The Phoenix Area Foreclosure Experts

Want to save $100,000? Buy a foreclosure-type property

The following chart looks at the cost of buying a "normal" home verses  a "foreclosure-type" home.  A normal sale is described as one where "the owner is selling their home (in an arm's length transaction) simply to move to another location." A foreclosure-type home can be described as one where the owner is "moving towards a trustee's sale or, due to financial hardship, is short-selling the home for less than the mortgage balance."

ARMLS (Arizona Regional Multiple Listing Service) allows Realtors to classify foreclosure-type properties as either "short sale,"  "lender owned property," or lender/corporate approval required.  That is how the foreclosure-type numbers can be obtained. 

I think you'll find the these results very telling (disclaimer: foreclosure-type properties often need work and can also be in undesirable areas).

Closing the deal -- FORECLOSURES Part 9 B

Here is the final post for this topic:

Now it’s time to meet with the owner and present the purchase contract

Your purpose at this meeting is to get all your documents signed. The owner might have questions, but the owner should not have any objections to your proposal if you have been honest and thorough during your earlier meetings. You will have discussed a variety of situations with the owner and provided possible solutions. Be honest and sincere and remind them of all the benefits of selling to you.

If they suddenly seem “cold” to your proposal, remind them if their home goes to the auction they will get nothing and their credit will be ruined. Let them know the deal must be mutually beneficial to both parties and that you are assuming many risks. If they are still hesitant, tell them that no one will offer them any better situation, and the most “seasoned speculators” will rarely offer more than 70% of a reasonable market value. Describe what a reasonable market value is in today’s market. A calm and strong voice will help to convince them you are right. Get their signatures and give them an idea of how the transaction will progress.

Take the signed purchase contract to the Title Company and open escrow

An escrow/title company, who acts as a third party, can manage the transfer of money and property ownership. This should be a fairly smooth process if all the financing and terms are solid.

Any good purchase contract will make closing the deal contingent on a full title search conducted by a title company. The purchase agreement should also allow for a professional inspection of the property before closing the deal. The standard AAR (Arizona Association of Realtors) contract does both of these things. You can cancel or renegotiate the deal if there are “undiscovered” title issues or serious physical problems with the house. Follow-up with the Title Company and owner to resolve any issues that arise and you will soon own the property.

One more thing

The owner may not vacate the property according to their agreement. But you are thinking …“they have to leave.” Well, you are right … but you may have to EVICT THEM if they do not leave on their own. This process could cost you another $300 - $400 and could take another 2-weeks. That is a whole different process and topic that we will not cover here, except to say it involves a legal notice, a process server, an eviction attorney, and the county constable.

CONGRATULATIONS

You now are an “inexperienced expert.” You know the fundamentals and can talk about the process with anyone and sound reasonably intelligent on the subject. If you haven't done so, read my 6-part PUBLIC AUCTION series.There is high quality information and INSIDER TIPS that will give you the edge with PUBLIC AUCTIONS.

Closing the deal -- FORECLOSURES Part 9 A

Closing the deal

You are about to realize an investing dream. It’s time to make it happen. Segment 8 gave you the essential things to accomplish once the owner says “yes.”

Owners might be more willing to work with you if you are flexible to help them out in creative ways that address their situation. You could offer to let them stay in the house for a certain amount of time (possibly paying rent) until they find a new place to stay. You could offer to pay their housing costs for the first month (or more) after they leave the property. If you’re purchasing the property as an investment, you may let them stay and pay rent until you decide to resell the house. You may even have to offer to split any equity with them. There are numerous ways to work out an agreement that benefits both parties. Remember, selling the property during pre-foreclosure allows owners to avoid a foreclosure-marred credit history, making it easier for them to find a new place to live.

Segment 6 discussed “assuming” the seller’s loan(s). This might be an option that will allow you to leverage the seller’s position to your advantage. Just remember that lenders do not want loans to be assumed. They would rather put you through a qualification process by assessing your income, debt, and credit.

If you are already having a Realtor help you, have him/her assist with this process. Even if you are doing this on your own to save commissions, you will need a Realtor to list the property on the MLS to sell it as quickly as possible. Make a deal with the Realtor for “reduced” commissions to handle BOTH SIDES of your transaction (buying it from the owner AND selling it for your profit). Again, unless you are experienced at the sales process a Realtor will save you time, mistakes, and money.

My next post will finish up the final details.

If the owner agrees to sell, do these things -- FORECLOSURES Part 8 B

The third thing to do is get the owners commitment to return your calls and keep the process going. They may be accustomed to “avoiding” collections calls and that could be a hard habit to break. One way to get around that problem is to always ask them the best time to call. Make a follow-up appointment and contact them when they are expecting your call. This will increase your chances of getting them to pick up the phone.

The fourth thing to do is to assess the condition of the property. You can do this during your initial contact with the owner. You might be willing to buy the property “as is” because owners in foreclosure may not have the money to make repairs. But you still want to keep a tab of estimated repair costs as you structure the deal. Your willingness to put some “sweat equity” in the property after you purchase it will increase the chances of realizing a “good bargain.”

The fifth thing to do is evaluate all your updated financial information to make sure the deal still makes sense. Use this time to contact the lender(s) and see if they will negotiate. After you have sent your authorization form and establish your right to talk to them, escalate the call to a financial decision maker. Tell the lenders you are trying to help them avoid further losses from the foreclosure process.

Assess your best deal from the lenders. Also, use this time to balance your known repair items against contractor quotes. Decide your best strategy and determine what you will actually offer the owner. We used the Letter of Intent earlier just in case the financials changed.

You are about to close the deal and buy a pre-foreclosure property. There is one more installment coming your way that will help you confidently finish the transaction and start down the road to realizing your profit.

PS … email me if you would like an AUTHORIZATION FORM.

If the owner agrees to sell, do these things -- FORECLOSURES Part 8 A

If the owner agrees to sell -- DO THESE THINGS.

Hearing an owner say “YES” to your proposal was your goal from the beginning. Now you’re ready for the next phase of the process.

The first thing to do is have the owner sign an authorization form giving you the authority to talk to their lender(s) or lien holder(s). Arrange to walk through the property to make sure it meets your criteria as a buyer and use the opportunity to get your form signed. The authorization form should include:

1. Printed name, signature, phone number, and date of authorization from the owners
2. Name and account number for all lenders
3. Last 4 digits of the owner’s social security number(s)
4. Date of birth of the owner(s)
5. Contact numbers for the lenders

This is the minimum information the lender(s) will need to verify you have the owner’s permission to discuss their loan. This signed form is mandatory to submit to the lender(s) or they will not talk to you. However, once they have the form, they will include it with the owner’s file and be willing to a.) talk to you and b.) work with you.

The second thing to do is get the general terms of the deal on paper. This is NOT TO be confused with a purchase contract. Rather, call it a Letter of Intent. Here is the reason you do not want a purchase contract at this point: you need to verify what you have learned about the AMOUNTS and TERMS of the liens with the lender(s). Find out everything you can about the owners situation, liens, or potential problems with purchasing the house. Tell the owner you will provide a purchase contract once you have contacted the lender(s) and verified all financials. Avoid using specific figures at this time. Instead, use general terms like “buyer intends to pay seller’s arrearages,” and “stop the seller from foreclosure,” and “save seller from serious credit issues.”

I'll conclude this topic on the next post.

What you MUST know about approaching owners -- FORECLOSURES Part 7 B

Finishing the previous foreclosure post, part 7A.

It is very possible to find foreclosure deals and approach the delinquent owners with calls, mail, and personal visits. Just be prepared to have a large portion of these people either ignore you completely OR close the door in your face. But let’s put this in perspective: Do you really care how many doors were closed in your face once you find the owner who says "O.K. - I'll sell to you."

Be aware the pre-foreclosure process can be stopped anytime the owner becomes current with their loan. This also means that all your marketing efforts to any delinquent owner could be made VOID at any time during the process. That’s because the owner can bring their loan current at any time or strike a deal with their lender to modify their loan. While this is a good thing for the owner because they keep their house – YOU have to start over and look for another pre-foreclosure. Refer back to segment 6 for reminders on this topic.

Here is another tip: You may be unaware that a house is no longer in pre-foreclosure as you continue trying to contact the owner. While “perseverance” is a virtue that leads to success, it is a waste of time if the owner has worked out their issues with their lender. How will you know if this has happened? Go back to the source of your information and see if they provide updates.

Let’s summarize topic 7:

• you can find pre-foreclosures in a variety of “public” places at the “90-day” mark
• every investor has the same opportunity as you
• be empathetic to the owner and their situation
• owners are experts at avoiding contact – you must be “thick skinned” and be able to take a “NO”
• some methods of contact are better than others
• a pre-foreclosure can be made “current” without you knowing it
• when you get a great pre-foreclosure deal … the process will be worth it

This concludes segment seven.

What you MUST know about approaching owners -- FORECLOSURES Part 7 A

What you MUST know about approaching owners.

Welcome back to the post. You are about to enter into the “prospecting” phase of this opportunity. Let’s examine your reason for being here. You probably have motives in 2 areas: 1.) to make money and 2.) to help people. It’s important to know your reasons for entering this arena, but it’s just as important to know something about the mindset of the people you will be contacting. You see, these people are not concerned about you making money. They are concerned about being helped. The number one piece of advice I can give you is: project your desire to be HELPFUL to these people. Listen to their concerns and be empathetic. Agree with their concerns and show them you care. Gain their trust and offer your solution.

When you decide to start contacting owners with the idea of “saving them from their dilemma” and getting a “great deal” for yourself, there are a few points to consider:

• The “state of mind” of owners going into pre-foreclosure
• The pre-foreclosure process can be stopped anytime the owner becomes current with their loan

There are two important things to remember regarding the “state of mind” of home owners

The first is: Many of these people have endured personal tragedy. They may have suffered a loss of one or more incomes, experienced expensive medical issues, lost someone they loved, or had to care for a very sick person. They may have been involved in a car accident, a divorce, a child custody battle, or a legal issue. The point is, these are good people with bad things in their lives. They need to feel better about themselves … not worse. Be sensitive and caring to get the best results.

The second is: from the moment they miss one mortgage payment they are hounded by the lender on a daily and weekly basis. They get phone calls, letters, and legal notices. Then the information goes PUBLIC and professional investors are sending them mail and knocking on their doors. They have no way to know who you are or that you come with a solution to their mortgage problem. And quite frankly, they may not even care.

So where does that leave you? Don’t be surprised if you are not greeted as a “hero” with a “solution” when you try to contact them. Delinquent home owners are experts at ignoring the phone and the door bell. They are also proficient at throwing away ALL mail that looks connected with their financial situation. For BEST RESULTS use:

1. Hand written letters - Avoid using address labels because, while efficient, they are impersonal. People are more prone to open hand addressed envelopes and read hand written letters because they appear to be from a friend.
2. Postcards – These can be effective because people won’t open letters but they can see your message on a postcard. TIP: avoid using derogatory words that can be seen by the postman or anybody looking at the postcard (ie: “foreclosure,” “bad credit,” or “hardship.”)
3. Presentation folders left at their door – This will require that you visit the house and leave your “presentation” for the owner to find. The advantage is a professional appearance and message that is directed to them in a personal manner.

I' ll finish this topic in my next post.

There are some things to be very careful about -- Foreclosures Part 6 B

Here is the remainder of my post I started yesterday:

HARD MONEY

I have briefly mentioned hard money but never really discussed it. Hard money comes from an investor with lots of cash. This “money investor” will loan you money without any qualification process. In other words, he won’t ask where you work, your monthly earnings, what your credit is like, or for your tax returns from the last 2-years. This investor wants to be on the property title as a lien holder. A hard money lender will rarely lend more than 70% of the properties market value. This way the hard money lender can still make money if the property must be sold. You can see what an advantage hard money can be, right? It’s instant money – with no qualifying process -- that allows you pay off the previous lien holders and complete the purchase. Additionally, most hard money loans do not require a monthly payment. The monthly interest will be added to the “loan payoff” and will be satisfied when you sell you Phoenix area property.

Hard money should never be used for a long-term solution because the interest rates are very high. Hard money will be a transitional solution while you prepare the house for resale. The only warning here is to fully understand the interest rate you will pay and the amount of your monthly obligation. Hard money loans are simple interest loans and do not include a principle payment. They can be as high as 18%. If you borrowed $150,000 your monthly obligation would be $2,250. That is derived by multiplying $150,000 X .18 and then dividing by 12-months.

DUE ON SALE CLAUSES

Every mortgage done in the last 10-15 years has one of these clauses. They are designed to protect the interests of the mortgage company. The clause essentially means that the mortgage is “due in full” when the property is sold. In other words, the mortgage company has inserted a clause telling the owner not to let you assume their loan. Does that make it illegal to assume a loan? NO, it’s not illegal … but it is a legal clause. What does that mean? It means you can’t go to jail for assuming a loan, but the mortgage company can make you pay off the loan balance or foreclose on YOU ... if they find out about it. So ... do not let the mortgage company know you are assuming the loan. An experienced title company should know how to do this. However, do not assume they know how to do it – ask them if they know how to do it.

INSURANCE

This TIP only applies if you are “assuming” a loan. The loan you are assuming is required to have a home owner’s insurance policy. The name of the “insured party” on the policy is the person whose house you are buying. The name of the “beneficiary” on the policy is the mortgage company who loaned the money for the property. Where is your name on that policy? It's no where to be found. What happens if a tree falls on your Phoenix area roof? Will you be able to place a claim? The answer is: You cannot place a claim with the policy in it's current state. Here is the REAL ESTATE INSIDER TIP: get the owner to name you as an “additional insured” on the home owner’s policy while you are  buying the house. That way you can talk to the insurance company for claims.

All right! We are at the end of segment six of this 9-part series. Do you see investing in a foreclosure as part of your near future? In the next segment we will talk about the “dos and don’ts” of approaching delinquent owners. Remember to call or email with any questions.

There are some things to be very careful about -- Foreclosures Part 6 A

There are some things to be very careful about.  Let’s divide this topic into several smaller ones:

1. Liens
2. Money changing hands
3. The owner’s back payments
4. Hard money
5. Due on Sale clauses
6. Insurance

LIENS

We have already talked about liens and how they are prioritized. This deserves mentioning again because when you buy a house in the pre-foreclosure stage you get all the liens that come with it. Make absolutely sure you have done all your research and know what you are getting into. As we have learned, many junior lien holders will negotiate with you when they know the delinquent owner is facing foreclosure. After all, they realize it is better to receive something rather than nothing. However, you may run into a junior lien holder that occasionally wants to play “hardball.” This is where you need a “poker face.” Do not let the lien holder know how badly you want this house or they may hold out for more money. Instead, let them know you are doing them a favor.

MONEY CHANGING HANDS

This one is probably common sense but it should be made clear to you. Never directly give the owner any cash. Handle everything through a title company. This way every part of the transaction is clear and documented to avoid confusion and dishonesty in the transaction. If you are new to this process you may have thought about doing everything on your own. There is a one word reply to this statement: DON’T. The peace of mind you get from a title company is well worth it.

THE OWNERS BACK PAYMENTS

Here is a tip: make sure the owner does not bring any back payments (delinquencies) current while you are attempting to negotiate with the lender(s). WHY? The lender will have NO incentive to negotiate with you if the loan(s) are current or if they are receiving partial payments. In other words, you will have lost all negotiating power in your attempts to make more money by reducing the liens. You may wonder how the owner could do this since they have not been making payments. First of all, see the above topic. You should NEVER “lend or advance” money to a distressed owner even if you think it is buying time while you negotiate. Maybe the owner has a well-meaning relative who decides to “help” them, at east partially. Discourage the owner from making any payments and focus them on helping you complete the short-sale with the lender(s). Remind them that the quicker they cooperate, the quicker you can cash them out.

I'll finish this post tomorrow.

How to pick the homes you really want to bid on? Foreclosures Part 5 B

This completes yesterday's post:

FINANCIAL ANALYSIS

Here is where the rubber meets the road, so to speak. How do you pick a good deal? Here are the key components:

1. Your total cost to buy
2. Your total cost of repairs or upgrades
3. The price at which you can sell the property (if you are an investor)

Determining these components can be a time-consuming task. The first item will be based on your research of the property and the liens on it. Then you will need to negotiate with the owner to determine how much money will be needed to buy him/her out. That amount can depend on how desperate the owner is and what value he/she places on the house. ONE THING TO REMEMBER: you can negotiate with junior liens to reduce your expense. When they know the current owner is defaulting they realize their liens can be “wiped out” at the auction. They would rather get “something” than “nothing.”

The second item (repairs) can be a concern. You have to rely on the owner to be truthful about hidden defects in the home. How do you protect yourself? Once you establish a rapport with the owner, perform a visual inspection -- and hire a home inspector after you agree to buy the house.

Regarding the third item of evaluation (selling price), get a good opinion of the properties “market value.” That can be accomplished with professional help (Realtor, foreclosure company, or subscription website). BE AWARE that fair market value is not always attainable in a buyer's market. Market value is the fair price based on current sales (within 6-months), but it sometimes has nothing to do with what a buyer is willing to pay.

OK, we are 5 topics into this series on foreclosures.

PS … feel free to call me and learn about my personal experiences in the pre-foreclosure and auction arenas. There is nothing like learning from someone else’s successes and failures.