In many parts of the country, home prices doubled during the period from 2000 to 2005. During this same time, creative financing programs (e.g. zero down payment, adjustable rate loans, interest only loans, option ARMs loans, negative amortization loans, etc.) gained popularity and helped some people buy homes who would not normally qualify based on their income, debt level and credit history.

Most real estate markets are now cooling, and some are even experiencing declining prices. In times of dropping real estate prices, the amount owed on a loan by some homeowners may actually exceed the value of a property. If homeowners cannot make their monthly mortgage payment, there is a potential for default on the loan and foreclosure of the property by the lender.

The term “short sales” is used to describe a situation in which a homeowner is at risk of defaulting on their loan, and the lender agrees to sell the property below the original appraisal price in order to avoid foreclosure. Most lenders do not readily agree to short sales, although exceptional circumstances such as a homeowner losing his/her job or the death of a wage-earning spouse may make some of them more open to doing so.

If a property is sold as a short sale, the lender recoups at least a portion of the original loan amount, the homeowner avoids the stress and stigma of foreclosure, and the new homebuyer gets a property below its original appraisal price. If a short sale doesn’t work, then the property usually goes into foreclosure.

Short sales may be an emerging trend as the rate of foreclosure is rising dramatically across the nation. According to Business 2.0 Magazine, the top 10 foreclosures markets are:

1. Greeley, CO

2. Detroit, MI

3. Miami, FL

4. Indianapolis, IN

5. Fort Lauderdale, FL

6. Denver, CO

7.Dayton, OH

8.Dallas, TX

9.Fort Worth, TX

10.Atlanta, GA

The credit of homeowners may be impacted after a short sale, but it all depends on how the lender reports the outcome. Some lenders report a partial loan repayment as full payment of the debt due, which does not adversely impact the credit of the borrowers. Other lenders report the sale as “settled,” which adversely and significantly impacts the borrower’s credit. The other problem is that the portion of the loan amount forgiven by the lender may actually count as taxable income by the IRS.

In summary, a successful short sale has some potential positive benefits (e.g., homeowners avoid foreclosure, lenders recoup at least a portion of the loan amount, new homebuyers gets a property at below the original appraisal price, etc), but there are also many negative consequences. Some of these potential negative consequences include: the negative impact on borrower’s credit, negative impact on the value of other similar homes in the neighborhood, and that the amount forgiven by the lender may be taxable event. Homeowners having difficulty making their monthly mortgage payment may benefit from talking to a real estate agent who is experienced in short sales.

Investing in Foreclosures For Beginners

by Lex Levinrad Copyright © 2008

If you are thinking about investing in foreclosures there are some key points for you to consider before you begin investing.

The first step for you to understand is how the foreclosure process works. The foreclosure process can be broken down into three key components.

Pre-Foreclosure Foreclosure Auction REO

 Pre-foreclosure

The first step in the foreclosure process is called pre-foreclosure. When a homeowner has not paid their mortgage for more than ninety days the bank that owns the mortgage on that property files what is called a “lis pendens” which means “suit pending” in Latin.

A “lis pendens” is a written public notice that a lawsuit has been filed concerning real estate. This notice is filed in the county public records against a piece of property. This notice is also often listed in the classified ad legal section of certain newspapers. Filing this public notice alerts any potential purchaser or lender that the title to this property is “clouded” or unclear.

When a property has a “clouded” title then the title is not “free and clear” which makes the property less attractive to potential buyers or lenders. In reality, once a “lis pendens” is filed, a property cannot be sold or refinanced without the buyer being fully aware of the fact that the “lis pendens” has been filed.  The only way to get rid of a “lis pendens” is through foreclosure which wipes out a “lis pendens”.

Once a lis pendens has been filed the property is considered to be in pre-foreclosure. If you subscribe to a public database like foreclosures.com, realtytrac.com and many other similar sites you can get access to the properties that are in pre-foreclosure. You can also get a list directly from your county clerk by visiting your county courthouse. In some counties these lists are even available online.

If you are investing in pre-foreclosures you are buying a house directly from the homeowner. This negotiation with the homeowner is usually done without the banks knowledge. If you are investing in pre-foreclosures you will need to negotiate directly with the homeowner about purchasing their house. Since the “lis pendens” filing is public knowledge investing in pre-foreclosures is very competitive.

If the house has no equity then you will need to negotiate a short sale with the bank. A short sale is where a bank agrees to take less than the full amount owed to them. This occurs when a buyer is only willing to purchase the property for less than the amount owed on the mortgage by the seller. In the case of a short sale the bank is aware of the process since you will need to negotiate with them. The department at the bank that is responsible for negotiating short sales is called “loss mitigation”.

There are numerous online sources of pre-foreclosure lists which make the barrier to entry in pre-foreclosure investing very minimal.  Anyone can become a pre-foreclosure investor simply buy purchasing a list of homeowners in foreclosure. Since the information is public record it can even be obtained for free by visiting your county courthouse.

For this reason, pre-foreclosure investing is fiercely competitive. Since there are so many potential pre-foreclosure investors, the homeowners in foreclosure are literally bombarded with offers to purchase their homes. This makes it difficult for investors to differentiate themselves from one another to the homeowner. Additionally there is often hostility and anger from the homeowner since they do not want to be bothered by “foreclosure sharks” or people that they perceive as trying to take advantage of their situation.

For the above reasons, pre-foreclosure investing is a difficult and competitive are of foreclosure investing. If the homeowner cannot do a loan modification or sell their house to an investor then the house goes to the foreclosure auction.

Foreclosure Auction

The foreclosure auction is a public auction that allows any member of the public to bid on a house. Typically you need to register prior to the day of the auction and you need to have a cashiers’ check made payable to the clerk of the court for at least 5% of the purchase price.

If you bid on a house and win the auction you are expected to pay the balance of the amount either later that day or within 24 hours. In the event that you do not pay the balance in time then in most counties you forfeit your deposit.

You cannot get a mortgage to buy a property at the foreclosure auction. You need to have the ability to pay cash for a property and you need to be able to produce both the deposit amount and the full amount within no more than 24 hours after the auction. Since so much cash is required, investing in foreclosures by buying at the courthouse is difficult for new investors.

Investing at the courthouse is also full of risks. When you buy a house at the courthouse you do not get free and clear title. You get a property as is. If there are liens, judgments or code violations recorded against the property then these will not be wiped out by the foreclosure auction. If your property has squatters or unwanted tenants you will need to go through the eviction process prior to even entering your property. In most cases there is no inspection of properties sold at the courthouse so any damages that there might be are your responsibility. You also might purchase a property only to find out later that all the cabinets, appliances, and fixtures have been stolen out of the property.

In some cases beginners at the courthouse are not even aware that they are not bidding on a first mortgage. I have seen bidders bidding on a second mortgage only to find out that there is a first mortgage ahead of them. If you are going to be investing in foreclosures by buying them at the courthouse it is imperative that you understand “position” and which mortgage you are bidding on. It is also imperative to do a very thorough title, lien, utility and code violation search. It is also important to do your homework in understanding the condition of the property, the value of the property and the estimated repairs that the property will need.

Investing in foreclosures at the courthouse is not for the faint of heart and certainly not for beginners. You need to be very knowledgeable about real estate law, the foreclosure process, and have access to a good title agent that will run title searches for you. Since buying at the courthouse requires cash it has a high barrier to entry. Anyone without access to cash cannot buy at the courthouse. This effectively eliminates a lot of the competition. If you are willing to be diligent and do the work, buying at the courthouse can be very rewarding. However this is not an area for beginners. Anyone can watch a foreclosure auction by going to the courthouse on the day of an auction. You do not need to be a bidder to enter the room where the auction is being held.

Buying at the courthouse can be frustrating since foreclosure auctions are often cancelled at the last minute. Auctions can be cancelled because one or both of the parties was not served correctly, the seller has filed bankruptcy or the seller has negotiated a loan modification with the bank. Doing a lot of research on properties and then watching them get cancelled at the last minute can be very time consuming and frustrating.

Usually the bank is prepared to let a property get sold at the courthouse for eighty to ninety percent of its market value. Depending on economic times, this number can be higher or lower. The attorney representing the bank will protect the banks interest by bidding up to the value of the amount that they are willing to sell their property for. It is a myth that foreclosures get sold at the courthouse for pennies on the dollar. In reality, the bank will protect their interest up to almost the full amount that is owed to them. This is another reason why bidding can be very frustrating at the courthouse. If the bank is the highest bidder, then the property goes back to the bank and becomes a bank owned or REO property.

REO

 Real estate owned or REO properties are properties that are owned by the bank. Since banks are not landlords the first thing that they do with a property that comes back to them is they try and sell it. The way that they do this is by using “asset managers” or asset management companies which are companies that represent the banks in dealing with their REO properties.

These asset managers submit their REO properties to pre-established realtors that only work with REO properties. These realtors give their asset managers a “brokers’ price opinion” (BPO) which lets the bank know at what price the realtor thinks the house should be listed. Usually bank owned properties are listed at competitive prices in order to facilitate a quick sale. REO properties are cash only deals meaning any potential buyer needs to be pre-qualified by the bank and needs to show a “proof of funds” like a bank statement. Buyers need to show that they have the cash available to purchase a property.

Buying REO properties is not as competitive as pre-foreclosures but is more competitive than buying at the courthouse. The reason is because all of the properties are listed on the multiple listing service (MLS) so any member of the general public can have access to REO properties through websites like realtor.com and zillow.com. This makes purchasing REO properties fairly competitive although the barrier to entry is high since you need to be a cash buyer.

You cannot get a mortgage to buy a property that is owned by a bank. In fact if a bank is faced with two offers they will always take the cash offer even if it is substantially lower than any other offer. The reason is because banks need to liquidate REO properties quickly in order to avoid a bottleneck of owning too many properties. Federal regulations limit how many bad loans a bank can have on their balance sheet so banks try and get rid of their REO properties as quickly as they can.

For this reason, cash buyers that are prepared to close quickly and waive contingencies like inspections will always get the best deals. One big advantage of purchasing REO properties is a relatively free and clear title. I use the word relatively since the banks use their own title companies to close on their REO properties. Sometimes these title companies do not search for code enforcement and utility bill liens. However the marketability of the title is never in question.

The popularity of purchasing REO properties changes depending on the current state of the real estate market. Presently in 2008 the best opportunity for buying foreclosed properties is with REO properties. In some situations these houses are being sold at ridiculously cheap prices. Since there is so much turmoil in the banking sector many banks are reluctantly being forced to “dump” properties are very low prices. If you have the cash to invest you should begin looking for an REO bargain while they are still available. It is estimated that there is enough supply still entering the market that you can probably purchase an REO property relatively cheaply and easily over the next two years.

For patient long term real estate investors, buying REO properties directly from the bank could have significant upside potential.

 

Recently I received a call from a real estate investment club member that asked this question - “I am responsible for a mortgage that is being paid by the homeowner but I am afraid he will be stopping the payments shortly, what should I do?” I will call him “Sam” but it is not his real name.

I asked Sam about the property and he said the mortgage was for $300,000 but the current market value was only $230,000. As we discussed the problem further, it became apparent that Sam was not on the deed of the property but was personally responsible for the entire mortgage!

A close personal friend of Sam had asked him to take the mortgage out in his name and his friend would pay Sam $3,000 for use of his credit. While Sam’s friend didn’t intend to defraud Sam, this scam of using another person’s credit to buy a property is called using a “Straw Buyer” to purchase a property. It is one of the most common types of mortgage scams and has resulted in thousands of people spending tens-of-thousands of years in jail and paying millions of dollars in fines.

Unwittingly, Sam committed mortgage fraud when applying for the mortgage because the lender has a questionnaire that asked if it would be Sam’s primary residence along with other financial questions that Sam undoubtedly falsified - or the mortgage broker did to have Sam qualify for the loan. Sam, like many unsuspecting individuals are innocent people with good credit, looking to make some money. However, the law looks at them as being fully involved because they knowingly took money to get the loan and committed fraud doing it. This potential fraudulent involvement by Sam is what the scam artists use to scare Sam from going to the Police - “tell on us and you are part of the problem”. Unfortunately, Sam is part of the problem but he needs to “roll-over” first with the Police to get lenient treatment.

Most often, in this form of fraud, the victim (Sam) is induced by being offered $10,000 to $20,000 to use his credit and a percentage (10% - 50%) of the profits when the property is sold. In addition, the unsuspecting individuals who use their credit, would be told that the property will be rented and the rent payments will pay the mortgage payments for which they are responsible. Unfortunately, they usually find out when they go to buy a high ticket item like a car and learn that their FICO credit score is in the 400’s instead of the 700’s!

The scam artists usually purchase the property at one price (i.e. $200,000) and with the help of an unscrupulous mortgage broker and appraiser, resell this property to Sam for a $100,000 INSTANT profit to themselves! Unfortunately, no mortgage payments are made and the scammers go ahead and rent the property and keep the rent until the property is foreclosed and the tenants evicted by the Sheriff.

Hopefully this isn’t going to happen to Sam, but if his “buddy” were to sell the property, there would be a $70,000 - $90,000 loss on the property after the mortgage is paid off. The only way to sell it is by doing a short sale, but for the lender to allow a short sale, the mortgagor (Sam) must be in foreclosure.

So the “players” in this mess are Sam, who participated without realizing the potential legal consequences and the long-term damage to his credit, Sam’s friend who has little or no financial loss or credit risk at stake and can walk away at any time, and the mortgage broker who must have had to participate in this fraud to the lender. The mortgage broker probably believes that he is immune to prosecution because he just took the application, but the problem is that he is a co-conspirator who told Sam how to “properly” fill out the loan application.

The moral of this story is not to allow anyone to induce you to use your credit to purchase a property - even if they say they will put it in your name. I have seen this guise used and the Sam’s knowingly signed a Quit Claim Deed at the signing of the mortgage documents to “facilitate the sale” for the scammers. If you are approached by anyone asking you to “loan your credit” for a mortgage on a property, see an attorney to make certain you have representation and the deal is not a scam.

I have a hard money loan against my dads commerical property under my name and I cannot afford it anymore …do you think I can do a bk on the hard money ? thats a lien against my dads commerical property ?

My husband and I are owners of a home with my parents that is currently trying to be short saled (in California). We have heard from several different people that if the house goes through a short sale or even worse a foreclosure that he will have no chance of getting into a police department. Does anyone have any experience with this? We have really good credit otherwise. He is looking at departments in California and Colorado.

If anyone has any experiences with good or bad in dealing with a debt consolidation company let me know. Would it be a good idea to have one help me if I have about 4,000 dollars in debt?

With the high rise in foreclosures these days, even those who do not invest in real estate are starting to hear the term “real estate short sale” or “mortgage short sale.” A simple definition of a short sale of real estate is an investor or buyer making a deal with the primary mortgage holder to accept less than the amount due on a mortgage; rather than the lender taking over the property through the foreclosure process and then ultimately loosing money on the property by selling it at a foreclosure auction.

Once a property goes into foreclosure the lender passes along the file they have on the property over to their loss mitigation department. It is the loss mitigator’s job to deal with the foreclosure and help the lender to retain as much money from the deal as possible. While the loss mitigation department may not act like they want to conduct a mortgage short sale, the truth of the matter is that generally they loose less money that way than having to auction off the property on the courthouse steps.

Dealing with a loss mitigator can be very challenging, especially to new real estate investors. The best advice I can give you is to try and always remember that it is in the loss mitigator’s best interest to ultimately deal with you. While they may act like they are not interested in negotiating with you, they are from the first time you reach out and contact them. For those who will not deal with you, there really is nothing you can do but go find another deal to make and leave that one on the table. There is nothing you can ultimately do about it and you are much better off finding other deals which will make you money.

Many real estate investors ask what is a reasonable offer to make to a lender for a mortgage short sale? Generally the rule of thumb is about 80% of the current mortgage balance on the property. But, the absolute rule is that you should never offer more money than you want to have into the property, and never more than you think the property is worth to work with and either sell or rent out.

By making a reasonable short sale offer, and treating loss mitigators well, you can generally close a deal with a mortgage short sale to your benefit.

A property that I am a co-signer on is going into foreclosure. In a question I asked previously regarding this matter, someone pointed out that I will be sent a 1099-c form. What exactly does this mean? If the house is sold at auction will I owe taxes on the amount the house sells for or the amount that was owed or, if the house does not sell for enough, will I owe taxes on the amount not paid?

If we can sell the house before the foreclosure is complete, how does that impact the situation? I’m so confused.

And please, no posts about your tax or loan company. I will report it as abuse.

Are you interested in buying a new home or a real estate investment property?  The current turmoil in the real estate market offers astute buyers great opportunities to buy real estate at a discount.  A record number of homeowners are now either in or at risk for foreclosure.  Foreclosure, however, will destroy the credit of a homeowner.  An alternative to foreclosure is a short sale.  In a short sale, the homeowner and lender agree to sell a property for less than the amount owed on the loan.  

 

If you are considering buying a short sale, there are some key points you need to consider.  

 

Get a Realtor: A realtor can help you find the perfect property.  Choose a licensed realtor that has experience in short sales.  Properties may or may not be listed as short sales.  Short sale listings, however, often tip off that offers need to meet the lender’s approval. 

 

Get a Lawyer: Even if the seller doesn’t have a lawyer, it doesn’t mean that you shouldn’t.  A short sale can have tax implications since debt forgiveness may be considered income for the seller.  In addition, a lender may go after the borrower for the difference between the amount owed and the amount paid.  For more information and help finding a real estate attorney, visit RealEstateAttorneyGuide.com

 

Check the Local Market: Your realtor should be able to get you  a comparative market analysis.  You will be able to see active sales, pending sales, and past sales of other similar homes in the area. 

 

Check Public Records: Before you make an offer, find out who is on the title, whether a foreclosure has been filed, and how much money is owed.  Also check if multiple lenders are involved.  Multiple lenders can complicate the approval process.

 

Get Pre-Approved: The lender will want to see that you are pre-approved and that you have a loan available.

 

Give the Lender a Deadline: Any offer you make should be contingent on the lender’s acceptance.  Make sure to give the lender a deadline to accept, after which you are free to cancel.  Most lenders should take two to three weeks to make a decision. 

 

Expect Commission Negotiations: Since the seller is not receiving any money from the sale, it is actually the lender who is paying the realtor commission.  The lender is likely to negotiate a lower broker’s commission.

 

Inspect the Property: Be sure to properly inspect the home.  Do not waive your right to conduct inspections and make your offer contingent on approving them. 

 

Buying a short sale can be difficult but can also be very rewarding.  To learn more about buying short sales or foreclosures, visit BestForeclosureDeal.com

I unwittingly entered a debt consolidation program with cesi and wish to stop. I have medical reasons from Iraq and I sometimes am overly impulsive. Has anyone ever stopped participation in one of these programs?