale is handled by a trustee. The lender will simply make a bid for what it is owed, or an investor purchases the property. If there are no other bids, the property is turned over to the lender. Regardless of whether the lender or an investor wins the bid, the property may be subject to a redemption period.

13. Redemption and possession: Based on where the property is located, the lender or investor could take immediate possession, or in states with redemption periods, there is a mandatory waiting period. Sometimes called a “cooling off period,” a redemption period gives the borrower one last chance to redeem the property by paying off the high bidder, plus certain reasonable costs. This redemption period could last just a few days—or it could last a year.

14. Redemption period expires: At the end of that redemption period, there may be another court hearing with the homeowners before the new owner (the lender or the investor) can take possession of the property. In certain circumstances, such as abandonment, the redemption period can be waived by the court.

15. Eviction: If the previous owner is not already out, the new owner will have the sheriff ’s department evict the previous owners. This eviction is done without any further notice, and without fanfare, and all of the previous owner’s belongings are put out on the street. This step can get ugly.

16. New owner moves in: Once the property has been secured, the new owner or investor can fully take o...

Table of contents

• Praise
• Title Page
• Copyright Page
• Dedication
• DOWNLOADABLE LETTERS, FORMS, AND CHECKLISTS
• ABOUT THE AUTHOR
• Foreword
• Acknowledgements
• Introduction
• IMPORTANT DISCLOSURE NOTICE
• PART I - WHERE TO START
• PART II - FINDING AND INVESTING IN FORECLOSURES
• PART III - CASHING OUT!
• 10 AMATEUR MISTAKES THAT WILL COST YOU THOUSANDS
• STATE-BY-STATE FORECLOSURE GUIDELINES
• 101 FORECLOSURE AND INVESTOR RESOURCES
• GLOSSARY
• INDEX