Creative Wealth Builder Club

“Foreclosure Profit Machine” Chapter 2

  "Foreclosure Profit Machine"

 Ethical Foreclosure Investing Strategies for Massive Wealth Creation

 © Copyright 2008 Asset Solutions 2100, LLC   All Rights Reserved

 
Chapter 2

To a novice, I understand that this discussion about the process of foreclosure may seem a little cold hearted, when you observe it strictly from the perspective of the homeowner in distress. 

Please understand that you should approach this business as a professional. You are, in fact, someone who can solve some of the distressed homeowner’s problems. You are no guiltier than a psychiatrist whose patient has mental problems, nor than an attorney whose client is a criminal. Foreclosures are just facts of life and always will be a part of the housing industry. It happens with or without you. 

Foreclosures have happened in the past, and they will continue to happen, no matter what. You never have to feel like a “home robber” by being in the foreclosure business. You are truly a problem solver. The methods we teach actually make you the “knight in shining armor,” whose actions can give people hope for a brighter future. Most importantly, be honest and straightforward with these people. They really need someone like this in their lives. Show them how to make things better.

You might be asking, “Why would any lender make loans to borrowers with little or no money down? Aren’t the banks at great risk when they do that?” You might also say, “But they get the property if you don’t pay.” Believe it or not, this is not always a great deal for the bank. Banks are not in the property ownership and resale business, nor do they want to be. They are only in this business by default.

The mortgage market and industry is essentially about risk and return. The higher the risk a lender is willing to take, the greater the return they want on the money. In actuality, it is their investors who put up the money to lend and then demand these criteria to be enforced.

For example, if you’re putting very little money down, you might receive or be charged a higher rate. If you’re self-employed, you may also receive a higher rate. If your credit is less than perfect (or just plain bad), you may receive a higher rate and be given a lower “loan to value” (loan as a percentage of the value of property). The banks understand how to hedge their risk with lower loan to values and higher rates, in order to offset the effects of foreclosures, which occasionally occur.

If a lender is willing to take on higher risk situations, it is more likely to end up with foreclosures on its books. Frankly speaking, many of what we call higher risk or “nonconforming” lenders expect to end up with some properties in their REO department. Since these lenders usually require a greater down payment, they are better secured by equity. Therefore, they have reduced their risk of loss in the event they have to foreclose and re-sell the property.

Here is another way to look at it. The banks make their money on the “spread of money” which they borrow. Banks really don’t lend “their” money. They borrow other people’s money and lend it out at a higher rate. The popular term for this is “OPM” or Other People’s Money. Many of the greatest riches in the world have been made using OPM. When we buy and sell property, we always try to maximize its use by using OPM vs. our own money, because we actually get a higher rate of return.

For example, say you put $100,000 down to buy a $100,000 property, it appreciates 10% over the next year, and you then sell the property. Your rate of return is 10%. 

However, say you put 10% down on the same property ($10,000), it appreciates 10%, and you then sell the property for $110,000. You actually get back your $10,000 down payment PLUS a $10,000 profit on “your money.” Remember, $90,000 was OPM. Your rate of return is literally 100% by using the “leverage” of OPM, with even less risk.

Assume you make a deposit into their account, and they pay you 2%-4% interest on that money. You have “loaned” this money to the bank. The bank then turns around and loans the money out at 6% to 9% on consumer loans. Since they’re lending none of their “own money,” the spread they earned is virtually pure profit.

In other words they’re earning 3% to 7% spread on every dollar in their system. They are really “making” money. If they process $1 million through this system in a day, they may be earning $40,000 to $70,000 for every million dollars they process. Now you know why banks are so willing to lend you money so aggressively. They make even more money as your payments float through, and these can even be loaned again before the banks ever make another loan payment to the ultimate investor. I think of this as the stacking effect. They’re making money on top of money making money. You may be thinking, “Maybe I should be in the banking business instead.” With real estate, and the proper approach, you can virtually do just that. 

Actually, the banks borrow their money from institutions like FNMA, the Federal Reserve Bank, or other private markets which have more money available. It’s no wonder they’re pushing so hard to get people to borrow, even if certain risks exist. The banks build in the risk factor, anyway, in the form of equity and interest spreads. Banks can’t lose, unless they are simply foolish. But consumers can lose, if they’re not wise to the system.  

The foreclosure process falls into a few simple stages, which are helpful to understand as an investor.

Perhaps this is due to a job loss, health problem, or they are simply over-financed. Frankly, this is my favorite stage to locate distressed sellers and help them out. This is before their credit has been seriously harmed, and they are not too many payments behind. In many cases, they are not behind at all, at this stage. They are just barely making it.

It is far easier to purchase property at this stage, and I will probably have to come up with less money to make the back payments. This approach assumes you understand how to take over a loan without “assuming” the actual liability for it, by performing a “subject-to” transaction. I have frequently gotten sellers to simply deed the property to me, if I will agree to take over the payments. If they are motivated enough, they will do this.

Stage 2: The Homeowner is Falling Multiple Payments Behind.

At this stage, the homeowners are receiving notices that they are delinquent. They may have begun to receive phone calls from the bank regarding the matter. This is a very uncomfortable stage, as these phone calls are very painful for homeowners to deal with.

They may also be receiving calls from other collection accounts that are falling behind at the same time. This can create a very emotional state for the homeowner. Again, this is an excellent opportunity for you, the investor, to help these people out. If you have the skill to simply have them deed you the property while you agree to make up the back payments, you become the hero. You’ve just rescued their credit from getting much worse and given them a quick solution to their bleeding payments and credit problems.

When the dreaded "N.O.D.” or notice of default arrives, this is essentially a final warning prior to foreclosure proceedings. In mortgage states, the homeowner can actually receive a summons notifying them of the bank’s legal action pending or “lis pendins.”

At this point, your credit and this situation are a matter of public record. Just about anyone who goes down to the courthouse can look up these actions. Many investors do go to the courthouse to get this information and begin contacting homeowners at this point. If you’re a serious investor, you can learn how to get this information without driving downtown every week.

This can be obtained through a foreclosure service found at my web site: www.tjmarrs.com. Look under the Tools tab.

Additionally, the credit bureaus see the notice of default as a very serious matter on the homeowner’s credit. The only thing worse would be an actual foreclosure sale, which is what we want to help these homeowners avoid.

The ”N.T.S.” or notice of trustee sale (or something similar in various counties) is the formal notice that indicates an actual auction date is being set.

At this point, the homeowners understand that the clock is truly ticking toward the sale of their house at the courthouse steps. Additionally, there are now multiple back payments due, plus penalties and legal fees, making it even more difficult for the homeowners to cure the problem.

As investors, it is at this stage when we begin to hear from these people. They are now realizing they must act, and act soon. They are even more motivated to act now. I find it quite amazing how many homeowners actually put off things until it gets to this point. In fact, most homeowners wait until just before the auction to start calling investors for help in dealing with the problem. What is important for the investor to understand is this: You must be in position with your marketing, so that these homeowners call you first.

 

Stage 5:         The Foreclosure Sale or Auction

In most cases, the trustee or attorney holding the sale will have payment and bidding requirements. In order to play the game at the courthouse steps, you must show proof of minimum funds and be prepared to place those funds immediately in the trustee’s hand.

The strategy I have used involves the use of a cashier’s check for the minimum bid, plus a few $5,000 cashier’s checks, and a few $1,000 cashier’s checks, up to the amount that I am willing to bid. If you don’t come prepared, you can’t play.

Another note of caution: If you’re not fully aware of other liens and encumbrances against the property, or any structural or major repairs it might require, you could be getting into a high-risk situation at the auction.

Know your property before buying. The good news is that if you’re buying out a first mortgage lender’s position, you should be receiving a relatively clean title, excluding whatever property taxes are due. However, junior liens could be the actual position being auctioned, and there may be more senior underlying liens to be paid. This can get quite complex. The bottom line is, check with your title company and know exactly what you’re buying.

Another unique thing that can happen at an auction is that the property may not end up getting auctioned that day, although it was previously scheduled. Sometimes lenders are lenient and give the homeowner more time after some payments or significant negotiations are made. On the other hand, I have had agreements to stop an auction, go to the courthouse steps for some other purpose, only to witness the property I was about to purchase being auctioned off.

This is due to one hand not knowing what the other hand is doing at the bank. Sometimes, they have simply disregarded my purchase agreement with the seller and decided they just want to auction off some other bad debts, regardless of their discussions with buyers like myself.

Auctions can be a fun and exciting time. But auctions offer no flexible terms like the ones you might find when dealing with the seller prior to the auction.

 

Stage 6: Real Estate Owned (R.E.O.) or Bank Owned Properties

Many investors do quite well by just making offers on these properties.

As banks take back large numbers of properties, they may be willing to significantly discount these properties, so they can get them sold quickly and minimize their losses. Depending on market conditions in the specific area, there may be bargains to be had. Then again, there may not. I’ve seen situations were banks are very willing to discount, and others where banks are more interested in fixing the properties, and selling them at full retail price. This is a bank-by-bank, market-by-market variable to consider.

Don’t get too excited about a foreclosure property, whether it is prior to foreclosure, at the auction, or bank owned. None of this automatically means it will be a “pennies on the dollar” deal. All it means is that you might be dealing with a motivated party that is willing to sell at a significant discount. This is your window to at least try.