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Pre-foreclosures; Getting There First Can Reap Rewards

By Elaine Zimmermann

Buying a foreclosure can be a lucrative investment. Finding a foreclosure before anyone else or a “pre-foreclosure” allowing you to be the only person negotiating with a motivated seller, can give you an additional advantage.  

Understanding the foreclosure the process gives you some insight into locating foreclosures at their earliest stages.  

The Federal government forecloses on hundreds of thousands of homes each year that have been financed through several of its funding source: Veterans Administration (VA), Housing and Urban Development (HUD), FANNIE MAE and Federal Depository Insurance Corporation (FDIC). These homes can make lucrative investments and there are many special programs to allow purchasers to buy these homes with little or no down payment and many have repair allowances.  Once the homes are taken back by these federal agencies they appear on the http://www.foreclosuresus.com database.  

Banks and financial institutions take back homes that they have loaned funds against.  They refer to the properties they retrieve as REO’s or real estate owned.  Within larger banks, they are REO departments solely devoted to the resale of these properties.  Banks supply their REO listings to the foreclosuresus.com database.  Most contain the bank’s name and the contact person’s name and phone number.  

New homes can also appear on bank REO lists.  Builders who build “spec” homes, homes not presold but built “speculatively”, finance the construction through banks.  Sometimes when a builder has several homes that have remained unsold for an extended period of time, the bank will take back the homes. These homes will also appear within the bank’s REO listings.

Extra Effort Can Reap Big Rewards  

In some cases and with some additional effort, you can find these homes prior to going into foreclosure or pre-foreclosures.  In the case of bank REO’s, when reviewing the list of banks and their contacts become familiar with local contacts of REO departments at banks in your city.  As you become acquainted with these contacts, you can tell them the type of home you are looking for and the area.  If you check back on a regular basis, you may obtain information on homes prior to it being added to the public database.  

When you review the database further, you will notice that many smaller banks do not include their REO listings. They may have too few foreclosures to have a REO department.  You should contact these institutions directly and ask who is the person designated to dispose of these properties.  Again, your effort may reap you information about properties that are not in any public database.  

Another source for finding properties prior to foreclosure is real estate agents. When you have decided on an area where you wish to purchase a home for yourself or as an investment, you should contact an agent familiar with the area. Many times real estate agents have clients who need to sell quickly.    

As you become familiar with an area, you may notice homes that appear to be vacant without any “for sale” sign.  You can obtain the phone number for the address from a reverse directory.  Many times, when people leave a home they forward their calls to a cell phone or other number.  You may reach an owner ready to sell quickly.  

Your local newspaper can be another source of pre-foreclosures.  Check for “For Sale By Owners” and “Homes For Rent”.  Sometimes these are the last efforts of homeowners who are struggling, but cannot afford to sell their home through a real estate agent.   

You can also use your newspaper proactively to find pre-foreclosures.  When you have identified the area in which you wish to purchase, place an ad in that section. If you wish to obtain investment property your ad will be “Will Buy Your Home, You Stay in Your Home and your phone number”.  In this case you purchase the home from the seller and then either lease or lease/purchase it back to them.  If you wish to purchase the home without tenants, you can run a similar ad without the option of the seller remaining in their home.  

Finally, public court documents give you information about homes 30-180 days from foreclosure, pre-foreclosures.  In every state, a legal notice must be filed before a foreclosure can be finalized.  The length of time between the initial legal action and the final resolution varies nationwide, but the procedure is the same. In most states, a “forcible detainer” is filed.  It may indicate the property address, name of the homeowner and amount owed.  This action is filed prior to the actual foreclosure and gives you enough information to contact the homeowner directly.  In many states, forcible detainers are also used to evict apartment dwellers, so you must check the address of the property to determine if it is a home or an apartment.  

Buying a foreclosure or a pre-foreclosure from a motivated seller can be a good investment for you and in the case of pre-foreclosure a good solution for someone else.

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Investing in Foreclosed Real Estate for a Higher Return

By Elaine Zimmermann

With savings interest rates at a 30-year low and the stock market looking too perilous for small investors, many people are putting money in an asset they understand -- real estate.

One of the best places to invest is in foreclosure and bargain residential real estate.

The current market conditions make it a perfect time for a small investor to purchase one or more foreclosure properties for their private residence, rental or resale. In this difficult economy, more upscale homes are going into foreclosure, so the notion that foreclosure homes are only available in crime-ridden areas is inaccurate. Beachfront and homes in affluent areas are part of the mix of foreclosed properties available.

Homes valued at $200,000 to $400,000 regularly appear in the national listings that can be found on http://www.foreclosuresus.com. The availability of more desirable properties combined with the reduced interest rates allow many people to qualify for the mortgages on these homes.

Last year, one man purchased a Florida ocean-view, four-bedroom townhouse in foreclosure for about $100,000. He renovated the home in his spare time, spending about $12,000 for materials, cabinets and fixtures to bring it up to "like new" condition. He recently sold it for $197,000, giving him an $85,000 before-tax profit.

He also purchased an inland foreclosure property that after renovation has also doubled in value. He decided to rent the second one. The inland property's rent exceeds the monthly mortgage note and expenses by about $500 a month, giving him $6,000 annual income from the property.

Many owners of homes that go into foreclosure have been struggling financially for almost a year before they give up, which usually means that the house has not received needed repairs or general maintenance for a while.

This may include everything from light bulbs not being replaced to roofs leaks not being repaired. Tree limbs in front yards, broken appliances and windows and dirty carpets, floors and walls are found in very affluent-area foreclosures.

The first rule of real estate, "location, location, location," applies in these situations. If there is trash in every room of the house, but the foreclosure is in a good area with high property resale values, hold your nose, walk through the entire house and consider making a low offer.

Hidden foreclosures
Not all foreclosures are previously owned homes. Some foreclosed homes are new. These homes are not as easy to identify and rarely appear on national lists.

The slow economy has left many builders of new mid-scale and upscale homes without a market to purchase them. With thousands of homes for sale in every city, some builders have reached the end of their construction-loan periods without finding buyers for their homes.

In these cases, the banks that issued the construction loans take possession of the homes and attempt to sell them, using real estate agents to handle the deals.

These too are foreclosures. They are "hidden" foreclosures because no one associated with the sale of these properties will refer to them as foreclosed homes.

In some cities, competition is fierce; in other cities it is nonexistent. In Mesquite, Texas and Collierville, Tenn., foreclosure homes are sold in one day to the top offer among many anxious bidders. In other cities, valuable properties sit for days without receiving one offer.

The climate of the competition for properties is largely dictated by the number of professional "rehabbers" in the area.

Rehabbers buy properties and renovate them quickly to resell them for a profit in 30 to 60 days. They have contract crews that help them complete the renovation work. They are constantly purchasing properties to keep their crews working.

But even in cities where rehabbers are present, a foreclosure home can be purchased. Many rehabbers had a maximum home price they'll pay that is very low compared with the value of other homes in the neighborhood. If you are willing to exceed their price by $3,000 to $5,000, you may obtain the home at a very low price but slightly above what a professional pays.

If you plan to do most of the repairs yourself and not employ a crew of subcontractors, you may have paid about the same amount for the home when you consider your savings on outside labor.

Getting started costs less than people think. With good credit, many banks will loan the full price of the foreclosure or more. If the home is to be used as a rental, many banks will require only a 10-percent down payment.

Individuals with a large amount of equity in another home may get a line of credit from their bank to purchase a foreclosure. When they convert the line of credit to a mortgage, no down payment may be required.

Foreclosure homes bought in good areas at below market values that appreciate annually can be a sound investment strategy for many investors. The appreciation of the homes is tax-exempt until the home is sold. If the home is a primary residence, the appreciation may be tax-free.

Homes used as rental properties give most investors valuable tax deductions while the house increases in value and builds equity. With many stock portfolios down 30 percent in the past 18 months, foreclosure real estate investing may be the alternative many people are seeking.

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Preforeclosures, Short Sales/Buying From the Bank

By Elaine Zimmermann

Finding a foreclosure before anyone else or a “pre-foreclosure” can be a worthwhile investment.  Buying a preforeclosure from a bank as a “short sale” can guarantee the purchaser equity on the day of closing.  A “ short sale” or “short payoff sale” is one in which the lender allows the property to be sold for less than the exiting loan balance.

Understanding the foreclosure process gives you some insight into locating foreclosures at their earliest stages.

The Federal government forecloses on hundreds of thousands of homes each year that have been financed through several of its funding source: Veterans Administration (VA), Housing and Urban Development (HUD), FANNIE MAE and Federal Depository Insurance Corporation (FDIC). These homes can make lucrative investments and there are many special programs to allow purchasers to buy these homes with little or no down payment and many have repair allowances.  Once the homes are taken back by these federal agencies they appear on the http://www.foreclosuresus.com database.

Banks and financial institutions take back homes that they have loaned funds against.  They refer to the properties they retrieve as REO’s or real estate owned.  Within larger banks, they are REO departments solely devoted to the resale of these properties.  Banks supply their REO listings to the foreclosuresus.com database.  Most contain the bank’s name and the contact person’s name and phone number.

New homes can also appear on bank REO lists.  Builders who build “spec” homes, homes not presold but built “speculatively”, finance the construction through banks.  Sometimes when a builder has several homes that have remained unsold for an extended period of time, the bank will take back the homes. These homes will also appear within the bank’s REO listings.  

In some cases and with some additional effort, you can find these homes prior to going into foreclosure or pre-foreclosures.  In the case of bank REO’s, when reviewing the list of banks and their contacts become familiar with local contacts of REO departments at banks in your city.  As you become acquainted with these contacts, you can tell them the type of home you are looking for and the area.  If you check back on a regular basis, you may obtain information on homes prior to it being added to the public database.

When you review the database further, you will notice that many smaller banks do not include their REO listings. They may have too few foreclosures to have a REO department.  You should contact these institutions directly and ask who is the person designated to dispose of these properties.  Again, your effort may reap you information about properties that are not in any public database.

“Preforeclosure Short Sales” are not handled in the REO departments of banks, but rather in the “Loan Loss Mitigation” Departments. You can find current, nationwide preforeclosures at http://www.ipreforeclosures.com

Bank Loan Loss Mitigation Departments

When a borrower begins to miss payments the loan is sent to the bank’s loan loss mitigation department.  Most banks also consider short loan payoff sale requests in their loss mitigation departments.

Lenders only will approve a short sale as a last resort.  The circumstances that would lead a lender to resort a short sale for a property are directly related to the property’s value as it relates to the amount owed to the bank.  If a property was purchased in an inflated market that has experienced a severe downturn, the home may have decreased in value and the loan maybe “upside down”—more is owed than it is worth.  The lender may consider a short sale.  The same holds true if a property was refinanced at 100 percent plus leaving the property without equity.  Another circumstance where a bank may consider a short sale would be in the case of a deteriorating property with would require extensive repairs to make it marketable.

Lenders also require borrowers to show hardship before they will approve a short sale.
These can include financial hardship bought on by: catastrophic illness, death or divorce of a spouse, employment loss or incarceration of the borrower or borrower financial insolvency without any realistic chance of improving in the near future.

Cash Only

A short sale is always a “cash only” sale, which will keep many investors away.  Also, it is an “arm’s length sale”, meaning you cannot purchase a home of a relative.  If you do you are open to a lawsuit and the sale being reversed.

Buying a foreclosure or a pre-foreclosure from a motivated seller can be a good investment for you and in the case of pre-foreclosure a good solution for someone else.  A “short sale” is one way to purchase a home with guaranteed equity to the investor.

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Foreclosure Tips & Traps

By Elaine Zimmermann

Buying a foreclosure can be a lucrative investment.  Your goal is to buy property far below market value so your investment already has substantial equity on the day you close.

Understanding the foreclosure the process gives you some insight into locating foreclosures at their earliest stages and avoiding some of the pitfalls.

The Federal government forecloses on hundreds of thousands of homes each year that have been financed through several of its funding source: Veterans Administration (VA), Housing and Urban Development (HUD), FANNIE MAE and Federal Depository Insurance Corporation (FDIC). These homes can make lucrative investments and there are many special programs to allow purchasers to buy these homes with little or no down payment and many have repair allowances.  Once the homes are taken back by these federal agencies they appear on the http://www.foreclosuresus.com database.

Banks and financial institutions take back homes that they have loaned funds against.  They refer to the properties they retrieve as REO’s or real estate owned.  Within larger banks, they are REO departments solely devoted to the resale of these properties.  Banks supply their REO listings to the foreclosuresus.com database.  Most contain the bank’s name and the contact person’s name and phone number.  These are people you should meet in person and tell them the type of property and zip codes you prefer.  Bring a letter of credit or prequalification with you.  In the case of bank, be sure you are prequalified at
their institution.

Pitfalls

Not all foreclosure listings are bargains.  In some cases, financial institutions will price the property based on the amount of outstanding loans on a property.  With 100% equity lending now available, this amount may be very close to the value the property.  If you purchase the property at this price you will have no equity at closing.

Auctions 

Home auction companies are nationwide.  Many of these companies require a minimum bid, which is almost the appraised value of the home.  Many times these homes are purchased by anxious buyers who get caught up in the excitement of the bidding and overbid on a property.  They pay the appraised value or more for a home. 

Auctions by municipalities offer far more lucrative opportunities.  These homes are sold for back taxes and to clear liens.  Homes worth $250,000 can be purchased for $100,000.  Successful bidders must fund the home purchases within 24-48 hours.  This means that a bidder must have a line of credit in place when bidding.  Because the properties are usually sold “as is”, with utilities not turned on; no appraisals can be done.  This combined with the rapid requirement for funds, makes traditional mortgage financing unavailable.

Unlisted Foreclosures 

When you review the www.foreclosuresus.com database further, you will notice that many smaller banks do not include their REO listings. They may have too few foreclosures to have  a REO department.  You should contact these institutions directly and ask who is the person designated to dispose of these properties.  Again, your effort may reap you information about properties that are not in any public database.

Determining the Best Bargains

The key to obtaining a bargain is knowing the value of the property minus the required repairs and comparing that to the asking price/starting bid.

Online appraisals are now available throughout the Internet.  For about $10 you can receive a summary of the recent sale of homes in the immediate area.  These appraisals are compilations of public records of property sales and are meant to be used for estimating purposes only. 

Review the sales using the most recent and those closest to the property you are interested in as the most reliable.  Remember to adjust for differences in square footage and features. Overestimate the cost of repairs in your calculations.  As any home renovators will tell you, repair costs always exceed what you anticipate by 30% or more.

Properties that have been vacant for an extended period of time may have many hidden problems not seen during an inspection.  If you can, ask a neighbor about a property.
Also, if there are contractors working on the property, ask them about the property.
I have had contractors tell me about termite damage and mold problems that were not visible.  Of course, do not bid on properties with these types of problems.  The repairs are far too expensive.

Your Goal/Residence/Rental/Resale/Retirement

Your goal in buying a foreclosure is to benefit from the sale of property at below market value to use as your residence, as a rental property or to resell for a profit. You must do the investigative work yourself to garner a solid investment.  Many investors have merely purchased 2-3 good investments in their lifetime and completely funded their retirement with the proceeds.  Whatever your goal is, it is worth the effort it requires.

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Glossary

Abandonment   A situation in which a homeowner leaves a home without any intention of returning.  If there is a mortgage on the property a foreclosure will occur.  Many times these are called “key tosses”, where the keys to the house are left inside or mailed to the mortgage lender.

Auction   The process of selling a property the highest bidder.  In the case of foreclosures, there may be starting price, which is the lowest amount the lender will accept.   In an Absolute Auction of a foreclosure, there is no minimum price.

Bill of Complaint   The initial paperwork that is filed in many states to the foreclosure process.

Clean-out, Trash out  Business of removing debris from foreclosed homes. Learn more. http://www.kptv.com/story/15369745/is-it-true-i-can-make-money-by-cleaning-foreclosed-homes

Compromise Sale   A VA property sale in which the amount on the VA loan is greater than the home’s sale price.  The VA may cover the loss.

Deed in Lieu of Foreclosure   Instead of waiting until the lender forces the sale of a house in the foreclosure process, the borrower deeds the property to the lender.

Deed of Trust   A deed of trust is a regarded a three-party mortgage arrangement between the borrower, the lender and a trustee.  If the borrower fails to pay his mortgage, the trustee is preauthorized by the borrower to sell the house and apply the sales proceeds to pay off what remains unpaid on the loan secured by the deed of trust of give the deed to the lender in exchange for cancellation of some or all of the borrower’s debt.

Defeased   A legal term meaning to lose ownership as in the case of a foreclosure.

Deficiency   Money a borrower who has lost real estate in foreclosure still owes to the lender because the foreclosure sale failed to generate enough from the sale price of the property to pay off the loan.

D’oench, Duhme Doctrine   A legal term that state that when FDIC takes over a lender, they may disallow almost any counterclaims by borrowers against the lenders they have taken over.  This clears the way for them to assume all loans and enforce all foreclosures.

Dutch Auction   An auction, which begins at a starting price and is lowered until a purchase occurs.

Entry and Possession   A foreclosure method used in some states which the lender either peacefully or by court order takes possession of the property from the borrower.

Execution Sale   The sale of a foreclosed property by a sheriff pursuant to a court orders.

Fix and Flip   See Flipping and Hard Money.

Flipping, House Flips    The selling of a house quickly, usually at a profit.

Often done with foreclosures.

Forbearance   Prior to foreclosing on a property, a lender may agree to accept lower payments than originally agreed upon or added missed payments to the end of loan to help a borrower avoid foreclosure.  This is normally handled by the lender’s Loss Mitigation Department.

Hard Money   Lenders for persons who cannot acquire funds through usual sources.  Their interest rates are above the average.  Some foreclosure investors who fix and flip acquire funds from these sources.

Holder in Due Course   This legal document holds that a person or entity that obtains a note without notice of any borrower defenses to its enforcement may enforce payment of that note in a court despite any borrower defense or other reason for not paying.

Judicial Foreclosure   A court-ordered foreclosure.  The lender must first file and win a lawsuit to foreclose.

Junior Lien holder   A holder of a right to foreclose on a property that is inferior to the first lien holder.

Lis Pendens   A recorded notice of a lawsuit in process, which may change the title of property.  It is the first indication of pending foreclosure in some states.

Liquidating Plan   A plan by which a borrower repays missed payments to a lender over time.  Again this in lieu of a foreclosure.  This handled by the lender’s Loss Mitigation Department.

Loan Modification   A procedure whereby a loans payment plan is altered due to the hardship of the borrower.  This can include the rate, term and monthly payment amounts.

This is handled by the lender’s Loss Mitigation Department.

Loss Mitigation Department   This is the lenders department to oversee delinquency of loans prior to foreclosure.  See Forbearance, Loan Modification, Relief/Recasting and Short Payoffs/Short Sales.

Mechanic’s Lien   A lien allowed by law upon a building or other improvement upon land, as a security for the payment of labor done and materials furnished for improvement.  Many contractors have acquired properties through this legal mechanism.

Mortgage Lien   The right of a mortgage lender to sell a mortgaged property is the borrower fails to repay the loan as agreed.

Nonjudicial Foreclosure   A foreclosure on a mortgage without filing a lawsuit.  Many states foreclose on properties in this way.

Power of Sale Clause   The clause in a deed of trust or mortgage, by which the borrower preauthorizes the sale of a house to pay off the balance on a loan in the event of the borrower’s default.  Usually the trustee will hold the sale. In some states it is done by the sheriff’s office. Each of these foreclosures is called a sheriff's sale.

Relief/Recasting   Various loans will offer various types of special payment plans to assist struggling borrowers prior to them going into foreclosure.  See Loss Mitigation Departments.

REO   The department that holds and disposes of foreclosure property within a lending institution.

Scire Facias   A court command to a borrower requiring them to appear at hearing to show why a foreclosure should not be authorized.

Short Payoffs/Short Sales   The sale of property prior to foreclosure at a reduced amount.  See Loss Mitigation Departments. 

Strict Foreclosure   A legal premise in some states that the lender owns a property and may simply evict the borrower for nonpayment and gain full and complete title free of the borrower’s right to redeem after the prescribed waiting period has passed.

Trustee’s Deed   A type of deed issued to the buyer at a trustee foreclosure sale.

Vendee Loan   A VA Loan made to help the VA resell a VA foreclosure.  Can be given to a non-vet.

Warranty Deed   A deed in which the seller guarantees or warrants that good title can be traced back in time when the land was owned by country.

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