Tip one: Banks do not want to foreclose on real estate

I’ve seen a lot of investors miss out on huge profits because they just don’t understand how far banks will go NOT to take back a property. Banks don’t want to own real estate. Banks don’t want to have bad loans on their books. All they want is people to pay them on time and take care of the house.

When you understand this, you recognize how much power you have when negotiating with lenders to find creative solutions to help sellers solve their problems. The key is to COMMUNICATE with the lender about what is going on and what you need to make this work for their best interest, which is having the loan brought current.

Many times I’ll do a three-way call with the seller and the lender. I’ll coach the seller to introduce me to the lender as a, “friend who knows more about this real estate thing than I do and who is helping me to understand what exactly is going on and how I can make sure you get your money.”

Then I take over and find out the specific details and exact status of the loan. Many times I negotiate a payment plan, known as a forbearance agreement, with the lender right there on the phone.

One word of caution, don’t tell the lenders that you are buying the property because they might not like you buying the property without paying off or assuming the loan. If they ask any questions about who you are, which they almost never will, simply repeat that you are a friend of the sellers who is trying to help them out.

Tip two: Foreclosure tidbits investors don’t know

What happens if the lender doesn’t get all its money out of the foreclosure sale? Many homeowners think that once the bank foreclosure sale has happened, all their worries are over.

This may not be true. In many states the lender can get a “deficiency judgement” from the court which means the borrower (homeowner) owes the lender any money that the lender LOST from the whole process.

Does the lender make money in foreclosure sales?

No, they’re not allowed to make a profit. Any money made in excess of the amount owed the lender, including the foreclosure costs, will go to the borrower. The reality is that rarely will the borrower get anything for his or her equity in a foreclosure sale.

Lenders can get money for fees like:

* Late penalties
* Accrued interest
* Attorney’s fees
* Court costs
* Filing fees
* Title work fees

Tip three: Other ways property owners default

While we usually see property owners default on loans by not making the monthly payments, there are other things home owners do that can trigger the foreclosure process.

* Homeowner fails to pay property taxes which creates a lien that jeopardizes the lender’s security
* Homeowner fails to pay a Home Owner Association fee
* Homeowner transfers title without getting the lender’s permission
* Homeowner does something to the property that diminishes it’s value

All of these things COULD trigger the lender to foreclose on the property, but rarely will they be the cause of the bank foreclosure. By far the most common reason for a lender to foreclose is non-payment by the borrower.

Tip four: Don’t be afraid to knock on doors

One useful technique to find great deals is to literally knock on the doors of owners who are default.

Can we really mean just show up at their doorstep and knock on their door? Yes!

Let’s face it, out of the 50 other investors who have the Notice of Default or Lis Pendens information about the sellers in the early stages of foreclosure, 25 of them will pop a postcard or letter one time in the mail to them.

Five of them will go to the effort of tracking down the owners’ phone number and giving them a phone call. And only one or two will actually face their fear and go knock on the seller’s door.

Now this is time consuming and takes a bit of finesse to make it pay off for you. The biggest clue that it is worth the time for a personal visit is if you reasonably expect there to be either:

1. A lot of equity in the house; or
2. The property is in an area where you are very interested in acquiring long-term keepers.

If one or the other (ideally both) of these criteria is not met, then give the sellers a call on the phone or plug them into your mailing sequence but don’t waste your valuable time visiting them.

You might be thinking that the homeowners wouldn’t want you to come to their door. In many cases they really are in desperate need of help.

For example, a student of ours in Columbus, Ohio knocked on the door of a couple who were in the end stages of foreclosure. The sellers were a nice couple who had gotten caught up in an unfortunate financial situation.

Our student, Mike, agreed to make up the back payments and stop the foreclosure. Then Mike would fix up the house, take over the payments, and resell it. There was a large chunk of equity in the house so Mike agreed to give 10% of his net profit back to the sellers to make it even more of a win-win deal.

What to say when you knock on the sellers’ door

Here are two scripts of what to say when you’re knocking on their doors cold:

Script One: This one works well if the sellers are still in pre-foreclosure OR if you’re not quite ready to use the gutsier script below.

Knock, knock…[Step back off the porch, turn sideways, assume a passive, harmless posture to put them at ease.]

Owner: “Yes?”

Investor: “Hi, (looking as harmless and Bambi-like as you can manage) my name is Jim and I’m an investor who is looking to buy another house in this neighborhood. I was wondering if you knew of anyone in the area who might be at all open to selling their house if they got a fair offer on it?”

Owner: “Well, actually I might want to sell my house.”

Investor: “Oh, okay, but I’ve probably caught you right in the middle of something, huh?” Owner: “No, I was just making dinner. Now’s as good a time as any.” And away you go with them showing you the house and following the Instant Offer System.

Script Two:

Knock, knock… Owner: “Yes, can I help you?”

Investor: “Hi, my name is Jim [looking passive and harmless like a small puppy dog], and I’m an investor who helps out folks who have a house that’s in trouble. Is your house in trouble?”

Owner: “No, I don’t know what you’re talking about.” Investor: “Oh…[looking down at his clipboard and scratching his head] I’m a little confused here. It says here that the city thinks this house is behind in it’s payments. Heck, they even have it listed in the legal notice newspaper. But they probably got all that wrong, huh?”

Owner: “Can I see that paper?”

Investor: “Sure…” [showing the owner the clipboard that has a list of the owner’s house with the date that the Notice of Default was filed or even a copy of the legal notice publication with the seller’s property highlighted]

Owner: [a bit softer now] “Well I guess I must be a bit behind. I thought the bank would work with me longer before they did this.”

Investor: “Yeah, I know…banks sure can play real tough with little fish like us.

“You know though, a lot of times banks make mistakes when they send you all that paperwork that can make them have to start all over again from the beginning. I was visiting with another homeowner like yourself the other day when we spotted how the bank misspelled her name on the official notice. I helped her get another 60 days’ delay in the process to give her more time to find her best solution.

“If you’d like, I’d be happy to take a quick look over the paperwork they sent you to see if I can spot any mistakes they made. Would you like me to sit down for a second and see if I can spot anything in the paperwork?”

Owner: “Would you?”

And now you’re in the house and connecting with the owner.

I got an email from an investor who found a great deal by doing some research at the courthouse to find sellers in default. Next he went and knocked on the seller’s door. The seller’s wife answered the door, and the three of them sat and talked for and hour and a half.

Our student funded the deal by taking on a money partner, and the two of them will split the $50,000 profit 50/50. The best part was that he helped the sellers avoid foreclosure.

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Mistake #1

They take TOO Long. Good deals don’t wait around for indecisive people. Many people “think a deal to death.” One way to lower your anxiety level with a deal is to move forward provisionally (i.e. with a clause of some sort.)

Mistake #2

They trust the seller’s numbers. Even if there are only good intentions, most sellers just aren’t knowledgeable, and they are inherently a bit biased.

Mistake #3

They trust appraisals. An appraisal really isn’t meaningful, unless YOU hired the appraiser, and YOU gave the instructions, and YOU are handing the appraiser the check.

I can influence an appraiser to appraise a “$100,000” house for as little as $80,000 and as high as $120,000 (or more). That’s a 20% variance! That’s a lot to have in a marginal deal. So take any “appraisal” the seller hands you in the spirit that it was intended–as a MARKETING piece!

Mistake #4

They do their math in pencil. The next time you catch yourself thinking it’s okay to “fudge” your numbers a little to make the deal cash flow or the rehab payoff, BEWARE! Some investors have a tendency to “play” with the number a little to make them show a marginal deal is better than it really is.

Mistake #5

They overestimate market rents. This one happens all the time. The way you know what a house will rent for is to do a market rent survey. The rents listed in the paper may or may not be accurate.

Mistake #6

They overestimate “as is” value. So many investors forget that to turn a house in 60 days or less requires the price to be REAL–not pie in the sky. Be conservative in your estimate of value going into the deal. The worst case then is that you make MORE money than you thought you would!

Mistake #7

They get bogged down in process. Use a “Layered” Approach: I will be talking about this innovative way to analyze a deal FAST on Real Estate Radio.

Mistake #8

They worry about the house on the first layer analysis. On your first pass, you are only concerned about three things:

1. Why is the seller selling (motivation level)?
2. Is there any equity?
3. Would the property cash flow if you held onto it?

Mistake #9

They underestimate the time it will take to flip, fix, fill, or sell. I’ve bought a lot of houses from investors who got stuck with holding costs too much for them to handle. Be careful here.

Mistake #10

They SKIP analysis until the deal falls apart on it’s own. Wishful thinking isn’t pretty.

Bonus Mistake #11

They hide behind analysis when they are AFRAID to act!

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You’ve seen the emails:

“Legally eliminate your mortgage”

Can this possibly be true? Well, I’ve read the claims and researched the law and here’s what I came up with.

The Claim

The claim is that you can legally eliminate your mortgage based on an accounting loophole that goes something like this…

“If the lender who funded your loan used borrowed money to fund your loan, then the loan is not valid. And, since the loan is not valid, the security (mortgage or deed of trust) is not valid either. All you do is simply march into court and ask a judge to void your mortgage lien, and you don’t have to pay it back.”

Now, without going into the legal issues, a common sense approach would tell you that the entire premise of this argument is patently absurd. Think about it… most lenders use borrowed money to fund loans, that’s the nature of the business.

So, if these “mortgage elimination” promoters are correct, then millions of mortgages would be void. The entire economy would collapse. This sounds vaguely familiar to the “tax protestor” scam where people claimed that they didn’t owe income tax because the government did not have the constitutional authority to tax them. More on that later…

The Law

The mortgage elimination promoters cite various court cases in support of their position. At first blush, it would seem there are dozens of court cases in which the judge actually did what they claimed, that is, declare a mortgage void because the lender used borrowed funds for the loan. But, since most laymen are not trained in the law, they take this stuff, hook, line and sinker.

I’ve read the decisions and they all have a common theme: they don’t support the mortgage elimination theory. In fact, most of the cases are only vaguely on point.

The “tax protestor” promoters did the same thing… take a quote from a judge’s decision out of context and cite the case as support for their position. In the end, the tax protestors all lost in court, paid large fines and went away with their tails between their legs. The government went after the promoters of the scam.

Similarly, the government is going after the promoters of the mortgage elimination scam. The Federal Reserve recently issued a warning, a copy of which can be found at the end of this article. The Office of the Comptroller of the Currency issued a similar warning last year.

The Minnesota Attorney General has also gone after a company that has allegedly charged consumers as much as $7,500 for this scheme.

The Cult of Stupidity

As I write this, undoubtedly a few “followers” of the theory will email me and argue that I don’t understand or that I’m part of the “establishment mentality” that keeps the little guy down. Of course, these are likely the same people who are collecting referral fees from the scammers that are charging thousands of dollars to consumers in exchange for a false promise to eliminate their mortgages.

On a philosophical level, I appreciate discussions about how the dollar really isn’t backed by gold, the government doesn’t have the right to tax Americans and the the like. But I wouldn’t tell a client to actually rely on any of these theories in a court of law. Nor would I charge someone thousands of dollars in exchange for a promise or guarantee that their mortgage could be eliminated without paying it off.

How to Really Eliminate Your Mortgage

There are some legal ways to eliminate your mortgage:

1. Pay it off in full

2. File for chapter 7 bankruptcy (in which case you will not be liable for the mortgage note, but you will also lose the house)

3. Find a REAL legal challenge that a judge is willing to accept as a valid reason to declare the debt void, such as usury, gross violation of lending laws, fraud, incompetency or the like.

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If you have ever bought or sold real estate, you have probably paid for title insurance. What exactly is title insurance? Why do we need it? How can I save money on title insurance? These are common questions asked by real estate investors.

Whenever title passes, the seller usually gives a deed containing certain guarantees or “warranties” (hence the name “Warranty Deed”). The seller warrants that title is good, that is, no one will come challenge the integrity of the title. For example, if a deed that was passed before him was forged, all subsequent transfers are void. Other problems may be more subtle, such as a deed with an incorrect legal description or misspelled name. Any irregularities in the “chain of title” will place a “cloud” on the integrity of the title.

The Title Search

When you are ready to sell a property, a title search is performed by a title company or attorney. The title searcher follows the chain of title back about 50 years, tracing the ownership through deeds recorded in pubic records. The searcher also checks to make certain that previously recorded mortgages and other liens have been released. Based on documents found in public records, the title company or attorney will prepare a “title insurance commitment.” A commitment is a statement that based upon certain documents found by a search of public records, the company will issue a title insurance policy for a certain fee.

The Title Insurance Policy

The title insurance policy, unlike most insurance policies, covers past events. For example, the daughter of a previous owner claims that her father conveyed a deed while not mentally competent, the current ownership may be in jeopardy. The title insurance company will defend the claim and pay for any damages (usually the value of the property). The policy does not cover claims based on events that occur after the policy is issued. Furthermore, the policy usually contains numerous exceptions, such as claims based on information undisclosed to the title company. Thus, if you are aware of any potential problems that might lead to a claim, your failure to disclose this information to the title company will lead to a denial of a claim based on those events.

Ask for a “Re-issue” Rate

A title insurance coverage starts from ancient history and ends from the date you transferred title. Since most transfers are insured by a title company, the longer you own the property, the more the policy costs. Consider this: if you buy a property and the transaction is covered by title insurance, then you sell it six months later, what are the chances that something went wrong in the last six months? The answer is that the chances are slim to none, so the risk of a claim against the title are slim to none. For this reason, title companies offer a “re-issue” rate. The re-issue rate is a discounted price (usually about 40%) on the title insurance policy if another policy from a title company was issued on the same property within the last few years. The rate is lower because any claims that arise from events before the previous owner are covered by the previous policy. Thus the new policy really deals with the risk of claims from events that occurred while you owned it.

Try a “Hold-Open” Policy

If you are buying a property with the intent of re-selling it within a year, ask the title insurance company for a “hold-open” policy. For a small fee (usually an additional 10% on the policy), the title company will hold a title commitment open for a year or more. Rather than issue a policy based on the first transfer (from the seller to you), they will issue a policy on the second transfer (from you to the next buyer). Since the seller usually pays for title insurance, you can pay the additional 10% when you buy, saving 90% on title insurance when you sell.

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The Veterans Administration has been persistently trying to find out measures for improving upon their home loan program. What they wish to achieve thus is to render the special programs offered by them for veteran home seekers more accessible and easier to manage. In the light of such objectives the VA adjustable rate mortgage has been introduced recently. Many a veteran can hope to save much owing to the low rates of interest being set for these mortgages.

The groups targeted to be benefited by the VA loans are the U.S. veterans and service persons. The VA loans help fulfill their house building/home improvement aspirations. As per the VA Loan program provisions the Veterans Administration guarantees a certain portion of home loans made by institutional investors. It provides this to the veterans who suitably qualify as such.

Now the question may arise that which persons are the ‘veterans’ qualifying for these loans. Well, the veterans are the ones who had served on active duty during the World War II or perhaps even at some later period and had been honorably discharged afterwards. So, if you too belong to the group of such persons then you can apply for these loans and make good use of them. You only need to obtain a certificate of eligibility for these loans by completing the VA Form 26-1880.

Some special features of the VA loans are:

* The VA guaranteed loans are usually 15 or 30 year fixed rate loans. These are much easier to qualify for than the regular loans and can be completely amortized.
* Veterans need to make little or no down payments on these loans.
* These are meant for all property occupied by the owner and they involve the financing of family homes that comprise of between a single unit and four units.
* The Veterans Administration charges a funding fee. This is based on the total loan amount sanctioned. This is to be paid in cash or financed. This depends on loan-to-value, the status of the particular veteran and info about whether or not the veteran had made use of the program earlier.
* It may be that a veteran had opted for a VA loan earlier. But this does not mean that entitlement of the person to the loans cannot be restored for taking another loan.

If you are suitably qualifying for the VA loans then think about opting for these loan products. It can be guessed that the host of benefits on these loans will be luring you to apply for them. You can consult some mortgage specialist too about how best you can get the loans approved and secured.

Notification about requirements of new appraisal forms and a new appraisal report (November 2005 onwards) in relation to VA loans has been recently made. Think about approaching the experts on mortgages/loans to get to learn more about this from them.

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