Buying Property with Little or No Money Down Part 7

One of the fastest ways to make large cash profits or equities in real estate is to buy properties substantially below their present or projected renovated market values. These bargain properties, some call distressed properties, offer the greatest opportunity for cash and equity profit.

Forced Sales

Forced sale properties would include FHA, VA and HUD foreclosure sales, tax sales, bankruptcy sales, government services administration spare property and drug arrest acquired property, developer close-out sales and auctions, property taken back by corporations in connection with employee transfers, civil judgement sales, IRS sales, probate sales and estate sales.

Many of the properties that are forced sales by the courts will often be run down and in need of repair, so look them over carefully.

Foreclosures Sales

Recent statistics show foreclosures are on the increase. As a matter of fact, the foreclosure rate is higher now than at any times since 1929. Unfortunately, this upward trend will probably continue because the stigma attached to bad credit and bankruptcy is not as great today as it once was.

Foreclosures occur for two reasons: either the owners do not want their properties or they cannot afford them. In some larger metropolitan areas, like New York and Los Angeles, declining neighborhoods have caused some owners to just walk away and abandon their properties. These properties are then repossessed through mortgage or tax foreclosures. The most common reason that properties are lost through foreclosure, though, is that the owner cannot afford the monthly payments because of divorce or loss of employment.

Adjustable rate mortgages (A.R.M.s), which were designed to help people buy homes by providing lower monthly payments, have created their own set of problems. When people borrow money with adjustable rate mortgages they have no idea what will happen to their future monthly payments. Since some of these mortgages were originated four to five years ago, there has been a consistent increase in the monthly payments. Home owners by the thousands have lost properties through foreclosure because of their inability to make these higher and higher payments.

Many people think that lenders like foreclosure because the lenders are going to get back a property that is potentially worth more than the amount owed. As a matter of fact, nothing could be further from the truth. Lenders will frequently go out of the way to avoid a foreclosure action.

The Foreclosure Process:
Delinquency

When a borrower fails to make a monthly payment on time, the lender sends a friendly reminder letter. If the payment is not received within a few days, another letter is sent warning of potential foreclosure. At some point in time, usually within thirty to sixty days, the lender turns the matter over to an attorney. The attorney contacts the borrower by mail and explains that if the mortgage is not brought current within a certain time, formal foreclosure proceedings will begin. This is known as the redemption period. The last date given for bringing the mortgage current is known as the cure date. During this period, most borrowers and lenders are extremely interested in talking to you as an investor about buying the property. The cost of bringing the mortgage current is at its lowest during this time because expensive forclosure proceedings and large atttorney fees have not been added into it. Usually only the interest, principle and penalties would be due at this point in time plus a small attorney fee.

Once the cure date is reached, the foreclosure period begins. In most states the attorney will file a notice of the action at the county courthouse in which the property is located. The attorney will also go to court and ask for a judgement directing the sale of the property. A copy of the summons and complaint will be served against the defendant (the borrower).

You, as an investor, can still buy the property at this point. However, the cost will have risen substantially primarily because of attorney fees. Also, you will have no assurance if you do buy the property that there are not other liens which must be satisfied. For example, other mortgages or even judgements from local professional people or credit card companies may be outstanding.

The Foreclosure Process:
The Public Sale

After a period of time prescribed by state law and a notice to the public has been printed in the newspaper, the sale of the property is held at a public action in a public place, usually the county courthouse. If you have never been to one of these auctions, you should attend one just to become familiar with how they work.

The lender, by law, has an automatic bid for the total amount owed. The lender may not bid higher than that figure. If there are no other bidders, then the lender will receive the property for the entire amount owed (amount of loan plus interest plus expenses). Once the lender has taken title, these properties are referred to as R.E.O.s, or real estate owned by the lender. They also represent a good investment opportunity.

If the R.E.O property is ultimately sold by a lender for less than the total amount owed, the lender will probably go to court and seek a deficiency judgement against the borrower. If there are excess funds from the public sale, however, these would rightfully go to the borrower.

Locating Foreclosure Opportunities

Foreclosure opportunities exist in three separate time frames: the period up to the foreclosure sale, the foreclosure sale itself, and finally, once the property has reached the status of R.E.O You have several ways to locate foreclosure opportunities during these three stages.

In some jurisdictions, the lender will post a notice on the property that it will be sold at a public auction. In some cases, too, the run-down condition of a property may indicate a foreclosure is in process. In either case, your course of action would be to approach the owner/borrower, not the lender.

Public Records. The owner's name can be found in the public records of the county. You should attempt to make contact even if the house is vacant. In the case of an unoccupied property, sometimes the next door neighbors or other people in the area might know how to get in touch with the owner. You could knock on doors and ask people if they know the owner's whereabouts. Explain that you are just trying to help the owner with the house.

Public Mail. Send a letter to the owner at the address of the house. Or, place a stamped envelope containing a letter from you in the mail box at the property address. Make sure it is stamped or you will be violating the law. If possible, try to find a place in the door or window where you could actually slip a letter inside. This way, the owner has a good chance of finding it if he or she returns to visit the property.
In the letter, explain that you understand the property is going to be sold at a public auction, and you would like to help the owner preserve credit and possibly retain ownership of the property. (You might work out an arrangement where you could buy the property by bringing the mortgage payments current and give the owner an option to buy the property back from you for a period of three or four years, if the owner is able to do so.

Telephone Directory. Consult you local telephone directory for the name of the person and call the information operator as well. If you come up with a dead-end using that approach, call some other people with the same last name that are listed in the directory. Chances are, they may be a relative or know the owner personally.

Purchasing A Property In The Initial Stage Of Foreclosure

To purchase property during the initial stage before foreclosure proceedings, you need the unqualified permission from the bank and the owner of the property. If either refuses, buying the property and bringing the mortgage current will be impossible.

Assuming the seller is willing to allow you to bring the mortgage current and buy the property under terms that are favorable to you, you should then visit the bank and determine whether you will be permitted to assume the mortgage if you bring the payments current. If the mortgage has a due-on-ale acceleration clause, but you are given permission to assume it, find out what the new interest rate will be. Be sure to get the answers in writing from an officer who is able to bind the bank corporation.

Assuming that you have assured yourself of the satisfactory physical condition of the property, now get a preliminary title report from a tittle insurance company. For a cost of approximately $50 to $100, the title company will give you a report on the title and will determine if there are other liens against the property, such as a judgement lien from a local finance company.

When you are satisfied about all aspects of the transaction, have the title insurance company prepare a deed which will be signed by all owners of the property. Their signatures should be witnessed and notarized by a notary public. You should quickly record the deed in the public records. Then be sure and obtain fire and casualty insurance for the property.

Purchasing A Property At Public Auction

You may find that either the bank is unwilling to allow you to assume the mortgage or that you do not want to buy the property before the auction because of the large number of liens that exist. If you are satisfied, however, that you would like to own the property, you need to make plans to bid at the public sale.

There are several ways that can be used to determine when the public sale is going to be held.

Contact the Sheriff's Department and ask the secretary to the Sheriff to look at the court calendar.
Contact the lender's attorney and ask when the property will be sold at auction.
Go to your local legal newspaper and check the ads to see when the property will be sold.
Visit your courthouse to review a posted schedule of foreclosure sales.

Once you learn the sale date, contact the lender's attorney to find out if the lender will accept any other terms than all cash. If the lender will not (and most will not), you will need to make arrangements to get the cash yourself.

Many properties have been sold on the courthouse steps for 50 or 60 cents on the dollar. If the property in which you are interested represents this kind of a bargain opportunity, generating the cash needed should not be difficult. You could go to private lenders or partners who might advance the money needed, or if you have sufficient credit yourself, go to a local bank and get a 90-day loan. Once you buy the property and make any need repairs, you will be able to put a new mortgage on the property and take out whatever cash you had invested, or maybe even more than you invested.

Purchasing property at a public auction can be a very risky business. You have to know what you are doing. You not only need to be absolutely certain, through an engineering report (by a firm recommended by a broker or banker), that the property you are buying is in reasonably good condition or at least be familiar with its faults. Further, you need to have a good understanding of market value so that you are sure that you are getting a bargain.

Making Money On R.E.O.s

When there are no other bidders at the public sale, the bank, by law, becomes the owner of the property. These properties taken back by banks are not assets, they are liabilities. Banks are naturally eager to sell these properties to generate cash or a mortgage loan, both of which would be assets.

Every banks has a list of R.E.O.s which it is generally willing to show to you, especially if the bank thinks you are a sincere and qualified investor.

Assume that you select one or two properties from the list that you think would make good investments. If the asking price is not shown on the list, then find out the price and terms from the banker. Remember, the banker's first price and first offer of terms is not the final one. Most bankers are willing to negotiate, especially with R.E.O.s. Some bankers are even willing to sell the properties on a lease option.

GOVERNMENT AGENCIES OFFERING FORECLOSURE PROPERTIES

Few people are aware of the large amount of property that is seized by federal government agencies and then later sold at bargain prices. Although it is beyond the scope of this document to list properties for sale by individuals across this country, we have provided the following LINKS from all the government agencies we're aware of that have property for sale in practically every decent sized city in America.

These LINKS are updated regularly and can be referred to as often as necessary.

www.gsa.gov/pbs/pr/prhome.htm

http://www.fdic.gov/buying/owned

www.treas.gov/auctions/customs/realprop.html

www.va.gov/

Part 6: Negotiating