Residual Income Through Real Estate

Although there is less liquidity with real estate, some folks prefer what they can see, touch and feel. As in most areas of life decisions are made with facts. They are confirmed with emotion. One way to have tangible property earning residual income is through foreclosures.

Foreclosure is simply what happens when you don’t pay your bills on your mortgage. The lenders want their money and they take actions to get it, often by selling the house.

My number one recommendation in this area is to THINK, RESEARCH AND BE KNOWLEDGEABLE before you act! Go to seminars. Read books. Visit web sites. Attend auctions. Talk to professionals. Join investment clubs. Become as knowledgeable as possible before you decide to act!

Most of the homework you need to do is at your local level. What are the tenant-landlord laws? What rules apply for late payment and eviction? Are there rent controls? Look up on the Internet to get a hold of local landlord and real estate specialty interest groups. Foreclosure law is formulated at the state level. Since each state has unique laws and time lines, you must read up and ask! Some states have mortgages. Some have deeds of trust.

The foreclosure process goes through 3 distinct phases:

Pre-foreclosure
Foreclosure at auction
Post-foreclosure (the property goes back on the books with the lender. The lender wants cash not property.)

In order to make money this way, you need to know about the foreclosures BEFORE they become public knowledge. FIRST COME, FIRST SERVE! BE THE FIRST TO LEARN AND ACT!

Non-payment for 2 or 3 months gets the foreclosure ball rolling. Letters start arriving from the bank. Then handed over to an attorney (4 to 6 week period), who will send further letters to the owners suggesting a cure date. Cure date is the latest date problems can be cleared up by before the foreclosure sale.

The earlier in the process you can intervene, the greater your leverage. Leverage means taking a small amount and using it to do big things. You're saving the owner’s face and credit and getting a good deal in the process. More legwork here, but greater leverage! Keep in mind that you did not create the situation, but you can provide a win/win solution. MY PREFERENCE is to enter into the process before that cure date or after auction (REOs).

There are differing laws and procedures between states, and even between counties in the same state. In general, states differentiate according to the security instrument(s) used to establish financing and legal status. There are two categories of security instruments: 1) mortgage, and 2) deed of trust. Methods of foreclosure where mortgages are the security instruments include judicial, non-judicial, or power of sale, and entry and possession. The method of foreclosure where a deed of trust is the security instrument is almost exclusively power of sale (in Utah, trust deeds are combined with a judicial process).

Mortgage Terms:

Two instruments:

The mortgage is the security instrument. This creates a lien on the property and serves as the debt security.
A note or bond is also signed by the original owner to evidence a promise to pay the debt.

The borrower is called the mortgagor.

The lender is called the mortgagee.

Deed of Trust Terms:

The borrower is called the trustor.

The lender is called the beneficiary.

Here there is an intermediary called the trustee. The trustee holds property title for the beneficiary. This serves as security for the repayment of the debt.

Judicial Foreclosure:

Judicial foreclosures are conducted under sanction of a court. These are often more time-consuming because the court must approve the final bid to guard against large deficiency judgments. Lis pendens (Latin for notice of pending action) is normally filed with the local county clerk. This serves as public notice that the mortgagee has brought an action of foreclosure on the mortgagor. No further liens may be brought or included after lis pendens is filed. If you research a property for investment purposes, make sure that all parties, owner, renters, lease holders, creditors, and so on, have been properly served notice of the foreclosure. The current tenant’s lease may survive the foreclosure process if not served properly and on time.

A court-appointed referee advertises the sale in the local newspapers. This is normally under the section called, legal notices. At auction, the referee will announce the terms of sale, then start the bidding process at an upset price or opening bid amount, that has also been set by the court. The upset price includes the mortgage balance, interest and back taxes, court costs, legal fees, and liens and judgments on the property before the foreclosure process began (lis pendens). Successful bidder at auction gets a Certificate of Sale. Some properties will have a Statutory Right of Redemption period that goes beyond the foreclosure auction, and has the possibility to kill the deal. If not, then the successful bidder gets the deed, sometimes called the sheriff’s deed.

Non judicial Foreclosure or Power of Sale:

In a non judicial foreclosure, also known as a power of sale, the court not involved in oversight. In most cases, trust deed foreclosure is non-judicial or power of sale. In a number of states, mortgages can also contain a power of sale clause. The “power-of-sale clause” allows the trustee, if payments are not made on the loan, to sell the property at the courthouse steps, and so bypass a lengthy court process (sometimes referred to as the “trustee’s sale”). Thus, the name, non judicial foreclosure.

The Trustee records a “notice of default” and sends a copy to the trustor. The sale here is final. There is no redemption and no deficiency judgments in trust deed states. Make sure your attorney includes in your purchase contract the right to various inspections after the sale, with sufficient time to perform such inspections.

A good reference for seeing your state’s security document/foreclosure method combination is the book, Your Fortune in Foreclosure: Today’s Best, Low-Risk, High-Profit Real Estate Investment, by Fredy Bush, Carl Hunter and Bruce Erb, pages 199 to 204.

Deed in Lieu of Foreclosure:

In a deed in lieu of foreclosure, the lender has taken possession and deed, i.e., put the house into the bank’s inventory. This is not good for the bank since they now have a liability with no offsetting receivable. Get to know the bankers dealing with this property. Take them to lunch. As always, do a lien search, but also get a Warranty Deed to protect against future claims on the property.

Sources of Information at Your Local Level:

So, where do you find the information first? There are many methods and I will list the most likely ones here:

Research and scour the local newspaper: Look for “For Sale By Owner” (FSBOs) or “Must sell, will consider all offers”.
Relocation companies
Local publications that list foreclosures.
Title insurance companies.
Divorces, deaths, business failures, probate court.
Inquire upon properties that appear to be abandoned.
Contact your local courthouse and ask if there is a mailing list for real property sales.
Courthouse or County Clerk: Lis Pendens (judicial) or Notice of Default (nonjudicial). You can monitor these filings yourself, pay someone (college business student), or buy from list service. My feeling here is the same as buying investments based on what you hear in the newspaper. It’s too late, or at least the profit potential has diminished. However, if you do not have a legal background, then “buying” this service may be more convenient and efficient. Again, convenience comes at a price.
Lots of Internet services. For starters, check out www.therealestatelibrary.com.
If looking to purchase your own home, check with HUD and VA. Go to HUD’s web page at www.hud.gov for information and links to other government and quasi-government sellers of repossessed homes. For homes in your area go further to www.hud.gov/homesale.html.
Join a local investment club.
Bankers and Lenders: They are the first to know. Schmooze!!!!!! Get to know the loan officers and other people at each bank that are responsible for loans and REOs. Open an account at each of these banks. Give these folks your card so they can pass on to distressed property owners.
Realtors: these are the folks owners come to if they know foreclosure is coming soon. Call realtors in the area you want to invest. Check out boards of realtors, real estate investor clubs and Real Estate Investor Association.
Get licensed in real estate yourself, then build a foreclosure niche practice.
Attorneys: They are the ones contacted by the bank and have first-hand information on the houses. Folks in financial trouble often contact their attorney first. Without bridging client confidentiality or ethical standards, have the attorney give your card out as well.
Flyers and classified ads: Pick out the area you want to live/invest in, and every month, leaflet the cars and houses there. Advertise in the local press.
Builders and Remodelers: They are in touch with the people in that area. Very often they will have valuable information.
Watch the local real estate section of the newspaper.

MAJOR IDEA:

Put together a free seminar or public speech that you’ll do for the local remodeling association, board of realtors or local bar association. The topic must be a high-perceived value. I can hear some of you saying, “Yeah, right. What in the world would I talk about?” Think of something you do and do well. Then come up with a Top Ten list. For instance, if you are a good writer, produce a seminar on the “Top Ten Written Advertising Mistakes.” Tell the attendees at the end of the program that you’d like to hear about any “situations” or pre-cure date deals. Then keep in touch electronically with these folks to give them follow up information on your topic. Of course, include in every message that you are still looking to acquire foreclosures.

To some extent, this is a numbers game! The more people you contact and the more you research, the more likely you are to come up with the right deal for you. Based on figures from the National Association of Realtors, 1994 to 1998, best months to close are January through April.

Part 4: Buying Discounted Mortgages

Part 6: System for Picking Foreclosures: