Have a question about buying foreclosures? This is the place to find answers.
Question: I’m having a hard time finding a good foreclosure deal. No matter what I do, it seems like either the auction is too close, or someone else is already working with the homeowner.
Answer: No doubt, the most challenging part of buying real estate, in general, is first finding a good deal. It is very competitive out there in the foreclosure world, however, there are some things you can do to help improve your chances. First, let people in foreclosure come to you. Make some flyers, magnets for your car, signs you can post in your yard, anything to let people know you can help them avoid foreclosure. Second, get the listing of Notices of Default as soon as they become available. Then begin knocking on doors, you will be surprised what this will do for you. Lastly and most importantly, you need to get others (bird doggers) working for you. This is by far the best way to find deals. You are only one person… to really take your foreclosure game to the next level, you have to find a way to multiply yourself. Get agents involved. They can be one of your best resources, especially if you set it up the right way.
Question: I feel like I’m taking advantage of someone in foreclosure if I try to buy their home at a discount.
Answer: Believe you me, when you do this enough, with the right attitude, they will thank you over and over again. You are here to help these homeowners figure out the best way to avoid foreclosure. If that means you lose a few deals because you suggest they contact their bank to work it out, then so be it. Since you are the foreclosure expert now, therefore, you must work with these homeowners with the right attitude and approach so you do not take advantage of them.
Question: I still don’t understand how I can buy foreclosures or any kind of real estate without any money. Especially if I have bad credit or a bankruptcy.
Answer: You just have to be more creative with your financing. That is the great part about real estate, you can control property with very little money. One technique that works well is called “Subject To”, or taking over a property subject to existing financing. So instead of applying for a loan the conventional way where they check your credit, debt to income ratios, and so on, you can take over the monthly payments and sell the house before it goes to auction. Or you can keep it as a “rent to own” and make a monthly cash flow. It’s kind of like assuming a loan, except you are not paying points, loan fees, and so forth.
Another option is to use transactional funding. Transactional funding is used when you’ve negotiated a deal with the bank and plan on doing a back to back closing but doesn’t have the money or good credit to fund the deal. The money is used to fund the transaction between the seller and you and then between you and your end buyer. You’ll have to pay a few points, however, you’d have to pay the same amount anyway if you were to fund it yourself… this way you’re never at risk because it’s not your money. It works very smooth.
Question: Is it true banks can call a loan due if the title is transferred to someone else without the lender’s consent?
Answer: Yes, the lenders have the option of calling the entire loan due, (due-on-sale clause) but rarely ever do. Here is why: Banks are in the lending business. They make money by lending money to you. As long as someone is making payments to them, they most likely will not call the loan due. The only time you really need to worry about lenders calling loans due is if interest rates went up dramatically. For example, if the previous owner was locked in at 6%, and interest rates have climbed to 12%, you can bet most banks want the higher interest rate and more than likely they would call the loan due just so you would have to refinance with them. So, can it happen, yes? Will it happen, most likely not?
Question: I have a property with two mortgages a 1st and a 2nd, with the 2nd it is upside down by at least 10-15,000 dollars, there is a divorce, high-interest rates and a need to sell, they are not in foreclosure, have not missed a payment but really can’t afford to make payments, I do not want subject to because of the loan is upside down and the high-interest rate, will the bank consider a short sell if they are not behind in payments?
Answer: No, why should they. The homeowner has agreed to pay the mortgage company x amount of dollars. If the loans are current, they are not going to discount the property. It would be like you lending a friend $100,000 and then this friend who has been paying you back, asks if you will forgive $30,000 just to be nice. Maybe you would, but the banks want their money. It’s the agreement you’ve made with them. They only discount real estate if they think it’s a win for them.
Question: I went to an auction. The house had 3 mortgages on it. The holder of the 3rd mortgage was foreclosing. The amount due was $100,000.00. The first and second mortgages totaled $200,000.00. The bidding was $250,000.00. Which mortgage gets paid first. Does the buyer owe $250,000 or $300,000?
Answer: At any auction, whoever is in 1st position will always get paid first. If there are any unpaid property taxes, those will also get paid. Whatever money is left over from paying off the 1st mortgage will now go towards paying off the junior lien holders. You can learn more about lien priority on our blog. Lien Priority.
Here is where you have to be careful. In some states, whoever is foreclosing has the option of starting the auction out at whatever they are owed. Then the high bidder has to pay off any senior lien holders. So if the 3rd is foreclosing and the opening bid is $100,000 and you bid, then you are responsible to pay off the 1st and 2nd. That is why you always have the title checked before you ever bid or you will get what you asked for.
Let’s hope this auction included all the loans. If not, someone will be very unhappy they have to pay $450,000 for a property worth $250,000. If it included all the lien holders, then yes, the high bidder only owes $250,000. Then the 3rd lien holder, since they did not receive the full amount that was owed, have the option of filing a deficiency judgment against the homeowner for the deficient amount. Or they can 1099 the homeowner and count the loss as income towards the homeowner.
Question: I purchased your course and so far I am completely satisfied. Though I am learning many things on my own, I have found some essential information in your material. I have one question for you. I read where you talk about buying second mortgages before the auction. What does the first lien holder do when the 2nd mortgage is sold? And why buy 2nd mortgages if there is a 1st mortgage or can you negotiate with the 1st lien holder to accept a discount?
Answer: The only time you buy the 2nd mortgage is when you plan to foreclose everyone else off who is junior to you. In some cases, you may come across a property that you know will sell for full price at the auction.
If you buy the 2nd at a discounted price the opening bid is the full amount. So if someone bids you get paid very well. Yes, you can negotiate a short sale with the 1st as well. Here is an article that may clarify this.
-Foreclosure University Newsletter Article –
By now you should have a good understanding of lien priority. I showed you an example a few weeks ago of how lien priority works and the importance of it. Not knowing who is senior or junior or who is initiating the foreclosure process, can cost you thousands of dollars. Today, I’m going to show you just the opposite. I’m going to show you how to make money using lien priority.
Using the example from 2 weeks ago, what if I approached the 2nd and offered them $4000 for their $60,000 mortgage? Can I do that? Absolutely. Here is how it works. You have a few options. If you have the deed which I talked about a few months ago, you want to use the first 2 options.
1- The lender can satisfy that mortgage for a specific amount of money. Meaning I agree to pay them x amount of dollars, in this case, $4000 for their $60,000 mortgage. This is considered now to be “Paid in full”. They cannot go after the borrower for a deficiency judgment. It shows up as paid in full and no longer exists.
2- They can also release the lien. Meaning I agree to pay the lender $4000 and they release their lien. They have given up their secured interest in the property but still retain the rights to go after the seller to collect the deficient amount. So if I pay them $4000 to release the lien, this means the loan has not been paid in full so they have the right to go after the borrower for a deficiency judgment of $56,000.
3- Now here is where it gets creative. Another option I have is to buy the mortgage. So I offer to buy the 2nd mortgage for $4000. This is called an assignment. Now that I own it, I can foreclose. So the only time you want to buy the mortgage is when your intentions are to foreclose everyone else off. You don’t want a satisfaction because then you wouldn’t be able to foreclose. The loan is paid off. So if I buy the 2nd mortgage for $4000, then I foreclose, the opening bid is the full amount. So if someone bids, I will make $56K. Not to bad for a few hours of work. I don’t have to ever own the property, therefore I don’t have to take out a loan which means anyone can do this. Right? Well, what if no one bids? Then you are responsible to pay off the Senior lien holders. From our example a few weeks ago, there was a 1st for $250K +$15K arrears. So we have to come up with $265K plus don’t forget the property taxes which are $5K + $4K that we pay to the 2nd. So we are into this property for $274K. But everyone else is wiped out. So you may have a house worth $350K you just picked up for $265K. I would hope you could sell it no problem for a profit.
I already know what some of you are saying. How am I going to come up with $265K if no one bids? Well, the good news is you don’t. If you own the 2nd, then foreclose and no one bids, as long as you are keeping the 1st current on mortgage payments, you don’t have to come up with $265K. More than likely, they won’t even know you foreclosed. So you now treat this like a “subject to” deal.
Could I do this to those in 3rd position or 4th position? Yes. As long as there is equity and I’ve done the research, ABSOLUTELY. So if there is a judgment in the 3rd position which you buy, you can foreclose everyone else off who is junior to you. However, you are still responsible to pay those senior to you in this case the 1st and 2nd lien holders. This can be very creative.
Question: Hi, I understand about the finding and everything. My main problem is financial support because you need financial approval from some mortgage companies that said they’re going to back you in this purchase. I read all about you don’t need credit, but can’t see proof of that notion. There are numerous amounts of foreclosures and a short sale is hard from my point of view. I personally have a few foreclosures in my book. If you can give an idea what to do it will be very thankful.
Answer: This is a great question. You are not the first to run into this. The best way, that I have found, especially if you have bad credit and no money is to use someone else’s money. Most banks will require proof of funds. You can do this 2 ways… If you have a rich family member who trusts you and you know what you are doing, have him put your name on his bank account and there you go… proof of funds if or when you need them. The 2nd way is to use funding from a 3rd party. There are several places you can get this type of funding for your deals and they will provide you with a proof of funds letter. All they require is that you have your end buyer lined up so they can do a back to back closing.
There are also a few ways to do this if you are a seasoned investor with superior credit. 1. Many times if you have a relationship with a mortgage officer, just tell them how much you need and they can write you a pre-approval letter. If you don’t have this relationship, you will need to verify proof of funds. I know some investors make up their own pre-approval letters, however, I wouldn’t advise this. 2. The other way is to tell the lender the funds are coming from a private source. This would be a hard money lender, private money, etc. Now, the only thing I would tell you is to make sure you have funding ready just in case you can’t find an end buyer and the discounts you received are good enough to buy the property and hold long term. They just want to know you are a serious buyer.
Question: I tried to sell my property in FL but the bank would not short sale. I have 2 mortgages on the property. I was planning on foreclosing as I’m no longer able to pay the mortgage. I received a letter from a collections agency who stated the 2nd mortgage would not be in foreclosure and I would have to pay. Is that true? Why wouldn’t it foreclose? Is bankruptcy the better option? Not to mention would I be responsible for back taxes?
Answer: First of all, don’t give up on the Short Sale. As time goes on, banks become more motivated. We just did one where they postponed the auction 3 times because they didn’t want to foreclose. We were having a challenge getting the 2nd to release their lien because they didn’t like our low offer, but was finally approved. So, don’t give up on the short sale.
The Collection Agencies are trying to get something rather than nothing. They want to settle with you or agree on some terms so they can get paid. Most of these collection agencies will play very hard and scare you into believing the only option is to pay them or they’ll come after you. It is true that the 2nd mortgage can sue or file a judgment against you for the amount they lost and they will use that scare tactic against you. However, it is not very common because it costs more money and ultimately if the homeowner can’t pay, they just file bankruptcy which wipes out the judgment altogether. So the bank ends up losing more money… Not very smart unless they believe you have a bunch of assets. If you can settle, then settle, just make sure it is a very very low amount… I’m talking no more than 5% to 6% of the original loan or less if that’s all you have. They won’t like that and they’ll keep threatening you, so you’ll have to tell them you were advised by your attorney to file bankruptcy because that’s all you have and if you go this route they won’t see a dime. You have to play hard too. If you plan on filing bankruptcy anyway, then you don’t have to worry about the 2nd unless you file a chapter 13 where you agree to pay a portion of all your debts, most people don’t qualify for a chapter 13 in this situation though. I wouldn’t worry about your back taxes either.
Bankruptcy, in my opinion, should be a last resort. Pay if you can pay. If you can’t, then you can foreclose and wait to see if the 2nd is going to file a judgment. If they do, then you have the option of filing bk.
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