Distressed Property Investing: A Foreclosure and REO Tutorial For New and Intermediate Real Estate Investors

CASTLE ARCH
REAL ESTATE INVESTMENT COMPANY
Distressed Property
Investing
A foreclosure and REO snapshot for
financial advisors and their clients
A user guide to understanding

the opportunity underneath the
foreclosure crisis in America
TABLE OF CONTENTS Page
Distressed Real Estate Primer
1. Introduction 1
2. Real Estate Value 3
3. The Distressed Real Estate Market 3
4. The Opportunity in Distressed Real Estate 7

Finding
5. Start With Financing and a Profile 10
6. Which Rocks to Look Under 11
Due Diligence
7. Inspection 19
8. Professional Inspector? 19
9. Rehab Estimates 20
10. Occupancy 21
11. Appraisal/Valuation 22
12. Valuing Income Property 24
Contract and Close

13. How Much to Offer? 31
14. Liens 33
15. Taxes 35
16. Creating a Holding Company 35
17. Financing 36
18. Negotiating With the Seller and Submitting an Offer 37
19. The REPC 39
20. Closing, Title and Escrow 40
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED

Rehabilitation
21. Finding a Contractor 44
22. What You Should or Shouldn’t Do Yourself 47

Exit
23. Lease to Own (Seller Financing) 48
24. Owner Occupancy 48
25. Sale 49
26. Income Property 50
Conclusion
Appendix
Bank and Lender REO Resources I
Government Websites IV
Additional Finding Resources VII
Asset Management Companies VI
Sample Home Inspection Checklist VIII
Sample REPC (State of Utah) X
Sample Seller’s Disclosure Form (State of Indiana) XVI
FTC Real Estate Glossary XVIII

DISTRESSED REAL ESTATE PRIMER
1. Introduction who got rich in real estate and

Real Estate investing is the someone else who went broke. How
ultimate mixed bag. On one hand, can people new to real estate investing
the rich all seem to have a portion of hope to make sense of it all?
their wealth that stems from owning Like any investment process,
property. Historically, land ownership participants become more competent
has almost been synonymous with with experience. The problem is that
wealth. Likewise, home ownership real estate transactions are big. Stock
has been inseparable from the market investors can invest almost
American Dream since the beginning. any amount, large or small, and can
Yet a flood of infomercials and tailor their risk to losses they can
get-rich-quick personalities have afford (that is not to say that they
preached real estate investing to always do). With real estate, the ante
the masses … and left scores of is bigger. This means many players
broken failures littered in their wake. end up going “all in” on the first
Everyone seems to know someone hand. Their first opportunity to gain

Page 2
experience requires everything they building blocks, the tools that form a
have got. If they survive, they go on solid foundation to get you started.
to play again—if not, the tuition they Now, I need to include a caveat.
paid ends up being very high. There is nothing that substitutes for
I bought my first property in 1981 gaining your own experience and
and have been involved in real estate there is no guarantee that you will
development and investing for most profit, no safety net other than your
of my life. I have done well, and I own understanding when it comes to
have been burned. Our company has investing in distressed property. There
systematized and perfected many of are not really any shortcuts and the
the techniques I discuss here. When last thing you want is to become a
appropriate, I will add insights about foreclosure investor whose bad deals
the methodologies we have developed
as well as the approaches typical for
individual investors. The last thing
When I was a boy, one of my
teachers told me, “the trick in life is you want to do is
to get wise before you get old.” He become a foreclosure
meant that to the extent that I could
learn from the experiences of others, investor who is facing
I would not have to pay the price to foreclosure yourself.
gain that experience myself.
That is what this book is all about.
I want to give you the opportunity
to learn from my experience without have you facing foreclosure yourself.
paying the “dumb tax” along the way. It is possible, however, to go
Rather than throw you in at the deep through the process of gaining that
end and watch you “sink or swim” experience prepared. You can be
through the various (and often very prepared with tools and information
sophisticated) elements of the deal, or that increase your probability of
giving you instructions on a specific success. I cannot guarantee that you
methodology that leave you helpless will never get burned in a deal, but I
when the terms of a deal change can help you go into those deals with
in ways the methodology does not your eyes open.
anticipate, instead, I will give you the

Page 3
2. Real Estate Value price and value. These distortions

Why is real estate valuable? Why have caused time-tested market
is it an investment worth considering? factors to become less reliable.
Under normal circumstances, real 3. The Distressed Real Estate
estate appreciates, meaning it gains Market
value over time. The reason for this is
Real Estate Professionals call
that one piece of property can be like
them the three Ds that drive sales:
another, but it cannot be identical. If
death, divorce and distress. Each of
one piece of property could be exactly
these conditions creates a “motivated
similar to another, real estate values
seller,” a reason why sellers have a
would be a function of square footage,
reason to place another objective over
amenities, age, and some objective
simply getting the highest possible
measure of construction features
price. Investors take advantage of that
and quality. Instead, property in the
motivation by negotiating a lower
foothills is more valuable than that
price than what might otherwise
in the valleys, property with a view
be considered “fair value,” in other
is worth more than property that is
words, the value of the property on the
boxed in.
open market where the equilibrium of
The essential characteristic that
supply and demand determine price.
drives real estate values is uniqueness.
The motivation behind death and
There is only one of any particular
divorce are straightforward. These
piece of land. In this respect, real
are singular life-changing events,
estate is like fine art. There are only so
which clearly induce a circumstance
many original Van Gogh’s and there is
where other concerns take priority
only so much land.
over simply getting the most money
The concept of uniqueness
out of the sale of a property. Distress,
underlies the other forces at work
however, can be caused by many
in the real estate market. Most
factors. “Distress” is sometimes used
importantly, it is uniqueness that
as a way of describing the physical
drives appreciation and appreciation
condition of a property, meaning it
underpins traditional real estate
is run down, dilapidated, or in bad
investing. The current real estate
repair.
climate, however, is rife with distress
For our purposes, however, we
where artificial manipulations have
are looking at a property’s financial
distorted the relationship between

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condition. When we talk about the critical events leading up to the

distressed property, we mean property current state of affairs in real estate.
that is involved in foreclosure. Either (For a more thorough treatment of
it is at risk of foreclosure, or it has the financial crisis, see Anatomy of a
already been foreclosed. Meltdown, which can be downloaded
Whatever the circumstances at np-adv.com/articles/meltdown.pdf.)
and economics that led the owner When the dot com bubble burst at
to default on the financing of the the end of the 90’s, investment money
property, foreclosure is the event that fled the stock market looking for
primarily indicates that this property safer havens. As a result, investment
is of interest to us. Either foreclosure banks orchestrated instruments called
is imminent, or it has already taken Collateralized Mortgage Obligations
place. Either way, the property ends (CMOs) that allowed investment
up in the hands of a motivated seller money to be secured by real estate.
… which creates an opportunity. Historically, real estate in the U.S. had
Foreclosures have been around as a stable long-term rate of appreciation
long as lending and we can probably (about 5.45% since the end of World
expect that a certain number of War II).1 Even though this was less
foreclosures will always exist. The than the historical average rate of
current market, however, is producing return on Wall Street (7.8%), investors
historic numbers of foreclosures, were looking for safety after being
which also means we are entering a burned by the tech stock reset. So,
historic period of opportunity. these CMOs offered just what they
The entire scope and ramifications were looking for. The money that
of the housing crisis in the first decade had fled Wall Street in the dot com
of the new millennium is a topic that crash, now came back into real estate
I expect will fill volumes and likely securities like a tidal wave.
keep economists and historians busy Rating firms like S&P and Moodys
for decades. Notwithstanding the gave CMOs a credit rating, which
enormity of the factors contributing to theoretically took into consideration
the state of the market, it is important that sub-prime mortgages (those given
for investors to have at least a basic to borrowers with bad credit) were
historical context of how we got riskier than typical “conforming”
here. What follows is a brief and mortgages.
intentionally truncated synopsis of

Page 5
Now, investors could not only they did the same thing with their
invest in an instrument backed by real investment in CMOs.
estate, but if they were looking for a The effect of all this new
little better return (of course paired investment in real estate was an
with higher risk) they could invest insatiable demand for mortgages,
where the credit rating was lower. whether the borrowers had good
Stock market investors were used to credit or bad. In response to the
protecting themselves against risky demand, lenders loosened their
investments through diversification— lending criteria, offering “creative”
they would spread their investments financing through ARMs, balloon
around in case one went bad—so mortgages, “interest only” loans, and

Page 6
the like to people with bad credit. of foreclosures started gaining

Borrowers were getting into homes momentum and the news started
they never could afford. Cookie cutter discussing the “housing bubble” and
luxury homes became so common the “subprime mortgage crisis.”
the media began referring to them as Bear Stearns, one of the five
McMansions.2 largest investment banks on Wall
Since practically anyone could Street, imploded because of its heavy
buy a home above their price range, investment in CMOs, only to be
demand on the overall housing market followed by the other four. Investment
went up, prices started to climb; banking as an industry crashed and
contractors started building new burned, accompanied by other banks
homes as fast as they could … and all and financial institutions whose
of it was based on a lie. Homes were money was tied up in mortgages or
not really worth what people were mortgage backed securities.
paying, construction was not really The effects were exacerbated by
worth what contractors were charging, leverage, the term used for the ratio
borrowers were not really able to of dollars lent versus dollars held
repay the mortgages they took out and in deposit. Traditional banks were
the credit ratings did not truly reflect leveraged at a five to one ratio. In
the risk of these investments. In fact, other words, for every dollar they
the market manipulations had created had on deposit, they could loan five.
a condition for negative appreciation. Which meant that every dollar tied up
In 2008, we saw the market start in a foreclosure prevented five dollars
to unravel. The Federal Reserve had from being loaned out. But that was
been raising interest rates to try and nothing compared with the Wall Street
stop the runaway train of borrowing. firms. Investment banks like Lehman
In a policy bordering on irresponsible, Brothers Holdings were leveraged
the Fed raised interest rates 17 times as much as 35 to one. (Thus the
and the market did not see a rate connection between foreclosures and
reduction for a period of 38 months. the “credit crunch.”) This ratio means
As a result, the ARMs started growing that $2 billion in foreclosures would
with climbing interest rates, the feel like $70 billion.
balloons started to mature, and the With home values inflated by
borrowers stopped being able to make artificial demand, many borrowers
their house payments. An avalanche were upside down—owing more on

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their homes than they were worth— Banks do not look at property
making it impossible to refinance or based on its market value; they look at
sell. Borrowers with bad credit often it based on the money they are losing
bought with little or nothing down and by not having those dollars generating
had virtually no “skin” in the game. interest somewhere. That is why they
It had never been easier to walk away are motivated sellers. They want to
from a mortgage, and so they did. get the bad stuff off their books and
The current market is going get on to making money the way they
through a period of deleveraging— know how.
also called a “reset” where the market So, what is still needed in order
should eventually return to price and to get the market going again? And,
value equilibrium. Foreclosures are a where is the opportunity for an
necessary part of that reset. investor to enter the distressed real
Even with government and private estate picture and create value for
support, credit is still tighter than it the parties involved and make some
was. But, who can expect lenders to money? That is where real estate
return to the irresponsible lending investors come in.
they were doing? The market is
4. The Opportunity in Distressed
contracting because it needs to return
Real Estate
to the point that buyers can buy what
they can afford. The only way for that The solution to getting the market
to happen is for foreclosures to reset back on track, where prices and
the portion of the market that is most intrinsic value are matched, requires
out of line. someone to match foreclosures with
The foreclosure solution is new buyers. The reset means that
not quite that simple, however. properties need to go from their
Foreclosures alone do not get the inflated rates, to fair market value. But
market back on track. Foreclosures the pendulum cannot simply swing
just return properties to the banks, and from “overvalued” to “fair valued.”
banks are not in the real estate sales It has to overcorrect in order to get
business. They want to loan money, participation from those with the
but are prevented from doing so when expertise to facilitate the transition. In
their money is tied up in a “non- other words, investors like you and me
performing” asset, like a house with a need to be able to make some money
mortgage that nobody is paying. for our efforts in moving property

Page 8
from the hands of the banks into a do not think like that. They do not see
reset “fair-valued” marketplace. the emotional component of selling
Where is the overcorrection going someone their dream home, or selling
to come from? It starts with the bank an investment that might mean a
as a motivated seller. Being motivated secure retirement. Bankers live by
means the bank has a reason to accept the numbers, and as such are terribly
a lower price than fair market value equipped to get good value out of
(in spite of whatever they might tell these properties.
you). Add to banker’s lack of
They have many criteria for appreciation for the emotional
deciding what price they are willing dimension of selling, the fact that
to accept. They are asking questions these properties are often in very
like: How much is left owing on the poor condition. Borrowers may have
mortgage? What is the cost of having been upset that the bank decided to
those dollars tied up in the property? foreclose; they may be embarrassed
What is our reasonable expectation that they have been kicked out of their
for the property, in other words how home.
much do we think we could get out in In any case, they often stop being
the marketplace? interested in basic maintenance and
Properties which have been upkeep of the property. Sometimes
repossessed by the bank are called they intentionally take out their
Real Estate Owned, or REO, frustrations on the home. It is not
properties. Often banks are willing uncommon to see things like concrete
to sell their REO pools for 80, 65, poured down toilets, dwellings left
50 cents on the dollar or less. That open to be ransacked and vandalized
margin represents work that bankers by local gangs, and everything of
are unwilling or unable to do. Bankers possible value stripped out from
are not real estate professionals. They appliances to copper pipes. If the
are not contractors. To them, property property is an apartment building or a
represents inventory—it is like shelves rental home, the complications can be
of unsold goods. even worse as tenants try to figure out
Where a good Realtor might talk where they stand in the whole mess.3
to a buyer about a home’s potential, In fact, dilapidated properties
the merits of the local schools or the often become an issue for other
realization of lifelong dreams, bankers community residents who resent

Page 9
eyesores in their neighborhood. This is making money; they are just operating
understandable. They are also victims from a different perspective. Because
of the market and are only trying to of this, you cannot count on the
salvage what property value they banker’s price to tell you anything
have left. As a result, communities are about the property’s true value. And
passing new laws requiring banks to that means you need to go in with a
pay for the upkeep of properties they system for estimating what the real
own; all of which simply adds more value is.
financial pressure for banks to sell.4 The story of buying a home on the
These market factors and cheap, cleaning and fixing it up with
motivation for banks to sell create an your own labor and selling it to the
opportunity where savvy investors market for a killing is a little bit of a
can buy real estate at less than its fair fairy tale. Is there money to be made?
market value, add value by cleaning, Absolutely. Is it as easy as it sounds?
making repairs, remodeling, or Absolutely not. If it were that easy,
simply making use of better sales and everybody would be doing it.
marketing tactics, and finally sell the There also seem to be dozens of
property for more than their total cost get-rich-quick schemes built around
of purchase and the necessary rehab investing in foreclosures. These
work. schemes are really nothing more than
Because banks operate by the a distraction to legitimate investors.
numbers, they often do not know There is a lot of risk in real estate
whether the price they set is a good investing and many people lose out,
value or not. They are looking at the especially if they are unprepared. But
implication on their own finances. this book is about putting probability
They consider what it costs them of success in your favor. It is certainly
to retain this property versus the possible to be successful, especially if
potential loss they take selling it you are determined and ready to put
cheap. in the work required— and from here
Don’t fall into the trap of thinking forward, I will walk you through the
that bankers are foolish. They are very steps from start to finish.
smart, especially when it comes to
Steps for Investing In Distressed Property

FINDING Page 10
5. Start With Financing and a Ask yourself, how much rehab

Profile work am I equipped to perform? Do
How do you go about finding an I need properties that require little,
imminent foreclosure, or an REO if any, additional work, or can I
property? I recommend that before tackle major construction projects?
you start looking for properties you How much can I afford in repair and
establish some criteria—a profile for refurbishment? Finally, no profile
the type of property you are interested would be complete without an
in. anticipated margin. You need a line in
When you are building your the sand that keeps your investment
profile, Ask yourself questions intact. If the terms of a deal fall
like: What is my price range? What outside the parameters you have set
can I really afford to put in to this out for yourself, then it is time to walk
investment? REO deals can range away.
from hundreds of thousands of dollars By outlining the characteristics of
to tens or hundreds of millions and your target property, you can begin
more. looking for properties without fear
What locations am I willing to of being overwhelmed by all the
look at? What is my exit strategy? possibilities.
What type of property fits my goals Understanding the characteristics
and expectations? (Are you sticking of your ideal property is cast against
with some flavor of residential the backdrop of your financial options.
property like single-family residences, In other words, your ability to finance
multifamily condos or apartments, or the purchase must be in place before
do you prefer commercial property, you go looking for distressed property.
industrial property, or raw land?) The reason for this is that the best
Where is your expertise and interest? opportunities are very time-sensitive.
For example, your background may If you cannot come with the cash, the
have equipped you to be familiar with deal will go to someone else.
the type of repairs and refurbishment The following checklist is
that is common for office space, designed to help you ensure that you
but not the issues involved with an are financially prepared to execute
apartment building or single-family when the right deal presents itself:
home.

Page 11
ball and is under pressure to pass it.

If he does not get rid of the ball, he’s
Financing Checklist: going to get sacked.
Cash The ball represents the property,
► How much cash do I have on
of course. You need to know whose
hand?
► Do I need to liquidate an asset hands it is in (who owns it), and the
in order to secure the necessary trajectory it will travel (the process) as
cash? the owner tries to pass it.
► Does my access to cash limit my Figure 1 on the following page
time frame?
outlines the foreclosure process.
Properties do not start out in
Cash and Debt
► Is my debt financing lined up? distress. In the beginning there is a
► Am I prequalified for the transaction between two entities: a
necessary amount? borrower who wants to purchase a
► How long do I expect my lender property and a bank who wants to
will take to fund?
make loans. The bank provides the
funds the borrower needs to purchase
Partnership
► Will I partner with others to do the property. In return, the borrower
this deal? promises to repay the bank what was
► Are the terms of our arrangement borrowed, plus interest.
clear and agreed upon by all The instrument that sets out
parties?
the terms of this arrangement is a
► Do I anticipate delays from my
partner(s)? mortgage or a deed of trust (which one
generally depends upon state laws and
whether or not your state allows non-
judicial foreclosures). Unless I am
With your profile and financing in drawing a specific distinction, I will
order, you are ready to go hunting for use the term mortgage to mean both
deals. mortgages and deeds of trust. The
6. Which Rocks to Look Under process of foreclosure is determined
by the terms of this document (and
Finding distressed property is like state law, but typically banks are
playing football. Imagine you are on very familiar with these laws and
defense and you are looking for an draft mortgage agreements in strict
interception. The quarterback has the accordance with them.)

Page 12
Figure 1: HOW PROPERTIES BECOME BANK REO

Page 13
Banks do not usually initiate

Mortgage Provisions: foreclosure after a single missed
Will Contain payment. Typically foreclosure
► Borrower will repay the lender starts after two or three missed
► Limitations on Borrower’s use of payments. In our current market,
the property before it is paid off banks have been known to allow
► Borrower will keep the property
borrowers to miss their payments for
insured
► The foreclosure agreement six months or more. They may also
► Borrower agrees to receiver or implement a workout agreement or a
trustee control in the event of “forbearance,” which are temporary
foreclosure short-term agreements between
borrowers and lenders that can be
May Contain used to help borrowers catch up on
► Prepayment penalties
► Additional default provisions payments and stay in the property in
► Default remedies and foreclosure order to avoid the costly foreclosure
schedule process. One source claims that banks
► “Due on Sale” clause typically lose $50,000 on every home
that goes into foreclosure.5
When the bank has had enough,
Foreclosure is not a single event, however, after the borrower defaults,
but rather a process. In this Figure, the bank will exercise its right to
you can see that the first phase of accelerate the debt. This means that
foreclosure is Pre-Foreclosure and they notify the borrower that the
the first step is Default. Mortgage entire balance of the loan must be
agreements will spell out the terms repaid in a short period of time called
under which the loan is repaid and the Reinstatement Period. Borrowers
what constitutes default. The most can try to sell the property during this
common type of default is not making period or pay the loan off with other
scheduled payments. It is not unusual funds, but this is often a very high
for mortgage agreements to include hurdle for borrowers to meet. At this
additional default provisions, such as point, the bank will also notify the
if the buyer stores illegal hazardous borrower of the auction schedule. The
wastes on the property or destroys the Reinstatement Period typically runs
property in some way. up to five days prior to the auction

Page 14
date, which can be 2-3 months from filed against the title of the property. A
the notice date. foreclosure hearing is then held by the
Sometimes lenders will allow a court.
loan to be reinstated if the default is No hearing is required for Non-
corrected, that is if the loan is merely judicial foreclosures, but a similar
brought current, rather than requiring Notice of Default (NOD) is filed by
the entire outstanding balance. But the trustee with the County Recorder’s
often the bank has exhausted its Office.
options for mending the relationship The bank then files a “Notice of
with the borrower. In that case, the Sale” with the county and publishes
bank may have made up its mind the same in the appropriate local
that foreclosure is the best course newspaper.
of action and the borrower is then
Getting information about
subject to whatever terms in the
properties at this stage is as simple
mortgage contract govern the process
as intercepting the property at some
of foreclosure.
point in its process. During all of the
Depending on whether the
aforementioned steps, the property is
mortgage is a Mortgage Agreement or
considered to be in Pre-Foreclosure.
a Deed of Trust, the bank will initiate
Which means that the owner is a
Judicial or Non-judicial foreclosure.
buyer in trouble. If you want to
Judicial foreclosure is processed
intercept a property at this stage of
through the court system. Non-judicial
the process, you will be dealing with
foreclosure is handled by any “Power
both the borrower who is losing his or
of Sale” terms in the mortgage as well
her home as well as a bank who is not
as being governed by state law. Non-
getting paid.
judicial foreclosures are generally
For individual investors, a good
handled outside the court system.
place to start looking for information
Judicial foreclosures typically take
about these properties is with public
longer than Non-judicial ones.
records and local publications.
Judicial Foreclosures generally
Anyone investing in real estate should
start with the filing of a Lis Pendens
become familiar with these resources.
(a notice encumbering the title of the
Public property records are
property in which someone claims an
typically filed with the County Clerk
interest in the property and that the
at the County Recorder’s Office.6
claim is the subject of a lawsuit). This
These are handled at the county
notice of interest in the property is

Page 15
newspapers under their Public Notice

sections, you can find sale notices.
Anyone investing in Pre-Foreclosure encompasses
real estate should all the steps necessary to take the
property to auction. Because it is
become familiar with so pivotal, Auction is its own phase
public records. in the foreclosure process. Again
there are subtle differences between
judicial and non-judicial requirements.
level, just like property taxes. As Judicial foreclosures culminate in a
we mentioned, certain “notices” are Sheriff’s sale. These are the auctions
required to be recorded during the that are physically held right on
foreclosure process. You should be the courthouse steps. Non-judicial
able to search for NODs, Notices of foreclosures also culminate in an
Sale, or Lis Pendens.7 auction, but it is typically held by a
There is usually no cost for private auction house and is called a
searching public records and they Public Auction or Trustees Sale. These
are available to anyone. Notices auctions are opportunities to bid on
filed with the Recorder’s Office are and purchase foreclosed properties.
also very current. You are likely Sales are as-is and typically
to find properties that have not yet buyers do not get the opportunity to
been added to the lists compiled by get inside and inspect these properties.
listing services or online providers. Auctions generally require that you
The drawback is that you are limited bring a cashier’s check for a minimum
to one county at a time, Internet amount (you will be asked to show
resources for county records vary this before you are allowed to bid) and
drastically from county to county then be able to close in a very short
(meaning that you will likely need window of time—often only 24 hours.
to plan on visiting these offices in Winning bidders then receive the
person), and searching these resources deed to the property, which they must
can be time-consuming, especially if then have recorded with the County
you are unfamiliar with the process. Recorder’s Office.
Notices of Sale must also be Auction prices start with an
published in the local newspaper. By opening bid, which is typically set
searching local business journals and by the lender as a function of the

Page 16
balances owed on the property plus dressing the property up for a sale, the
interest, bank fees, and possibly previous owner could still redeem the
attorney’s fees associated with the property throughout the redemption
legal aspects of foreclosure. period with no obligation to reimburse
If the borrower had a significant investors for improvements they have
amount of equity in the property, made.
banks may part with it for a low price. A tactic for mitigating the risk of
Often, however, auctions come and go a previous owner exercising his or
with no bids that are equal or greater her right of redemption is to buy the
than the opening bid. In this case, the redemption rights, or better yet, get
auction has failed to produce a buyer the owner to assign them to you. The
for the property, or at least a buyer pros here are that you take control
at the asking price. Failure to sell at of an unknown risk in both losing
auction is where REOs are born. After the property and waiting out the
an auction, if there are no buyers, the redemption period. Cons are that you
property reverts to bank ownership. may have another cost to deal with
and you have to be able to negotiate
for the rights with the person who
holds them.
Failure to sell at Just like pre-foreclosures, when
auction is where REOs a property becomes an REO, your
finding opportunity starts with
are born. identifying who owns it. The owner is
typically going to be a bank or other
financial institution—although various
One exception that investors need government entities also have the
to be aware of is that typically judicial power to foreclose or seize properties
foreclosures have a redemption (these entities range from the IRS
period. The redemption period is a and Fannie Mae to seizures made by
set time where the borrower can pay U.S. Customs or the U.S. Marshalls
off the balances owed to the bank Service).8 You can also check with
and redeem the property. If investors local government offices to see if they
are too hasty and immediately begin have a list of Tax Foreclosures. All of
making repairs on a property they these resources have processes they
bought at auction in anticipation of

Page 17
go through when foreclosing or trying and deceptive marketing practices.

to sell the properties. Make sure you look for third-party
The Internet can be a great validation that the company is
resource in your search for REO legitimate. Ask around on Internet
properties. Many real estate forums or consumer protection sites
brokerages compile lists of before giving anyone your money or
foreclosures in the areas they serve. credit card information.
In addition, several significant Sometimes you can find REO
financial institutions list their REO properties by going through an
properties on their company web sites Asset Management Company. These
(Countrywide, Washington Mutual, companies are like listing agents for
Bank of America to name a few—a lenders with a focus on the disposition
more lengthy list is provided in the of REO properties. They tend to
Appendix). buy or represent bulk “REO tapes.”
Most have tools for sorting through Typical REO tapes contain between
properties to refine your search. You 20 and 500 homes (although they
may be able to sort by city, price, can contain more). Bulk tapes are
number of bedrooms, and other available at a discount that is typically
criteria. unavailable to individual investors
There are also listing service buying a single property. Just like
companies who provide lists of REO banks these companies are motivated
properties for a fee. (A list of some of to sell and sometimes will do some
these is provided in the Appendix.) of the tests or rehab work already
There are literally hundreds of these in order to make the sale look more
online.9,10 Many offer a free trial and attractive.11
then charge a periodic fee. There are One of the benefits of dealing
regional and national listing services with an asset management company
that offer information on properties is that these companies have had a
in various stages of foreclosure, chance to build relationships with
including the notices filed with banks which could be impossible, or
the County as well as additional very time consuming for individual
information regarding the loans on the investors to cultivate. Some of them
property and sometimes even contact will specialize in buying REO tapes
information. However, if you decide and then selling the properties off
to use one of these, be wary of scams individually. Many Asset Management

Page 18
companies provide REO property got your financing lined up, and you
listings on their web sites.12 (A list of have successfully found a number of
Asset Management companies can be properties that fit your criteria. What
found in the Appendix.) next?
In our company, the relationships Before you start making bids or
we have with banks and asset submitting offers, you have some
managers allows us to access some
of the best tapes early in the process
and search for the prime opportunities
ahead of many other investors. Before you start
Be cautious. For every legitimate making bits or
company working in this trade, there
are dozens of companies that are submitting offers, you
attracted by the big dollars, but who have some homework
do not have the capacity to really get a
deal done. to do.
Another resource for finding REO
deals is local clubs or organizations.
Many areas have privately organized homework to do. It may be helpful
real estate investing clubs. Joining a to think of the process of investing
club like this could be an opportunity in distressed real estate as a business
to network with others who have been venture rather than just an investment.
down the distressed property investing Just like managing a company, you
road before and who may have will need to manage these steps and
valuable insights about dealing with the processes and people within them
local conditions, and opportunities to maximize your chances of a return.
that exist within your local market.
Now let’s say you have
established your profile, you have

DUE DILIGENCE Page 19
7. Inspection
A Home Inspector once told me, Inspection Checklist:
“Every home has its secrets.” This Interior
is something my own experience has ► Plumbing
► Electrical
taught me—many times over—to
► HVAC (Heating and Cooling)
be true. Not everyone performs a ► Structural
physical on-site inspection before ► Surfaces (Walls, Floors,
purchasing a distressed property. Counters)
That does not mean you should skip ► Doors & Windows
► Security (Locks & Alarms)
this step. In fact, in order to protect
yourself, you need to become an
Exterior
expert at inspecting properties. ► Roofing
There is an industry of ► Foundation
professional building inspectors (and ► Wall Facings
in the next section I am going to ► Irrigation/Water Drainage
► Ingress/Egress
discuss using one) but remember that
► Site Hazards
if the deal goes bad it is not going to
be your building inspector’s money
that is on the line. The person writing of complaints, on-site calls, and
the check is the one who is ultimately repairs.
responsible for everything—and that’s Some types of disasters require
you. special cleanup. You need to know
So, learn how to evaluate a if the property has had a flood, fire,
building’s systems. Check the utilities mold problem, has been a meth house,
if possible. Learn how to inspect the or is otherwise contaminated.
power, natural gas, and other heating
systems. Know whether the building 8. Professional Inspector?
is connected to public sewer, or has a There are several types of
septic tank. inspections that you can pay to have
Water damage is one of the most performed. As a general rule it is
common and expensive problems in cheaper to pay for an inspection
any type of building. Learn to detect before you own the property than it is
signs of poor drainage, leaks, and to fix a problem that went undetected
previous plumbing problems. Call during due diligence. You need
utility companies and ask for a record

Page 20
to weigh the cost of an inspection structural damage or exterminators for

with your stage of evaluation. You rodents or insects.
may want to reserve professional
inspections as a condition of your 9. Rehab Estimates
purchase contract or use their findings One of the most critical factors
as a point of negotiation (more on this that will determine whether you make
in the Contract and Close section). money or lose it will be your ability to
Typically, for a few hundred accurately estimate the cost and value
dollars you can hire a professional of repairs to the property.
inspector to perform an inspection. A Repair costs have a way of
sample home inspection checklist is spiraling out of control and taking
included in the Appendix. Often these longer than estimated. Both end up
inspectors will provide a guarantee or eating away at the return you hope
even some type of limited warranty to make on your investment. More
for those items included in their than a few “house flippers” end up
inspection. (Unlike homes on the scrambling to get out with their skin
regular real estate market, REO on. You will need to quickly become a
properties will generally be sold “as- master estimator and skilled manager
is” with no warranty at all. When you of the subcontractors you hire to do
buy it, you are 100% responsible for this work.
anything that is wrong or goes wrong Some repairs are deal breakers.
with the property.) Inspectors may What I mean is that some repairs
also have specialized equipment to can be so extensive that the risk
test for water damage, gas leaks, and is inordinately high that they will
harmful Radon gas. destroy your margin. These are
Look for someone who is a especially critical when they affect
member of the National Institute of the safety and structural integrity of
Building Inspectors (NIBI).13 Watch the home. Examples of this type of
them closely in order to learn things problem are: cracks in the foundation,
that might help you in performing decay in bearing walls or structural
your own inspections. members, contamination, water issues
You will very likely need a pest (especially those likely to recur),
inspection. You may need to factor in etc. When I see this type of problem,
costs for termite treatments, repair of I generally walk away. Another
acceptable option is to negotiate a

Page 21
concession in price that truly reflects You need to be aware of any

the risk associated with the problem. occupants and the risks they represent.
Sometimes that means you are They may continue to deteriorate
negotiating at the value of only the the value of the property, and be
land because it is cheaper to tear the uncooperative with your due diligence
house down than to fix it. efforts. If you anticipate needing to
It is also important to determine evict the occupants, allow for the legal
which repairs are important and which costs and the extended time frame.
are not. Our company often sells its
properties “as-is” because we think
the return on investment for certain
types of refurbishment are not worth
Due Diligence Essentials:
the time and effort. On the other hand, Valuation Data
► Property Records
sometimes, relatively inexpensive
► Property Tax Records
repairs like paint and carpeting can ► Economic Data for the Area
dramatically improve how a property ► Comparable Sales
shows to potential buyers. When you ► Neighborhood Crime Rate
estimate repair costs, make sure you
expect to reap a margin on those costs Risks
► Required Repairs
equal to the percentage margin you
► Hazardous Waste
expected from the property to begin ► Building Code Violations
with. ► Flood Zone Information
10. Occupancy
Just because a home has been
foreclosed on, does not mean the In our company, we often take a
occupants are gone. Eviction laws Cash for Keys approach to limit our
vary state by state, but it is not exposure. Cash for Keys means that
uncommon for eviction to be a we essentially offer the occupants
lengthy and difficult process. Eviction a bribe to vacate the property. In
time frames range from 30 days principle, if these occupants were
to over a year. Occupants (former flush with cash, they could probably
owners or renters) are frequently pay for lodging like everybody else.
informed about how to stay in the So, it is often cheaper to pay them to
home as long as possible. leave than it is to execute all the legal

Page 22
proceedings to have them evicted by property will perform. Both high- and
court order and removed. low-selling comparables are useful.
You will want information on low-
11. Appraisal/Valuation selling comparable to present to the
So far our discussion of due bank when you submit your bid. The
diligence has focused on uncovering mixture of other comparables will
hidden costs associated with the help you get a fair sense of the price
property. Do not be surprised by the market ought to bring. You want to
something you should have caught be neither optimistic nor pessimistic
during the early due diligence phase. here, but realistic. Don’t forget to
As part of your due diligence, you consider how much price you might
need to establish the property’s value need to give up to meet your target
when you expect to sell it. This is sales time frame. In other words, you
often referred to as your After Repair should expect to sell your property for
Value (ARV) and reflects the realistic less if you expect to find a buyer in 30
amount of cash you expect to walk days, than you would if you expect to
away with when you sell. A mistake find a buyer in 90 days.
here can be just as detrimental to your There are several resources
investment as being blind-sided by you can access to get information
hidden costs. on comparables. You can get a
Start by looking for general indication for residential
comparables—homes that meet property values from web sites like
similar criteria to your desired Cyberhomes.com, PropertyShark.
property that have recently sold. The com, and Zillow.com.
more alike they are, the better in terms If you plan on using a Realtor,
of square footage, age, number of they will have access to a Multiple
bedrooms and bathrooms, amenities, Listing Service (MLS). An MLS is a
lot size, location and condition. computer database of properties listed
Comparables will give you a for sale by Realtors who subscribe
relative ballpark estimate of the to it. Historical data within the MLS
selling price you should be able to will tell you about the sales history of
get. The idea is that the performance other properties in the neighborhood.
of similar properties in the same What they listed for, what they sold
general location ought to be fairly for, and how many days they spent on
accurate predictors of how your the market before selling.

Page 23
Although not a guarantee, this The neighbors’ driveways were full

information can help you determine of expensive cars and ski boats. This
what price you can get for your told us that the other owners were all
property. It can also help you estimate players in the housing business and
what you need to accept if you want a were heavily leveraged. We expected
fast sale. most of the neighborhood to go into
You will want to also take a foreclosure eventually, and decided
close look at the local market and that our maximum bid was about $250
make sure you understand it. Take a thousand. This offer was not accepted,
good look at the neighborhood, the and the bank even indicated that
schools, key employers nearby, and they had accepted another offer. But,
access to shopping and healthcare we noticed the property was simply
facilities. Look at who is living in relisted and still has not sold.
the neighborhood. Are they mostly Look for indicators that the market
students, or retirees? Are they young is hot or cold—commonly described
families or empty nesters? The type of as either a buyer’s market or a seller’s
buyer the market has attracted in the market.
past is a pretty good indicator about A seller’s market means that
who will be interested in the future. buyers are plentiful and sellers can
In our company, we saw a afford to take only the best deals that
property that had originally been listed come along. Signs of a seller’s market
for $1.8 million. It had been on the include: very little inventory (ie.
market for some time with no buyers. relatively few homes for sale), quick
The price dropped to $1.5 million, sales measured in terms of “Days on
then $1.3 million. It dropped to $900 the Market” (DOM). These conditions
thousand before entering foreclosure. can result in multiple offers and even
It was eventually offered to us at $400 bidding wars where homes sell for
thousand. You would think that we more than the asking price
would have jumped all over this deal. A buyer’s market is the opposite.
How often do you see a property that More homes are available than ready
has been reduced by $1.4 million! In buyers to take them, so buyers are
our due diligence process, however, in a strong position to negotiate for
we identified that the neighborhood what they want. You will notice that
was occupied primarily by Realtors, in this type of market, homes are
contractors, and mortgage brokers. listed and spending many more DOM,

Page 24
generally over 120 days, without 12. Valuing Income Property

offers. Analysts describe the inventory Rental properties are valued
in terms of how many months it will differently than individual houses
take at the current rate of sales, to for sale. They also use comparables
absorb the inventory on the market. as part of their valuation process,
The current market has some areas but the valuation analysis uses
of the country carrying a 24-month terms and techniques more common
inventory or more, and that does not for traditional investing. Income
include new homes being listed for property is looked at as a business that
sale. produces income. As such, metrics
With a clear picture of your costs, for how the property produces income
the ARV will tell you what you need and return on investment (ROI) are
to calculate the margin you expect to customary. However, just like single-
make on the property. It can be helpful family residences, valuing rental
to look at the margin on these deals property begins with comparables.
in terms of percentages. For example, These valuations consider
$50,000 in profit potential on a comparable rents as well as the
$550,000 home represents a much occupancy levels and value of
thinner margin than $50,000 in profit comparable properties. For residential
potential on a home worth $150,000. properties these may be a simple
In our company, we specifically calculation based on bedroom and
look for deals that have enough bathroom configuration and square
margin for a speedy transaction. Our footage. For commercial property it
typical property is under contract is likely a rate per square foot for a
within 13 days or less and our average similar class of commercial property.
number of days to close is 42. If your For example, most office space is
margins are too tight, you won’t be considered Class A (in practice this is
free to avoid the risks of a distended so common that Class A has become
holding time. practically meaningless as a standard
Also, do not forget to figure in for evaluating the quality of an office
6-9% of the final price toward closing building). In your market it may be
costs and real estate commissions if typical to see annual rents anywhere
you decide to use a Realtor. from $25 to $250 per square foot. In
some areas of Manhattan, the rate is
over $1,000 per square foot.

Page 25
Rental property valuation then as anything more than a simple rule

considers the business processes that of thumb. One of the most common
produce income. They are valued as valuation methods is determining the
much for the revenue stream they Capitalization Rate or “Cap” Rate.
produce as they are for the market
value the property would bring in a Figure 3: EXAMPLE: CAPITALIZATION “CAP” RATE
sale.
A quick rule of thumb is the Gross
Rent Multiplier (GRM). GRM is
calculated by dividing the sales price
by the annual rents. In this example
(Figure 2) we compare two properties
based on their GRM. All things being
equal, the lower the GRM, the better
value the property because you earn
more income for the amount of money
you have to spend.14 In this case,
Property #2 gives us a better GRM.
Figure 2: EXAMPLE: GROSS RENT MULTIPLIER (GRM) Cap Rate looks at the net income
of the property before taxes. To
calculate the Cap Rate, first subtract
your operating expenses from your
gross rents and then divide the
sales price by the net (Figure 3).
Knowing the sources and amounts
of the expenses it takes to operate
the property should be considered
the bare minimum information when
evaluating an income property. In
this example, both properties spend
GRM, however, does not take $500 per month per unit in operating
into account many of the factors expenses.
that impact the profitability of an Another way of thinking about
income property and so is not used Cap Rate is that it is an expression

Page 26
of how long it will take for the income) of the property by how much
investment to repay your initial cash is required to close the deal (in
capital. In other words if you received
Figure 4: EXAMPLE: CASH ON CASH
all the money you put in back in
the first year, your Cap Rate would
be 100, or 100%. In this respect,
investors familiar with the stock
market could equate Cap Rate to a P/E
ratio (Price to Earnings ratio).
Essentially, a higher Cap Rate
is better for buyers and a lower one
is better for sellers. In this example
(which uses the same terms as the
GRM example), Property #2 has a cap
rate of 18.23, meaning that it would
take us five and a half years to get this case, the down payment). This is
our initial investment back. Property sometimes shown as a percentage.
#1, however, would take a full six The first rule of finance is never
years to generate that much income. run out of cash. In this analysis,
Since we are looking to buy, this investors want to see how much cash
makes Property #2 a more attractive outlay is required to complete the
investment. GRM did not include purchase in relation to how much cash
any information about the expenses flow the property generates. It is a
relating to the property, but the Cap method that takes into consideration
Rate approach shows us that even the time-value of money (ie. cash flow
though Property #2 has $90,000 more today is worth more than cash flow
in expenses each year (due to more tomorrow) and the impact of financing
units), the extra income offsets that on the deal when some of the purchase
risk and it continues to be the better is made with debt.
choice of the two. For instance, let’s say that we
Another quick-check method again compare Property #1 and
of evaluating rental property is the Property #2, but this time we add that
Cash on Cash Return method (Figure we intend to pay 30% of the purchase
4). Cash on Cash is calculated by price as a down payment, and finance
dividing the cash flow (annual the remainder. 30% of $3.5 million

Page 27
is $1,050,000. With Cash on Cash, and expenses summed for each year.
the higher the number, the better. The The formula for calculating NPV
higher Cash on Cash Return shown looks like this:
for Property #2 indicates that for the
Figure 5: NET PRESENT VALUE (NPV) FORMULA
amount of Cash required, this property
generates the greatest amount of cash
in return.
Cash on Cash Return is limited
like GRM in that it does not account
for expenses. Its calculation only
includes gross revenues, not net However, if you have not worked
income. It also does not distinguish your way through one of these
between income and Return of formulas since College (and frankly
Capital (ROC). Nor does it take into even if you have), you will find it
account appreciation, depreciation, or much easier to use the tools built
compounding interest which all have
the potential to change the desirability Figure 6: EXAMPLE: NPV
of a deal.
These analyses all show us results
over a single period; in our example
that period is one year. However,
these investments are typically multi-
year with terms adjusting each year
for inflation, appreciation, etc. By
estimating each of these years, we
can apply some more sophisticated
investment tools to our analysis.
Net Present Value (NPV)
analysis is at the center of this type
of valuation and essentially accounts
for the time value of money. NPV
calculates the current value of positive
and negative cash flows over a range
of periods. For our example, we are
using a six-year range with revenues

Page 28
into Microsoft Excel, or another our NPV example, we used a 10%

spreadsheet program. discount rate, which yielded a positive
Using Excel, we can calculate NPV over seven years. But, what
NPV by using the discount rate if we just want to know what the
(also called our Cost of Capital or rate of return is at breakeven? Let’s
our Required Rate of Return—this say I have a choice between two
represents how much we might investments (in this case the two
reasonably expect to get as a rate of comparison properties) and I want to
return on an alternative investment know which one is likely to generate
and becomes the factor by which we the higher return. Or maybe I want to
measure the time value of money), decide whether I should be investing
and the before-tax positive and in real estate at all and I am going
negative cash flows anticipated for to compare my returns to those I
each period. In this example (Figure would expect when buying stocks or
6), we assumed a 3% inflation factor treasuries.
in both our expenses and our ability to
Figure 7: INTERNAL RATE OF RETURN (IRR) FORMULA
raise the rents. In addition to operating
expenses, we included the down
payment in year one.
Both properties show a positive
NPV occurring between year six and
seven. At year six, however, only
Property #1 has a positive NPV. If
we anticipate being in the deal for
less than six years, our NPV will be The idea with IRR is that you want
negative, indicating that we won’t the Net Present Value (NPV) of all
be generating the 10% discount the cash flows to zero out so you have
rate on the cash outlay. Notice that an “apples to apples” comparison.
this analysis shows a higher NPV Essentially, you are estimating the
for Property #1, where the ratio of chances that one deal will generate
expenses to income is lower. returns over another. With IRR we
NPV gives us what we need to take these cash flows and figures out
calculate our Internal Rate of Return at what interest rate will you equal
(IRR). Investors are often used to your initial investment. The higher
focusing on the IRR in a deal. In the rate, the better the investment.

Page 29
In fact, investment companies often the Modified Internal Rate of Return

have an established hurdle rate, (MIRR).
which indicates the threshold at which
they are willing to invest. Again, my Figure 9: EXAMPLE: MODIFIED IRR (MIRR)
example (Figure 8) uses Excel to

calculate IRR based on the same data
we used to calculate NPV.
Figure 8: EXAMPLE: IRR
This example (Figure 9) shows

the MIRR. Notice the difference
between MIRR and our previous IRR
example. Now that Property #2 is able
to reinvest its larger cash flows, it is a
It is common for investors to much more competitive investment in
reinvest the positive cash flows and relation to Property #1.
plow them back into the investment It is important to remember that
for the duration of its term. there is a “crystal ball” element to
If you intend to follow this all valuations. We are using tools,
practice, you will need to modify each with its inherent limitations, to
the IRR calculation. This new predict future performance. Predicting
calculation is called, not surprisingly, the future is impossible. The closest

Page 30
we can get is to model the past pitfalls and risk not apparent on the
and establish the most reasonable surface. You should obtain your best
probability for what is to come. By understanding of what the property’s
using multiple analyses, you can true current market value (your ARV)
increase your chances of seeing the is before you decide to submit an
deal from all angles and detecting offer.

CONTRACT AND CLOSE Page 31
13. How Much to Offer? estate starts with a motivated seller,

If the market will only yield a the banks. Inexperienced buyers
certain price for any given property, often fall into the trap of becoming
then it stands to reason that the “motivated” themselves. They develop
opportunity to increase the margin is an emotional attachment or become
in the buying more than in the selling. enamored with the possibilities that
This makes submitting the right offer the investment represents.
the critical step, since the offer is your You need to develop the discipline
real opportunity to capture whatever to follow your game plan and be
margin is available in the property. willing to walk away if the deal does
Let’s start looking at offers by not meet the terms you outlined in
identifying what can keep you from your profile. Do not waste time trying
submitting the right offer. to justify purchasing a property if the
Warren Buffet is quoted as saying, numbers are bad. Develop the habit
“Once you have ordinary intelligence, of setting your emotions aside and
what you need is the temperament evaluating properties objectively. If
to control the urges that get other there is one lesson that will help keep
people into trouble in investing.”15 you from getting burned, it is that
Disciplining yourself to avoid making there is always another deal.
emotional decisions that could cost Another emotional problem is
you money starts right from the the reaction to your offer. Realtors
beginning. and bank sellers may thrash around
As we stated earlier, the reason and flagellate themselves about how
for the opportunity in distressed real offensive your low-ball offer is. You
should be prepared to show a rationale
why you think the offer makes sense,
but also do not get hung up on the
Inexperienced buyers emotions across the negotiating table.
If you are using a Realtor,
often fall into the make sure he or she is not afraid of
trap of becoming submitting a low bid. Their fiduciary
obligations state that they MUST
“motivated” submit all offers, but if you sense
themselves. friction over the amount of your
bid, you might as well save yourself

Page 32
the brain damage—just get another party Realtor to perform this service,
Realtor. they are covering their base in case
Part of the reason making an anyone questions their efforts.
offer can be so emotional is that new The problem is that the Realtors
investors are not used to making hired to perform the BPOs are getting
these deals, so the first ones have a lot paid by the banks. Even though fees
riding on them. If you offer too low, for BPOs typically only run from
your offer might not be accepted. If $50 to $150, Realtors often feel an
you offer too high, you leave profit obligation to deliver good news. As
on the table and potentially expose a result, they often return optimistic
yourself to greater risk. opinions and overvalue these
In our company, we have a fairly properties.
sophisticated process for determining In order to combat this, you need
what we are willing to offer. The to establish the value yourself and be
process removes any emotional prepared to justify it to the bank. Your
component and allows us to focus on best chance of getting the bank to
the specifics of the deal. If a deal has accept a lower offer is to thoroughly
elements that make it more risky, that justify your position. Take pictures,
does not always mean that we will find comparables, and do not forget
pass, but we expect the price to reflect that the market is not static. Values are
the increased risk. moving targets. If the market is falling
Banks typically attempt to and the BPO was done a couple of
establish the Fair Market Value months ago, the property could have
(FMV) of their REO properties using dropped in value 2-8%, a significant
what is called a Broker Price Opinion impact on your bottom line.
(BPO), which means they have hired a Banks are fickle and they may
Realtor to tell them what the property reject your offer, they may counter
is worth. They do this for two reasons. your offer, they may reject it and
First, they are not skilled at doing give you an opportunity to counter,
this work themselves—paying a or they may accept. You want to take
fee to the Realtor is a transaction your best shot and provide as much
they understand. And, they have an information supporting your offer as
obligation to their shareholders to you can.
make their best efforts to protect the Many of my recommendations
cash in the bank. By using a third this far have indicated this, but just

Page 33
to underscore the importance, I will

say it again. Before making an
offer, (especially first-time) investors
you ought to make every effort to
thoroughly understand the property’s
actual value. This means its value
to the market, not necessarily its
value to you. Unless you want to Use the same process for every
end up owning the property yourself, deal. If you cannot get the numbers to
you need to know how quickly you add up, it is time to pass on the deal.
can turn it, and that means a sale to
14. Liens
someone on the open market. If you
first do your homework and spend Real property is used to secure
some “shoe leather” looking at similar many types of obligation—the most
homes on the market, you will be common of these is a mortgage.
much more confident in your bid. The instrument securing these
Take advantage of terms that may obligations to the property is called a
make your offer more attractive such lien and represents an encumbrance
as paying all cash, or emphasizing on the title of the property. There
your capability to close quickly. are two types of liens: voluntary
Develop a systematic method for and involuntary.16 Mortgages are
calculating your bids. For example, a considered voluntary liens because
common approach is to start with your the borrower entered into the
ARV, multiply by 70% and subtract mortgage agreement voluntarily. An
your repair costs. This should yield example of an involuntary lien is a
your maximum bid. Mechanic’s Lien filed by a contractor
for work performed on the property.
In customary practice, a lien makes
property difficult to sell, because the
new owner does not want any dispute
For example, if we have done over the ownership of the property
our homework, estimated an ARV and title companies do not want to
of $250,000 (assuming 30 DOM), insure titles that have potential claims
with $25,000 in repairs required, we or “clouds” against them.
calculate our bid as follows.

Page 34
Liens can originate from several (ie. lower in priority) liens, however,
sources, and the order or priority in are wiped out in a foreclosure. The
which they have a right to be repaid mortgage lien itself is typically the
is called their position. A common subject of the foreclosure and the bank
way to look at this is a home with a resolves it through the process we are
first and second mortgage on it. The discussing.
first mortgage is in first position on
the property. That means that if the
lien is foreclosed in order to produce What you need to
a sale of the property and satisfy the
lien, any proceeds from the sale go to watch out for are liens
the lien in first position initially, then that might penetrate
any balance goes to the lien in second
position, and so on. Lien holders or the foreclosure.
lienees, are very concerned about the
position of their lien because if the
proceeds of a sale are not sufficient What you need to watch out for
to cover all liens with greater priority are liens that might penetrate the
than theirs, they are left with a debt foreclosure. Liens that persist after
that is unsecured and therefore you have purchased the property will
virtually uncollectible. become your responsibility and could
Liens can be filed against a be very problematic.
property by the government, banks An example of this might be an
and lenders, contractors (as in my HOA lien. Properties that are part
example of Mechanic’s Liens), home of an HOA are bound by the Codes,
owners’ associations (HOAs) and Covenants, and Restrictions (CC&Rs)
basically anyone who claims an within the association. These CC&Rs
interest in the property. are recorded against the title of all
A foreclosure affects liens. For the member properties. HOAs are
example, liens for property taxes typically funded by the dues paid by
are typically required to be brought the members—the property owners
current by the seller at closing in the association. When those dues
regardless of the foreclosure (more go unpaid, the HOA typically has the
about these liens in the next section). right to place a lien on the property.
Mechanic’s liens and subordinate These liens can persist through a

Page 35
foreclosure, so you need to discover anticipated as profits get siphoned off

them before you close. to pay taxes.
You can find all liens and If you are new to investing or
encumbrances recorded against a property ownership, you may also
property through a title search. be new to capital gains taxes. As
you anticipate selling an investment
15. Taxes property, make sure you consult with
The government always gets its an accountant and understand the
share. Tax liens are always in first implications of capital gains taxes on
position on a property’s title. The your anticipated returns.
same economics that cause borrowers Similarly, if you have never owned
to default on their mortgages can rental property before, you may not
cause them to be delinquent in be aware of the tax shelter benefits
paying their property taxes. Banks of depreciating the improvements on
typically protect themselves against income property. Sometimes these tax
this in single-family home mortgages benefits can be the entire motivation
by setting up an escrow account for a buyer.
and collecting money for taxes and
insurance. However, when borrowers 16. Creating a Holding Company
default, money stops going into that I always recommend that
account. If the process of foreclosure investment properties be purchased
takes several months or the house has in the name of a company created for
been on the market for some time, the purpose of holding the property,
money for taxes quickly runs out. rather than personally. This simply
Transfer of title often requires that requires that you form a company to
taxes be brought current. The purchase act as the buyer in the transaction.
contract will typically address who is Your attorney should be able to help
responsible for bringing taxes current you file the necessary paperwork with
(customarily the seller). That does the Department of Commerce in your
not mean that, as the seller, a bank state.
won’t try to pull something over on Why take the extra step and incur
you. When it comes to who pays the hassle and expense of forming a
the taxes, make sure you know if it company for the transaction? I am not
is you! Don’t find yourself wiped an attorney, and of course recommend
out at closing when the funds you that you consult with your own

Page 36
attorney regarding all of the benefits within 24 hours. I am a little wary

of forming a company and the various of discussing alternatives to cash,
forms that company might take. because cash truly is king. Cash is
But essentially, a company provides certainly the strongest position for
protection for you from liability. negotiation, and offers you the best
In the worst case, a bad deal chance to get the most attractive
could end up in a lawsuit for any deal. But is just is not true that all
number of reasons. By forming a foreclosures are sold for cash.
holding company, your risks are Back at the beginning, we
generally limited to your exposure recommended that you review your
in the company. In other words, as financing strategy as part of your
an individual you bear unlimited and investment profile. When it comes to
unseverable personal liability. That executing that financing strategy, your
means that if you lose a lawsuit over goal is to avoid letting your financing
the deal, it is possible that you would become an issue for the seller—the
not only lose the house you planned bank. If you can still produce the
to invest in, but you could lose the funds, timely and without excuses,
one you are living in! You could lose you should be able to execute the
not only the dollars you have invested sale. Just remember, the banks are
in this deal, but the dollars you have motivated by the opportunity to get
anywhere else as well. A company that money quickly and get it back
essentially creates a barrier that limits into their lending pool. They will not
your liability (in most cases) to what be inclined to haggle about your lack
you have in the company. You do not of ability to perform. Do not take the
want one bad deal to spread to your risk of both losing a good opportunity
other deals that are performing well. and falling out of favor with the
banks.
17. Financing Sometimes, you can negotiate with
The common logic is that REO the bank to finance your purchase of
properties are only available to buyers an REO they are listing. This is tricky,
coming to the table with cash. This is because you are letting them have
probably a misconception that comes some control both sides of the deal,
from trustee sales, sheriff sales and but I have seen buyers successfully
auctions, which require a cashier’s negotiate with banks to convert the
check on the spot and the remainder non-performing REO into a standard,

Page 37
performing asset on their books. In the Next, you submit your bid or
end, the most important factor is that offer. You should plan on your offer
the bank is willing to sell at a price including an Earnest Money of
that fits your profile. typically 10% of the purchase price
(see the next section for more about
18. Negotiating with the Seller and Earnest Monies) and the bank may
Submitting Your Bid require you to prove that you are
Banks typically have a department capable of making the purchase. They
responsible for the selling of their do this by requesting Proof of Funds
REO property. Although each bank is (POF) as a way of shaking out real
different, this is often the Home Loan buyers from the Lookie Lous.
Trading Group or the Capital Markets One of the challenges investors
group. I recommend that you always find is getting banks to deal with
try to contact the lender directly. You them directly. If the bank has listed
want to speak with the head of the its REO properties with a real estate
Home Loan Trading Department or broker, they may want to require that
the department that handles the sale contact and offers are made through
of assets or Asset Management for the Realtor.
the bank’s REOs. Explain that you There is also an industry of
want to view and possibly make an “middle men” that you may encounter.
offer on the property. The head of this They are called intermediaries, seller’s
department is who you want to submit mandates, or seller’s agents, etc.
your offer or bid to. These players are trying to earn a split
The first step is often submitting a of the commission on the sale of the
“Letter of Intent” or LOI. Your LOI is properties and claim that they have
really just a way to tell the bank that exclusive authority to represent the
you are interested in the property. It seller, even though this is often untrue.
is a placeholder that the bank might As a general rule, make every
use as it decides what to do with its effort to reach out to the bank, the
REOs. If the bank knows that you seller, itself. Intermediaries—even
are interested, they may contact you. legitimate real estate professionals—
Otherwise, this step is simply telling just tend to get in the way of getting a
the bank that you understand the deal done.
process. Regardless of its experience in
real estate, the bank is skilled at

Page 38
negotiation—which means that many asset managers have done this), or

times they won’t. If you get to the allow contingencies in the purchase
point that they will accept your offer, contract that depend upon inspection.
and you are negotiating on certain It is possible to get inspection and
points of the purchase contract (banks repair provisions into the deal, but
often have their attorneys draft their where this is quite common in the
purchase contracts), the bank will retail market, it is not with REOs. You
be represented by its attorney. You should expect very little wiggle room.
should be prepared for your attorney The property will most likely come to
to negotiate with the bank’s attorney you “as-is” so you need to have done
after your offer is submitted, but your due diligence ahead of time and
before the purchase contract is signed. be fully aware of what you are getting
Once you sign, you are on the into.
hook. (Technically, many states have Any response contact from the
a “buyer’s remorse” grace period in bank after you submit your bid is
which home purchases can be voided. typically a good sign. The “ignore
However, my point remains that you play” is a favorite among banks and
need to know your position going in, lenders. If you have not successfully
before you submit an offer, before made your case that your bid is fair,
you enter any type of negotiations, or (for any of a host of other reasons)
and definitely before you execute a your bid does not fit their criteria, you
contract.) will be flatly rejected, if contacted at
The bank’s representatives will all. If you submitted a bid based upon
not show weakness in their position, your profile and your understanding
even if both of you know it exists. of the property’s true value, you
You should be prepared to walk away have given it your best shot, and still
from a deal, even if the only thing get rejected—better luck next time.
wrong with it is the banker’s attitude. Expect this to happen on deals. I do
Remember, emotions make for bad not know anyone who has been in
deals. Always be willing to walk this business a significant length of
away. time who does not have a hefty stack
You should also be prepared of rejections. If you think you will
for the fact that, unlike individual struggle with that, you might want
sellers, banks sellers will most often to reconsider getting into this type of
not perform repairs (although some

Page 39
investing. Persistence is the name of The REPC will outline the terms
the game. of the sale. I always recommend that
If your offer is interesting to the you retain a skilled and experienced
bank, you might get a response that real estate attorney to draft these
sounds something like this, “We are contracts, along with any addenda,
currently considering multiple offers and represent your interests.
and the running is tight. Please present
your ‘highest and best’ offer.” This is
a common response whether there are REPC Provisions:
any other offers on the table or not.
If you can afford to give a little, that ► Names of Buyer and Seller
might be all it takes to get the deal. ► Property Address & Legal
Just remember, that if it does not meet Description
your profile, you are better off to walk ► Financing Terms
► Property Condition Provisions
away. ► Condition of Title Provisions
► Default Provisions
19. The REPC ► Terms of Possession
My father always told me “your ► Earnest Money Provisions
word is your bond and your handshake
is a contract, but if you do not get it
in writing, it’s worthless.” Legally, all
transfers of real property must be in You may initially have an
writing. Although property could be aversion to the cost of hiring an
sold with a simple bill of sale or even attorney, but I encourage you to
given away with a quit claim deed, develop a good relationship with one
the document that typically describes particularly skilled in real estate for
the terms of this transaction is a Real two reasons: 1. If you are serious
Estate Purchase Contract or REPC. about making your living investing
In some states, Realtors are required in real estate, you ought to consider
by law to only use state-approved this an essential role in your team of
REPC forms, including state-approved professional advisors. 2. The financial
addenda. (Samples of some of these consequences of legal mistakes can
forms are included in the Appendix.) be devastating—a good attorney is
In others, REPCs simply must contain like insurance against inexperienced
all of the provisions legally required. mistakes that can wipe you out. I have

Page 40
been in this business a long time, and A fade provision means we intend to
I would not be without my attorney in justify a lower price. The bank does
any of my deals. not have to accept the fade, but having
You should be familiar with the it in the contract gives us greater
elements contained in a typical REPC. flexibility when it comes to finalizing
REPCs will list the buyer and seller, the contract at a price we want to pay.
contain a description of the property,
include terms relating to financing, 20. Closing, Title & Escrow
condition of the property, condition of Once you have a REPC signed by
title, provisions for default by buyer both you and the bank, the next step
and seller, terms of possession, and is closing. Closing, or “Settlement” is
terms regarding Earnest Money. The when the contract is fulfilled and the
REPC often also requires disclosures official transfer of property ownership
from the seller as to the condition of from the seller to the purchaser takes
the property place. Technically, there can be a few
Earnest Money is essentially a days after signatures are executed in
deposit, which is refundable under which title can be recorded, financing
certain conditions and nonrefundable can still fund, and other details can
under others. Real Estate Brokers take place, but for all intents and
keep a trust account for holding purposes the sale is completed at
Earnest Monies. It is typical for banks closing. Closing itself typically
to accept 10% of the purchase price as happens at the offices of a title
Earnest Money on REO properties. company and often involves a lot of
If your offer is accepted, the bank paperwork and a lot of signatures.
will probably present you with a As an investor, you can prepare for
REPC that describes the terms as they the closing process by understanding
want them. You should be prepared to what you need to have ready in order
thoroughly review this. Do not sign it to close. Being prepared will make
unless you understand and accept all the entire process smoother and
the terms. less stressful. Surprises that arise
In our company, because we make at closing are not fun for anyone
it a practice to submit an extensive involved.
due diligence file substantiating the The following steps are typical.
value of our bid, we typically submit However, keep in mind that real estate
offers that include a “Fade” provision.

Page 41
settlement laws and requirements vary interest. This is the point in which
from state to state. first-time home buyers are shocked
Often prior to closing, you will go and horrified to learn that their
through a pre-Settlement checklist: $100,000 home is actually costing
You must have your financing them $350,000.
lined up. If you are securing a loan Confirm the date, time and place
as part of your purchase, you must of closing. It is not uncommon for
have a Loan Approval in place prior to banks to want to close at the offices of
closing. In fact, the POF may require the title company where they do most
that you have all of your financing in of their business. They have typically
place earlier in the process than would negotiated more favorable fees due
be required if you were making a to the volume of work represented
traditional purchase instead of buying by their account. The confirmation
an REO. represents agreement between the
If you are financing part of the lender (if any), the title/escrow
purchase, your lender will provide you company, and the buyer and seller.
with a Truth-In-Lending statement. Utilities are sometimes neglected
The Truth-In-Lending statement and become an irritation. You should
outlines the loan repayment terms, transfer utility accounts into the name
including the total cost of the loan if of your holding company prior to
you follow the anticipated repayment closing. It is a good idea to reinspect
schedule, including principal and that all utility-impacted systems in
the property are working properly
as part of your final walkthrough.
Pre-Settlement Checklist: Remember to get them transferred
out of your responsibility after you
► Financing Commitment sell. (We have had many buyers enjoy
► Truth-In-Lending Statement complimentary power and heating for
► Date, Time and Place Confirmation a few months due to this detail being
► Utilities
► Insurance overlooked.
► Final Walkthrough Prepare to have the property
► Settlement Statement (HUD-1) insured from the moment you
► Certified Check own it. Most lenders will require
Homeowners, Hazard & Liability
Insurance as a condition of the loan.

Page 42
Even if you are executing the deal in with your real estate agent, attorney or
cash and expect a quick sale, do not settlement agent.
take the risk that something could In most cases, you will need to
happen to the property during that bring a certified check with you to
period. This is simply a common- settlement to cover all the closing
sense protection of your investment. costs for which you are responsible.
Know whether or not flood The amount of this check is based on
insurance is required. Check out www. the settlement statement. (Be sure to
floodsmart.gov or other resource to bring a photo ID with you as well.
determine if the property is located in Title companies are typically required
a flood plain. Know if flood insurance to verify the identities of the parties to
has been carried on the property the transaction.)
before. Assuming all things are in order,
Typically sellers allow buyers to at closing, your will be required to
make a final walkthrough inspection sign documents and make payment of
a day or two before closing. This is your portion of closing costs and title/
your last chance to view the property escrow fees.
before taking ownership of it. Make If you are getting a loan and have
sure everything is as you remember it not signed your loan documents prior
(no new damages). Also, if you made to closing, you will be required to sign
the contract contingent upon certain them at closing. These documents
repairs, make sure the seller actually represent the agreement between you
completed those repairs. Although and your lender regarding the terms
your Earnest Money could be at risk, and conditions of the mortgage. The
if you find problems during the final remaining documents represent the
walkthrough, you are still free to back agreement between you and the seller
out of the deal. transferring ownership of the property.
At least one business day before Again, be sure to read all documents
settlement, you should receive a carefully before signing them, and
Settlement Statement (also referred do not sign forms with blank lines or
to as a HUD-1 statement). This spaces.
document will list all the costs you are Title companies sometimes make
required to pay at closing. Review it jokes about this type of buyer—one
carefully. If you find errors or items who is a “reader”—because most
you do not understand, bring it up buyers do not take the time to read

Page 43
the mountain of paperwork presented costs, the title company, escrow agent
to them at closing. You may have felt or attorney will record in the County
the same way when you purchased Recorder’s office all documents such
your first home. However, you owe as the warranty and security deeds,
it to yourself to read and understand return to the lender the completed
everything that could potentially loan package, and disburse all funds
impact your investment. in accordance with the HUD-1
After signing all the appropriate Settlement Statement.
documents and paying the closing

REHABILITATION Page 44
The nature of REOs often means

these properties have taken a beating. Contractor Checklist:
In section 9, we discussed how equest Competitive Bids
R
essential it is to be able to estimate from Multiple Contractors.
rehab costs as part of your due
diligence and evaluate which repairs Ensure Contractors Provide
will bring the greatest ROI. In this ► Active License in Good Standing
section, we will discuss more about ► Insurance (Bond if Necessary)
how to get the work done. ► Evidence of Good Standing with
BBB & Trade Associations
One of the cheapest and most
► Multiple Trade References
valuable things you can add to a ► A Clean “Google”
property is soap and water. A good
cleaning will do wonders. Beyond Protect Yourself
that, superficial cosmetic repairs ► Contract for a “Guaranteed
and refurbishment (often called Maximum Price” (GMP)
► Establish a Firm Timeline with
“lipstick”) like fresh paint and new
Delay Penalties
carpeting can generate great returns ► Review the Contract with Your
yet keep your costs low. Typically if Attorney
you need to install carpet or anything ► Ensure You Have Included the
more involved, you will need to get Entire Scope of Work
► Thoroughly Discuss the Process
outside help; you will need to find a
for Change Orders
contractor. ► Understand Your Risk of
Mechanic’s Liens
21. Finding a Contractor
Contractors, like Realtors, run
the gamut from trusted professionals Request for Proposals, or RFP) from
to crooks. As a newbie, you cannot multiple contractors on the same
afford to choose the wrong one. scope of work. It is important that you
A good contractor is an understand and outline the scope of
indispensable resource for your REO work ahead of time. Scope creep is
investing. Finding a good contractor one of the quickest ways to lose your
requires a little homework. To start shirt in real estate investing.
with, set up a competitive bidding Interview contractors like you
process, where you request bids (for would your daughter’s prom date.
more complex work, this could be a Do not be afraid to probe and ask

Page 45
a lot of questions. Watch for signs bonded and that the amount of the
of dishonesty. Do they look you in bond is appropriate considering the
the eyes? Do they talk about getting scope of the work.
ripped off? Are they complainers? You should also check with the
Ask every bidder to go back and Better Business Bureau.
sharpen his pencil. It is okay for They provide an online search
contractors to make a fair profit, but function at www.bbb.org that is
ensuring that happens is not your localized and lists complaints by
responsibility. After you have asked consumers. Be sure to search for
each of your bidders if that is their the name of the contractor and any
best price, then review the estimates variations that you are aware of.
and begin doing some due diligence In addition to the BBB, many
on the contractors themselves. trades are organized into labor unions
General Contractors and and professional associations. These
subcontractors in most trades are organizations are usually interested
licensed by the state in which they in promoting the good reputation
operate. If your state requires a license of their organization and distancing
for the type of work you are getting themselves from bad publicity. If your
done, make sure you check with the contractor is in bad standing with
state and that your contractor has a the appropriate trade organization, a
license and that it is in good standing. telephone call will likely reveal it.
Check with the Consumer Protection Request references for both
Agency and the Attorney General’s customers and business trade
office in your state to see if any relationships and follow up on them.
complaints have been filed. Find out what type of experience the
Typically, contractors insure contractor delivered to others who
themselves up to a certain amount have already worked with them.
and then are able to take jobs for that Suppliers, bankers, and general
amount or less. License and insurance contractors will help you understand
details should be items contractors are the reputation of a particular
showing potential customers all the contractor.
time. Ask to see them. Finally, perform an Internet
Depending on the type of work search using Google or another search
and its value, a bond may be required. engine. Watch for entries on sites like
Make sure the contractor is properly Yelp, AngiesList, or RipoffReport

Page 46
which specialize in reporting bad thoroughly and notice potential

consumer experiences. A full vetting overruns up front, before work begins.
of your potential contractors does not Another factor you should
guarantee that you will never have a consider is time. Delays are notorious
bad experience, but you will have a and costly for REO investors.
shot at seeing the writing on the wall Establish a time for completion
and increase your probability that this in your contract, and appropriate
critical role does not eat up all your penalties for delays.
profits. Contract work which improves
In addition to checking up on real property generally gives the
your contractors, you should plan contractor the right to place a
on adopting some “best practices” Mechanic’s Lien on the property as
approaches to executing your security for payment. I recommend
contracts and overseeing the work. you have your attorney draft a lien
The estimates you received during release form. Every time you pay a
the bidding process and the final contractor, you should require them
contract for work, may be separate to sign the form. This is essentially
documents. When it comes time to a receipt for what you paid for and
execute a contract, you should let your a protection against future title
attorney review it and you should problems. I have seen cases where
ensure that the terms of the deal have contractors filed liens but were slow
not changed. In the end, the contract, to have them removed even after
not the estimate, will govern how receiving payment and resolving any
much you have to pay. dispute. A signed lien release is often
Whenever possible, contract for enough for you to secure a release of
an explicit scope of work under a the lien yourself.
Guaranteed Maximum Price (GMP) If you pay a contractor in
contract.17 By using a GMP contract, installments (typical only when the
the contractor takes responsibility for job is large or lengthy), I recommend
cost overruns beyond the agreed upon your contract withhold 10-20%
maximum price. This does two things. until the final payment. And final
First, you have some legal protection payments should only be made after
from creeping costs. Second, the you perform a thorough inspection,
contractor has an incentive to bid verify that all punch-list items are
completed, receive signed lien-

Page 47
releases, and the job is complete to 22. What you should or shouldn’t
your satisfaction. Remember that your do yourself
leverage to get the work completed Often new investors look at rehab
is a function of how much money and repair work as an opportunity to
you still hold. In my experience, it is gain value by doing work themselves.
always more difficult to get repairs They think that their sweat equity will
or punch-list items completed if you increase the margins they get when
have already made full payment. the property sells, because the work
Frequently inspect the progress “did not cost them anything.” While
along the way and do not be afraid this is sometimes true, especially if
to ask questions if something seems the investor has a background as a
wrong. The relationship with your contractor or tradesperson, it is also a
contractor has an element of trust in common pitfall.
it, just like any other relationship. But, Work you perform yourself is
trust is developed over time. Initially, not really free. Setting aside the time
a lot of checkup might seem annoying you spend (which has an opportunity
to your contractor, but then again it is cost if it takes away from the time
not the contractor that will lose money you would be spending finding the
if the deal does not go according to next deal), repairs have costs in
plan. materials. Are you sure that your trip
Rehab on REO properties has to Home Depot will cost you less
the potential to bring greater returns than a contractor’s visit to the local
because of its impact on perceived contractor supply yard? Do you have
value. It is an overall impression that access to the proper equipment to
leads to the sale, not the accumulation ensure the job is done correctly? Are
of repair costs. If your repairs do you tackling work that has related
not add to the perceived value, then liability, like plumbing or electrical
they are not helping your investment work, for which a contractor will be
returns, no matter what they cost. licensed and insured?
In general, I recommend that
beyond cleaning, very minor repairs,
and perhaps painting, investors not

EXIT Page 48
perform work themselves unless they property is not your primary focus,
are true professionals at the type of you are now in the position of acting
work that needs to be done. This as a short-term landlord with full
might require a little soul searching property management responsibilities.
as you examine yourself and honestly In other words, you have a new job,
reflect on your capabilities. Just which will intrude into whatever your
remember that it is always cheapest to primary focus is.
do a job once and do it right. Even with all of the increased
The disposition of the property is headache and risk, this still may be
how you get paid. All of the work you preferable to owning a property you
have done nurturing the investment want to sell and nobody wants to
to this point rests on your ability to buy. Lease payments may offset or
exit the investment with your returns completely cover payments you are
intact. Our discussion will include obliged to make if you financed the
four typical dispositions. The first two purchase of the property or any of the
are the least common for investors, rehab work.
Lease to Own, and Owner Occupancy.
24. Owner Occupancy
Then, I will cover selling and holding
as income property. A perfectly legitimate exit strategy
is owner occupancy. This means you
23. Lease to Own (Seller Financed) choose to move into and live in the
Typically an investor mentality house yourself. As the owner, you
would perceive seller financing as may feel that “sweat equity” you put
a less than optimal exit. The reason into the property is a good trade-off
for this is that seller financing is for the reduced price.
usually a way to create incentives for Owner occupancy has
buyers who are unwilling or unable limitations in terms of its investment
to complete a sale. If buyers are characteristics. Discussion around
plentiful, a quick sale is preferred. this exit is limited because owner
Seller financing protracts the occupancy is not typically an
relationship between the buyer and investing or primarily moneymaking
the seller, which increases the risk. It disposition of the property.
does not yield the full return, which
also creates risk and limits your
opportunities to reinvest. If rental

Page 49
25. Sale What if you decide to use a real

The simplest exit is a sale. In a estate broker? A Realtor can be
single transaction, a buyer takes the invaluable. Unfortunately, as a group,
property off your hands and your their reputation ranks close to used car
investment cashes out immediately. salesmen. So, how do you find a good
You always have the option of one?
selling your property by yourself Think of your relationship with
in a “For Sale by Owner” or FSBO your realtor like you would any other
transaction. It is worth discussing the essential service provider in your life.
pros and cons of a FSBO versus hiring Did you find your attorney or your
a Realtor. doctor by where they ranked in the
The advantages of a FSBO yellow pages?
approach are that you do not have to You need to do your homework.
pay any fees to Realtors (you should Talk to their clients and colleagues.
still expect to have some selling costs, Ask them about their track record and
advertising, open houses, etc.). The request examples of other properties
disadvantages are that you do not have like yours that they have sold in the
access to all the same tools Realtors area. Ask about their certifications and
use and you may have less expertise additional credentials.
selling real estate. This decision You also need to understand the
requires a little introspection and legal relationship you have with your
honest self-assessment of your talents Realtor. Realtors actually practice law
and abilities. in a limited and heavily regulated way.
Your advertising will attract as They have a fiduciary responsibility
many bottom-feeding Realtors as to represent your interests. Do not
it does prospective buyers (good abdicate your position as the buyer or
Realtors get their listings by referrals seller. Remember that your Realtor
from satisfied clients, not combing works for you, so do not be pressured
the classifieds). Selling the property into a quick sale if you do not think
yourself, you will still have Realtors you are getting the best deal.
coming to you claiming to represent Make sure you understand the
buyers. These will want you to agree terms of any contract you sign.
to pay them a commission before (It would be remiss for me not to
introducing their buyers to you. recommend that you engage the
services of a qualified attorney in

Page 50
addition to your Realtor for the models for how this business will
purposes of reviewing contracts.) operate? Do you know what your
Remember that even though a Realtor costs will be? Do you know what
is required by law to use state- the market rents are in your area?
approved forms when making offers Do you have a concept for creating
on your behalf—forms which are a competitive advantage over other
construed to alleviate the burden on rental properties?
the state courts from lawsuits over Do you have a plan for
real estate transactions—that you performing the maintenance and
are not restricted to structuring your repairs that tenants will expect? Are
transaction with the language or terms you comfortable collecting rent and
included on state-approved forms. processing evictions and collections?
Write a deal that favors you. Rent a copy of Pacific Heights
Know when it is time to fire your from NetFlix or Blockbuster to test
Realtor. Make sure your expectations your stomach for the risks of being
are clear and take decisive action if a landlord. I am not looking to
they are not met. discourage you from taking on this
challenge—income property can
26. Income Property be a very rewarding and profitable
Another common disposition investment—just keeping with the
of investment property is to rent it theme of helping you go into these
as income property. What is not to deals with your eyes open.
like about the perpetual stream of If the thought of being a landlord
income that grows with inflation while is scary to you, but the income
providing a significant tax advantage? property returns are attractive,
Well, for starters, income you may want to consider hiring a
properties are more like businesses professional manager or management
than investments. They need to be company. This service is not free, but
managed; they to be run for them to you may be able to find a scenario
make money. You need to ask yourself where professional management
if you are ready to be a landlord. is well worth the cost and avoided
Have you projected detailed financial

CONCLUSION Page 51
headaches and still lets you participate represents 7.9% of mortgages that are
in the investment returns. 30 days or more past due, and 3.3%
Our company holds several which are already in the process of
income properties as investments— foreclosure. This is the highest level
enough so that we formed our own since these statistics began to be
property management company. When tracked almost 40 years ago.
it comes to this type of skill set, my Like many types of investing,
experience is that specialists often can there is a distinct risk and reward
outperform generalists and do it in a correlation when it comes to investing
way that makes the associated costs in distressed property. I have made
very affordable. every effort to help you get a realistic
Distressed property investing perspective of both the challenges and
can be a dynamic and exhilarating rewards of tackling this exciting facet
process. Many investors have been of real estate investing.
very successful working the process The saying goes, a fool and his
outlined in this book to generate very money are soon parted. I hope that
healthy returns. the tools provided here will help
I am sincere in saying that you to “become wise before you get
shortening the reset of the bloated real old.” Or, in more practical terms, I
estate market depends on facilitating hope that this material will help you
the transfer of foreclosures back to avoid the pitfalls and traps that
into a “fair valued” market. The can turn a promising career investing
volume of those transfers will be the in real estate into a nightmare that
bottleneck for much of the desperately wreaks havoc with your life.
needed economic recovery. The To those of you ready to tackle the
market is offering every indication challenges, face the risks, and show
that foreclosures and the attendant your determination, I invite you to
opportunities are on the rise and will join the ranks of successful investors
be with us for at least the next several who are filling their role in getting the
years. economy back on track.
In fact, a recent report18 indicated If you are hesitant, or question
that about 11% of mortgages in the your ability to overcome all the risks
U.S. are in trouble—which represents involved (and rightly so), but still
a seasonally adjusted increase of have the enthusiasm for the process
3% over last year (2008). The 11% that brought you this far—find a

Page 52
way to participate. You may find that

partnering with a company like mine
(please excuse the shameless plug
here) offers you the ability to capture
some of the money to be made in this
market without necessarily taking on
all of the risk by yourself. If not my
company, than someone else’s, but
in any case, there is plenty of room
for more well-prepared people to be
involved.
If you have read everything this
far, thank you for spending your
valuable time. The appendix offers
many great resources to help you get
started. I wish you good luck and
greater prosperity as you dive in to the
next chapter of your life. 

ABOUT THE AUTHOR
Kirby Cochran is the manager of Castle Arch Opportunity Partners, a series of real estate
investment funds specializing in REO acquisition and disposition. Responsible for hundreds of
millions of dollars worth of real estate transactions, he has served as the CEO of Castle Arch Real
Estate Investment Company for over 5 years.
Mr. Cochran is also an educator, speaker and thought leader in the fields of management,
finance, and real estate and is a leading expert on capital structure and shareholder value. He has
been teaching new venture financing and entrepreneurship to graduate students for over a decade.
Kirby currently serves as an adjunct professor in the Finance department of the David Eccles
School of Business at the University of Utah.
In his new series of articles entitled Leadership Insight, Mr. Cochran makes sophisticated
investment methodologies used by successful investors, accessible to novice and intermediate
investors with his pragmatic approach to communicating in plain English. This information has
always been difficult and painful for investors to acquire, found only in the ruthless university of
experience and obtained through costly tuition at the school of hard knocks.
ACKNOWLEDGEMENTS
Chad Jardine, my close associate and friend, was responsible for much of the leg work and
physical writing of this book. His contribution allowed the principles and practices of my real
estate investing process to come to life in book form and bring my insights, personal experiences
and unique “voice” to a new audience via the printed page.

1. Freeby50. More on Historical Home Appreciation. http://freeby50.blogspot.com/2008/05/
more-onhistorical-home-appreciation.html
2. Wikipedia. McMansions. 2009. http://en.wikipedia.org/wiki/McMansion
3. The Boston Globe. Online. Forgotten in Foreclosure, Renters Forced to Live in Decaying
Homes. 2008. http://www.boston.com/business/articles/2009/02/03/forgotten_in_
foreclosures_renters_forced_to_live_in_decaying_homes/
4. Milwaukee Rising Weblog. 2008. http://milwaukeerising.net/wordpress/2008/12/29/city-tags-
lenders-with-property-upkeep-duties/
5. AARP Bulletin. 2009. Foreclosures Open Door to Disorder: Vermin, Crooks, Exploit Housing
Market Crisis. http://bulletin.aarp.org/yourmoney/personalfinance/articles/foreclosures_open.
html
6. Bigger Pockets. How to Find Foreclosure and Pre-Foreclosure Listings. 2009. www.
biggerpockets.com/renewsblog/2006/09/01/how-to-find-foreclosure-and-pre-foreclosure-
listings/
7. Nolo. Lis Pendens. 2009. http://www.nolo.com/definition.cfm/term/BDA664CA-D50E-468E-
90A891295A1D404C
8. Note: web links to government foreclosed properties can be found at http://www.
biggerpockets.com/government-owned-property.html
9. Mortgage News Daily. 2009. www.mortgagenewsdaily.com/wiki/REO_Database_List.asp
10. Bigger Pockets. Foreclosed Property Management. 2009. http://www.biggerpockets.com/
foreclosed_property_management.html
11. Bigger Pockets. How to Find Foreclosure and Pre-Foreclosure Listings. 2009. www.
biggerpockets.com/renewsblog/2006/09/01/how-to-find-foreclosure-and-pre-foreclosure-
listings/
12. Bigger Pockets. Foreclosed Property Management. 2009. http://www.biggerpockets.com/
foreclosed_property_management.html
13. National Institute of Building Inspectors. 2009. http://www.nibi.com/
14. Wikipedia. Gross Rent Multiplier. 2009. http://en.wikipedia.org/wiki/Gross_Rent_Multiplier
15. Morningstar. Investing Classroom: Stocks 400. 2005. http://news.morningstar.com/
classroom2/course.asp?docId=145104&page=1&CN=COM
16. Orlando, Frankie, and Marsha Ford. 2007. The Complete Guide to Locating, Negotiating,
and Buying Real Estate Foreclosures: What Smart Investors Need to Know—Explained
Simply. P. 45
17. Business Dictionary. Guaranteed Maximum Price. 2009. http://www.businessdictionary.com/
definition/guaranteed-maximum-price-GMP.html
18. Hagerty, James R. 2009. Overdue Mortgages Increase. The Wall Street Journal. March 6,
2009. http://online.wsj.com/article/SB123630052006746901.html

APPENDIX
BANK & LENDER REO WEBSITES

Note: Several of the major lenders are in the process of being acquired by other banks. For
example, Washington Mutual is now part of JP Morgan Chase and Wachovia is part of Wells
Fargo. This sector is changing so fast, we cannot claim that this list will be perpetually up to date,
and you may need to do some research as entities change, restructure and enter the market.
21st Mortgage Corporation

www.21stmortgage.com/web/21stSite.nsf/locating?OpenForm
Search Criteria: State, City, Zip, Price, Bedrooms, Bathrooms, Property Type
American Home Mortgage

re.oomc.com/staticBroker/reProperties.jsp
Search Criteria: State, Zip Code, Price
Bank Of America
bankofamerica.reo.com/search/
Search Criteria: Property Type, County, City, Price, Bedrooms, Baths, and Zip Code
BB&T
www.bbt.com/bbt/applications/specialassets/search.asp
Search Criteria: State, City, County, Price
Compass Bank
www.compassbank.com/appforms/properties/index.jsp
Search Criteria: State, Property Type Price Range
Countrywide
www.countrywide.com/purchase/f_reo.asp
Search Criteria: State and City
Downey Savings (Acquired by US Bank)

www.downeysavings.com/bank-owned-properties
Search Criteria: State, County, City, Property Type, Price, Bedrooms, Bathrooms
GRP Capital
www.grpcapital.com/properties/index.php
Search Criteria: State, City, Zip, Price, Agent, Status

HSBC
www.us.hsbc.com/1/2/3/personal/home-loans/properties
Search Criteria: State
IndyMac Bank
http://apps.indymacbank.com/individuals/realestate/search.asp
Search Criteria: Property Type, City, State, Zip, Price, Bedrooms, Bathrooms
Integrated Asset Services

www.iasreo.com/homesforsale.aspx
Search Criteria: State, Bedrooms, Baths, Price
JP Morgan Chase
mortgage.chase.com/pages/other/co_properties_landing.jsp
Search Criteria: State, County, City, Zip
M&T Bank (Merging with Provident Bankshares Corporation)

http://services.mandtbank.com/personal/mortgage/reomort.cfm
Search Criteria: State, City, Price
Ocwen Financial REO

www.ocwen.com/reo/home.cfm
Search Criteria: State, City, Bedrooms, Baths, Square Footage, Price, Property Type
Regions Financial Corporation

http://realestate.regions.com/servlet/Ore/ForeclosedPropertySearch.jsp
Search Criteria: State, City, Property type
Taylor Bean
www.taylorbeanhomes.com/
Search Criteria: State, City, Zip, County, Price, Bedrooms, Baths, Property type
US Bank
www.usbankforeclosures.com/
Search Criteria: State, County, Status, Listing Type, City Zip, Bedrooms, Baths,
Price

Wachovia (Acquired by Wells Fargo)
reo.wachovia.com
Search Criteria: State, City, Zip, County, Bedrooms, Baths, Price, Property type
Washington Mutual (Acquired by JP Morgan Chase)

www.wamuproperties.com/
Search Criteria: State, City, Zip, Type of property, Bedrooms, Baths, Price
Wells Fargo
www.pasreo.com/pasreo/public/propertySearch.do
Search Criteria: State, City, Zip, County, Bedrooms, Bathrooms, Price

GOVERNMENT WEBSITES
Fannie Mae
reosearch.fanniemae.com/research
Search Criteria: State, City, Zip, Price, Bedrooms, Baths
Freddie Mac
www.homesteps.com/hm01_1featuresearch.htm
Search Criteria: State, City, Zip, County, Price, Rooms, Bedrooms, Bathrooms
Freddie Mac Appraisal Form: www.freddiemac.com/sell/forms/pdf/70.pdf
GovernmentHousing.US
governmenthousing.us
Search Criteria: State, County, City, Zip
Homeowners Assistance Program

www.sas.usace.army.mil/hapinv/haphomes.htm
Homesales.gov
www.homesales.gov
Search Criteria: State, Property type
U.S. Department of Housing and Urban Development

www.hud.gov/
Search Criteria: State
United States Marshal Services

www.treas.gov/auctions/treasury/rp/
Sorted by State also includes other personal property
U.S. Department of the Treasury

www.treas.gov/auctions/treasury/rp/
Auction schedules for subject properties
Internal Service:
www.treas.gov/auctions/irs/cat_Real7.htm
Properties are listed in order of State then City

VA Homes for Sale
https://va.reotrans.com/index.cfm?
Search Criteria: State, City, Zip, Bedrooms, Bathrooms, Price,

ASSET MANAGEMENT COMPANIES
Corporate Asset Management, LLC

www.camreo.com
Search Criteria: Zip, Bedrooms, Baths, Property Type
Grasha Real Estate

www.grasha.com/html/reo.lasso?-search=REO
Keystone Asset Management

www.keystonebest.com/
LAMCO
www.lendersreo.com/listings.aspx
Search Criteria: State, City, Price, property type
Mortgage Lenders Network USA

mlnusa.com
OakTree Reo Asset Management

www.gotooaktree.com/ASSET_20_MANAGEMENT.html
Search Criteria: City, County, Bedrooms, Baths, Property Type
TREO
www.treonet.com/
TriMont Real Estate

trimontrea.com/html/properties/properties_for_sale.asp

ADDITIONAL FINDING RESOURCES
Bid 4 Assets
www.bid4assets.com/
Properties are listed by property type and when auction is closing
Buy Bank Homes

www.buybankhomes.com
Search Criteria: State, City, Zip, County
Default Research Inc

www.defaultresearch.com/
Listings available for purchase
Foreclosurenet.net
www.foreclosurenet.net/
Search Criteria: State, Zip
Foreclosure.com
www.foreclosure.com/
Search Criteria: State, Zip
Foreclosures.com
www.foreclosures.com/
Search Criteria: State, County, Zip
Hudson and Marshall

www.hudsonandmarshall.com/AuctionSchedule.aspx
Search Criteria: State, City, Zip
Realtor.com
www.realtor.com/FindHome/default.asp?mode=Map
Realty Trac
www.realtytrac.com
Search Criteria: State, City, Zip

SAMPLE HOME INSPECTION CHECKLIST
1. Roofing Foundation
Roofing material Attic Ventilation
Flashings Walls/Ceilings
Plumbing Stacks Siding
Ventilation Covers Vehicle Doors
Rain Gutters/Eavestroughs Door Operators
Downspouts/Roof Drains Electrical
Fascia/Soffits House/Service Doors
Chimneys
5. Attics
2. Exterior Elements Roof Framing
Siding (Brick, Vinyl, Aluminum, Roof Deck/Sheathing
Stucco, Stone, Composite, Ventilation Provisions
Other) Insulation
Windows
Entry Doors 6. Bathroom(s)
Stairs/Stoops
Sink(s)
Porch(es)
Toilet
Deck(s)
Bathtub
Railings
Shower
Electrical Outlets
Surround/Enclosure
Flooring
3. Site Elements Walls/Ceiling
Patios Ventilator
Walkways Electrical/GFCI
Driveways
Retaining Walls 7. Kitchen
Window Wells
Plumbing/Sink
Ground Slope at Foundation
Floor
Site Grading
Walls/Ceiling
Irrigation Systems
Electrical/GFCI
Oven
4. Garage(s) Range
Roofing Dishwasher
Floor Slab Disposal

Ventilator Devices
Cabinetry Wiring/Conductors
Countertops GFCI Test
Refrigerator
12. Cooling System
8. Interior Elements Outdoor Units
Ceilings Indoor Blower/Fan
Walls Condensation Provisions
Floors Thermostat(s)
Stairs
Railings
Windows 13. Heating System
Room Doors Heating Unit
Slider/Patio Doors Burner
Smoke/CO Detectors Fuel Line at Unit
Fireplaces Combustion Air Provisions
Vent Connector
Blower
9. Foundation/Substructure Thermostat(s)
Foundation Walls
Floor Framing
Basement Floor Slab 14. Plumbing System
Stairs/Railings Water Supply Piping
Water Flow at Fixtures
Drain/Waste Piping
10. Foundation Area Water Fixture Drainage
Penetration Exterior Faucet(s)
Exterior Features/Water Intrusion Gas Piping
Factors
Interior Conditions/Signs of Water
Intrusion 15. Hot Water Piping
Water Heater
11. Electric System Vent Connector
Service/Entrance Line Gas/Fuel Lines at Unit
Grounding Provisions Safety Valve Provisions
Main Disconnect(s)
Distribution Panel
Source: HouseMaster Home Inspections

SAMPLE REPC STATE OF UTAH
REAL ESTATE PURCHASE CONTRACT
This is a legally binding Real Estate Purchase Contract (“REPC”). Utah law requires real estate licensees to use this form. Buyer and Seller,
however, may agree to alter or delete its provisions or to use a different form. If you desire legal or tax advice, consult your attorney or tax
advisor.
OFFER TO PURCHASE AND EARNEST MONEY DEPOSIT

On this _____ day of ____________, 20____ (“Offer Reference Date”) (“Buyer”)
offers to purchase from __________________________________________ (“Seller”) the Property described below and
[ ] delivers to the Buyer’s Brokerage with this offer, or [ ] agrees to deliver no later than four (4) calendar days
after Acceptance (as defined in Section 23), Earnest Money in the amount of $_______________ in the form
of___________________________________. After Acceptance of the REPC by Buyer and Seller, and receipt of the
Earnest Money by the Brokerage, the Brokerage shall have four (4) calendar days in which to deposit the Earnest Money
into the Brokerage Real Estate Trust Account.
Buyer’s Brokerage ___________________________________________ Phone:_________________________________

Received by: on (Date)
(Signature above acknowledges receipt of Earnest Money)
OTHER PROVISIONS
1. PROPERTY:
also described as:
City of , County of , State of Utah, Zip ___________ (the "Property").
Any reference below to the term “Property” shall include the Property described above, together with the Included Items and
water rights/water shares, if any, referenced in Sections 1.1, 1.2 and 1.4.
1.1 Included Items. Unless excluded herein, this sale includes the following items if presently owned and in place
on the Property: plumbing, heating, air conditioning fixtures and equipment; ovens, ranges and hoods; cook tops;
dishwashers; ceiling fans; water heaters; light fixtures and bulbs; bathroom fixtures and bathroom mirrors; curtains,
draperies, rods, window blinds and shutters; window and door screens; storm doors and windows; awnings; satellite dishes;
affixed carpets; automatic garage door openers and accompanying transmitters; security system; fencing and any
landscaping.
1.2 Other Included Items. The following items that are presently owned and in place on the Property have been left
for the convenience of the parties and are also included in this sale (check applicable box): [ ] washers [ ] dryers
[ ] refrigerators [ ] water softeners [ ] microwave ovens [ ] other (specify)________________________________
__________________________________________________________________________________________________
The above checked items shall be conveyed to Buyer under separate bill of sale with warranties as to title.
1.3 Excluded Items. The following items are excluded from this sale: _____________________________________
__________________________________________________________________________________________________
1.4 Water Service. The Purchase Price for the Property shall include all water rights/water shares, if any, that are the
legal source for Seller’s current culinary water service and irrigation water service, if any, to the Property. The water
rights/water shares will be conveyed or otherwise transferred to Buyer at Closing by applicable deed or legal instruments.
The following water rights/water shares, if applicable, are specifically excluded from this sale: ________________________
__________________________________________________________________________________________________
2. PURCHASE PRICE. The Purchase Price for the Property is $ ____________________. Except as provided in this
Section, the Purchase Price shall be paid as provided in Sections 2(a) through 2(d) below. Any amounts shown in 2(b) and
2(d) may be adjusted as deemed necessary by Buyer and the Lender.
$ (a) Earnest Money Deposit. Under certain conditions described in the REPC, this deposit may
become totally non refundable.
$ (b) New Loan. Buyer may apply for mortgage loan financing (the “Loan”) on terms acceptable to
Buyer: If an FHA/VA loan applies, see attached FHA/VA Loan Addendum.
$________________ (c) Seller Financing (see attached Seller Financing Addendum)
$ (d) Balance of Purchase Price in Cash at Settlement
$ PURCHASE PRICE. Total of lines (a) through (d)
Page 1 of 6 pages Buyer’s Initials ________ Date Seller’s Initials ________ Date
3. SETTLEMENT AND CLOSING.
3.1 Settlement. Settlement shall take place no later than the Settlement Deadline referenced in Section 24(d), or as
otherwise mutually agreed by Buyer and Seller in writing. “Settlement" shall occur only when all of the following have been
completed: (a) Buyer and Seller have signed and delivered to each other or to the escrow/closing office all documents
required by the REPC, by the Lender, by the title insurance and escrow/closing offices, by written escrow instructions
(including any split closing instructions, if applicable), or by applicable law; (b) any monies required to be paid by Buyer or
Seller under these documents (except for the proceeds of any new loan) have been delivered by Buyer or Seller to the
other party, or to the escrow/closing office, in the form of cash, wire transfer, cashier’s check, or other form acceptable to
the escrow/closing office.
3.2 Prorations. All prorations, including, but not limited to, homeowner’s association dues, property taxes for the
current year, rents, and interest on assumed obligations, if any, shall be made as of the Settlement Deadline referenced in
Section 24(d), unless otherwise agreed to in writing by the parties. Such writing could include the settlement statement. The
provisions of this Section 3.2 shall survive Closing.
3.3 Special Assessments. Any assessments for capital improvements as approved by the HOA (pursuant to HOA
governing documents) or as assessed by a municipality or special improvement district, prior to the Settlement Deadline
shall be paid for by: [ ] Seller [ ] Buyer [ ] Split Equally Between Buyer and Seller [ ] Other (explain) _ ____
_____ __. The provisions of this Section 3.3 shall survive
Closing.
3.4 Fees/Costs/Payment Obligations. Unless otherwise agreed to in writing, Seller and Buyer shall each pay one-
half (1/2) of the fee charged by the escrow/closing office for its services in the settlement/closing process. Tenant deposits
(including, but not limited to, security deposits, cleaning deposits and prepaid rents) shall be paid or credited by Seller to
Buyer at Settlement. Buyer agrees to be responsible for homeowners’ association and private and public utility service
transfer fees, if any, and all utilities and other services provided to the Property after the Settlement Deadline. The
escrow/closing office is authorized and directed to withhold from Seller’s proceeds at Closing, sufficient funds to pay off on
Seller’s behalf all mortgages, trust deeds, judgments, mechanic's liens, tax liens and warrants. The provisions of this
Section 3.4 shall survive Closing.
3.5 Closing. For purposes of the REPC, “Closing” means that: (a) Settlement has been completed; (b) the proceeds
of any new loan have been delivered by the Lender to Seller or to the escrow/closing office; and (c) the applicable Closing
documents have been recorded in the office of the county recorder. The actions described in 3.5 (b) and (c) shall be
completed within four calendar days after Settlement.
4. POSSESSION. Seller shall deliver physical possession of the Property to Buyer as follows: [ ] Upon Closing;
[ ] ___Hours after Closing; [ ] Calendar Days after Closing. Any contracted rental of the Property prior to or after
Closing, between Buyer and Seller, shall be by separate written agreement. Seller and Buyer shall each be responsible for
any insurance coverage each party deems necessary for the Property including any personal property and belongings.
Seller agrees to deliver the Property to Buyer in broom-clean condition and free of debris and personal belongings. Any
Seller or tenant moving-related damage to the Property shall be repaired at Seller's expense. The provisions of this Section
4 shall survive Closing.
5. CONFIRMATION OF AGENCY DISCLOSURE. Buyer and Seller acknowledge prior written receipt of agency
disclosure provided by their respective agent that has disclosed the agency relationships confirmed below. At the signing of
the REPC:
Seller’s Agent , represents [ ] Seller [ ] both Buyer and Seller as a Limited Agent;
Seller’s Brokerage , represents [ ] Seller [ ] both Buyer and Seller as a Limited Agent;
Buyer’s Agent , represents [ ] Buyer [ ] both Buyer and Seller as a Limited Agent;
Buyer’s Brokerage , represents [ ] Buyer [ ] both Buyer and Seller as a Limited Agent.
6. TITLE & TITLE INSURANCE.
6.1 Title to Property. Seller represents that Seller has fee title to the Property and will convey marketable title to
the Property to Buyer at Closing by general warranty deed. Buyer does agree to accept title to the Property subject to the
contents of the Commitment for Title Insurance (the “Commitment”) provided by Seller under Section 7, and as reviewed
and approved by Buyer under Section 8. Buyer also agrees to accept title to the Property subject to any existing leases,
rental and property management agreements affecting the Property not expiring prior to Closing which were provided to
Buyer pursuant to Section 7(e). The provisions of this Section 6.1 shall survive Closing.
6.2 Title Insurance. At Settlement, Seller agrees to pay for and cause to be issued in favor of Buyer, through the
title insurance agency that issued the Commitment (the “Issuing Agent”), the most current version of the ALTA
Homeowner’s Policy of Title Insurance (the “Homeowner’s Policy”). If the Homeowner’s Policy is not available through the
Issuing Agent, Buyer and Seller further agree as follows: (a) Seller agrees to pay for the Homeowner’s Policy if available

through any other title insurance agency selected by Buyer; (b) if the Homeowner’s Policy is not available either through the
Issuing Agent or any other title insurance agency, then Seller agrees to pay for, and Buyer agrees to accept, the most
current available version of an ALTA Owner’s Policy of Title Insurance (“Standard Coverage Owner’s Policy”) available
through the Issuing Agent.
7. SELLER DISCLOSURES. No later than the Seller Disclosure Deadline referenced in Section 24(a), Seller shall provide
to Buyer the following documents in hard copy or electronic format which are collectively referred to as the "Seller
Disclosures":
(a) a written Seller property condition disclosure for the Property, completed, signed and dated by Seller as provided in
Section10.3;
(b) a Commitment for Title Insurance as referenced in Section 6;
(c) a copy of any restrictive covenants (CC&R’s), rules and regulations affecting the Property;
(d) a copy of the most recent minutes, budget and financial statement for the homeowners’ association, if any;
(e) a copy of any lease, rental, and property management agreements affecting the Property not expiring prior to Closing;
(f) evidence of any water rights and/or water shares referenced in Section 1.4;
(g) written notice of any claims and/or conditions known to Seller relating to environmental problems and building or zoning
code violations; and
(h) Other (specify) ____________ ______
8. BUYER’S CONDITIONS OF PURCHASE.

8.1 DUE DILIGENCE CONDITION. Buyer's obligation to purchase the Property: [ ] IS [ ] IS NOT conditioned
upon Buyer’s Due Diligence as defined in this Section 8.1(a) below. This condition is referred to as the “Due Diligence
Condition.” If checked in the affirmative, Sections 8.1(a) through 8.1(c) apply; otherwise they do not.
(a) Due Diligence Items. Buyer’s Due Diligence shall consist of Buyer’s review and approval of the contents of
the Seller Disclosures referenced in Section 7, and any other tests, evaluations and verifications of the Property deemed
necessary or appropriate by Buyer, such as: the physical condition of the Property; the existence of any hazardous
substances, environmental issues or geologic conditions; the square footage or acreage of the land and/or improvements;
the condition of the roof, walls, and foundation; the condition of the plumbing, electrical, mechanical, heating and air
conditioning systems and fixtures; the condition of all appliances; the costs and availability of homeowners’ insurance and
flood insurance, if applicable; water source, availability and quality; the location of property lines; regulatory use restrictions
or violations; fees for services such as HOA dues, municipal services, and utility costs; convicted sex offenders residing in
proximity to the Property; and any other matters deemed material to Buyer in making a decision to purchase the Property.
Unless otherwise provided in the REPC, all of Buyer’s Due Diligence shall be paid for by Buyer and shall be conducted by
individuals or entities of Buyer's choice. Seller agrees to cooperate with Buyer’s Due Diligence. Buyer agrees to pay for any
damage to the Property resulting from any such inspections or tests during the Due Diligence.
(b) Buyer’s Right to Cancel or Resolve Objections. If Buyer determines, in Buyer’s sole discretion, that the
results of the Due Diligence are unacceptable, Buyer may either: (i) no later than the Due Diligence Deadline referenced in
Section 24(b), cancel the REPC by providing written notice to Seller, whereupon the Earnest Money Deposit shall be
released to Buyer without the requirement of further written authorization from Seller; or (ii) no later than the Due Diligence
Deadline referenced in Section 24(b), resolve in writing with Seller any objections Buyer has arising from Buyer’s Due
Diligence.
(c) Failure to Cancel or Resolve Objections. If Buyer fails to cancel the REPC or fails to resolve in writing
any objections Buyer has arising from Buyer’s Due Diligence, as provided in Section 8.1(b), Buyer shall be deemed to have
waived the Due Diligence Condition.
8.2 APPRAISAL CONDITION. Buyer's obligation to purchase the Property: [ ] IS [ ] IS NOT conditioned upon the
Property appraising for not less than the Purchase Price. This condition is referred to as the “Appraisal Condition.” If
checked in the affirmative, Sections 8.2(a) and 8.2(b) apply; otherwise they do not.
(a) Buyer’s Right to Cancel. If after completion of an appraisal by a licensed appraiser, Buyer receives written
notice from the Lender or the appraiser that the Property has appraised for less than the Purchase Price (a “Notice of
Appraised Value”), Buyer may cancel the REPC by providing written notice to Seller (with a copy of the Notice of Appraised
Value) no later than the Financing & Appraisal Deadline referenced in Section 24(c); whereupon the Earnest Money
Deposit shall be released to Buyer without the requirement of further written authorization from Seller.
(b) Failure to Cancel. If the REPC is not cancelled as provided in this section 8.2, Buyer shall be deemed to have
waived the Appraisal Condition.
8.3 FINANCING CONDITION. Buyer’s obligation to purchase the property: [ ] IS [ ] IS NOT conditioned upon
Buyer obtaining the Loan referenced in Section 2(b). This condition is referred to as the “Financing Condition.” If checked
in the affirmative, Sections 8.3(a) and 8.3(b) apply; otherwise they do not. If the Financing Condition applies, Buyer agrees
to work diligently and in good faith to obtain the Loan.
(a) Buyer’s Right to Cancel Before the Financing & Appraisal Deadline. If Buyer, in Buyer’s sole discretion, is
not satisfied with the terms and conditions of the Loan, Buyer may cancel the REPC by providing written notice to Seller no
later than the Financing & Appraisal Deadline referenced in Section 24(c); whereupon the Earnest Money Deposit shall be
released to Buyer without the requirement of further written authorization from Seller.
(b) Buyer’s Right to Cancel After the Financing & Appraisal Deadline. If after expiration of the Financing &
Appraisal Deadline referenced in Section 24(c), Buyer fails to obtain the Loan, meaning that the proceeds of the Loan have
not been delivered by the Lender to Seller or to the escrow/closing office as required under Section 3.5 of the REPC, then
Buyer or Seller may cancel the REPC by providing written notice to the other party; whereupon the Earnest Money Deposit,
or Deposits, if applicable (see Section 8.4 below), shall be released to Seller without the requirement of further written
authorization from Buyer. In the event of such cancellation, Seller agrees to accept as Seller’s exclusive remedy, the
Earnest Money Deposit, or Deposits, if applicable, as liquidated damages. Buyer and Seller agree that liquidated damages
would be difficult and impractical to calculate, and the Earnest Money Deposit, or Deposits, if applicable, is a fair and
reasonable estimate of Seller’s damages in the event Buyer fails to obtain the Loan.
8.4 ADDITIONAL EARNEST MONEY DEPOSIT. If the REPC has not been previously canceled by Buyer as
provided in Sections 8.1, 8.2 or 8.3(a), then no later than the Due Diligence Deadline referenced in Section 24(b), or the
Financing & Appraisal Deadline referenced in Section 24(c), whichever is later, Buyer: [ ] WILL [ ] WILL NOT deliver to
the Buyer’s Brokerage, an Additional Earnest Money Deposit in the amount of $_________________. The Earnest Money
Deposit and the Additional Earnest Money Deposit, if applicable, are sometimes referred to herein as the “Deposits”. The
Earnest Money Deposit, or Deposits, if applicable, shall be credited toward the Purchase Price at Closing.
9. ADDENDA. There [ ] ARE [ ] ARE NOT addenda to the REPC containing additional terms. If there are, the terms of
the following addenda are incorporated into the REPC by this reference: [ ] Addendum No. ___ _____
[ ] Seller Financing Addendum [ ] FHA/VA Loan Addendum [ ] Lead-Based Paint Disclosure & Acknowledgement
(in some transactions this disclosure is required by law) [ ] Other (specify)
10. HOME WARRANTY PLAN / AS-IS CONDITION OF PROPERTY.
10.1 Home Warranty Plan. A one-year Home Warranty Plan [ ] WILL [ ] WILL NOT be included in this transaction.
If included, the Home Warranty Plan shall be ordered by [ ] Buyer [ ] Seller and shall be issued by a company selected
by [ ] Buyer [ ] Seller. The cost of the Home Warranty Plan shall not exceed $ and shall be paid for at
Settlement by [ ] Buyer [ ] Seller.
10.2 Condition of Property/Buyer Acknowledgements. Buyer acknowledges and agrees that in reference to the
physical condition of the Property: (a) Buyer is purchasing the Property in its “As-Is” condition without expressed or implied
warranties of any kind; (b) Buyer shall have, during Buyer’s Due Diligence as referenced in Section 8.1, an opportunity to
completely inspect and evaluate the condition of the Property; and (c) if based on the Buyer’s Due Diligence, Buyer elects
to proceed with the purchase of the Property, Buyer is relying wholly on Buyer’s own judgment and that of any contractors
or inspectors engaged by Buyer to review, evaluate and inspect the Property.
10.3 Condition of Property/Seller Acknowledgements. Seller acknowledges and agrees that in reference to the
physical condition of the Property, Seller agrees to: (a) disclose in writing to Buyer defects in the Property known to Seller
that materially affect the value of the Property that cannot be discovered by a reasonable inspection by an ordinary prudent
Buyer; (b) carefully review, complete, and provide to Buyer a written Seller property condition disclosure as stated in section
7(a); and (c) deliver the Property to Buyer in substantially the same general condition as it was on the date of Acceptance,
as defined in Section 23, ordinary wear and tear excepted. The provisions of Sections 10.2 and 10.3 shall survive Closing.
11. FINAL PRE-SETTLEMENT WALK-THROUGH INSPECTION.
11.1 Walk-Through Inspection. No earlier than seven (7) calendar days prior to Settlement, and upon reasonable
notice and at a reasonable time, Buyer may conduct a final pre-Settlement walk-through inspection of the Property to
determine only that the Property is “as represented,” meaning that the items referenced in Sections 1.1, 1.2 and 8.1(b)(ii)
("the items") are respectively present, repaired or corrected as agreed. The failure to conduct a walk-through inspection or
to claim that an item is not as represented shall not constitute a waiver by Buyer of the right to receive, on the date of
possession, the items as represented. If the items are not as represented, Seller agrees to cause all applicable items to be
corrected, repaired or replaced (the “Work”) prior to the Settlement Deadline referenced in Section 24(d).
11.2 Escrow to Complete the Work. If, as of Settlement, the Work has not been completed, then Buyer and Seller
agree to withhold in escrow at Settlement a reasonable amount agreed to by Seller, Buyer (and Lender, if applicable),
sufficient to pay for completion of the Work. If the Work is not completed within thirty (30) calendar days after the Settlement
Deadline, the amount so escrowed may, subject to Lender’s approval, be released to Buyer as liquidated damages for failure
to complete the Work. The provisions of this Section 11.2 shall survive Closing.
12. CHANGES DURING TRANSACTION. Seller agrees that from the date of Acceptance until the date of Closing, none of
the following shall occur without the prior written consent of Buyer: (a) no changes in any leases, rental or property

management agreements shall be made; (b) no new lease, rental or property management agreements shall be entered
into; (c) no substantial alterations or improvements to the Property shall be made or undertaken; (d) no further financial
encumbrances to the Property shall be made, and (e) no changes in the legal title to the Property shall be made.
13. AUTHORITY OF SIGNERS. If Buyer or Seller is a corporation, partnership, trust, estate, limited liability company or
other entity, the person signing the REPC on its behalf warrants his or her authority to do so and to bind Buyer and Seller.
14. COMPLETE CONTRACT. The REPC together with its addenda, any attached exhibits, and Seller Disclosures
(collectively referred to as the “REPC”), constitutes the entire contract between the parties and supersedes and replaces
any and all prior negotiations, representations, warranties, understandings or contracts between the parties whether verbal
or otherwise. The REPC cannot be changed except by written agreement of the parties.
15. MEDIATION. Any dispute relating to the REPC arising prior to or after Closing: [ ] SHALL [ ] MAY AT THE OPTION
OF THE PARTIES first be submitted to mediation. Mediation is a process in which the parties meet with an impartial
person who helps to resolve the dispute informally and confidentially. Mediators cannot impose binding decisions. The
parties to the dispute must agree before any settlement is binding. The parties will jointly appoint an acceptable mediator
and share equally in the cost of such mediation. If mediation fails, the other procedures and remedies available under the
REPC shall apply. Nothing in this Section 15 prohibits any party from seeking emergency legal or equitable relief, pending
mediation. The provisions of this Section 15 shall survive Closing.
16. DEFAULT.
16.1 Buyer Default. If Buyer defaults, Seller may elect one of the following remedies: (a) cancel the REPC and retain
the Earnest Money Deposit, or Deposits, if applicable, as liquidated damages; (b) maintain the Earnest Money Deposit, or
Deposits, if applicable, in trust and sue Buyer to specifically enforce the REPC; or (c) return the Earnest Money Deposit, or
Deposits, if applicable, to Buyer and pursue any other remedies available at law.
16.2 Seller Default. If Seller defaults, Buyer may elect one of the following remedies: (a) cancel the REPC, and in
addition to the return of the Earnest Money Deposit, or Deposits, if applicable, Buyer may elect to accept from Seller, as
liquidated damages, a sum equal to the Earnest Money Deposit, or Deposits, if applicable; or (b) maintain the Earnest
Money Deposit, or Deposits, if applicable, in trust and sue Seller to specifically enforce the REPC; or (c) accept a return of
the Earnest Money Deposit, or Deposits, if applicable, and pursue any other remedies available at law. If Buyer elects to
accept liquidated damages, Seller agrees to pay the liquidated damages to Buyer upon demand.
17. ATTORNEY FEES AND COSTS/GOVERNING LAW. In the event of litigation or binding arbitration to enforce the
REPC, the prevailing party shall be entitled to costs and reasonable attorney fees. However, attorney fees shall not be
awarded for participation in mediation under Section 15. This contract shall be governed by and construed in accordance
with the laws of the State of Utah. The provisions of this Section 17 shall survive Closing.
18. NOTICES. Except as provided in Section 23, all notices required under the REPC must be: (a) in writing; (b) signed by
the Buyer or Seller giving notice; and (c) received by the Buyer or the Seller, or their respective agent, or by the brokerage
firm representing the Buyer or Seller, no later than the applicable date referenced in the REPC.
19. NO ASSIGNMENT. The REPC and the rights and obligations of Buyer hereunder, are personal to Buyer. The REPC
may not be assigned by Buyer without the prior written consent of Seller. Provided, however, the transfer of Buyer’s interest
in the REPC to any business entity in which Buyer holds a legal interest, including, but not limited to, a family partnership,
family trust, limited liability company, partnership, or corporation (collectively referred to as a “Permissible Transfer”), shall
not be treated as an assignment by Buyer that requires Seller’s prior written consent. Furthermore, the inclusion of “and/or
assigns” or similar language on the line identifying Buyer on the first page of the REPC shall constitute Seller’s written
consent only to a Permissible Transfer.
20. INSURANCE & RISK OF LOSS.
20.1 Insurance Coverage. As of Closing, Buyer shall be responsible to obtain casualty and liability insurance
coverage on the Property in amounts acceptable to Buyer and Buyer’s Lender, if applicable.
20.2 Risk of Loss. If prior to Closing, any part of the Property is damaged or destroyed by fire, vandalism, flood,
earthquake, or act of God, the risk of such loss or damage shall be borne by Seller; provided however, that if the cost of
repairing such loss or damage would exceed ten percent (10%) of the Purchase Price referenced in Section 2, either Seller
or Buyer may elect to cancel the REPC by providing written notice to the other party, in which instance the Earnest Money
Deposit, or Deposits, if applicable, shall be returned to Buyer.
21. TIME IS OF THE ESSENCE. Time is of the essence regarding the dates set forth in the REPC. Extensions must be
agreed to in writing by all parties. Unless otherwise explicitly stated in the REPC: (a) performance under each Section of
the REPC which references a date shall absolutely be required by 5:00 PM Mountain Time on the stated date; and (b) the
term "days" and “calendar days” shall mean calendar days and shall be counted beginning on the day following the event
which triggers the timing requirement (e.g. Acceptance). Performance dates and times referenced herein shall not be
binding upon title companies, lenders, appraisers and others not parties to the REPC, except as otherwise agreed to in
writing by such non-party.
22. ELECTRONIC TRANSMISSION AND COUNTERPARTS. Electronic transmission (including email and fax) of a signed
copy of the REPC, any addenda and counteroffers, and the retransmission of any signed electronic transmission shall be
the same as delivery of an original. The REPC and any addenda and counteroffers may be executed in counterparts.
23. ACCEPTANCE. "Acceptance" occurs only when all of the following have occurred: (a) Seller or Buyer has signed the
offer or counteroffer where noted to indicate acceptance; and (b) Seller or Buyer or their agent has communicated to the
other party or to the other party’s agent that the offer or counteroffer has been signed as required.
24. CONTRACT DEADLINES. Buyer and Seller agree that the following deadlines shall apply to the REPC:
(a) Seller Disclosure Deadline (Date)
(b) Due Diligence Deadline (Date)
(c) Financing & Appraisal Deadline (Date)
(d) Settlement Deadline (Date)
25. OFFER AND TIME FOR ACCEPTANCE. Buyer offers to purchase the Property on the above terms and conditions. If
Seller does not accept this offer by: _______ [ ] AM [ ] PM Mountain Time on
(Date), this offer shall lapse; and the Brokerage shall return any Earnest Money Deposit to Buyer.
(Buyer’s Signature) (Offer Date) (Buyer’s Signature) (Offer Date)
(Buyer’s Names) (PLEASE PRINT) (Notice Address) (Zip Code) (Phone)
(Buyer’s Names) (PLEASE PRINT) (Notice Address) (Zip Code) (Phone)
ACCEPTANCE/COUNTEROFFER/REJECTION
CHECK ONE:
[ ] ACCEPTANCE OF OFFER TO PURCHASE: Seller Accepts the foregoing offer on the terms and conditions specified
above.
[ ] COUNTEROFFER: Seller presents for Buyer’s Acceptance the terms of Buyer’s offer subject to the exceptions or
modifications as specified in the attached ADDENDUM NO. .
[ ] REJECTION: Seller rejects the foregoing offer.
(Seller’s Signature) (Date) (Time) (Seller’s Signature) (Date)(Time)
(Seller’s Names) (PLEASE PRINT) (Notice Address) (Zip Code) (Phone)
(Seller’s Names) (PLEASE PRINT) (Notice Address) (Zip Code) (Phone)
THIS FORM APPROVED BY THE UTAH REAL ESTATE COMMISSION AND THE OFFICE OF THE UTAH ATTORNEY GENERAL,
EFFECTIVE AUGUST 27, 2008. AS OF JANUARY 1, 2009, IT WILL REPLACE AND SUPERSEDE THE PREVIOUSLY APPROVED VERSION OF THIS FORM.
SAMPLE SELLER DISCLOSURE FORM

FTC REAL ESTATE GLOSSARY
Federal Trade Commission ftc.gov
The Real Estate Marketplace Glossary:

How to Talk the Talk
Buying
a home can be
exciting. It also can
be somewhat daunting, even
if you’ve done it before. You will deal
with mortgage options, credit reports, loan
applications, contracts, points, appraisals, change
orders, inspections, warranties, walk-throughs, settlement
sheets, escrow accounts, recording fees, insurance, taxes...the list
goes on. No doubt you will hear and see words and terms you’ve
never heard before. Just what do they all mean?
The Federal Trade Commission, the agency that promotes competition
and protects consumers, has prepared this glossary to help you
better understand the terms commonly used in the real estate
and mortgage marketplace.
A
Annual Percentage Rate (APR): The cost of Appraisal: A professional analysis used
a loan or other financing as an annual rate. to estimate the value of the property. This
The APR includes the interest rate, points, includes examples of sales of similar prop-
broker fees and certain other credit charges erties.
a borrower is required to pay.
Appraiser: A professional who conducts an
Annuity: An amount paid yearly or at other analysis of the property, including examples
regular intervals, often at a guaranteed of sales of similar properties in order to de-
minimum amount. Also, a type of insurance velop an estimate of the value of the prop-
policy in which the policy holder makes erty. The analysis is called an “appraisal.”
payments for a fixed period or until a stated
age, and then receives annuity payments Appreciation: An increase in the market
from the insurance company. value of a home due to changing market
conditions and/or home improvements.
Application Fee: The fee that a mortgage
lender or broker charges to apply for a Arbitration: A process where disputes are
mortgage to cover processing costs. settled by referring them to a fair and neu-
tral third party (arbitrator). The disputing
Glossary
parties agree in advance to agree with Automated Underwriting: An auto-

the decision of the arbitrator. There is mated process performed by a technol-
a hearing where both parties have an ogy application that streamlines the
opportunity to be heard, after which the processing of loan applications and
arbitrator makes a decision. provides a recommendation to the lender
to approve the loan or refer it for manual
Asbestos: A toxic material that was underwriting.
once used in housing insulation and
fireproofing. Because some forms of as-
bestos have been linked to certain lung
diseases, it is no longer used in new
B
homes. However, some older homes may Balance Sheet: A financial statement
still have asbestos in these materials. that shows assets, liabilities, and net
worth as of a specific date.
Assessed Value: Typically the value
placed on property for the purpose of Balloon Mortgage: A mortgage with
taxation. monthly payments often based on a
30-year amortization schedule, with
Assessor: A public official who estab- the unpaid balance due in a lump sum
lishes the value of a property for taxa- payment at the end of a specific period
tion purposes. of time (usually 5 or 7 years). The mort-
gage may contain an option to “reset”
Asset: Anything of monetary value that the interest rate to the current market
is owned by a person or company. As- rate and to extend the due date if certain
sets include real property, personal conditions are met.
property, stocks, mutual funds, etc.
Balloon Payment: A final lump sum
Assignment of Mortgage: A document payment that is due, often at the matu-
evidencing the transfer of ownership of a rity date of a balloon mortgage.
mortgage from one person to another.
Bankruptcy: Legally declared unable to
Assumable Mortgage: A mortgage loan pay your debts. Bankruptcy can severely
that can be taken over (assumed) by the impact your credit and your ability to
buyer when a home is sold. An assump- borrow money.
tion of a mortgage is a transaction in
which the buyer of real property takes Before-tax Income: Income before taxes
over the seller’s existing mortgage; the are deducted. Also known as “gross in-
seller remains liable unless released by come.”
the lender from the obligation. If the
mortgage contains a due-on-sale clause, Biweekly Payment Mortgage: A mort-
the loan may not be assumed without gage with payments due every two weeks
the lender’s consent. (instead of monthly).
Assumption: A homebuyer’s agreement Bona fide: In good faith, without fraud.
to take on the primary responsibility
for paying an existing mortgage from a Bridge Loan: A short-term loan secured
home seller. by the borrower’s current home (which
is usually for sale) that allows the pro-
Assumption Fee: A fee a lender charges ceeds to be used for building or closing
a buyer who will assume the seller’s ex- on a new house before the current home
isting mortgage. is sold. Also known as a “swing loan.”
Glossary
Broker: An individual or firm that acts Certificate of Deposit: A document is-

as an agent between providers and users sued by a bank or other financial institu-
of products or services, such as a mort- tion that is evidence of a deposit, with the
gage broker or real estate broker. See issuer’s promise to return the deposit plus
also “Mortgage Broker.” earnings at a specified interest rate within
a specified time period.
Building Code: Local regulations that
set forth the standards and require- Certificate of Eligibility: A document is-
ments for the construction, maintenance sued by the U.S. Department of Veterans
and occupancy of buildings. The codes Affairs (VA) certifying a veteran’s eligibility
are designed to provide for the safety, for a VA-guaranteed mortgage loan.
health and welfare of the public.
Chain of Title: The history of all of the
Buydown: An arrangement whereby documents that have transferred title to
the property developer or another third a parcel of real property, starting with the
party provides an interest subsidy to earliest existing document and ending
reduce the borrower’s monthly payments with the most recent.
typically in the early years of the loan.
Change Orders: A change in the original
Buydown Account: An account in construction plans ordered by the prop-
which funds are held so that they can be erty owner or general contractor.
applied as part of the monthly mortgage
payment as each payment comes due Clear Title: Ownership that is free of
during the period that an interest rate liens, defects, or other legal encumbranc-
buydown plan is in effect. es.
Closing: The process of completing a

C financial transaction. For mortgage
loans, the process of signing mortgage
Cap: For an adjustable-rate mortgage documents, disbursing funds, and, if
(ARM), a limitation on the amount the applicable, transferring ownership of
interest rate or mortgage payments may the property. In some jurisdictions, clos-
increase or decrease. See also “Lifetime ing is referred to as “escrow,” a process
Payment Cap,” “Lifetime Rate Cap,” “Pe- by which a buyer and seller deliver legal
riodic Payment Cap,” and “Periodic Rate documents to a third party who completes
Cap.” the transaction in accordance with their
instructions. See also “Settlement.”
Capacity: Your ability to make your
mortgage payments on time. This de- Closing Agent: The person or entity that
pends on your income and income coordinates the various closing activities,
stability (job history and security), your including the preparation and recordation
assets and savings, and the amount of of closing documents and the disburse-
your income each month that is left over ment of funds. (May be referred to as an
after you’ve paid for your housing costs, escrow agent or settlement agent in some
debts and other obligations. jurisdictions.) Typically, the closing is con-
ducted by title companies, escrow compa-
Cash-out Refinance: A refinance trans- nies or attorneys.
action in which the borrower receives
additional funds over and above the Closing Costs: The upfront fees charged
amount needed to repay the existing in connection with a mortgage loan trans-
mortgage, closing costs, points, and any action. Money paid by a buyer (and/or
subordinate liens. seller or other third party, if applicable)
Glossary
to effect the closing of a mortgage loan, tenance. Common areas include swim-
generally including, but not limited to ming pools, tennis courts, and other
a loan origination fee, title examination recreational facilities, as well as common
and insurance, survey, attorney’s fee, corridors of buildings, parking areas,
and prepaid items, such as escrow de- means of ingress and egress, etc.
posits for taxes and insurance.
Comparables: An abbreviation for “com-
Closing Date: The date on which the parable properties,” which are used as a
sale of a property is to be finalized and a comparison in determining the current
loan transaction completed. Often, a real value of a property that is being ap-
estate sales professional coordinates the praised.
setting of this date with the buyer, the
seller, the closing agent, and the lender. Concession: Something given up or
agreed to in negotiating the sale of a
Closing Statement: See “HUD-1 Settle- house. For example, the sellers may
ment Statement.” agree to help pay for closing costs.
Co-borrower: Any borrower other than Condominium: A unit in a multiunit

the first borrower whose name appears building. The owner of a condominium
on the application and mortgage note, unit owns the unit itself and has the
even when that person owns the prop- right, along with other owners, to use
erty jointly with the first borrower and the common areas but does not own the
shares liability for the note. common elements such as the exterior
walls, floors and ceilings or the struc-
Collateral: An asset that is pledged as tural systems outside of the unit; these
security for a loan. The borrower risks are owned by the condominium associa-
losing the asset if the loan is not repaid tion. There are usually condominium as-
according to the terms of the loan agree- sociation fees for building maintenance,
ment. In the case of a mortgage, the property upkeep, taxes and insurance
collateral would be the house and real on the common areas and reserves for
property. improvements.
Commission: The fee charged for ser- Construction Loan: A loan for financ-
vices performed, usually based on a ing the cost of construction or improve-
percentage of the price of the items sold ments to a property; the lender disburs-
(such as the fee a real estate agent earns es payments to the builder at periodic
on the sale of a house). intervals during construction.
Commitment Letter: A binding of- Contingency: A condition that must be

fer from your lender that includes the met before a contract is legally binding.
amount of the mortgage, the interest For example, home purchasers often
rate, and repayment terms. include a home inspection contingency;
the sales contract is not binding unless
Common Areas: Those portions of a and until the purchaser has the home
building, land, or improvements and inspected.
amenities owned by a planned unit
development (PUD) or condominium Conventional Mortgage: A mortgage
project’s homeowners’ association (or loan that is not insured or guaranteed
a cooperative project’s cooperative cor- by the federal government or one of its
poration) that are used by all of the agencies, such as the Federal Housing
unit owners, who share in the common Administration (FHA), the U.S. Depart-
expenses of their operation and main- ment of Veterans Affairs (VA), or the
Glossary
Rural Housing Service (RHS). Contrast agreed.” Your credit history is called a
with “Government Mortgage.” credit report when provided by a credit
bureau to a lender or other business.
Conversion Option: A provision of some
adjustable-rate mortgage (ARM) loans Credit Life Insurance: A type of insur-
that allows the borrower to change the ance that pays off a specific amount of
ARM to a fixed-rate mortgage at speci- debt or a specified credit account if the
fied times after loan origination. borrower dies while the policy is in force.
Convertible ARM: An adjustable-rate Credit Report: Information provided by

mortgage (ARM) that allows the borrower a credit bureau that allows a lender or
to convert the loan to a fixed-rate mort- other business to examine your use of
gage under specified conditions. credit. It provides information on money
that you’ve borrowed from credit institu-
Cooperative (Co-op) Project: A project tions and your payment history.
in which a corporation holds title to a
residential property and sells shares to Credit Score: A numerical value that
individual buyers, who then receive a ranks a borrower’s credit risk at a given
proprietary lease as their title. point in time based on a statistical eval-
uation of information in the individual’s
Cost of Funds Index (COFI): An in- credit history that has been proven to be
dex that is used to determine interest predictive of loan performance.
rate changes for certain adjustable-rate
mortgage (ARM) loans. It is based on the Creditor: A person who extends credit
weighted monthly average cost of de- to whom you owe money.
posits, advances, and other borrowings
of members of the Federal Home Loan Creditworthy: Your ability to qualify for
Bank of San Francisco. credit and repay debts.
Counter-offer: An offer made in re-

sponse to a previous offer. For example,
after the buyer presents their first offer,
D
the seller may make a counter-offer with Debt: Money owed from one person or
a slightly higher sale price. institution to another person or institu-
tion.
Credit: The ability of a person to bor-
row money, or buy goods by paying Debt-to-Income Ratio: The percent-
over time. Credit is extended based on a age of gross monthly income that goes
lender’s opinion of the person’s financial toward paying for your monthly hous-
situation and reliability, among other ing expense, alimony, child support, car
factors. payments and other installment debts,
and payments on revolving or open-end-
Credit Bureau: A company that gath- ed accounts, such as credit cards.
ers information on consumers who use
credit. These companies sell that infor- Deed: The legal document transferring
mation to lenders and other businesses ownership or title to a property
in the form of a credit report.
Deed-in-Lieu of Foreclosure: The
Credit History: Information in the files transfer of title from a borrower to the
of a credit bureau, primarily comprised lender to satisfy the mortgage debt and
of a list of individual consumer debts avoid foreclosure. Also called a “volun-
and a record of whether or not these tary conveyance.”
debts were paid back on time or “as
Glossary
Deed of Trust: A legal document in cepts your offer, unless one of the sales
which the borrower transfers the title to contract contingencies is not fulfilled.
a third party (trustee) to hold as security
for the lender. When the loan is paid in Easement: A right to the use of, or ac-
full, the trustee transfers title back to cess to, land owned by another.
the borrower. If the borrower defaults on
the loan the trustee will sell the property Employer-Assisted Housing: A program
and pay the lender the mortgage debt. in which companies assist their employ-
ees in purchasing homes by providing
Default: Failure to fulfill a legal obliga- assistance with the down payment, clos-
tion. A default includes failure to pay on ing costs, or monthly payments.
a financial obligation, but also may be a
failure to perform some action or ser- Encroachment: The intrusion onto
vice that is non-monetary. For example, another’s property without right or per-
when leasing a car, the lessee is usually mission.
required to properly maintain the car.
Encumbrance: Any claim on a property,
Delinquency: Failure to make a pay- such as a lien, mortgage or easement.
ment when it is due. The condition of a
loan when a scheduled payment has not Equal Credit Opportunity Act (ECOA):
been received by the due date, but gen- A federal law that requires lenders to
erally used to refer to a loan for which make credit equally available without
payment is 30 or more days past due. regard to the applicant’s race, color, reli-
gion, national origin, age, sex, or marital
Depreciation: A decline in the value of status; the fact that all or part of the ap-
a house due to changing market condi- plicant’s income is derived from a public
tions or lack of upkeep on a home. assistance program; or the fact that the
applicant has in good faith exercised any
Discount Point: A fee paid by the bor- right under the Consumer Credit Protec-
rower at closing to reduce the interest tion Act. It also requires various notices
rate. A point equals one percent of the to consumers.
loan amount.
Equity: The value in your home above
Down Payment: A portion of the price the total amount of the liens against
of a home, usually between 3-20%, not your home. If you owe $100,000 on your
borrowed and paid up-front in cash. house but it is worth $130,000, you
Some loans are offerend with zero down- have $30,000 of equity.
payment.
Escrow: An item of value, money, or
Due-on-Sale Clause: A provision in a documents deposited with a third party
mortgage that allows the lender to de- to be delivered upon the fulfillment of
mand repayment in full of the outstand- a condition. For example, the deposit
ing balance if the property securing the by a borrower with the lender of funds
mortgage is sold. to pay taxes and insurance premiums
when they become due, or the deposit of
funds or documents with an attorney or
E escrow agent to be disbursed upon the
closing of a sale of real estate.
Earnest Money Deposit: The deposit to
show that you’re committed to buying Escrow Account: An account that a
the home. The deposit usually will not mortgage servicer establishes on behalf
be refunded to you after the seller ac- of a borrower to pay taxes, insurance
Glossary
premiums, or other charges when they Executor: A person named in a will and
are due. Sometimes referred to as an approved by a probate court to adminis-
“impound” or “reserve” account. ter the deposition of an estate in accor-
dance with the instructions of the will.
Escrow Analysis: The accounting that
a mortgage servicer performs to deter-
mine the appropriate balances for the
escrow account, compute the borrower’s
F
monthly escrow payments, and deter- Fair Credit Reporting Act (FCRA): A
mine whether any shortages, surpluses consumer protection law that imposes
or deficiencies exist in the account. obligations on (1) credit bureaus (and
similar agencies) that maintain consum-
Eviction: The legal act of removing er credit histories, (2) lenders and other
someone from real property. businesses that buy reports from credit
bureaus, and (3) parties who furnish
Exclusive Right-to-Sell Listing: The consumer information to credit bureaus.
traditional kind of listing agreement un- Among other provisions, the FCRA limits
der which the property owner appoints the sale of credit reports by credit bu-
a real estate broker (known as the list- reaus by requiring the purchaser to have
ing broker) as exclusive agent to sell the a legitimate business need for the data,
property on the owner’s stated terms, allows consumers to learn the informa-
and agrees to pay the listing broker a tion on them in credit bureau files (in-
commission when the property is sold, cluding one annual free credit report),
regardless of whether the buyer is found and specifies procedure for challenging
by the broker, the owner or another errors in that data.
broker. This is the kind of listing agree-
ment that is commonly used by a list- Fair Market Value: The price at which
ing broker to provide the traditional full property would be transferred between
range of real estate brokerage services. a willing buyer and willing seller, each
If a second real estate broker (known as of whom has a reasonable knowledge of
a selling broker) finds the buyer for the all pertinent facts and is not under any
property, then some commission will be compulsion to buy or sell.
paid to the selling broker.
Fannie Mae: A New York stock ex-
Exclusive Agency Listing: A listing change company. It is a public company
agreement under which a real estate that operates under a federal charter
broker (known as the listing broker) acts and is the nation’s largest source of
as an exclusive agent to sell the prop- financing for home mortgages. Fannie
erty for the property owner, but may be Mae does not lend money directly to
paid a reduced or no commission when consumers, but instead works to en-
the property is sold if, for example, the sure that mortgage funds are available
property owner rather than the listing and affordable, by purchasing mortgage
broker finds the buyer. This kind of list- loans from institutions that lend directly
ing agreement can be used to provide to consumers.
the owner a limited range of real estate
brokerage services rather than the tra- Fannie Mae-Seller/Servicer: A lender
ditional full range. As with other kinds that Fannie Mae has approved to sell
of listing agreements, if a second real loans to it and to service loans on Fan-
estate broker (known as a selling broker) nie Mae’s behalf.
finds the buyer for the property, then
some commission will be paid to the Fannie Mae/Freddie Mac Loan Limit:
selling broker. The current 2006 Fannie Mae/Freddie
Glossary
Mac loan limit for a single-family home Foreclosure: A legal action that ends
is $417,000 and is higher in Alaska, all ownership rights in a home when the
Guam, Hawaii, and the U.S. Virgin homebuyer fails to make the mortgage
Islands. The Fannie Mae loan limit is payments or is otherwise in default un-
$533,850 for a two-unit home; $645,300 der the terms of the mortgage.
for a three-unit home; and $801,950 for
a four-unit home. Also referred to as the Forfeiture: The loss of money, property,
“conventional loan limit.” rights, or privileges due to a breach of a
legal obligation.
Federal Housing Administration
(FHA): An agency within the U.S. De- Fully Amortized Mortgage: A mortgage
partment of Housing and Urban Devel- in which the monthly payments are de-
opment (HUD) that insures mortgages signed to retire the obligation at the end
and loans made by private lenders. of the mortgage term.
FHA-Insured Loan: A loan that is in-

sured by the Federal Housing Adminis-
tration (FHA) of the U.S. Department of
G
Housing and Urban Development (HUD). General Contractor: A person who
oversees a home improvement or con-
First Mortgage: A mortgage that is the struction project and handles various
primary lien against a property. aspects such as scheduling workers and
ordering supplies.
First-Time Home Buyer: A person with
no ownership interest in a principal Gift Letter: A letter that a family mem-
residence during the three-year period ber writes verifying that s/he has given
preceding the purchase of the security you a certain amount of money as a gift
property. and that you don’t have to repay it. You
can use this money towards a portion
Fixed-Period Adjustable-Rate Mort- of your down payment with some mort-
gage: An adjustable-rate mortgage (ARM) gages.
that offers a fixed rate for an initial
period, typically three to ten years, and Good-Faith Estimate: A form required
then adjusts every six months, annually, by the Real Estate Settlement Proce-
or at another specified period, for the dures Act (RESPA) that discloses an esti-
remainder of the term. Also known as a mate of the amount or range of charges,
“hybrid loan.” for specific settlement services the bor-
rower is likely to incur in connection
Fixed-Rate Mortgage: A mortgage with with the mortgage transaction.
an interest rate that does not change
during the entire term of the loan. Government Mortgage: A mortgage
loan that is insured or guaranteed by a
Flood Certification Fee: A fee charged federal government entity such as the
by independent mapping firms to identi- Federal Housing Administration (FHA),
fy properties located in areas designated the U.S. Department of Veterans
as flood zones. Affairs (VA), or the Rural Housing
Service (RHS).
Flood Insurance: Insurance that com-
pensates for physical property damage Government National Mortgage
resulting from flooding. It is required for Association (Ginnie Mae): A govern-
properties located in federally designated ment-owned corporation within the U.S.
flood hazard zones. Department of Housing and Urban De-
Glossary
velopment (HUD) that guarantees se- to an amount that represents a specified

curities backed by mortgages that are percentage of the borrower’s equity in
insured or guaranteed by other gov- the property.
ernment agencies. Popularly known as
“Ginnie Mae.” Home Inspection: A professional in-
spection of a home to determine the
Gross Monthly Income: The income condition of the property. The inspec-
you earn in a month before taxes and tion should include an evaluation of the
other deductions. It also may include plumbing, heating and cooling systems,
rental income, self-employed income, roof, wiring, foundation and pest infesta-
income from alimony, child support, tion.
public assistance payments, and re-
tirement benefits. Homeowner’s Insurance: A policy that
protects you and the lender from fire or
Ground Rent: Payment for the use of flood, which damages the structure of
land when title to a property is held as the house; a liability, such as an injury
a leasehold estate (that is, the borrow- to a visitor to your home; or damage to
er does not actually own the property, your personal property, such as your
but has a long-term lease on it). furniture, clothes or appliances
Growing-Equity Mortgage (GEM): Homeowner’s Warranty (HOW): In-

A fixed-rate mortgage in which the surance offered by a seller that covers
monthly payments increase according certain home repairs and fixtures for a
to an agreed-upon schedule, with the specified period of time.
extra funds applied to reduce the loan
balance and loan term. Homeowners’ Association: An organi-
zation of homeowners residing within a
particular area whose principal purpose
H is to ensure the provision and main-
tenance of community facilities and
Hazard Insurance: Insurance cover- services for the common benefit of the
age that compensates for physical residents.
damage to a property from fire, wind,
vandalism, or other covered hazards Housing Expense Ratio: The percent-
or natural disasters. age of your gross monthly income that
goes toward paying for your housing
Home Equity Conversion Mortgage expenses.
(HECM): A special type of mortgage
developed and insured by the Federal HUD-1 Settlement Statement: A final
Housing Administration (FHA) that listing of the closing costs of the mort-
enables older home owners to convert gage transaction. It provides the sales
the equity they have in their homes price and down payment, as well as the
into cash, using a variety of payment total settlement costs required from the
options to address their specific finan- buyer and seller.
cial needs. Sometimes called a “re-
verse mortgage.” Hybrid Loan: An adjustable-rate mort-
gage (ARM) that offers a fixed rate for
Home Equity Line of Credit an initial period, typically three to
(HELOC): A type of revolving loan, ten years, and then adjusts every six
that enables a home owner to obtain months, annually, or at another speci-
multiple advances of the loan pro- fied period, for the remainder of the
ceeds at his or her own discretion, up term.
10 Glossary
I you. Interest is usually expressed as a

percentage of the amount borrowed.
Income Property: Real estate developed Interest Accrual Rate: The percentage
or purchased to produce income, such rate at which interest accumulates or
as a rental unit. increases on a mortgage loan.
Index: A number used to compute Interest Rate Cap: For an adjustable-

the interest rate for an adjustable-rate rate mortgage (ARM), a limitation on the
mortgage (ARM). The index is generally amount the interest rate can change per
a published number or percentage, such adjustment or over the lifetime of the
as the average interest rate or yield on loan, as stated in the note.
U.S. Treasury bills. A margin is added to
the index to determine the interest rate Interest Rate Ceiling: For an adjust-
that will be charged on the ARM. This able-rate mortgage (ARM), the maximum
interest rate is subject to any caps on interest rate, as specified in the mort-
the maximum or minimum interest rate gage note.
that may be charged on the mortgage,
stated in the note. Interest Rate Floor: For an adjustable-
rate mortgage (ARM), the minimum in-
Individual Retirement Account (IRA): terest rate, as specified in the mortgage
A tax-deferred plan that can help you note.
build a retirement nest egg.
Investment Property: A property pur-
Inflation: An increase in prices. chased to generate rental income, tax
benefits, or profitable resale rather than
Initial Interest Rate: The original inter- to serve as the borrower’s primary resi-
est rate for an adjustable-rate mortgage dence. Contrast with “second home.”
(ARM). Sometimes known as the “start
rate.”
Inquiry: A request for a copy of your J

credit report by a lender or other busi-
ness, often when you fill out a credit Judgment Lien: A lien on the property
application and/or request more credit. of a debtor resulting from the decree of a
Too many inquiries on a credit report court.
can hurt your credit score; however,
most credit scores are not affected by Jumbo Loan: A loan that exceeds the
multiple inquiries from auto or mortgage mortgage amount eligible for purchase
lenders within a short period of time. by Fannie Mae or Freddie Mac. Also
called “non-conforming loan.”
Installment: The regular periodic pay-
ment that a borrower agrees to make to Junior Mortgage: A loan that is subor-
a lender. dinate to the primary loan or first-lien
mortgage loan, such as a second or third
Installment Debt: A loan that is repaid mortgage.
in accordance with a schedule of pay-
ments for a specified term (such as an
automobile loan). K
Interest: The cost you pay to borrow Keogh Funds: A tax-deferred retire-
money. It is the payment you make to ment-savings plan for small business
a lender for the money it has loaned to owners or self-employed individuals who
Glossary 11
have earned income from their trade or Loan Origination: The process by which
business. Contributions to the Keogh a loan is made, which may include tak-
plan are tax-deductible. ing a loan application, processing and
underwriting the application, and clos-
ing the loan.
L Loan Origination Fees: Fees paid to
Late Charge: A penalty imposed by the your mortgage lender or broker for pro-
lender when a borrower fails to make a cessing the mortgage application. This
scheduled payment on time. fee is usually in the form of points. One
point equals one percent of the mortgage
Lease-Purchase Option: An option amount.
sometimes used by sellers to rent a
property to a consumer, who has the op- Loan-To-Value (LTV) Ratio: The re-
tion to buy the home within a specified lationship between the loan amount
period of time. Typically, part of each and the value of the property (the lower
rental payment is put aside for the pur- of appraised value or sales price), ex-
pose of accumulating funds to pay the pressed as a percentage of the property’s
down payment and closing costs. value. For example, a $100,000 home
with an $80,000 mortgage has an LTV of
Liabilities: A person’s debts and other 80 percent.
financial obligations.
Lock-In Rate: A written agreement
Liability Insurance: Insurance coverage guaranteeing a specific mortgage inter-
that protects property owners against est rate for a certain amount of time.
claims of negligence, personal injury or
property damage to another party. Low-Down-Payment Feature: A feature
of some mortgages, usually fixed-rate
LIBOR-Index: An index used to deter- mortgages, that helps you buy a home
mine interest rate changes for certain with a low down payment.
adjustable-rate mortgage (ARM) plans,
based on the average interest rate at
which international banks lend to or
borrow funds from the London Inter-
M
bank Market. Manufactured Housing: Homes that
are built entirely in a factory in accor-
Lien: A claim or charge on property for dance with a federal building code ad-
payment of a debt. With a mortgage, ministered by the U.S. Department of
the lender has the right to take the title Housing and Urban Development (HUD).
to your property if you don’t make the Manufactured homes may be single-
mortgage payments. or multi-section and are transported
from the factory to a site and installed.
Lifetime Cap: For an adjustable-rate Homes that are permanently affixed to
mortgage (ARM), a limit on the amount a foundation often may be classified as
that the interest rate or monthly pay- real property under applicable state law,
ment can increase or decrease over the and may be financed with a mortgage.
life of the loan. Homes that are not permanently affixed
to a foundation generally are classified
Liquid Asset: A cash asset or an asset as personal property, and are financed
that is easily converted into cash. with a retail installment sales agree-
ment.
1 Glossary
Margin: A percentage added to the index Mortgage Insurance Premium (MIP):

for an adjustable-rate mortgage (ARM) to The amount paid by a borrower for
establish the interest rate on each ad- mortgage insurance, either to a govern-
justment date. ment agency such as the Federal Hous-
ing Administration (FHA) or to a private
Market Value: The current value of your mortgage insurance (PMI) company.
home based on what a purchaser would
pay. An appraisal is sometimes used to Mortgage Lender: The lender providing
determine market value. funds for a mortgage. Lenders also man-
age the credit and financial information
Maturity Date: The date on which a review, the property and the loan appli-
mortgage loan is scheduled to be paid in cation process through closing.
full, as stated in the note.
Mortgage Life Insurance: A type of
Merged Credit Report: A credit report insurance that will pay off a mortgage if
issued by a credit reporting company the borrower dies while the loan is out-
that combines information from two or standing; a form of credit life insurance.
three major credit bureaus.
Mortgage Rate: The interest rate you
Modification: Any change to the terms pay to borrow the money to buy your
of a mortgage loan, including changes to house.
the interest rate, loan balance, or loan
term. Mortgagee: The institution or individual
to whom a mortgage is given.
Money Market Account: A type of in-
vestment in which funds are invested in Mortgagor: The owner of real estate who
short-term securities. pledges property as security for the re-
payment of a debt; the borrower.
Mortgage: A loan using your home as
collateral. In some states the term mort- Multifamily Mortgage: A mortgage loan
gage is also used to describe the docu- on a building with five or more dwelling
ment you sign (to grant the lender a lien units.
on your home). It also may be used to
indicate the amount of money you bor- Multifamily Properties: Typically,
row, with interest, to purchase your buildings with five or more dwelling
house. The amount of your mortgage units.
often is the purchase price of the home
minus your down payment. Multiple Listing Service (MLS): A
clearinghouse through which member
Mortgage Broker: An individual or firm real estate brokerage firms regularly and
that brings borrowers and lenders to- systematically exchange information
gether for the purpose of loan origina- on listings of real estate properties and
tion. A mortgage broker typically takes share commissions with members who
loan applications and may process locate purchasers. The MLS for an area
loans. A mortgage broker also may close is usually operated by the local, private
the loan. real estate association as a joint venture
among its members designed to foster
Mortgage Insurance (MI): Insurance real estate brokerage services.
that protects lenders against losses
caused by a borrower’s default on a Mutual Funds: A fund that pools the
mortgage loan. MI typically is required money of its investors to buy a variety of
if the borrower’s down payment is less securities.
than 20 percent of the purchase price.
Glossary 1
N part of the financing for the buyer’s pur-

chase of the property.
Negative Amortization: An increase in Owner-Occupied Property: A property

the balance of a loan caused by adding that serves as the borrower’s primary
unpaid interest to the loan balance; this residence.
occurs when the payment does not cover
the interest due.
Net Monthly Income: Your take-home P

pay after taxes. It is the amount of
money that you actually receive in your Partial Payment: A payment that is less
paycheck. than the scheduled monthly payment on
a mortgage loan.
Net Worth: The value of a company or
individual’s assets, including cash, less Payment Change Date: The date on
total liabilities. which a new monthly payment amount
takes effect, for example, on an adjust-
Non-Liquid Asset: An asset that cannot able-rate mortgage (ARM) loan.
easily be converted into cash.
Payment Cap: For an adjustable-rate
Note: A written promise to pay a speci- mortgage (ARM) or other variable rate
fied amount under the agreed upon loan, a limit on the amount that pay-
conditions. ments can increase or decrease during
any one adjustment period.
Note Rate: The interest rate stated on a
mortgage note, or other loan agreement. Personal Property: Any property that is
not real property.
O PITI: An acronym for the four primary

components of a monthly mortgage
payment: principle, interest, taxes, and
Offer: A formal bid from the home buyer insurance (PITI).
to the home seller to purchase a home.
PITI Reserves: A cash amount that a
Open House: When the seller’s real borrower has available after making a
estate agent opens the seller’s house to down payment and paying closing costs
the public. You don’t need a real estate for the purchase of a home. The princi-
agent to attend an open house. pal, interest, taxes, and insurance (PITI)
reserves must equal the amount that the
Original Principal Balance: The total borrower would have to pay for PITI for a
amount of principal owed on a mortgage predefined number of months.
before any payments are made.
Planned Unit Development (PUD): A
Origination Fee: A fee paid to a lender real estate project in which individuals
or broker to cover the administrative hold title to a residential lot and home
costs of processing a loan application. while the common facilities are owned
The origination fee typically is stated in and maintained by a homeowners’ as-
the form of points. One point is one per- sociation for the benefit and use of the
cent of the mortgage amount. individual PUD unit owners.
Owner Financing: A transaction in Point: One percent of the amount of the

which the property seller provides all or mortgage loan. For example, if a loan
1 Glossary
is made for $50,000, one point equals Prepayment Penalty: A fee that a bor-
$500. rower may be required to pay to the
lender, in the early years of a mortgage
Power of Attorney: A legal document loan, for repaying the loan in full or pre-
that authorizes another person to act paying a substantial amount to reduce
on one’s behalf. A power of attorney can the unpaid principle balance.
grant complete authority or can be lim-
ited to certain acts and/or certain peri- Principal: The amount of money bor-
ods of time. rowed or the amount of the loan that
has not yet been repaid to the lender.
Pre-Approval: A process by which a This does not include the interest you
lender provides a prospective borrower will pay to borrow that money. The
with an indication of how much money principal balance (sometimes called the
he or she will be eligible to borrow when outstanding or unpaid principal balance)
applying for a mortgage loan. This pro- is the amount owed on the loan minus
cess typically includes a review of the the amount you’ve repaid.
applicant’s credit history and may in-
volve the review and verification of in- Private Mortgage Insurance: Insur-
come and assets to close. ance for conventional mortgage loans
that protects the lender from loss in the
Pre-Approval Letter: A letter from a event of default by the borrower. See
mortgage lender indicating that you Mortgage Insurance
qualify for a mortgage of a specific
amount. It also shows a home seller that Promissory Note: A written promise to
you’re a serious buyer. repay a specified amount over a speci-
fied period of time.
Pre-Qualification: A preliminary assess-
ment by a lender of the amount it will Property Appreciation: See “Apprecia-
lend to a potential home buyer. The pro- tion.”
cess of determining how much money a
prospective home buyer may be eligible Purchase and Sale Agreement: A docu-
to borrow before he or she applies for a ment that details the price and condi-
loan. tions for a transaction. In connection
with the sale of a residential property,
Pre-Qualification Letter: A letter from the agreement typically would include:
a mortgage lender that states that you’re information about the property to be
pre-qualified to buy a home, but does sold, sale price, down payment, earnest
not commit the lender to a particular money deposit, financing, closing date,
mortgage amount. occupancy date, length of time the offer
is valid, and any special contingencies.
Predatory Lending: Abusive lending
practices that include making mort- Purchase Money Mortgage: A mortgage
gage loans to people who do not have loan that enables a borrower to acquire
the income to repay them or repeatedly a property.
refinancing loans, charging high points
and fees each time and “packing” credit
insurance onto a loan.
Q
Prepayment: Any amount paid to re- Qualifying Guidelines: Criteria used to
duce the principal balance of a loan determine eligibility for a loan.
before the scheduled due date.
Glossary 1
Qualifying Ratios: Calculations that are but are generally not involved in the
used in determining the loan amount lending process.
that a borrower qualifies for, typically
a comparison of the borrower’s total Real Estate Settlement Procedures
monthly income to monthly debt pay- Act (RESPA): A federal law that requires
ments and other recurring monthly lenders to provide home mortgage bor-
obligations. rowers with information about transac-
tion-related costs prior to settlement, as
Quality Control: A system of safeguards well as information during the life of the
to ensure that loans are originated, un- loan regarding servicing and escrow ac-
derwritten and serviced according to the counts. RESPA also prohibits kickbacks
lender’s standards and, if applicable, the and unearned fees in the mortgage loan
standards of the investor, governmental business.
agency, or mortgage insurer.
Real Property: Land and anything
permanently affixed thereto — including
R buildings, fences, trees, and minerals.
Radon: A toxic gas found in the soil Recorder: The public official who keeps
beneath a house that can contribute to records of transactions that affect real
cancer and other illnesses. property in the area. Sometimes known
as a “Registrar of Deeds” or “County
Rate Cap: The limit on the amount an Clerk.”
interest rate on an adjustable-rate mort-
gage (ARM) can increase or decrease Recording: The filing of a lien or other
during an adjustment period. legal documents in the appropriate pub-
lic record.
Rate Lock: An agreement in which an
interest rate is “locked in” or guaranteed Refinance: Getting a new mortgage with
for a specified period of time prior to all or some portion of the proceeds used
closing. See also “Lock-in Rate.” to pay off the prior mortgage.
Ratified Sales Contract: A contract Rehabilitation Mortgage: A mortgage

that shows both you and the seller of loan made to cover the costs of repair-
the house have agreed to your offer. This ing, improving, and sometimes acquiring
offer may include sales contingencies, an existing property.
such as obtaining a mortgage of a cer-
tain type and rate, getting an acceptable Remaining Term: The original number
inspection, making repairs, closing by a of payments due on the loan minus the
certain date, etc. number of payments that have been
made.
Real Estate Professional: An individual
who provides services in buying and Repayment Plan: An arrangement by
selling homes. The real estate profes- which a borrower agrees to make ad-
sional is paid a percentage of the home ditional payments to pay down past due
sale price by the seller. Unless you’ve amounts while still making regularly
specifically contracted with a buyer’s scheduled payments.
agent, the real estate professional rep-
resents the interest of the seller. Real Replacement Cost: The cost to replace
estate professionals may be able to refer damaged personal property without a
you to local lenders or mortgage brokers, deduction for depreciation.
1 Glossary
Rescission: The cancellation or annul- Second Mortgage: A mortgage that has

ment of a transaction or contract by a lien position subordinate to the first
operation of law or by mutual consent. mortgage.
Borrowers have a right to cancel certain
mortgage refinance and home equity Secondary Mortgage Market: The mar-
transactions within three business days ket in which mortgage loan and mort-
after closing, or for up to three years in gage-backed securities are bought and
certain instances. sold.
Revolving Debt: Credit that is extended Secured Loan: A loan that is backed by
by a creditor under a plan in which property such as a house, car, jewelry,
(1) the creditor contemplates repeated etc.
transactions; (2) the creditor may im-
pose a finance charge from time to time Security: The property that will be given
on an outstanding unpaid balance; and or pledged as collateral for a loan.
(3) the amount of credit that may be ex-
tended to the consumer during the term Securities: Financial forms that shows
of the plan is generally made available to the holder owns a share or shares of a
the extent that any outstanding balance company (stocks) or has loaned money
is repaid. to a company or government organiza-
tion (bonds).
Right of First Refusal: A provision in
an agreement that requires the owner Seller Take-Back: An agreement in
of a property to give another party the which the seller of a property provides
first opportunity to purchase or lease financing to the buyer for the home pur-
the property before he or she offers it for chase. See also “Owner Financing.”
sale or lease to others.
Servicer: A firm that performs servicing
Rural Housing Service (RHS): An functions, including collecting mortgage
agency within the U.S. Department of payments, paying the borrower’s taxes
Agriculture (USDA), which operates a and insurance and generally managing
range of programs to help rural commu- borrower escrow accounts.
nities and individuals by providing loan
and grants for housing and community Servicing: The tasks a lender performs
facilities. The agency also works with to protect the mortgage investment,
private lenders to guarantee loans for including the collection of mortgage
the purchase or construction of single- payments, escrow administration, and
family housing. delinquency management.
Settlement: The process of complet-

S ing a loan transaction at which time the
mortgage documents are signed and
Securities: A financial form that shows then recorded, funds are disbursed, and
the holder owns a share or shares of a the property is transferred to the buyer
company (stock) or has loaned money to (if applicable). Also called closing or es-
a company or government organization crow in different jurisdictions. See also
(bond). “Closing”
Sale-Leaseback: A transaction in which Settlement Statement: A document

the buyer leases the property back to that lists all closing costs on a consumer
the seller for a specified period of time. mortgage transaction.
Glossary 1
Single-Family Properties: One- to Third-Party Origination: A process by

four-unit properties including detached which a lender uses another party to
homes, townhouses, condominiums, and completely or partially originate, pro-
cooperatives, and manufactured homes cess, underwrite, close, fund, or pack-
attached to a permanent foundation and age a mortgage loan. See also “Mortgage
classified as real property under appli- Broker.”
cable state law.
Title: The right to, and the ownership
Soft Second Loan: A second mortgage of, property. A title or deed is sometimes
whose payment is forgiven or is deferred used as proof of ownership of land.
until resale of the property.
Title Insurance: Insurance that pro-
Servicemembers Civil Relief Act: A tects lenders and homeowners against
federal law that restricts the enforce- legal problems with the title.
ment of civilian debts against certain
military personnel who may not be able Title Search: A check of the public re-
to pay because of active military service. cords to ensure that the seller is the le-
It also provides other protections to cer- gal owner of the property and to identify
tain military personel. any liens or claims against the property.
Subordinate Financing: Any mortgage Trade Equity: Real estate or assets

or other lien with lower priority than the given to the seller as part of the down
first mortgage. payment for the property.
Survey: A precise measurement of a Transfer Tax: State or local tax payable

property by a licensed surveyor, show- when title to property passes from one
ing legal boundaries of a property and owner to another.
the dimensions and location of improve-
ments. Treasury Index: An index that is used
to determine interest rate changes for
Sweat Equity: A borrower’s contribution certain adjustable-rate mortgage (ARM)
to the down payment for the purchase of plans. It is based on the results of auc-
a property in the form of labor or ser- tions by the U.S. Treasury of Treasury
vices rather than cash. bills and securities.
Truth-In-Lending Act (TILA): A fed-

T eral law that requires disclosure of a
truth-in-lending statement for consumer
Taxes and Insurance: Funds collected credit. The statement includes a sum-
as part of the borrower’s monthly pay- mary of the total cost of credit, such as
ment and held in escrow for the pay- the annual percentage rate (APR) and
ment of the borrower’s, or funds paid by other specifics of the credit.
the borrower for, state and local prop-
erty taxes and insurance premiums. Two- to Four- Family Property: A
residential property that provides liv-
Termite Inspection: An inspection to ing space (dwelling units) for two to
determine whether a property has ter- four families, although ownership of the
mite infestation or termite damage. In structure is evidenced by a single deed;
many parts of the country, a home must a loan secured by such a property is
be inspected for termites before it can be considered to be a single-family mort-
sold. gage.
1 Glossary
U
Underwriting: The process used to de-
termine loan approval. It involves evalu-
ating the property and the borrower’s
credit and ability to pay the mortgage.
Uniform Residential Loan Applica-

tion: A standard mortgage application
you will have to complete. The form
requests your income, assets, liabilities,
and a description of the property you
plan to buy, among other things.
Unsecured Loan: A loan that is not

backed by collateral.
V
Veterans Affairs (U.S. Department
of Veterans Affairs): A federal govern-
ment agency that provides benefits to
veterans and their dependents, includ-
ing health care, educational assistance,
financial assistance, and guaranteed
home loans.
VA Guaranteed Loan: A mortgage loan

that is guaranteed by the U.S. Depart-
ment of Veterans Affairs (VA).
W
Walk-Through: A common clause in a
sales contract that allows the buyer to
examine the property being purchased
at a specified time immediately before
the closing, for example, within the 24
hours before closing.
Warranties: Written guarantees of the

quality of a product and the promise to
repair or replace defective parts free of
charge.
Federal Trade Commission

ftc.gov
Castle Arch Lease-To-Own Income Fund: Executive Summary, March 3, 2009
12
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CASTLE ARCH

REAL ESTATE INVESTMENT COMPANY

A user guide to understanding

Contract and Close

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1. Introduction who got rich in real estate and

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2. Real Estate Value price and value. These distortions

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condition. When we talk about the critical events leading up to the

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the like to people with bad credit. of foreclosures started gaining

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Steps for Investing In Distressed Property

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5. Start With Financing and a Ask yourself, how much rehab

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ball and is under pressure to pass it.

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Figure 1: HOW PROPERTIES BECOME BANK REO

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Banks do not usually initiate

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newspapers under their Public Notice

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go through when foreclosing or trying and deceptive marketing practices.

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to weigh the cost of an inspection structural damage or exterminators for

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concession in price that truly reflects You need to be aware of any

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Although not a guarantee, this The neighbors’ driveways were full

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generally over 120 days, without 12. Valuing Income Property

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Rental property valuation then as anything more than a simple rule

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into Microsoft Excel, or another our NPV example, we used a 10%

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In fact, investment companies often the Modified Internal Rate of Return

example (Figure 8) uses Excel to

This example (Figure 9) shows

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13. How Much to Offer? estate starts with a motivated seller,

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to underscore the importance, I will

Buyer’s Brokerage ___________ Phone:_