BUYING REAL ESTATE FORECLOSURES 3/E

Buying Real Estate Foreclosures

Buying Real Estate Foreclosures

Third Edition

Melissa Kollen-Rice

Copyright © 2009 by Melissa Kollen-Rice. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

0071546626

The material in this eBook also appears in the print version of this title: 0-07-154661-8.

All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps.

McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at george_hoare@mcgraw-hill.com or (212)904-4069.

TERMS OF USE

This is a copyrighted work and The McGraw-Hill Companies, Inc. (McGraw-Hill) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill's prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms.

THE WORK IS PROVIDED AS IS. McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise.

DOI: 10.1036/0071546618

Want to learn more?

We hope you enjoy this McGraw-Hill eBook! If you'd like more information about this book, its author, or related books and websites, please click here.

For Steve—my best friend, my inspiration, my knight in

shining armor, and the love of my life

For Jimmy—my pride and joy, my rising superstar, and the

wealth of my life

For Mom—my momager, my heart and soul, the wind

beneath my wings, and the angel in my life

For Tom and Maggie—my guiding lights of love, support,

wisdom, and kindness—and the glow in my life

Contents

Table of Sample Forms, Illustrations, and Checklists

Preface

Acknowledgments

Introduction

1. Understanding Foreclosures

An Overview of the Legal Procedure in Foreclosure Actions

Mortgages and Deeds of Trust

Judicial and Nonjudicial Foreclosures

Finding the Foreclosure Statute in Your State

The Soldier's and Sailor's Civil Relief Act of 1940

The Three Opportunities for Purchasing Foreclosures

2. The Basics of Buying Foreclosures at the Auction

A Day at the Auction

Warning: Peculiar Purchase Ahead

Finding Upcoming Foreclosure Auctions

3. The Basics of Buying Foreclosures after the Auction—from Banks

Defining Bank-Owned Properties

Redefining Bank-Owned Properties

A Lender's View of Bank-Owned Property

An REO Purchase versus a Bank Auction Purchase

Finding REOs

Preparing Your Offer

Negotiating Strategies That Help You Cut through the Red Tape

4. The Basics of Buying Foreclosures after the Auction—from Federal, State, and Local Government Agencies

Defining Government-Owned Property

Finding Government-Owned Foreclosures

5. The Basics of Buying Foreclosures before the Auction

Understanding the Defaulting Owners

How You Can Help

Negotiating with Defaulting Owners—When the Property Has Equity

Negotiating with Defaulting Owners—When There Is Negative Equity (a.k.a. Short Sales)

Steps in a Short Sale

Finding Pre-Auction Foreclosures

Contacting Defaulting Owners

Additional Strategies and Tips for Buying Pre-Auction Foreclosures

Buyers Beware: Has Your State Adopted a Home Equity Theft Prevention Act?

Clarifying Government Acts of Kindness

6. Financing Foreclosures with Traditional Real Estate Loans

Riddle for Buyers

Calculating Your Foreclosure Budget

The Burden of Proof

Decisions, Decisions

Types of Loans

Comparison Shopping for the Best Lender

Key Questions to Ask a Lender

7. Creative Strategies for Financing Foreclosures

Category 1: Foreclosure Purchasers with Limited Cash and Good Credit

Category 2: Foreclosure Purchasers with Limited Cash and Tarnished Credit

Category 3: Foreclosure Purchasers with a Lot of Cash and Good Credit

Category 4: Foreclosure Purchasers with a Lot of Cash and Tarnished Credit

8. Equity Sharing: Buying Foreclosures with a Partner

How It Works

Why It Works

The Owner-Occupant's Goals and Challenges

The Investor's Goals and Challenges

Comparing Purchase Details and Finance Costs

Equity Sharing to the Rescue

Contract Terms to Agree Upon

The Risks Involved in Equity Sharing

Equity Sharing for Parents and Children

Equity Sharing for an Investor and a Contractor

Finding a Partner for Equity Sharing

Equity Sharing Helps People Achieve Their Goals

9. Choosing the Right Property: What You Don't Know Can Hurt You

Finding the Right Property

Asking the Right Questions

Organizing Yourself

Inspecting the File of the Foreclosure Action

Hiring a Title Expert

Asking for the Terms of Sale before Bidding on Foreclosures at Auctions

Uncovering Hidden Costs

Establishing Property Values

Calculating Cash Flow

10. Preparing Your Bid Sheet

Organizing Your Prebid Calculations

Fine Tuning Your Prebid Calculations

Final Confirmation

11. Congratulations! You Are the Successful High Bidder

When You Are the High Bidder at the Auction

When Your Offer for a Bank- or Government-Owned REO Foreclosure Is Accepted

When Your Offer to the Defaulting Borrower for a Preforeclosure Is Accepted

Coast to the Closing with These Five Standard Operating Procedures

Applying the Five Standard Operating Procedures to Your Particular Circumstances

An After-Contract Checklist

12. Now that You Own the Property

Steps to Take for Completing the Transaction

An After-Closing Checklist

13. Making Repairs to Your Foreclosure

Pinpointing Priorities

Finding a Contractor

Implementing a Competitive Bidding System

Implementing a Performance-Based Payment Plan

The Big Picture

14. Getting Started Today

Follow These Six Steps for Success in Purchasing Foreclosures

From Rags to Riches with Real Estate Foreclosures

Glossary

Index

Table of Sample Forms, Illustrations, and Checklists

Chapter 1

Figure 1-1. Understanding a mortgage loan default

Figure 1-2. A sample deed of trust

Figure 1-3. A sample note and mortgage

Figure 1-4. Mortgages vs. deeds of trust

Figure 1-5. Steps in a judicial foreclosure action

Figure 1-6. Steps in a nonjudicial foreclosure action

Figure 1-7. State-by-state foreclosure facts

Chapter 2

Figure 2-1. A standard deed

Figure 2-2. A Torrens title

Figure 2-3. Buying a property from a traditional seller vs. buying a property at a bank foreclosure auction

Figure 2-4. A sample legal notice from a newspaper

Chapter 3

Figure 3-1. Buying a foreclosure at a bank auction vs. buying an REO from a bank or government agency's inventory

Figure 3-2. An example of an offer letter for a bank-owned property

Chapter 4

Figure 4-1. An illustration of an HUD advertisement

Chapter 5

Figure 5-1. An example of a letter to a defaulting owner

Chapter 6

Figure 6-1. A comparison between a 15-year and a 30-year loan after 5 years

Figure 6-2. A sample spreadsheet for comparing mortgage programs offered by lending institutions

Chapter 7

Figure 7-1. Refinancing a 10-year-old loan with a new loan

Figure 7-2. Taking out an equity loan/line of credit as a junior lien

Figure 7-3. A contract transfer

Figure 7-4. A sample partnership arrangement: organizer plus three partners

Figure 7-5. A sample partnership arrangement: three equal partners

Chapter 8

Figure 8-1. Owner-occupant, investor, and equity-sharing partners—comparing purchase details

Figure 8-2. A 90 percent–10 percent split under an equity-sharing arrangement

Figure 8-3. An equity-sharing arrangement between parents and their child

Chapter 9

Figure 9-1. A certificate of occupancy

Figure 9-2. A survey

Figure 9-3. A sample checklist of prebid questions

Figure 9-4. A sample engineer's report

Figure 9-5. An example of a cash flow projection for a single-family dwelling

Chapter 10

Figure 10-1. A bid-calculating worksheet

Figure 10-2. A sample checklist: prior to bidding

Chapter 11

Figure 11-1. An example of a greetings letter to cooperative occupants

Figure 11-2. An example of a greetings letter to uncooperative occupants

Figure 11-3. A sample checklist: after the contract

Chapter 12

Figure 12-1. A sample checklist: after the closing

Chapter 13

Figure 13-1. Bid specification worksheet—exterior work

Figure 13-2. Bid specification worksheet—kitchen

Figure 13-3. Bid specification worksheet—bedroom

Figure 13-4. Bid specification worksheet—bathroom

Figure 13-5. Bid specification worksheet—living room

Figure 13-6. Bid specification worksheet—dining room

Figure 13-7. Bid specification worksheet—hallway

Figure 13-8. Bid specification worksheet—plumbing/heating/electrical work

Figure 13-9. Bid specification worksheet—miscellaneous

Figure 13-10. Bid specification worksheet completed by owner—exterior

Figure 13-11. A notice-to-bidders form

Figure 13-12. A bid summary sheet

Figure 13-13. A comparative cost analysis worksheet

Figure 13-14. A sample contractor's agreement

Figure 13-15. A sample contractor's extension form

Chapter 14

Figure 14-1. A sample checklist: getting started today

Preface

Copyright © 2009 by Melissa Kollen-Rice. Click here for terms of use.

In the first edition of Buying Real Estate Foreclosures (1991), I introduced readers to the foreclosure market with this innovative step-by-step guidebook that included practical, street-smart techniques for beginners and experienced foreclosure purchasers based on my 10 years of experience in buying, selling, renting, and creatively financing hundreds of real estate properties.

In the second edition of Buying Real Estate Foreclosures (2003), I expanded the best-selling guidebook with reader-friendly features, including introductions and summaries for each chapter to help readers focus on each stage of the foreclosure purchasing procedure, Internet Web sites to help readers locate the most up-to-date sources of foreclosure listings, and helpful tips for financing foreclosures.

In this third edition of Buying Real Estate Foreclosures (2008), drawing on my legal experience, I have updated the guidebook once again to reflect the latest developments in the foreclosure marketplace and to help readers uncover, and benefit from, today's newest foreclosure opportunities safely and sanely, while avoiding potential risks. In addition to the unique features, comprehensive checklists, and step-by-step purchasing techniques that have set this book apart from any others on this topic, this expanded revision also includes

Ways to benefit from the Mortgage Debt Cancellation Relief Act, and other recent groundbreaking foreclosure legislation on both state and national levels, and the essential steps that readers must take in order to comply with these new laws

Strategies and checklists for negotiating short sales with sellers and the foreclosing lenders

A guide for calculating your foreclosure purchasing budget

Tips for raising your FICO score

The latest financing strategies (that won't come back to haunt you)

More due diligence questions to ask—and investigate—before you buy a foreclosure

More safety tips that can save your life

A state-by-state foreclosure fact sheet

A comprehensive new glossary of foreclosure terms

Melissa S. Kollen-Rice

Acknowledgments

Copyright © 2009 by Melissa Kollen-Rice. Click here for terms of use.

I gratefully acknowledge the following people for their invaluable contributions to the third edition of Buying Real Estate Foreclosures.

My Family

To Steve, for being my hero, preserving my sanity, for loving me so flawlessly, and for treating me like a diamond every day of my life. Your unselfish support, sacrifice, and faith in me are the foundation of my happiness, and your love is the driving force behind everything I accomplish.

To Jimmy, for having the courage and drive to achieve excellence— thank you for understanding and supporting my dream and for being the best son any parent could hope for. From the moment you were born, it has been, is, and will always be my privilege to be your mother.

To Mom, for being my manager, my lifelong role model, and my brave angel. Thank you for bringing me up in an environment that values advocacy and compassion.

To Jack, for letting me adopt you and for being such an honorable, beloved addition to our family.

To Tom and Maggie, for your love and support, proof that you don't have to be blood-related to be family.

To Matt and Beth, and Lindsey and Kim, Laura and Bob, Sharlene, George, and Sharlet, for being so patient and supportive in arranging holidays and birthdays around my crazy schedule and for forgiving my absences so graciously.

My Literary Support System

Jake Elwell, my literary agent; for tirelessly promoting this revision and making this happen.

Mary Glenn, editorial director for McGraw-Hill, for being on my team, supporting my ideas, and seamlessly guiding this book through to production.

Ed Chupak, editorial coordinator for McGraw-Hill, for your patience, encouragement, and technical assistance in the production of this third edition.

Ruth Mannino, Senior Production Supervisor for McGraw-Hill, for your dedication to this project, for keeping everything on schedule, and for making this the best edition yet.

Alice Manning, copyeditor, for your incredible talent in finding the right words and putting them where and how they belong.

Introduction

Copyright © 2009 by Melissa Kollen-Rice. Click here for terms of use.

How many of you have bosses who stay up late at night thinking of ways to help you make a lot of money? On the other hand, how many of you have worked diligently for others, for many years, and have made them a lot of money? You will never get ahead by waiting for a boss to give you what you think you deserve. You have to take control of your own destiny.

Whether you are a renter who is in pursuit of the American dream of home ownership or an investor who is looking to build wealth, Buying Real Estate Foreclosures will help you to achieve your goal, safely and sanely. By choosing real estate in general, and foreclosures in particular as your vehicle to success, you have joined thousands of entrepreneurs who started out along the same path as you are now— with a dream and the motivation to attain it.

5000 living room set be worth more, or less? The answer, of course, is less. Entrepreneurs are different. We want more. We will forgo immediate gratification for future gain, and we look to buy things like real estate, which will be worth more in five years.

Now, I am not going to tell you that buying foreclosures is a get rich quick endeavor. With few exceptions, everything that is rewarding in life requires some investment of our time and effort. But the ratio of the effort expended in relation to the success that is generated makes purchasing foreclosures incredibly worthwhile.

Who Would Be Interested in This Book?

This book is designed especially for the following types of readers nationwide, regardless of experience level, occupation, or financial status:

Renters who wish to purchase a home at an affordable price.

Investors who wish to purchase properties at below-market prices and either fix them up and flip them (i.e., sell them) for a quick profit, or keep them and rent them out to tenants while the properties build up equity.

Real estate professionals who wish to help customers and clients buy foreclosures, help defaulting borrowers sell their homes to prevent foreclosure, and/or to help locate sources of bank and government listings to sell to their customers and clients.

Contractors who wish to buy a foreclosure that needs work, complete the repairs at a minimal cost, and then sell it for a profit, or keep it to live in.

Entrepreneurs who wish to build wealth by buying and selling foreclosures for a profit.

Accountants who wish to help their clients buy foreclosures as tax shelters.

Attorneys who want to help their clients purchase foreclosures, or to help their clients who are in danger of defaulting on their home loans to negotiate short sales, or to restructure a defaulting loan to save the client's home from foreclosure.

Parents who wish to learn creative techniques for purchasing real estate with their children.

Landlords who wish to buy foreclosures for use as rental property that yields monthly rental income and yearly income tax deductions.

The list is seemingly endless. …

Why This Book Is Unique

I began an extensive career in real estate when I worked for a multifaceted firm that specialized in residential investing, financing, and residential property management. At that time, there was a limited selection of books or courses available to help me get started. Therefore, with no previous experience in the real estate field, I was guided by common sense; an innate ability to react with immediacy and take remedial action when faced with new challenges; trial and error; and the parameters set forth by my industrious, entrepreneurial employers. Thankfully, I didn't make a lot of mistakes—at least, not the same one more than once!

In 1991, with more than a decade of experience under my belt in buying, selling, renting, managing, and creatively financing hundreds of real estate properties, I wanted to make it easier for those who followed in my footsteps. Buying Real Estate Foreclosures (first edition) was originally written as a hands-on guidebook that was based on my own real-life experiences. I have been in the trenches, and I have had the same questions, doubts, and feelings of inadequacy that many people encounter when they try something new. I knew that providing easy-to-follow, step-by-step procedures for buying foreclosures could help motivate people who wanted to expand their horizons by instilling in them the confidence they needed to pursue their dreams. From my experience as an investor for myself and my clients, I will help you distinguish a good investment from a poor one. From my experience as real estate broker and a mortgage broker, I will help you find a way to locate the best properties and financing available. From my experience as a professional property manager and as a landlord, I will give you tips for negotiating with people who may presently be occupying, or who may wish to become a tenant in, the foreclosure you purchase. After the first edition of Buying Real Estate Foreclosures was published, I attended law school and became a real estate attorney. Drawing from my experience in a daily practice, this third edition includes the latest practical information to help readers understand how to benefit from the most recent state and national foreclosure legislation and identifies the risks and the most common mistakes to avoid in order to protect their interests.

Of course, there are other books on the market for people who wish to buy foreclosures, but this book is unique for three reasons. First, it prepares the reader to buy foreclosures using practical, street-smart techniques. Second, it explains potential legal roadblocks (such as unfriendly occupants and missing legal documents) and gives proven, practical methods for resolving these issues safely and sanely. Third, the book is geared to all levels of experience. Beginners as well as experienced foreclosure purchasers will appreciate the checklists that have been written for every phase of the foreclosure purchase in a logical, organized manner. Beginners will appreciate learning about potential problems they may face before they make costly mistakes, and experienced buyers will relate to the war stories.

Finding What You Want

The topics in this book have been organized in the following manner:

Understanding foreclosures. The legal procedure behind a foreclosure action is explained to provide readers with an insight into how a lender forecloses on a defaulting borrower. Knowledge of the fore-closure process helps potential buyers identify optimum purchasing opportunities that arise at specific intervals throughout the procedure, recognize certain statutory regulations that may affect purchasing decisions, and begin a new