Matt's Foreclosure Home Buying Secrets

AuthorHouse

Contents

Introduction: Welcome to the World of Foreclosure Home Buying!.....................................................xiChapter 1: What is a Foreclosure?..................................................................................1Chapter 2: Everything You Need to Know About Finding Foreclosure Properties and Other Bargains.....................15Chapter 3: Everything You Need to Know About Researching Foreclosure Properties....................................25Chapter 4: Everything You Need to Know About Bidding At a Foreclosure Auction......................................55Chapter 5: Payment FAQS: What Happens After You Win a Foreclosure Auction?.........................................68Chapter 6: Closing FAQS: How to Close and Take the Title on Your Property..........................................90Chapter 7: Market FAQS: What You Need to Know About Current Market Trends..........................................108Chapter 8: Investing FAQS: Foreclosure Investing Strategies and Pitfalls...........................................115Chapter 9: Conclusion: It's Time to Take Action!...................................................................131

Chapter One

First, let's define some of the terminology that you'll see in this book and in your business dealings with foreclosure attorneys, trustees, banks and so on ...

Foreclosure: A foreclosure is a legal process whereby a creditor repossesses collateral for a loan that's in default. In most cases, that means the bank or mortgage lender repossesses a house so that they can resell it to satisfy the debt.

Usually, they put the home up on auction, with a minimum or reserve bid equal to the amount of money they need to clear their debt and associated fees. This amount tends to be below market value, which is why you have the opportunity to get a good deal. However, the property is usually sold "as is" (and in most cases, buyers are unable to inspect the inside of the property).

This sale is referred to as the foreclosure auction.

Pre-foreclosure: This is the period before the property goes on sale at the foreclosure auction. The pre-foreclosure period allows time for you to research the property and possibly contact the homeowners with a deal (more about this later).

For the homeowners, it's also the period of time where they may be able to save their home from foreclosure, provided they can satisfy the debt and all fees. This period of time happens before the foreclosure auction and is referred to as the reinstatement period.

Redemption Period: In some states, there is a redemption period lasting from a few weeks to several months after the sale of a home at a foreclosure auction. If the original homeowner can satisfy the debt during this period, then they can reclaim (redeem) the property.

Real Estate Owned (REO): If no one bids the minimum amount at a foreclosure auction, then the bank owns the property. This property is listed as REO in their records. Since a bank is in the business of loaning money not holding onto real estate, the bank will try to move this property off their books.

Buying REO property tends to be a safer transaction (as opposed to buying at a foreclosure auction), since the bank often - but not always - makes repairs and ensures they give you a clear title. If that happens, then you can expect to pay more for the property to cover those additional expenses. Otherwise, if the bank doesn't do these things, then you can usually buy the property for less than the opening bid at the original foreclosure auction.

Short Sale: A short sale occurs when the bank or other lender agrees to take less than the total amount owed on the loan to satisfy that debt.

One of the reasons a lender would agree to this is to avoid a foreclosure. Obviously, a short sale helps the borrower since they can avoid losing their home and further damaging their credit. But in some cases, it makes sense for the bank as well, since they won't have to put the time and money into going through the foreclosure process.

Distressed Property: This refers to any real estate property that's at risk of foreclosure or perhaps already in foreclosure.

Now that we've defined some of these common terms, let's look at the process in a little more depth ...

How the Foreclosure Process Works

Let me say this up front: Different states have different foreclosure laws. So while you'll get a good overview of how the foreclosure process works by reading this book (and how you can benefit), you MUST check your local laws before you start buying foreclosed homes.

Because the laws differ between states, you'll find that the timing can greatly differ. For example:

Some lenders start foreclosure proceedings when a debt is past due 90 days, while other lenders wait more time or less time.

In some states, you can get the title and close on the property within a few days or weeks after a foreclosure auction, while in other cases it may take months or even a year for you to get the title and take possession of the property.

In some states, the original homeowner has little or no redemption period after the auction, meaning you can take possession almost immediately. In other states, you'll want to hold off on putting any money into the property, as the homeowner might still redeem their property.

If there are people living in the home, you may have to start an eviction process. In some states, this process may take just a couple weeks. In other states, it may drag on for months. (Although later in this book, you'll discover how to expedite the process so that the tenants are happy to leave.)

Again, check your local laws for the details.

For your general information, here's how the process works. Look at this timeline first, and then in a moment I'll explain these steps in more detail ...

Foreclosure Process Timeline

Start of the process: Homeowner (borrower) falls behind on mortgage payments

60-180 days later: Lender starts foreclosure process by filing Notice of Default

Note: Reinstatement period begins after NOD is filed.

90 days later: Lender files Notice of Sale (NOS)

21 days later: House goes up for bidding at foreclosure auction

Note: At this point the timeline differs depending on whether:

A: someone wins the property or ...

B: No one wins the property at auction (because no one placed the minimum bid).

Here are timelines for both those scenarios:

A. If someone wins property at auction, then:

Immediately after bidding: Winner pays down payment on property

24 hours-60 days later: Winner pays balance owed on the property

Note: Redemption period begins in some states, lasting 10 days to one year.

Two weeks to one year later: Winner takes title on the property and in some cases also takes possession.

One week to six months later: If need be, winner evicts occupants from property and takes possession of the house.

B. If no one wins the property at auction, then:

Immediately: If no one bids, then lender's attorney "buys back" the property at the auction - bank immediately becomes "bank owned" property (also known as REO - Real Estate Owned - property).

Immediately: Investors can submit offers to the lender for the REO property, even while it's still in "as is" condition. However, you may submit contingencies with your offer.

Two weeks to six months later Some lenders may repair home, offer a clean title and list it for sale. (But note that you can make offers at any time during this process.)

Now let's go over this process in a little more detail ...

1. Borrower falls behind on payments.

The borrower may fall behind on payments for a variety of reasons, including divorce, death in the family, losing a job, health problems, unforeseen major expenses, legal problems and more. Add the original problem to the new debt problems, and you can see where this quickly becomes a stressful situation for the borrower.

We'll talk about investing in pre-foreclosure properties later in this book. For now, let's get back to an overview of the foreclosure process ...

We'll talk about investing in pre-foreclosure properties later in this book. For now, let's get back to our overview of the foreclosure process.

When the borrower initially falls behind on the loan (mortgage) payments, he or she usually has a 10 to 15 day grace period to make the payment without penalty. After that time, late penalties and fees begin to accrue.

After about 30 days, the bank will begin sending urgent notices to the borrower, and the late payment may show up on the borrower's credit report. At 60 and 90 days the payments are accumulating along with interest and penalties, and the lender usually continues sending notices in the mail and tries to contact the borrower by phone.

Around 90 to 180 days, the "acceleration clause" of the mortgage agreement may go into effect. This means that the homeowner could be bound by the contract to pay the loan immediately and in it's entirety (including late payments and fees) ... or face foreclosure.

Even if the mortgage contract has an acceleration clause, most lenders would prefer to work with the homeowner rather than going through the foreclosure process (as a foreclosure costs the lender time and money). So rather than getting the full amount of the loan, most lenders are happy if the homeowner simply gets current on the loan - meaning the borrower needs to pay all back payments and penalties.

SECRET: Sometimes homeowners attempt to sell their own house at this point just to save their credit rating from getting hammered with a foreclosure. You may see "FSBO" (for sale by owner) ads in the paper which make mention of "taking over payments" (or similar). You may be able to secure a good deal on these homes if the owner is motivated to sell fast to avoid foreclosure.

However, just be aware that a homeowner who tries to sell his home shortly before a bankruptcy will likely cause problems for the buyer. More about that later in this course.

If the bank believes the borrower is unable to repay the loan, then usually between 90 and 180 days the lender begins the legal foreclosure process. This process officially starts with the next step ...

2. The bank posts a Notice of Default (NOD).

Once the bank or other lender decides that the borrower is unable to make payments on the loan, then the lender posts a "Notice of Default" (NOD) with the County Recorder and sends a notice to the borrower. This serves as the official notification to the borrower that the foreclosure process has started.

SECRET: A Notice of Default is a public record, which means you can secure these records to find out about homeowners who may be willing to sell their homes (to avoid foreclosure) or who may be forced to sell their homes during the foreclosure.

Sometimes investors buy the homes at this point to help the homeowner avoid the foreclosure. Some investors buy the homes and allow the former homeowners to pay rent - so while they no longer own the home, they don't have to move either.

As mentioned before, some homeowners may not be receptive to your offers at this point in the foreclosure process. In addition, the homeowners are likely getting calls from your competition ("foreclosure hunters"). And because some homeowners have been told that anyone who wants to buy their house is a con artist, they may view you very suspiciously.

Again, none of this means that you shouldn't contact homeowners at this point in the foreclosure process. Just be aware of how some people may react to your offers.

Once the Notice of Default is posted, a "reinstatement period" begins. In most states, this period lasts approximately three months (often ending just days before the scheduled foreclosure auction). At this time the homeowner has a chance to bring the loan current - or in some cases, pay off the loan - to save the home.

3. Lender posts Notice of Sale (NOS) and a sale3. date is established.

If three months pass and the loan isn't current (e.g., back payments and penalties haven't been repaid), then the lender can post a Notice of Sale (NOS) which gives the time and location of the foreclosure auction.

The Notice of Sale is posted at the County Recorder's office, a notice is sent to the homeowner, and the sale is usually mentioned in the local papers for a period of three weeks.

Because there's still a chance that the homeowner could make back payments to save the property, not every property that's listed in the paper or in the public records actually goes on the auction block. Sometimes they are postponed. Sometimes they are outright cancelled. To save yourself some time, call the trustee the day before or day of the auction to see if the property is still scheduled to go on auction.

SECRET: While you generally can't inspect the inside of the property, this is the time you should be doing a "drive by" to inspect the outside of the property. Later on in this book I'll tell you what to look for when you do this research. I'll also tell you what other research you must do before you even think about placing a bid on a property - and I'll share a horror story from someone who didn't do this research!

Bottom line: Most properties are sold "as is," which means that your ability to do research is directly related to how much money you can save buying a foreclosed home (versus a home being sold at full market value).

4. House goes up for auction.

If the homeowner doesn't save the house (and if the homeowner hasn't made other arrangements with an investor), then the house goes on auction. Usually the auction occurs on the steps of the courthouse in which the property is located. If not, then the auction usually happens in some other public space. Check the Notice of Sale for the time, date and location of the sale.

While auctioneers prefer to sell homes without a reserve price or minimum bid (because these auctions generate more interest), you'll likely find that most of the properties do indeed have a minimum bid. This minimum bid is set by the lender and is generally equal to the amount of money they need to balance their books. In other words, the minimum bid is equal to the outstanding loan amount plus any legal expenses or other fees.

Now one of two events occurs ...

5. Winner pays for property and closes deal ... OR if there's no sale, then the bank owns the house (REO).

If no one bids the minimum amount, the bank now owns the property (which is listed as REO in their records). At this point you can make an offer on the house by dealing directly with the bank's representatives. In this case, you may even be able to submit contingencies along with your bid.

SECRET: As mentioned before, the bank may also clear the title and repair the home (if needed), which makes the transaction safe for you. We'll talk about buying REO property later in this book.

The other possible outcome is that one or more buyers bids on the property ... and the buyer with the highest bid wins the auction. The buyer usually needs to put down a deposit immediately (usually at least $5000 or 5%, whichever is greater), and then pay the remainder anywhere between 24 hours and 60 days later.

The winner is usually given a deed that he takes down to the County Recorder's office so that he can get his name added to the title. You'll also want to purchase homeowner's insurance to protect your property. If someone is living on the property, you may begin eviction proceedings.

In some states a redemption period begins after the auction, whereby the former homeowner can still buy back and save his or her home. If your state has redemption period, don't put any money or do any repairs on the home until after the redemption period has expired.

Quick Recap

There are three points in the foreclosure process where you can buy the home:

1. In pre-foreclosure - here you may find homeowners trying to sell their property to avoid foreclosure, or you may consider approaching homeowners to buy their property.

2. At the foreclosure auction - here you'll bid against your competitors in an attempt to secure a good home at a great price.

3. After an unsuccessful auction - if no one bids, then the bank owns the property. You can work directly with the bank's attorneys and other representatives to purchase this bank-owned property.

As you've already discovered, the foreclosure process doesn't happen overnight. And that means you have time to do the necessary research, which you'll learn about in the next section ...

(Continues...)

Excerpted from Matt's Foreclosure Home Buying Secretsby Matt Malouf Copyright © 2009 by Matt Malouf. Excerpted by permission.
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