Creative Real Estate Club

“Foreclosure Profit Machine” Introduction & Chapter 1

 Ethical Foreclosure Investing Strategies for Massive Wealth Creation
 

 © Copyright 2008 Asset Solutions 2100, LLC   All Rights Reserved

  

Disclaimer: The information in this educational manual is designed to provide accurate and authoritative information in regard to the subject matter covered. It is offered with the understanding that the presenters are not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert advice is required, the services of a competent professional should be sought.  Adapted from a Declaration of Principals jointly adopted by a committee of the AmericanBar Association and a Committee of Publishers and Associations

T.J. Marrs has performed hundreds of real estate transactions as a licensed California Real Estate Agent, an Oregon & Washington licensed Mortgage Broker & Mortgage Banker, 

and a real estate investor over the past 17 years. T.J. has also held professional certifications in securities and insurance. He is a decorated U.S. Naval Intelligence 

Officer who served during the Iran-Iraq War and the Cold War.

While parking his car to attend Midnight Mass on Christmas 1998, T.J. survived a near-fatal multiple stabbing attack in a church parking lot. Ever since then, T.J. has dedicated his life to helping others overcome their fears and obstacles so they 

can change their lives. T. J. has authored two books and multiple courses on real estate and is developing another on business success. He currently serves as Chairman 

of the Northwest Real Estate Investors Association. He now dedicates his time to his real estate investments, speaking internationally, and helping his students succeed 

in their businesses. He is the select author for one of the internet’s highest volume web sites on Real Estate, RealtyTrac.com. He has twice been interviewed by the Wall 

Street Journal and CNBC’s Power Lunch. He has also contributed to “The Idiots Guide to Foreclosure Investing” and “House Poor” (Harper Collins).

T.J.’s motto is “Helping people succeed, one person at a time.” T.J. invites everyone to try his success newsletter, available at: www.tjmarrs.com

Homeownership today is at an all-time high. Every American wants to own his or her own home. At least, those who understand the value of owning their own home do.

At an unprecedented level, our government is providing incentives to own homes. The banking system is offering record level low rates to entice people to become homeowners. This all began during the period following World War II, when the government made it a priority to provide housing for returning veterans. President Roosevelt created this program for the veterans so that they would receive better treatment and benefits in exchange for their service to the country. These measures eventually led to the GI Bill and the Federal Housing Administration (FHA). These events have caused a mass movement and understanding of the opportunity to own your own home.

Rather than live in poorly designed and cramped apartments with little economic opportunity or pride, homeownership gave Americans the dream of building their own little nest egg, which they could eventually use during retirement. We have long seen homeownership as a tool to provide community pride and improve the social condition of our entire society. These opportunities, combined with the postwar economic boom, affected the Baby Boomer generation. This entire generation has grown up with a higher standard and has really had to deal with the harsh economic conditions of the prior generation. Homeownership in a nicer place is an expectation, not just an opportunity to expand one’s life.

As the demand for homes stays high, and the government and financial markets create sources of cheap loans, the economy has grown to record levels. Thus, we have seen amazing prosperity during these past 50 years.

Through all of the interest rate fluctuations, people still want to own their own home. Of course, they want it at the cheapest price possible. However, prices in some areas of the country have risen significantly faster than incomes can rise. When interest rates rise, this has a further impact on what we call the “affordability index.” Other factors, such as the rising cost of living, inflation, oil prices, and the effect of over-borrowing money, can significantly impact one’s lifestyle. This is the basis for the fear of a “housing bubble.”

However, in reality, the only places to worry about such conditions are in the super high-end markets, which have seen the fastest appreciation in recent years. That is a market-by-market concern, not a national one. What goes up fast just might come crashing down fast. On the other hand, as long as demand is high, I believe housing is a great place to invest, as long as you have the right buying strategies and criteria. 

As far as foreclosure investments are concerned, we can make money in any market. If the market is up, consumers tend to over-buy and therefore overextend themselves. When a market is down, there is a general trend of more foreclosures in that market. We simply adjust our buying and selling strategies to fit the marketplace. As long as people need a place to live, we are in business. What a great business this is. More importantly, we are actually helping these people improve their situations and avoid a credit catastrophe that could ruin their futures.

Another condition that creates a solid marketplace for a foreclosure investor is the tendency for Americans to borrow too much. Then, something happens which disrupts their ability to pay. In some cases, people are simply credit abusers. In other cases, it is just bad luckthat leads to a distressed seller situation. Our society has actually evolved into one of “indentured servitude.” This means that we live our lives around paying our bills, living from paycheck to paycheck. As a result, some of us fail. The good news is we live in a great country where anyone can recover, if they make the effort.

I, for one, don’t believe indentured servitude is a way to live, but merely a slow way to die. One of my goals in writing this book is to educate consumers about this reality and to educate people as to how this reality creates opportunity at the same time. I’m not suggesting one take advantage of people in distress, but merely to recognize how to help others improve their situation, while improving your situation at the same time. You really can get into the real estate investing business and build a fortune. It takes hard work, plus the mentality that you are building a real business.

Purchasing foreclosures is by no means an easy answer to lowering your cost of living or to venturing into a new business of real estate investing. I want to encourage you to be a real estate investor and a better consumer.

My motto has always been:

“You’re automatically already in the real estate business. The real question is, ‘Are you profiting from it, or are you the one providing the profit to someone else?’ With this training, you have the opportunity to make that choice.”

Everyone relies on real estate to exist on this planet. From the beginning of time, human beings have fought and died over real estate concerns. Today, corporations rely on it for major portions of their holdings. Stocks come and go, but the real estate stays and generally continues to increase in value.

“Real estate is the business of all businesses.”

One simple objective of this book is to give you an introduction to the idea of purchasing a home at a discount. Another is to show you some great strategies that can help you increase your profits as a real estate investor, even if you don’t have a lot of time, money, or credit. 

If you are a Realtor, my hope is that you will look at this business from the point of view of the consumer and the investor to see ways in which you could expand your business. Many realtors get into the business with the intent of becoming investors, only to find out later that they’re in a different business than real investors. Real estate licensing school does little to teach you how to invest the way I can. So, I hope this book can help you get closer to the dreams you had.

Good luck, and happy hunting.

T.J. Marrs

 

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 What have students said about T.J.’s materials and support…
 

I like the practical examples and hands on instruction.

A comprehensive, practical course combining excepts and actions to make them real.
Thanks.  Fred M.

The way T.J. presented his information in a local format. I feel I can get started without being scared, because I will know how to focus on one step at a time and not worry about the unknown. P.S. I have attended other seminars and have always come away overwhelmed and have not taken any action! With T.J’s coaching I an excited to get started and am looking forward to taking action.   Lisa R.

…This student found his first deal within 3 weeks for a profit of almost $30,000…..I almost negotiated the deal for a $10,000 profit, TJ showed me how to find another $20,000 I never realized I could get out of the deal on my own. Casey C.

…I did not believe you at first. Who would sell to us with such terms? Somebody would give their home away!? I thought it was just a once in a life time chance. In my first month I made $10,000 and it only took me a total of 10 hours of work.  More recently I acquired new TWO more deals with no money out of pocket, with over $85,000 in combined equity!  Chris B.

I pulled $55,000 cash out at my purchase closing on first deal with T.J….Steven M.

I am already wholesaling an average of 4 transactions a month, with a wholesale profit of about $2,000-$3000 cash each deal. With your help I am sure I will be able to perfect my deals so they become more profitable…..Oscar M.

…I am very grateful we have had the opportunity to work together and become friends.  By following your suggestions I have been able to create a bright future for myself.  I am very excited about this.  I realize I don’t have to stay stuck in a j.o.b for the rest of my life.  I realize I have the personality and drive to be successful, but I know many people are not risk takers and may not take enough action to change their lives.  I tried to say something today to motivate the people in your training….Leaha L.

I’ve always heard: "them’s that can… do; them’s that can’t… teach." It’s good to find someone who can, and teaches!  J. Jessup

I have one deal complete and 5 others started (that’s over $1m in properties). “You have made real estate investing processes so easy to understand, given the multitude of marketing tips, and new time saving auto forms, makes the investor more confident about the paperwork. You’ve done it all for us, except talk to the motivated sellers (and the new CD of TJ talking to sellers does that too)."

“I have been looking for a program s comprehensive as this for years. I would highly recommend this course for anyone that is serious about operating a real estate investment business!”   Debbie T.

You’re too good!!  You REALLY do want us to succeed don’t you??:-)) Thank you very much, TJ  Briana W.- Indiana

I definitely know I am exactly where I need to be (with your program). I continue to go through your course and find that it is as complete as a course could be. Thank you
for that….Scott S.

Thank you for your reply and the e-book . I just finished the 45 minute audio and all I can say is WOW !!!  It appears you  have been doing this for a  long time. You did lose me on the whole trust thing at the end of the audio but most of the rest I could comprehend. …Jason

I took the "$5,000 in 15 Days Challenge" program after last Wednesday’s (11/17) call and I’m just writing to tell you that tomorrow, Sunday 11/22/04, I am going to meet with 2 sellers on 2 properties!

Property 1 was actually taken sub2 by another local investor who has too many projects going and she wants to pass it on. She’s already even gotten 5 or 6 potential tenant buyers for the property. All I have to do is pay her an assignment fee (which I can get from a portion of the TB’s option payment) and the place will be mine (or rather, my TB’s!).

Property 2 is a pre-foreclosure. The owner is willing to just walk away, basically. She’s 3 months behind, owes $256k and the property is worth approx. $280k. Might take this one over for myself! It’s a nice place on 5 acres. Or maybe I’ll flip it to a retail buyer, leaving them some built in equity so that I can move it fast and walk away with $12k or so.

Any tips or advice on these would greatly appreciated. Thanks for your course, TJ. It’s down to earth, practical and well laid out. I love the fact it came with all the forms, too! Take care …Annie Anderson

Thank you for helping me reach my peak potential as a real estate investor.  Lonnie Wiig
 

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Introduction: What is a Foreclosure?

Foreclosure seems to be one of today’s hot money making phrases, one that is frankly overused by the “get rich quick overnight” gurus. I am not indicating that you cannot get rich with foreclosure real estate. You can. But first, we must gain a realistic understanding of what foreclosure is and learn some basic terminology required to develop in this business.

“Foreclosure” simply means to stop or prevent an event, a term we usually associate with real estate. A more legal approach to this issue is, to stop a borrower from his right to redeem the property. In a typical mortgage arrangement, the borrower is referred to as the “mortgagor.” The lender is referred to as the “mortgagee.” These terms are more common in the states that use a mortgage instrument, versus those states that use a trust deed. The borrower “gives a mortgage” and the lender receives the contract for it. In exchange, the lender grants a loan of funds to purchase a property.

The foreclosure process provides a legal means for the lender to exercise its security in the property and take it back, due to nonperformance of payments by the borrower. The property was given as security for the note. Since the note was not performed on, that security is given up. The instrument that is recorded to secure the promissory note is either a trust deed or a mortgage instrument. I commonly refer to this as the “lien instrument” used to secure the mortgage.

First of all, the bank lends you money and, in exchange, receives your pledge of the property as security. As the mortgagor, you will give the mortgagee (the bank) a mortgage type instrument in exchange for this privilege. Most people reverse this terminology. Most people believe the bank gave them a mortgage. This is simply not a correct way to look at it. You give the mortgage instrument in exchange for the loan funds. As we proceed, you will come into a clearer understanding of this.

After closing a transaction, the borrower will sign a mortgage or trust deed at closing. At that time, you simultaneously receive, the deed of ownership to the property, as the purchaser. The title officer or closing officer’s job is to ensure everything happens as necessary to safely transfer title. The reason an escrow is used is that it is impossible to do everything at the exact same time. Therefore, we use the terms “open escrow” and “closed escrow” to describe the process of completing all the steps of the paperwork. This third party sees to it that everything is completed prior to what we call a “closing.” The closing company will also ensure that everything is properly recorded on the county records.

Keep this thought in mind while studying this book. Most of the concepts I’m speaking of are universal in nature, yet can vary from state to state, county to county, and town to town. You can always consult a local adviser, one who is either experienced in the market or is an attorney practicing real estate law in your area.

Other possible source of good information about your local characteristics might be a local Realtor who is familiar with foreclosures in your area. You can also use that same relationship for obtaining values on properties, working short sales (covered later), and many other useful services. Get a good relationship with your local Realtor early on.

Be advised, these people will not necessarily want to give away free advice. You will need to show them what is in it for them. Is there future business? Is there a future fee in it? Is there a free lunch every couple of weeks? Whatever it takes, build these relationships, and they will pay you back many times over.

Other people you might consult about developing your local foreclosure business are:

• Your accountant
• The staff at the county recorder’s office
• Other real estate investors
• Local banks who deal with foreclosure properties
• A professional mentor who can be at your call when needed

The difference between a “mortgage” and a “deed of trust” or “trust deed”

Although both instruments perform a similar function, there are slight variations to be aware of. In a trust deed arrangement, a “trustor” (borrower) essentially grants a portion of his legal title on the property to someone called a trustee, who actually becomes the legal title-holder during the obligation of debt. This way, should a foreclosure be necessary, it will be easier to transfer title back to the bank. 

In a mortgage method state, there is essentially a lawsuit to get title back. Knowing this, one can understand why more and more banks prefer trust deeds and why more states are going toward trust deeds as the favored instrument. In a trust deed state, a non-judicial procedure is required to process a foreclosure to completion. A “receiver” is essentially appointed to handle this process, should the borrower default and not make the payments as agreed.

As an investor, you should be aware of certain other provisions, which can catch up to you later. The “right of redemption” is a process where the mortgagor has the right to get back the property, even after foreclosure. Watch out for this as an investor. Obviously, some very specific legal requirements must be in place. You would not want to be on the buying side of the transaction and have the mortgagor come back on you. I would not be too concerned with this issue: Just be aware of your local laws. It rarely comes into play. Consult local legal counsel on this.

Most savings and loans, banks, and credit unions have certain conditions that must be in place in their mortgage and note instruments.

1. The mortgagor promises to pay back the loan

2. The entire principal will be accelerated and become due should the borrower defaults on payments or tax assessments.

3. Insurance is required to protect the mortgagee’s interest.

4. The mortgagor consents to have a receiver appointed in the event of foreclosure.

5. Buildings must remain intact and must not be removed without consent.

6. Many mortgages will also contain a due on sale clause, explained later.

We must always keep in mind that money borrowed is not the borrower’s money: It is the lender’s. Yes, some people need this explained to them.
The money belonged to the lender. When something is requested as security, that is simply the nature of the lending business.

The provisions that allow the lender to foreclose are built into the process. Having standardized and clearly-understood provisions in place dramatically reduces ambiguity and potential for frivolous lawsuits between the parties.

I should point out that when a foreclosure in a “mortgage state” occurs, there is a effectively a lawsuit filed. A judgment is then given, allowing the lender to take back the property, if needed, to recover their funds. This is an unpleasant and unpredictable process for both parties, which again is why so many states and banks are using trust deeds instead. The trust deed process clearly outlines the process so that it will be fairly automatic without a judicial proceeding. This process is more objective and thus better for both parties, in my opinion.

In this section, I’m primarily concentrating on the basic subject of foreclosures. You should be aware that there are ways in which the seller facing foreclosure can stop the process, before it is too late. This will come into play if you begin to pursue “pre-foreclosures,” as I generally recommend. The best deals to be had are prior to the auction.

• Forbearance:

  When I am pursuing a property, I want to give the seller every possible positive option, even if I’m not going to purchase property. In such circumstances, I may recommend a forbearance arrangement with the bank. This is simply when the owner of the property works out the repayment arrangement for the back payments due.

  For example, there may be $12,000 in back payments due.
  The lender may allow you to pay $3,000 now and the remaining $9,000 over a period of months, in addition to the regular mortgage payment. This way, the lender can avoid the risks and expense they incur during a foreclosure.

• Deed in lieu of foreclosure:

  This is essentially when the seller talks to the bank, and they agree that the homeowner will sign over a deed to the property, thereby giving the property back to the bank. Although this might stop foreclosure, it can result in significant credit damage, anyway. Many homeowners believe this will avoid credit problems. This is simply not true.

• Short sale (How to multiply your profits):

  This is the process of asking for a “discounted payoff” of the current loans. Frequently, lien holders who were in secondary positions on foreclosure properties are at great risk of not receiving any money at all, should the first mortgage lender foreclose. As investors, we will frequently negotiate a small payment to these lenders in exchange for their ownership to the property. Therefore, a great amount of equity can be created for the skilled short sale negotiator.

• Bring payments current:

  Obviously, this approach requires that all back payments and penalties to be brought current immediately. The lender cannot deny you the right to bring the transaction current. Lenders typically don’t like to take partial payments. It is usually all or nothing.

• Declare bankruptcy:

  Only upon seeking legal counsel, one may decide that bankruptcy is an option. I won’t go into detail as to the different types of bankruptcy here, but the mere declaration of bankruptcy can immediately forestall the foreclosure temporary. By itself, it does not automatically prevent foreclosures, though. I have seen bankruptcy used in this way. The homeowner simply files but does not complete the bankruptcy. This can buy a little time, minimize the credit damage, and hold off the foreclosure until an investor can complete the purchasing process.

• Deed the property to an investor “subject to” existing loans.

  The investor will then make an effort to bring the loan current and pay it off. This one is my favorite methods and thus the most common thing we do.

Each of these choices carries certain credit and financial implications, which should be considered carefully prior to taking the action.

Many of these choices will vary and may be impacted by the available equity in the property. The bottom line is this: If there is a lot of equity, the homeowner has more options regarding refinances, partnerships, leasebacks, or other creative financing arrangements.
If there are other liens against the property, these can limit the homeowner and investor options.

As far as credit is concerned, I believe everyone should be concerned with it today. In today’s world, to have poor credit is like becoming a second-class citizen for the rest of your life. You’ll have to put more money down for more money, you’ll pay higher payments and higher interest rates to borrow money, and you’ll be looked at in a way that will make you feel uncomfortable for years to come. My biggest pitch to sellers is, “I can help prevent you from being labeled as ‘credit criminal’ for the next 10 years.” I say this not to be cute, but because it is true.

Assuming the auction is looming, now the seller MUST decide what to do…

Borrowers in a pre-foreclosure situation will most likely realize they really will lose their home, equity, credit standing, and that all this will negatively impact their ability to borrow with dignity in the future. This is not a problem easily ignored, as many people in this situation find. It can be trying, emotional, and frankly overwhelming for most people. However, the last thing a home seller should do is wait until right before the auction to take serious action. At that point, the options are fewer, and thus it may be too late.

The lender will most likely exercise its right to redeem the property, through the foreclosure auction process if necessary. Once the bidding starts at the auction, it is too late. More times than not, the lender itself ends up bidding for its own mortgage and buying the property. At the closing, all liens falling after the foreclosed lien are wiped out. But keep in mind the inverse is also true. There may be liens, ahead of the foreclosing lien, that are not wiped out. For example, there may be another mortgage ahead of the mortgage foreclosing, or property taxes may also be past due. This is the most common event that catches auction investors off guard. Another consideration is that, if there are bidders who pay more than the lien balances due against the property, only some proceeds may go back to the seller.

In my investing career, I found many commonalities that cause foreclosures to come about. The bottom line is, the parties can no longer afford the payments. In fact it, is common for about 5 percent of all mortgages in this country to fall 30 days late EACH month. For every one million homes, that means 50,000 people EACH MONTH who fall behind on their mortgage payments. These people are experiencing some distress, you might expect. A person in this situation may not yet be a true “foreclosure deal,” but may be just as ready to deal. If you become good at marketing, you can attract many of these people prior to their getting on the public foreclosure lists. This is where a REAL opportunity exists, both to help the homeowner out with more options, and for you to have more buying options with little competition! 

Once they do get on public foreclosure lists, you might have a bit more competition, but the seller may also have a lot more motivation. Either way, I’m looking for a way to help these people out, while also finding a profitable deal for myself. I always want a true win-win strategy.

 

The top reasons people fall into foreclosure:

·         Divorce.

·         Job loss.

·         Excessive debt due to credit cards, auto

            loans, or excessive refinancing.

·         Business failure (four out of five businesses

            fail within the first five years).

·         The wrong kind of mortgage: certain

            adjustable-rate mortgages might catch up

            to you.

·         Health problems leading to inability to work

            and/or causing excessive health care

            payments.

·         Robbing Peter to pay Paul. Refinancing debt

            with debt becomes commonplace, with only

            one conclusion possible.
  

As a result of these everyday events, more and more properties fall into default and subsequently become bank-owned properties (REOs - real estate owned). 

By the way, even though the housing market is undergoing tremendous growth, the trend is up and not down, for these very reasons. 

Here is my basic market position. I believe the place to find flexible and creative deals are prior to the auction of the property. On the other hand, banks end up with properties (REOs), which can also be excellent values to purchase, if the banks are willing to be flexible.