Secrets to Foreclosure Investing E-book

8/9/2019 Secrets to Foreclosure Investing E-book

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Pre-Foreclosure Solutions

Secrets To Foreclosure, Probate And The Flip &

Fixer upper Markets"

How you can do it, common sense for the common man

Knowledge is POWER, POWER to the people!

Real Options and Solutions Real Estate Investorscan use to Profit from the Foreclosure Market.

By Charles Galan


2/93

Introduction; Foreclosure is the most misunderstood real estate market inour business. It is portrayed by the media and Internet "Gurus" as an easytarget of opportunity. Their programs are filled with promises for a fast buckbased on slick schemes for separating troubled owners from their property,and their equity. Foreclosure is actually one of the most competitive marketsin real estate acquisition, and results in the greatest failure rate for theinexperienced investor.

What the Guru's never tell you is that more than 90% of all properties indefault never reach the court house steps. These properties are eitherrefinanced or sold by conventional means, pre-foreclosure agreements, orshort sale acquisition methods. However, the beauty of the foreclosuremarket is that it opens very profitable revenue streams even if the investornever completes one purchase, and presents a "gold mine" of opportunity for

those who understand how this market really works.

You must first understand the property owner's state of mind. Many propertyowners fall prey to the feeling of helplessness when faced with economicstress, and simply give up and walk away forsaking their equity. Foreclosureis generally the result of a complete emotional and financial collapse, andthe property is only one of many personal and financial concerns. Often thevalue of the property is simply lost amidst the confused mind set of theowner. Adding to the owner's confusion is the many offers they get fromlenders, real estate consultants and buyers when their property is reported in

default. Because of this you will find owners in default are generally veryresistant and almost impossible to contact. There are very few ways tosuccessfully approach defaulting owners during this emotionally chargedperiod when they are in fast retreat, and deep under cover. Therefore, youwill succeed only if you can open their door when no one else can.

The key to unlocking the door is empowerment. Not yours, but theirs.Success in the foreclosure market is not found by "fooling" the homeowner,or moving faster than the competition, but begins by establishing a

relationship based on trust. Properly understanding the homeowner's legaland lender mandated workout options forms the foundation for all successfulforeclosure practitioners. The pros begin by learning these rules, and thenskillfully apply their knowledge as they establish the needed level ofproperty owner trust that separates them from the competition.

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"Workout Strategies For The Foreclosure Professional" is the foundationfor all successful foreclosure practitioners. This publication has been draftedfrom the official guidelines established by the Federal National MortgageAssociation (FNMA), and is the basis for the loan mitigation policies ofvirtually all home mortgage lenders throughout the United State and Canada.Once available at considerable cost, this publication is no longer available tothe general public. These guidelines outline the rules for delinquencyresolution and foreclosure workout, and are essential to understanding howthe foreclosure market works, and your place as a foreclosure professional inthe process.

If you would like to be a highly successful participant in the foreclosuremarkets begin by embracing this vital resource as the starting point for yourfuture success. Once you have acquired an understanding of these rules you

will be well on your way to becoming a solid professional, and a clearstandout among the competition.

However, this is only the starting point. You will then need to develop a planto effectively communicate with the property owner in a manner that clearlyestablishes you as an ally rather than an adversary. If you will take the timeto learn the rules established by the Guide To Foreclosure, Probate & theWholesale Markets" your Mentor will create a high velocity business planusing the special tools developed by Real Estate Investment Forum thatopens the door every time, and you will become the star of a market filled

with inept competition.

Preface The foreclosure market and the "flip" and "fixer" markets, which wewill henceforth refer to as the wholesale market, are highly integrated sinceeach can be separate, or the same. More to the point a foreclosure prospectmay also represent a fix and flip opportunity. While we will introduce themseparately, if you are planning to work in these markets it will be necessaryto think of them as interchangeable. Additionally, since you are making areal estate investment you must extend the appropriate investment theory

and practice to the reality of foreclosure and wholesale markets with adetailed look at the structure of a successful real estate investment and theimpact of clearly defined planning objectives that reach far beyond thepurchase decision leading you to a successful and profitable conclusion

Foreclosure & Probate What applies to foreclosure generally applies toprobate. Hopefully, the purists won't hold our feet to the fire. We are just

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trying to keep it simple. Both foreclosure and probate are governed by localstatute and a matter of public record. Probate occurs when the owner of realproperty dies intestate, or fails to make trust provisions. While much is madeof probate as a target of opportunity for the investor seeking below marketopportunities most of the real sizzle has been removed by effective andefficient use of estate preservation techniques such as the "Living Trust" toshelter recipients from the kind of destructive taxation which results in theliquidation of assets in probate to pay estate taxes. Additionally, court andestate appointed trustees are formidable "gatekeepers" for the heirs making itdifficult to purchase probate property profitably. However, once you havebecome familiar with foreclosure acquisition techniques you will find theyare interchangeable with probate requirements.

Public And Private The foreclosure market consists of the a public

(government) market made up primarily of the Department of Housing andUrban Development (HUD) under which the Federal HousingAdministration (FHA) operates, and the Veterans Administration (VA)which administers housing benefits for qualifying veterans. It also includesthe sale of real property by other government agencies such as theGovernment Services Administration (GSA), and the Resolution TrustCorporation (RTC) established in 1889 by the Federal Government todispose of property received from the failed chartered members of thesavings and loan associations. The private market consists of all otherproperties. The foreclosure process is quite different for each of thesemarkets and offers quite different possibilities.

A property in default is not likely to go directly to foreclosure. Before thatoccurs it is offered to the market and sold at market price thereby relievingthe owner of the debt. There is also a procedure known as "deed in lieu offoreclosure" in which the property is voluntarily surrendered to the lienholder. Many home owners select this option when they must relocate andthe property's debt exceeds the resale value. Owners of commercial propertyopt for this solution when they can no longer support the property due to

insufficient income, or when overcome by management problems. Theseproperties are then added to the lender's REO inventory. The remainder ofthe foreclosure market winds up on the court house steps. If after the manyhours of investigation, travel and inspection you wind up there too, you willnot be alone. For beside the secured and unsecured creditors will be all theother foreclosure "trekies" that have been beating a wide path down the

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foreclosure trail. By the way, take cash, and plenty of it, because they do notaccept American Express.

Now, once your breathing and pulse rate have returned to normal, andassuming you are prepared to accept these realities, you can now moveahead with the focus and resolve required to be successful in the privateforeclosure market. And, trust us when we say that many have been verysuccessful in this market, and you can be too.

The Process Foreclosure in the private market is not an event, but aprocess. It is a process that can work to the advantage of those seeking toplay the foreclosure market as well as those being foreclosed upon. Whilethe processes for public and private foreclosure share certain similarities thedifference occurs in the order and manner of the events. As with any process

it has a beginning (Pre Foreclosure), a middle (The Auction) and an end(Sale, Or REO). Before the auction, at the auction and after the auction.Each is a distinct phase of the process offering specific alternatives andopportunities. The principle deference between public and privateforeclosure is in the rules of the auction and the absence of the REO. If youare pursuing the foreclosure market you should explore each phase. As youlearn more about the foreclosure process you are likely to demonstrate apreference for that part of the process which best suits your personality andskill set.

The Purpose Foreclosure is an efficient process by which a lien holder ofreal property may recover money owed by the property owner in the eventthe owner defaults on a promise or pledge made for the beneficial interest ofa person, or entity, providing money, or services, on behalf of the owner ofthe property. Two legal instruments are commonly used to create the debtand recognize the obligation. The instrument used to establish an agreementbetween the parties is commonly referred to as a note. The note defines theworking relationship between the owner of the property and the lien holder.It provides for the amount of the loan, terms of repayment and procedures to

be instituted in the event of foreclosure. It is the agreement between theparties. A second instrument is prepared and recorded in the county wherethe property is located. This instrument provides the security for the loan andconstructive public notice as evidence of the debt. This security instrumenttakes the form of a trust deed or a mortgage. The foreclosure procedure isnot only generically different for both, but the specific procedure and theinstrument used differ from state to state. Since it would be impractical to

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attempt a review of all the states procedures, it is important that you becomefamiliar with laws effecting foreclosure action in your state. The best way isto obtain a copy the standard form mortgage or deed of trust, used in yourarea which will include the statuary language for the foreclosure action.These documents can be obtained from a local title or escrow company, andtheir representatives are available to explain the foreclosure language indetail. We also recommend that you invest whatever is required to have alocal attorney review the details and protocol for the foreclosure action inyour state.

The Procedure In many states mortgages are used as the recorded securityinstrument for the debt while a deed of trust is used in others. In a few statesboth the mortgage and deed of trust is used. When using a mortgage theprocedure begins following default when the lender files a local law suit

which initiates a judicial foreclosure. Upon judgment a sale is ordered.Following the sale there may be a redemption period during which time theborrower may recover the property by repaying the loan and related costs ofthe foreclosure proceedings. This redemption period may be as short as 21days and as long as one year. When a deed of trust is used as the recordedsecurity agreement there are a number of parties involved. The borrowercalled the trustor, the lender referred to as the beneficiary and a third partyknown as the trustee who records the deed of trust and acts on behalf of thebeneficiary. In the event of default the trustee records a notice of default(NOD), and is empowered by the "power of sale clause" contained in thedeed trust to foreclose on behalf of the beneficiary without the need to file alaw suit. This is known as a non-judicial foreclosure since it is completedwithout judicial intervention. The table below summarizes the procedure forboth the mortgage and deed of trust.

Filing ForForeclosure

Reinstatement The Sale Transfer

MortgageLender fileslawsuit

From 21 days toone year

Courtordered sale

Sheriffsdeed

TrustDeed

Beneficiaryrecordsa notice ofdefault

Much shorter.90 to 180 days

Trustee saleTrusteeDeed

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COLORADO 5 NEW MEXICO 5

CONNECTICUT 6 NEW YORK 10

DELAWARE 7 NEW JERSEY 10

DISTRICT OFCOLUMBIA

4 NORTH DAKOTA 4

FLORIDA 7 OHIO 8

GEORGIA 3 OKLAHOMA 7

GUAM 11 OREGON 5

HAWAII 7 PENNSYLVANIA 9

IDAHO 9 PUERTO RICO 12

ILLINOIS 10 RHODE ISLAND 3

INDIANA 9SOUTHCAROLINA

6

IOWA 7 SOUTH DAKOTA 4

KANSAS 4 TENNESSEE 3

KENTUCKY 7 TEXAS 2

LOUISIANA 6 UTAH 5

MAINE 10 VERMONT 10

MARYLAND 5 VIRGINIA 4

MASSACHUSETTS 5 VIRGIN ISLANDS 10

MICHIGAN 3 WASHINGTON 5

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MINNESOTA 4 WEST VIRGINIA 4

MISSISSIPPI 4 WISCONSIN 10

MISSOURI 3 WYOMING 3

Rule #1 "Avoid the auction whenever possible." The most successfulpractitioners in the foreclosure market are skilled problem solvers that assistthe property owner in obtaining relief from a difficult financial andemotional situation before the property goes to auction, while purchasing theproperty at a price that insures a profitable outcome. This requires specificsolicitation and negotiation skills that take time to perfect. If the propertysells at auction the process and the outcome will be dictated by the system

and offers little or no advantage even if you are the only bidder.

Rule #2 "Purchase from the lender if you can". If Rule #1 fails and youcan't purchase the property at auction on your terms prepare for theopportunity to purchase from the lender (REO) if it is not purchased at bid.There are a number of circumstances under which this can be done and eachwill be covered under Buying from the lender.

Rule #3 If Rule #1 has failed, and before you get to Rule #2, you may haveto invoke Rule #3. "When buying at auction plan your work and work your

plan". Since the foreclosure process often involves a great deal ofuncertainty it requires that you begin with the assumption that the propertywill go to auction. Preparing for the auction, therefore, becomes the firstorder of business. Your preparation is also essential to the PreforeclosureandREO phase.

PreForeclosure

When most people hear the words foreclosure investing, they immediatelythink of an auction sale on the steps of the courthouse. Yes, it is true thatinvestors can buy properties at bargain prices at foreclosure auctions. Butc'mon, that is super risky!

In addition to needing a considerable amount of cash, you must also be veryskilled at searching title for any and all liens and encumbrances that may berecorded against the property. Many of these liens might not be wiped out by

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the foreclosure action, which means you could be bidding on debt thatexceeds the quick-sale value of the property and not even know it! I suredon't have the stomach for that game. Buying homes at the foreclosureauction can be a dangerous and costly game. But hold on, us little guys canstill make the big score if we know .... "The Foolproof Secret!" The trulyamazing opportunity is in pre-foreclosure prospecting!

Pay attention now, because this is almost too good to be true! In most states,the foreclosure process must start with a published notice, sometimes calledthe "notice of default". This is the official and legal notice to thehomeowner that he is in default on some aspect of the mortgage or trust deedcontract and the mortgage holder intends to take action against him. 99% ofthe time it means the homeowner has missed at least two loan payments.Wow, and double WOW!

Did you catch that? In a publication of general circulation, there willappear a list of those facing foreclosure (notice of default) and the listingwill contain the name and address of the person in default. It is as ifsomebody is waving a flag in your face signaling that "Here is where youfind super bargain properties". Look how easy ...

You locate where these foreclosure notices are published or filed. (I'll showyou how.) This will give you a daily list of distressed homeowners. Thenyou use my exclusive system for persuading these homeowners to listen toyour offer of help. Yes, you can help them with this plan! Stay with me andyou'll get to the fun part.

"Everybody Wins" Deals!"

The accepted philosophy in dealing with distressed homeowners is to strivefor a deal that will benefit both of us. Yes, I am trying to make a profit and Imake no secret of that, but I refuse to fleece the owner in the process.

You must understand that the distressed homeowner is about to have aforeclosure on his credit record for the next ten years or so. This will makeany credit he is able to get in the future very expensive. He's broke, hasrotten credit and his nerves are shot. Let's not kick him when he's down.

You come galloping onto the scene with an honest desire to try and

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minimize his financial pain. You will be armed with many clever ways tooffer help. (You will quickly learn these.) You probably can't save himcompletely, but you might be able to help him save-face and even make itpossible for him to leave the property voluntarily with some cash in hispocket.

Getting Started It is particularly important when working in theforeclosure market that you approach the proposed purchase with acompletely unbiased assessment of the true market potential of the propertyyou are considering. The process of locating and identifying the value of aproperty, therefore, becomes the first order of business. We will look first atthe various sources for obtaining property information.

Legal Notice Lenders are required to publish foreclosure action in a local

newspaper. This is the fastest way to locate a qualifying property and begina game plan. The notice will include the name of the lender, the person(s) orentity against whom the action is taken, the location, date of the auction andany other information required by local jurisdiction. These notices appear inmost every newspaper each day and present immediate opportunities toventure into the foreclosure market.

Check the Legal Notice section of your newspaper. Locate a foreclosurenear your home and preview the property. This is your first visit to anactionable property so start developing a precision approach to property

inspection. Take pictures of the site and the surrounding area. If you do nothave a digital camera, now would be a good time buy one. These camerasare relatively inexpensive and essential to creating the computer file you willbe using later. This is not the time to speak with the occupant, or becomeintimately involved with the physical aspects of the property. Obtain asmuch information about the area as you can assume you have no previousfamiliarity. Contact the local police department. Ask about complaints andservice calls dispatched to the area. Make an assessment of local retailactivity. Find a local real estate agent that will provide you with a market

valuation of the property and rental information. Most agents will be eagerto work with you in anticipation of building a business relationship. Rewardyour agents work with your loyalty. If you are not willing to accept thoserelationships dont ask for the service. Then begin to evaluate your interestin this property based solely on location considerations.

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Foreclosure Consultants Look for the opportunity to create relationshipswith local foreclosure consultants These consultants includes centers ofinfluence such as attorneys, accountants, real estate professionals andforeclosure specialists that provide a variety of services intended for thebenefit of the property owner from conducting workshops to packagingexpensive workout solutions. Many of their clients will continue on toforeclosure. A well developed relationship may provide an inside trackduring the Preforeclosure process.

Bankruptcy & Probate Probate and bankruptcy sales are a potential sourcefor below market transactions since they sometimes occur outside theconventional marketing mainstream. A probate sale is used to settle estatematters. Bankruptcy can precipitate into foreclosure, and it is often used as ameans of obtaining additional time by delaying a foreclosure action.

Foreclosure Lists In the past you located foreclosure lists from whateversource was available. Local newspapers, referrals from a title company orreal estate attorney and others active in the foreclosure industry. But todaythe .com has become an important resource. After all, that's how you foundthis site. So, search the web first. At any time you are likely to find severalsites that offer a foreclosure list for your area. However, these lists are oftenout of date before you receive them due to the labor intensive maintenancerequirements as well as the short life expectancy of their usefulness. Beforepurchasing any list, be sure to sample the content first. Ask the publisher for

the most recent list compiled for your geographical area of interest.Remember, one list has no recurring value so the publisher should be happyto provide you with a list for validation. Particularly if it is good list offeringauction, lender and contact information at competitive prices. However,before investing in expensive lists learn something about the process in yourarea first.

A quality foreclosure list will be very expensive. Before considering thispurchase go to the local court house and determine how foreclosure,

bankruptcy and probate information is reported. Constructive notice of theprocedure will be in the form of a recorded lawsuit if a mortgage is used, orthe filing of a notice of default (NOD) for a deed of trust. Review the NOD'sand the bankruptcy and probate filings. Start in the recorders office and workyour way through the building until you are satisfied that you know how andwhen timely information is available. The court house clerks are an excellent

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source of information for locating list providers and other foreclosurepractitioners since they are frequent visitors to the court house offices.

Overview This section provides the process of going from Preforeclosure toREO. While you may enter the process at any time each of these steps, andaccompanying check lists, provide the foundation for making an accurateand well informed purchase decision.

Market Analysis If you have diligently worked through the recommendedfield exercises you are now comfortable with the court house bureaucracy,and you have found a real estate agent and at least one property of interestbased on location. Ask your real estate agent to obtain aMarket Analysis fora property you have selected. If you haven't located a property use yourhome, or the home of a friend. The Market Analysis is a standard marketing

tool used by real estate agents in every community and made availablewithout charge to realtors by local title and escrow companies. Thesereports contain important information about the property and include vestingconfirmation, liens of record and a plot map showing the physical features ofthe site. Your agent will complete theAnalysis by including the most recentsales data for comparable properties in the neighborhood.

Physical Inspection Establishing value will be determined by your intentfor the property's use. If your intent is to occupy the property your purchaseconsiderations will be quite different than if you plan to invest with tenant

occupancy. However, no matter what your intent the first priority is tocomplete a physical inspection of the property site. This is also the time totake a personal inventory of your particular home improvement skills. Sinceforeclosure implies the possibility of distress it is important to evaluate theextent to which you are capable and willing to participate in the repair andimprovement requirements of the property. Your ability, and the extent towhich you can participate in the needed work, will often determine theprofitability if you are purchasing for investment. The following check listprovides for both inspection comments and estimated cost of repair. They

may not include all the inspection items for the property you are inspecting.So, be sure to carefully annotate these forms as required.

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EXTERIORCOST OFREPAIR

ROOF /TYPE $

SIDING $

PAINT $

GUTTERS & DOWN SPOUTS $

WINDOWS $

FENCING $

PATIO/WALKS/DRIVE $

LANDSCAPING $

OTHER $

OTHER $

OTHER $

LIVING AREASCOST OFREPAIR

WALLS & PAINT $

WINDOWS/COVERING $

FLOOR COVERING $

DOORS & TRIM $ELECTRICAL $

OTHER $

OTHER $

OTHER $

KITCHEN COST OFREPAIR

WALLS & PAINT $

WINDOWS/COVERING $

FLOOR COVERING $

DOORS & TRIM $

ELECTRICAL $

APPLIANCES $

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CABINETS $

COUNTER TOP $

SINKS/FIXTURES $

OTHER $OTHER $

OTHER $

BATHSCOST OFREPAIR

WALLS & PAINT $

WINDOWS/COVERING $

FLOOR COVERING $

DOORS & TRIM $

ELECTRICAL $

CABINET $

COUNTER TOP $

SINKS/FIXTURES $

TUB/SHOWER ENCLOSURE $

OTHER $

OTHER $OTHER $

SERVICESCOST OFREPAIR

ELECTRICAL $

HEATING/TYPE/BTU $

AIR CONDITIONING/LOAD $

PLUMBING $

POOL/SPA $

INCOMPLETE OR UNINSTALLED PROPERTY SERVICES $

OTHER $

OTHER $

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bonding requirement the contractor will probably require a license in yourstate.

INSURED/BONDED: Verify that the contractor can post a completionbond and provide the necessary liability and property damage insurance for

all employees, subcontractors and materialmen while working on yourproperty.

RESUME: Obtain client references and visit property sites where thecontractor has completed work.

THE CONTRACT: Most contracting services should employee some kindof written contract. It may be as simple as a short handwritten agreement, ora complex legal document that even a Philadelphia attorney would notunderstand. You should also consider developing your own for thosesituations where none exists.

MECHANIC LIENS: It is extremely important that you understand what amechanic's lien is, its purpose and how it benefits all parties. This statutorylien recorded by contractors and materialmen providing labor or material forthe purpose of effecting repairs or improvements to real property isrecognized by statute to protect these contractors since they are providingservices that maintain or improve the value of property, and thereforedeserving of priority recognition if they are not paid as agreed by theproperty owner. These laws vary in each state and are usually created whenthe contractor records the contract and begins upon commencement of work

. These laws protect subcontractors as well. Therefore, if the contractorintends to subcontract any part of the work to be performed your contractmust insure, and protect, payments to be made to all others in order to avoidlien disputes with subcontractors. Be sure you understand the law in yourstate, and the means by which a mechanics lien is removed.

Income Proforma Factors With the exception of a single family home thepresent and future value of an income producing property has little to dowith the conventional notion of appreciation. If it is your intent to seek

foreclosure opportunities in the multi-family or commercial markets youshould understand certain investment fundamentals. The Income & ExpenseSummary andDecision Model used here are reproduced directly from our"Real Estate Investment Guide And Field Reference Manual". Thesespreadsheet illustrations represent a 28 unit apartment building. While youropportunities in the foreclosure market will most likely involve considerablysmaller buildings the wholesale market will offer a broad range of apartment

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and commercial opportunities. The Income & Expense Summary andDecision Model can be easily constructed to any scale, and by understandingthe more complex business decisions relating to a larger property you will bein a much better position to make a more informed decision on smallerproperties.

"Income properties are bought and sold based on the strength anddurability of the current and future value of the "Net Operating

Income". The Net Operating Income, or NOI, is the Gross ScheduledIncome (GSI) after all operating expenses including vacancy and bad debt.Write this down. Read it every day. This is the linchpin in the real estateinvestment pendulum. Your grip on the driver. If you ever lose sight of thismost critical fundamental it is essential that you step back, regrip and re-establish your target line with this concept, once again, firmly in mind.

"A Property Management Primer" The Income & Expense Summary isthe focal point for the analysis, valuation and selection process. Review thisillustration and the construction in detail. The field explanations provide asolid foundation in the fundamentals of property management. Constructyour own for properties you are considering. Then compare your Summarywith the statement offered by the broker, or owner. Is the GSI actual income,or is it based on market income, commonly referred to as effective rents. Payparticular attention to the representation of vacancy and maintenanceexpenses. Compute the GRM of the offering price based on your Summary.

Does your computed value compare favorably with the recent sale ofcomparable properties in the same market. Keep in mind that comparablemeans a similarity in condition, location and square footage of the rentalunits.

Locate a competent broker with experience in the field of investment realestate. Ask that he, or she, review your data along with the contents of thispresentation and validate your observations. Your broker may disagree withsome of the theory expressed here. Perhaps strongly. If so, it probably means

they are knowledgeable, and a valuable resource worthy of your trust.

A Decision Model The Income & Expense Summary provides the means ofevaluating the data associated with the property's day-to-day performance.This data having been prepared and validated by the investor can then beinserted into a decision model for the purpose of creating a defined futureexpectation. The model can take any form necessary with respect to the

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investor's particular objective. Decision models can be created for suchthings as tax shelter analysis, evaluating competing investments, buy vs.lease, sale leaseback and real estate exchange planning to mention just afew. Most investors, however, are primarily interested in the future incomestream and potential growth of their initial investment.

The Cash Flow And Capital Gain Projection is an analytical tool createdfor this purpose. It is very important to become familiar with this illustrationsince the analysis further refines the data fields of the Income & ExpenseSummary, and all the analysis that follows builds carefully on the principlescontained in this model. Use the data form your Income & ExpenseSummary to construct a decision model for the property. Build your ownspreadsheet. You may have to brush up on some of the math required.Experiment with different kinds of data fields and their location . You will

find this a particularly useful exercise for the development of more complexinvestment models later. When you are finished evaluate the outcome. Is itmore, or less, than your expectations for this property. If it is lessexperiment with changes to price, down payment, expenses and financingparameters. Observe how changes in the data fields affect the Cash FlowAnd Capital Gain Projection. When you reach an outcome consistent withyour expectations determine if you can realistically effect the neededchanges in the data. If your requirements have certain tax implications itwould be advisable to have your accountant assist in the construction of youmodel..

These illustrations provide the simple basics for validating real estateinvestment decisions. Many important questions often go unanswered in thequest to enter an investment environment that continues to produceextraordinary wealth, and the process has become considerably morecomplicated. Structuring the transaction, establishing value and removingthe confusion about the best available financing now requires expertprofessional guidance to stay ahead of the competition. Even the mostinexperienced real estate investor often finds this to be a daunting task, but

an extraordinary opportunity is ahead for those willing to learn how thelarger game is played. We believe that for those of you seeking to create alarge estate in real property the "Real Estate Investment Guide And FieldReference Manual "will be the catalyst for your success. This presentationwill provide the foundation necessary to select the property that meets yourpurchase and management objective. Beginning with the fundamentals it

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moves ahead into advanced purchase, exchange and refinance modelingessential for long term success.

As a real estate investor you will need more than just property knowledgeand management skill to be successful. You will need an inventory ofcontracts and forms, and you will need to be adept in their use.Unfortunately many people in this industry view the paperwork as anecessary evil. So much "psychobabble" to satisfy the suits sitting in thestate capitol, or as a means of protection from the attorneys downtown withtheir hands poised on the meter. Much of this attitude has been precipitatedby laws throughout the country deemed to be particularly pro tenant. Whilethis is probably true, even in your area, it has come about primarily as theresult landlord abuse. And like any suppressed minority tenants formedunions and associations to protect their rights. But remember, the same law

that protects the tenant also provides the property owner with strict andpredictable management guidelines. And, if you choose to view your legallymandated requirements as the first step towards positive tenant relations youwill find, believe it or not, that it will add real value to your property.

Purchase Offer Strategy You have found a property you would like to buy.You have worked out an Income & Expense Summary, constructed aDecision Model and you are ready to prepare the Contract. If you arepurchasing a property with long term investment implications then it is very

important that you understand the principles of "Refinance and ExchangeTheory & Practice" and the construction of the "Property Presentation,Refinance and Exchange Models" contained in the Real Estate InvestmentGuide And Field Reference Manual .

During the many years of our experience one observation remainsconsistent. Prospective Buyers and Sellers often alienate the offering andacceptance process in an attempt to maintain an edge. Control the highground. The Offer, instead should be thought of as the beginning of a

relationship not unlike the first date, or a job interview. This is not the timeto become defensive, Nor, for that matter, is there ever a time to beovercome by self doubt and insecurity. Instead, this is the perfect time tohumanize the process and the principals. This could, in fact, be one of themost important business relationships you will ever create. The Seller mayhave a large portfolio of properties that he might be willing to share withyou in the future. He, or she, may be needed to provide transition assistance

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after the close of escrow. The brokers offer valuable marketing services,investment insight and control virtually all the property information in theinvestment market. These are not people with whom you want an adversarialrelationship. Instead, seek to create an environment based on courtesy, trustand mutual respect.

Contingencies Contingencies control the pace and outcome of thetransaction. Contingencies have little relevance to Preforeclosure and

Auction strategy, but are critical to the REO and Wholesale market. Thetypical purchase offer will could include a broad range of contingencies.Generally, however they refer to three primary considerations. Financing,inspections and close of escrow.

Financing Most of the preparation for the removal of this contingency

can be done prior to the offer. It is important that as the buyer you determinethe primary sources of apartment and commercial financing. There will notbe that many competitive sources located in any geographical area. Whilethere may be a large number of mortgage brokers specializing in commercialfinancing you will soon discover that each is corresponding with the samecore group of lenders. The only difference among the brokers will be therefee and experience. Each lender will have an array schedule of financingprograms with varying terms. Each will have certain underwriting practices.And each will be more, or less, competitive at any particular point in timedepending upon budget, commitment and reserve requirements. It isimportant that you contact these lenders while in the process of developingthe Income & Expense Summary and Decision Model. They can completemuch of the work associated with qualifying you and the property duringthis process. Then, when preparing the Purchase Offer any prequalificationcan be included so that the time required to remove this contingency can beshortened. This will add exceptional credibility to the offer both from thestandpoint of the Seller and the Lender. It will also provide a distinctadvantage should there be competing offers that are not as well prepared.This will be your first opportunity to establish respect for your knowledge

and preparation in the minds of all the principals.

Inspections Needed or required inspections are too numerous to mention.The usual inspection contingencies are contained in the sample Offer. Othersarise from local practice and law. It is particularly important that allinspections requiring a vendor's service be ordered immediately afteracceptance, or upon recognition of the need. Unfortunately vendors have a

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reputation for being slow, and notoriously unresponsive and independentwhen busy. Inspection reports may also need to be supplemented either bythe reporting vendor, or with a second party vendor. Be absolutely sure thatyour Purchase Offer provides for the time required to complete anysupplementary or added contingencies based on the requirement to obtainadditional reports. Continue to build your vendor list for propertymanagement. Start with the property owner's list. These vendors are alreadyfamiliar with the property's unique requirements. A dependable vendor thatprovides quality work and competitive pricing is hard to find and oftendifficult to maintain. Start your list early and maintain it carefully.

Close Of Escrow (COE) You may not get to the close of escrow if you failto comply with the contingency requirements of the Purchase Offer. EachOffer will specify the manner by which the contingency related provisions

will be removed and acknowledged. Be sure that you understand themethods agreed upon. Many a Seller has pulled the rug from under anunsuspecting Buyer in favor of a better backup offer for failing to remove acontingency in the time required, or in the manner agreed upon. ManyPurchase Offers provide for either active or passive removal ofcontingencies. We recommend the active option. This helps to insure thatyou remain focused on the details, thereby keeping the rubber on the road. Inaccordance with the Purchase Offer the close of escrow occurs not later thana specified date, or on a date pursuant to a specified event. Good strategydictates that you attempt to create the COE as a contingency as well.Contingent upon the removal of all other contingencies made a part of theOffer. It is sometimes difficult to get agreement on this provision. Generally,however the escrow is extended automatically if there remain unsatisfiedconditions and both parties are in compliance. If you are in an exchangeyour facilitator will provide closing instruction that will protect you in theevent your exchange property is closing later than expected. Finally becertain that your broker, or a third party, is granted the authority to extendthe close of escrow in the event you are unavailable on the date agreed upon.

The Lease Agreement The tenant lease is a contract in which the propertyowner actually conveys, or transfers, certain property rights to the tenant inthe form of a leasehold. This is a particularly sensitive document due to thenature of the landlord/tenant relationship referred to earlier, and shouldalways be constructed based on current local law. A generic form shouldnever be used. As a property owner it is imperative that you be thoroughlyfamiliar with the landlord/tenant laws in your state. These laws are generally

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found in the Civil and Business and Professions codes, and may be easilylocated on your state's web site. We strongly recommend that all forms andcontracts related to tenant management be obtained from your local board ofrealtors. Most Realtor Associations provide the property management formsthat have been written and approved by the Associations attorney's forcompliance with current law. Use them.

Lease Strategy The lease is not only an important legal document it formsthe basis of your future relationship with the tenant. Other than the initialinterview and the date of installation, the lease forms the most lastingimpression of your management style and commitment. Consider thefollowing supplements to your lease.

If your state prohibits a late fee, provide an incentive for earlypayment and establish a date. Provide the tenant with addressed andstamped envelopes.

Require that routine communication be by FAX or E-mail. Provide anemergency phone number assigned to a pager, or cell phone. Nevergive the tenant your home phone, or address. Provide a list ofemergency vendors for times that you are away. Or, arrange forreciprocal property management with a neighboring property owner.

Schedule periodic safety inspections. This serves more than onepurpose. It enables you to identify unreported maintenance problems

before they become serious, and to discover lifestyle issues that maycreate a property hazard or pose risk to other tenants.

Provide a clearly stated policy converting payment options to cash,money order or certified check in the event of chronic late payment ora written notice to pay. Never customize a payment plan to suit thetenant, or as a solution for the tenant's cash flow problems.

State a committed policy for an unlawful detainer action.(eviction)Once initiated it will not be terminated. Better to be wrong thanuncertain. Once the tenant has been lost to eviction it rarely pays to

chase the debt.

Getting The Good Tenant

Property Preparation

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Resist the temptation to minimize vacancy by showing the propertybefore it has been vacated, or properly prepared. Never show aproperty before it is ready for occupancy.

Prep each unit as though it is for sale. Your preparation effort will live and die with the condition of window

and floor covering. Paint all units the same color. If your property is energy efficient use it as a selling point.

Marketing

Comprehensive newspaper ads create the largest pool of prospectivetenants and reduces the time required to introduce the property.

Do not make appointments to show property. Schedule a day and timethe property will be available for preview and include this informationin the ad.

Do not promote questionable features and benefits. Avoid puff andyour honesty will be rewarded in the savings of time and appropriateapplicants.

Tenant Application

The Tenant Application can take any form. The basic rule is getting as muchinformation as you can. Construct your own and revise as you gain

experience. The important elements include Personal information, formerresidence, employment (current and previous), banking and automobileinformation. Never approve an application without a credit check,employment verification and a reference from a previous landlord. Youcannot discriminate based on race, or national origin. You can discriminatebased on financial considerations relating to your opinion of the applicant'sability to pay the rent, or in preference to another applicant. Be very, verycareful if there are no other applicants at the time of a denial, and use a formletter approved by your attorney. Most states will allow a non-refundableapplication fee. It's your call. We suggest you retain the fee with applicationto the first months rent if approved. Then, when the tenant is approved, andthe lease is signed, get all the money the law will allow.

Recommended Forms These forms are offered as illustrations only. If youchoose to use any of them be sure they are in compliance with your laws.

Statement Of Condition

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(MOVE IN / MOVE OUT) STATEMENT OF CONDITION

AddressUnit/Apartment#

Occupant(s)Date

When completing this form, check the Premises carefully, and be specific inall items noted. Use additional paper, if necessary.

SMOKE DETECTOR(S) has (have) been tested on MOVE-IN, and found tobe operative, except: ( ) INITIAL

LIVING ROOM AND DINING ROOM ITEMS: doors, locks, carpeting,

floors, baseboards, walls, ceiling, electrical fixtures, electrical switches andoutlets, windows coverings, windows, screens, and other it

MOVE-IN CONDITION (DATE)

MOVE-OUT CONDITION (DATE)

KITCHEN ITEMS: floors, baseboards, walls, ceiling, electrical fixtures,electrical switches and outlets, cook top oven, hood and fan, refrigerator,plumbing fixtures, sink, disposal, cabinets, counters, window coverings,windows, screens, and other items:


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Received (Date) Occupant's Initials ( ) () Page of Pages

NO REPRESENTATION IS MADE AS TO THE LEGAL VALIDITY ORADEQUACY OF ANY PROVISION IN ANY SPECIFIC

TRANSACTION. A REAL ESTATE BROKER IS THE PERSONQUALIFIED TO ADVISE ON REAL ESTATE TRANSACTIONS. IF

YOU DESIRE LEGAL OR TAX ADVICE, CONSULT AN

APPROPRIATE PROFESSIONAL.

Page (2)

AddressUnit /Apartment#

BEDROOM ITEMS: doors, lock, carpeting, floors, baseboards, walls,ceiling, electrical fixtures, electrical switches and outlets, window coverings,windows, screens, closet, closet doors and tracks, and other items:

BEDROOM 1



BEDROOM 2

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BEDROOM 3



OTHER ITEMS/AREAS: (if applicable) Entry door and window locks,heating and air conditioning, equipment, patio or balcony, yard areas,fencing, garage or carport, and



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YOU DESIRE LEGAL OR TAX ADVICE, CONSULT ANAPPROPRIATE PROFESSIONAL.

Page (3)

AddressUnit/Apartment#

BATHROOM ITEMS: doors, locks, carpeting or flooring, baseboards,walls, ceiling, electrical fixtures, electrical switches and outlets, windowcoverings, windows, screens, tub or shower, shower door or curtain, toilet,sink, medicine cabinet, counter, towel racks, fan, and other items:

BATHROOM 1



BATHROOM 2


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MOVE-IN:

The Move-In Inspection of the Premises was performed on (date)Receipt of a copy of the Statement of Condition is acknowledged by:

Occupant (s)Date

Landlord /AgentDate

MOVE-OUT

The Move-Out Inspection of the Premises was performed on (date)Receipt of a copy of the Statement of Condition is acknowledged by:

Occupant (s)Date

Landlord /AgentDate



TRANSACTION. A REAL ESTATE BROKER IS THE PERSON

QUALIFIED TO ADVISE ON REAL ESTATE TRANSACTIONS. IFYOU DESIRE LEGAL OR TAX ADVICE, CONSULT ANAPPROPRIATE PROFESSIONAL.

Notice To Pay Or Quit

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| Contents |

NOTICE TO PAY RENT OR QUIT

To:

and all subtenants and any other occupants in possession of the premiseslocated at (street address)

(unit/apartment#)

City State zipcode ("Premises").

WITHIN THREE DAYS from service of this Notice you are required toeither (i) pay rent for the Premises in the following amount, which is pastdue, or (ii) vacate the Premises and surrender possession.

Past Due Rent: $ for the periodto

And:

Total Due: $

If you do not pay the past due amount or give up possession, a legal actionwill be filed seeking not only damages and possession, but also a statutorydamage penalty for an additional $ Landlord declares a forfeitureof the lease if past due rent is not paid and you continue to occupy the

Premises. As required by law, you are hereby notified that a negative creditreport reflecting on your credit record may be submitted to a credit reportingagency if you fail to pay your rent.

Landlord (Owner or Agent)Date

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YOU DESIRE LEGAL OR TAX ADVICE, CONSULT ANAPPROPRIATE PROFESSIONAL.

Notice Of Termination

| Contents |

THIRTY-DAY NOTICE OF TERMINATION OFTENANCY

To:

and all subtenants and any other occupant in possession of the premiseslocated at (street address)

(unit/apartment #)

(City) (state) (zipcode) ("Premises").

Your tenancy, if any, in the Premises is terminated thirty days from serviceof this Notice, or on (whichever is later).

If you fail to give up possession by that date, a legal action will be filedseeking possession and damages which could result in a judgment beingawarded against you.

Landlord (Owner or Agent)Date

(Keep a copy for your records.)


TRANSACTION. A REAL ESTATE BROKER IS THE PERSONQUALIFIED TO ADVISE ON REAL ESTATE TRANSACTIONS. IFYOU

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DESIRE LEGAL OR TAX ADVICE, CONSULT AN APPROPRIATEPROFESSIONAL.

Before we discuss foreclosure strategy this is a good opportunity tounderstand something about the loan process and how a mortgage comesinto existence. For the borrower it probably seems very straight forward. Goto the bank, complete the application, endure the qualifying andunderwriting procedure, close the loan and move in. For the lender,however, the process is far more compelling.

Banks and savings & loan associations make real estate loans from moneyon deposit. The high cost of property in many developing areas of thecountry creates a demand for real estate loans which exceeds deposits, andthe money loaned needs to be replaced in order to maintain the required

reserves and operating capital. Most mortgage money is made available bylarge institutional investors outside California and include large banks,pension funds, mortgage REIT's and publicly traded investment pools suchFannie Mae, Ginnie Mae and Fredie Mac. These investors demand aguaranteed yield and timely placement of their investment. The guarantee isprovided in the form of a "commitment" by participating banks and S & L's,also known as correspondents. Each commitment promises the delivery of apackage of loans in a specific amount and having a defined average yieldand maturity. In exchange for the commitment the correspondent willrecover the money loaned and profit from fees and other costs charged to the

borrower. Each loan in the package must be underwritten in accordancewith strict guidelines and delivered by a specific date. Failure to deliver thecommitment, or late delivery, results in severe financial penalties along withthe risk of being removed as an approved correspondent. The lender oftenacts as the loan servicing agent by receiving the payment from the borrowerand transmitting the proceeds to the investor, or beneficiary. The lender alsocreates a separate corporation to act as the trustee for the beneficiary if thesecurity instrument is a trust deed. You will recall that in the event of defaultby the borrower the trustee forecloses on behalf of the beneficiary

and, depending on the contract, the lender could wind up with both the loanand property if there is no sale at auction. It is precisely for this reason youwill usually find the lender eager to provide information regarding theproperty and the procedures for foreclosure.

Before we discuss foreclosure strategy this is a good opportunity tounderstand something about the loan process and how a mortgage comes

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Preforeclosure Many property owners fall prey to the feeling ofhelplessness when faced with economic stress and simply give up and walkaway forsake their equity. This is particularly true of government financedproperties. You might ask why they dont just sell. Foreclosure is generallythe result of a complete financial collapse and the property is only one ofmany personal and financial concerns. Often the value of the property issimply lost amidst the confused mind set of the owner. Adding to theowner's confusion is the many offers they get from lenders, consultants andbuyers when their property is reported in default. Because of this you willfind owners in default generally resistant to contact. Therefore, it most likelythat you will succeed as a bargain hunter in the Preforeclosure market basedon your patients and intuitive skills when communicating with owners infinancial distress.

There are many ways to creatively approach defaulting owners during thereinstatement period. Your efforts will be extraordinarily empowered,however, if your strategy is to offer assistance and guidance rather thanemploying any approach that may appear to be adversarial or predatory.Many very successful buyers begin by offering financial assistance bysupplying proceeds secured by a mortgage or trust deed that reinstates theloan providing temporary financial relief for the owner. Investment in a noteis not the strategy here but many specialize in this form of financial returnvery profitably. It is also another way of acquiring the property if the ownershould default again since as a mortgage holder the investor will have apreferred, and secured, position at auction. This is a particularly attractivestrategy since more than 80% of all loans in default are reinstated, usuallywith a financing solution.

The reverse of this process is to purchase with an owner carry. This workswhen the buyer agrees to reinstate all conditions in default and gives theowner a mortgage, or deed of trust to secure their equity. This can be anespecially attractive solution for the owner since it solves the problem andcreates an added income stream at the same time. The buyer may either take

the existing loan(s) subject to the existing terms, or create new financing.While there are still a few conventional loans that may be taken "subject to"the existing terms and conditions, they are very, very, rare. Actually, theyare very, very, very, rare. Many conventional loans can be "assumed" (Notethat we say assumed and not taken) subject to the existing terms, but thebuyer must qualify pursuant to the lenders rules and pay an assumption fee.Some real estate investment gurus promote the notion that loans taken will

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often be ignored if detected by the lender. While this is sometimes true anyassumption technique which ignores the lenders assumption requirements,including those which we will recommend, risks immediate acceleration ofthe loan balance. Private financing can provide an an exceptionalforeclosure solution and the Aggressive Strategies section includes a broadrange of special techniques for implementing an owner financed purchase.

Getting Your Message To The Owner When contacting the owner becareful not to intrude into their personal space. Calling or appearing at theproperty without an invitation is not the best way to build the personal trustthat will have to develop. These methods of contact should be deferred to atime when you have more experience, or as a means of obtaining a veryquick settlement if that is your objective. Keep in mind that your goal is tobe placed ahead of all the others attempting to get the attention of the owner.

The most efficient and reliable means of communicating your intent to theowner, whether a foreclosure or the wholesale prospect covered later, is byuse of a post card. Unlike solicitation letters which are rarely opened, a postcard is always read, and much more time and cost efficient to deliver. It isthe "perfect" tool. Consider the following message.

Dear Property Owner:

I buy and finance houses. If you would like to sell or refinance your housequickly without paying a sales commission, or high loan fees, please contact

me. I can also recommend ways in which you may enjoy added income froma sale.

Your NameYour Phone Number

This message is short and to the point. It offers the property owner optionsfor immediate relief without embarrassment, or humiliation. Unless youwant to completely destroy your credibility with the owner do not make anyreference to default or foreclosure which would reveal the owner's situationto the outside world and uninformed family members. This card is for thesole purpose of getting an invitation to the property. When contacted by theowner do absolutely nothing more than establish a meeting time. Neverdiscuss price, terms or the value of the property. Never! The easiest way toavoid this discussion is by explaining that you "cannot confirm your interest,or offer any honest opinion without first completing a preview of the

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property". And, guess what? That is absolutely true. If the owner will notgive you an appointment without some confirmation of price thank him forthe reply and propose the possibility of follow-up in the future. By supplyingpurchase information you are providing the owner with the means tocompete with other offers and to exclude you. Do not get caught in thisinescapable trap.

"A Short Course In Sales"

This is a particularly difficult and confusing time for the owner. Althoughyour letter does not disclose that you are aware of the situation, yourknowledge will be a foregone conclusion. Your ability to get an appointmentwith the owner will be based on the time tested principle of successful sales.Trust. First, the owner must trust you. The owner is ashamed, humiliated

and consumed by fear. He will agree to meet with you only if he believesthat his vulnerability is safe in your hands. Be prepared for the propertyowner's response. Have a plan intended to reinforce your credibility as alegitimate buyer, and that it sincerely communicates you desire to providethe needed assistance.

Second, the owner must trust the recommendation or solution you offer. Donot approach the owner with any preconceived notions. Listen, don't talk,Allow him to disclose his intent to you. If that disclosure is not immediatelyforthcoming ask questions intended to find the real need, or intent. Let your

questions evolve from the general to the specific. Do you remember yourconversation the last time you saw your doctor about some ailment.

"How are you?""Fine Doc.""So, what can I do for you today.""I've been experiencing some pain.""Where is the pain located?""Well, it's on my side.""Left, or right?""On the right side.""Is it t here?""No. A little further down. About here.""Right here?"Yes.""Does it hurt now?" Pressing easily.

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"No." ."Now?", Pressing harder"Some."Pressing much harder, "How about no?.""Oh!, That really hurts"

Moving efficiently from the general to the specific your doctor quicklylocated the precise location and relative intensity of the pain. A few morequestions probably produced a diagnosis and a recommended course oftherapy, or medication. A skilled negotiator asks questions intended tolocate the need, or source of pain, and listens for the answers. Then followswith a plan that leads the other side to the desired conclusion based on asolution that provides a trustworthy remedy.

The third principle of successful sales is trust in your ability to provide thesolution quickly and painlessly. Your doctor had already earned that trustover time. But the owner will have to feel good about the decision theymake, and trust your commitment to perform. As you gain experienceduring the Preforeclosure period you will learn how to lead the owner downa comfortable and respectable path to an agreement while establishing theneeded trust along the way. Consider some of these ideas when workingwith the owner towards affecting the solution.

Pay the moving costs. Pay all, or a portion, of the rental deposits for relocation. Offer a lease back. Consider a lease with an option to purchase. Be sure the law in your

state does not consider this to be a loan rather than a sale. Reinstate the delinquent loans secured by a mortgage, or deed of trust. Purchase subject to reinstating the delinquent loans and all other

conditions in default, with the owner's equity secured by a mortgage,or deed of trust.

Form a partnership with the owner and complete a workout solutiondirectly with Fannie Mae if the FNMA is the beneficiary.

Getting From Value To Equity Once the owner has agreed to negotiate asale be sure your ducks are lined up for a fast close. By now you havecompleted the property inspection and have established a value for theequity using the EQUITY WORKSHEET below. The equity is the Market

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ValueminusMortgages minusMortgages minusTaxes minusCosts ofForeclosure minusRepairs And Deferred Maintenance minus YourProfit (20%-30% of market value) = Negotiable Equity. Negotiate theequity purchase, not the value of the house. Time is of the essence. Asquickly as you can, arrange for a close in accordance with the financing andthe method of taking title customary in your area. The following EQUITYWORKSHEET is prepared for both Preforeclosure orAuction.

EQUITY WORKSHEET

MARKET VALUE $100,000

MORTGAGES $(25,000)

TAXES $( 2,500)

COSTS OF FORECLOSURE $( 1,000)

REPAIRS/DEFERRED MAINTENANCE $(15,000)

20% Profit $(20,000)

OTHER $

OWNER'S EQUITY $ 36,500

There are three ways you can take title once the owner has agreed to a

settlement. The fastest way is to accept a Quit Claim Deed in exchange forthe agreed upon equity payment. You may also give the owner a note forthe equity or complete a conventional purchase with new financing Do notcomplete any closing without executing a purchase offer, and always use theservices of a title or escrow company.

Since about 20% of all properties in default are sold at auction, or during thereinstatement period the foreclosure property buyer with the best strategy forcommunicating with the owner will find the profits to be rewarding.

The Auction Funny things happen on the way to the court house.Foreclosure not always involves default on the loan of the foreclosinglender. Secured loans are prioritized based on the date of recording. Thesenior loan has the earliest date of recording, and junior liens line up basedon the earliest recorded dates thereafter. Where there is more than one loanon a property it is possible that while only one is in default both lenders areforeclosing. Most security instruments used today provide for immediate

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foreclosure if a superior lien is reported in default, or if aNotice of Default(NOD) is filed by any secured lender. Junior lien holders almost alwaysrequest notification from superior lien holders if the loan(s) are in default.Even though the junior lien is current any default on a superior lien triggersforeclosure pursuant to the terms of the mortgage, or deed of trust. Whenone lien holder files for foreclosure all lien holders will generally file inorder to protect their position in the event of an auction. This particularlytrue if the senior loan is foreclosing since, in most jurisdictions, a senior loancan ignore a junior lien. Therefore, when a senior loan forecloses junior liensforeclose in order to protect their position. An exception would exist if a

junior lien holder concludes that the market value of the property exceedsthe value of all superior liens.

It is very important to know which liens are foreclosing because if you are

the successful bidder it will determine the amount of financing you willrequire. Often the senior lien holders will file for foreclosure, but yield tothe junior lien holder as a means of curing the default. When the property issold at auction subject to senior liens the successful bidder is responsible forthe condition of those liens and most jurisdictions allow the senior liens tobe assumed by the bidder even though the loans would not ordinarily beassumable in the course of a conventional sales transaction provided they arereinstated to a current condition. When preparing the BID/AUCTIONWORKSHEET make sure you know which liens(s) are foreclosing andwhat your financial responsibilities will be should you become thesuccessful bidder.

NOTE: In most jurisdictions, and pursuant to the "right of redemption", thesuccessful bid accepts all secured and unsecured liens filed prior to the lienforeclosed upon, and is relieved of all liens filed after subject to the 120 dayredemption period for Federal tax liens.

Auction Check List While you are inspecting properties you are interestedin you will need to confer with the people and agencies providing essential

information pertinent to theAuction. This table guides you through animportant fact gathering process. While auction protocol and closingprocedure is likely to be very inflexible, each of these considerations isnegotiable with the REO.

THE CONTRACT Be certain to remain focused on the profit objective.

TITLE Compare the title report provided by the referee, or attorney with

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the one you have obtained for irregularities. Be sure you are not bidding ona partial title.

RESPONSIBILITIES PRIOR TO CLOSE Who is responsible for thecondition and safety of the property between auction and close. Occupants

pose extended risk for the buyer, and may require added cost for eviction.POSSESSION Who is responsible for the owner, or tenants in possession..Be prepared to begin an immediate unlawful detainer action. Determine ifyou can take possession of the property during the contract subject toredemption. Be sure you understand the redemption statute in your state.

PROPERTY CONDITION: With rare exception the property is taken "asis" at foreclosure.

LIENS AND JUDGMENTS If you are the successful bidder on a juniorlien you will be responsible for all secured liens that are superior. Determine

how unsecured liens are to be discharged, and be aware the federal tax lienshave a 120 redemption. If you want to take possession of the propertypursuant to a federal lien it will be necessary to negotiate a settlement unlessyou want to risk government possession. If this occurs you will not lose yourdeposits, but you will lose any money spent for repairs or to remove anoccupant.

PERMITS Contact the building department to insure the property iscompliance with certificate of occupancy (CO), or rental permitrequirements.

INSPECT AVAILABLE FILES Inspect the files pursuant to theforeclosure action that are maintained by the designated government officesand other authorities.

TITLE EXPERTS If your time is limited title experts, paralegals andattorneys can be employed to do most of these tasks. Office clerks canprovide contact information.

Attend an auction. The principle purpose is to understand the auctionprotocol, but complete as much of the total check list process as you can.

The better your preparation for the auction the more enhanced your totalunderstanding will be. If the property is sold speak to the buyer and attemptto determine their intent. If they plan to resell the property follow theprogress of the resale to see how close it compares with your estimates. Ifyou are purchasing to occupy this is an opportunity to obtain a bargain.Many buyers are eager to "flip" the property for a quick profit and mayagree to a sale on the court house steps. This is your opportunity to watch

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the progress of foreclosure from filing the law suit, orNotice of Default(NOD), to the final sale. Do not be in a hurry to start building your realestate fortune. If you are not comfortable after the first time, repeat theprocess until you are.

The REO This is the bargain hunter's dream. The defaulting borrower haslost the property to the foreclosing lender and the emotion is gone. Theproperty is now in the lenders inventory (REO). Foreclosure, however, is notthe only way property ends up in the lender's back room. Often the propertyis surrendered by the owner when offering a "deed in lieu" of foreclosure.When a lender accepts a deed in lieu of foreclosure the property is relievedof any additional liabilities arising from the mortgage obligation. Theimportant thing to understand now is that money lenders are in the businessof making loans. They make their money based on the spread between their

cost of money and the loan rate. Real estate owned (theREO) represents lostopportunity since their investment is usually tied up in non productiveassets. Occasionally the bank takes an income producing property intoinventory, however this is rare. And, even when the property is producingincome the lender is rarely prepared with the appropriate resources tomanage the income profitably. With rare exception the lender is very eagerto convert the property to cash, and often at a loss.

Locating the REO This is a very simply task if you are looking to invest ina house or an apartment building. The vast majority of residential loans are

made by members of savings and loan associations. Unlike commercialbanks which exist primarily for business purposes, savings and loanassociations have been formed exclusively for the purpose of providing lowcost residential financing. In most communities there are only a few S&L'sthat make most of the residential loans. Ask your real estate agent who theprimary lenders are and contact their property departments for availability.Another way to locate properties is to conduct an ownership search for thebanks and S&L's in your community, or the market you are interested in.When the institution is shown as the owner the property is likely to be an

REO. If you are looking for office, industrial and retail properties contactyour local commercial banks.

Talking Smart To The Banker The longer a property remains in thelender's inventory the more likely the property value established by theREOdepartment will be influenced by the lender's accounting practice. Thelargest accounting liability is likely to occur at the time of receipt, and the

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begin to diminish thereafter. The best time to approach the lender'srepresentative is when the property represents the greatest cost. Immediately.An opportunity to remove an accounting liability without the requirement topay a sales commission, and at the same time remove the on going riskassociated with unlawful detainer (removing the tenants, or defaultingproperty owner), repairs, deferred maintenance, vandalism and codeviolations usually looks the most attractive to a lender in the beginning. So,make you move while the property managers still feel the pain. An offerdirected to the bank president with a deposit check will usually getimmediate attention. Your offer may be in the form of a letter ofintroduction and a simple property presentation attachment which includes apicture and a general description of the property and the local market .

Date

The LenderStreet AddressCity,State,Zip

Dear President:

I would like to submit a purchase offer for the property located at

.

Purchase Price:Down Payment :

Financing Terms:

Closing Date:

Sincerely,

Attachment:

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Be prepared for what happens next. If you do get a reply, follow up. Thisapplies to any communication that you initiate with parties to the foreclosureat any point in the process. If the lender rejects your offer in writing, find outwhy. If the lender is interested in your offer the reply is more likely to be inthe form of a counter offer using the lender's legally approved contract. Ifyou completed the Auction check list then you will have already seen thecontract and you will be better prepared to respond.

The REO Contract Check List When replying to the lender's contracteverything is negotiable. The table below is intended to help you organizeyour reply to the lender's contract offer.

PRICE: When negotiating with the lender be sure to remain focused on thenet equity.

FINANCING: Attempt to make your offer conditional uponREOfinancing. TheREO lender has added incentive to provide preferred terms.Be sure to review "Institutional Financing Techniques" in the AggressiveStrategies Section.

CLOSING DATE: Insure the closing date allows enough time to exploreall financing options, or the completion of partnership formation.

PROPERTY CONDITION: Seek cash credits for repairs and deferredmaintenance. The cash will provide added reserves and will allow you tocontract for the needed work for less than the credits.

TENANTS IN POSSESSION: Insure the property is vacated at close ofescrow.

LIENS AND JUDGMENTS: Insure the property is free of secured andunsecured liens at close of escrow.

CERTIFICATE OF OCCUPANCY: Insure the property is compliancewith certificate of occupancy (CO), or rental permit requirements.

TITLE, ESCROW AND CLOSING COSTS: Payment for these servicesare often based on local custom and practice. But each is negotiable.

Contact your local lenders and locate their foreclosure departments or theirasset recovery division. Determine how they makeREO informationavailable, and seek as much information about their disposal process as youcan. Be sure to ask for a list of the current inventory and request placementon their mailing list if they maintain one. Occasionally lenders are reluctantto cooperate with the general consumer, preferring instead to work through a

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network of preferred brokers. Identify these brokers and contact them. Askyour real estate agent to run an ownership search for local lenders.

THE GOVERNMENT MARKET

Leverage Properties purchased out of the government market areparticularly attractive since they can be purchased with considerably lessmoney. While the values tend to hug market levels the leverage andgovernment financed terms provide good value for investors, and excellenthome purchase opportunities for families.

THE GOVERNMENT MARKET

Leverage Properties purchased out of the government market areparticularly attractive since they can be purchased with considerably lessmoney. While the values tend to hug market levels the leverage andgovernment financed terms provide good value for investors, and excellenthome purchase opportunities for families.

VA and FHA Properties financed under the auspices of the FederalHousing Administration (FHA), and the Veterans Administration (VA)make up most of the government foreclosure market. These properties donot go through the conventional foreclosure process discussed within thecontext of the Private Markets. Instead, the properties are repossessed based

on the default guidelines and operating practices of the individual agenciesof the federal government.

With the exception of the disposal authority (FHA) and certain aspectsrelated to buyer qualification the sale process is the same. Private propertymanagement companies are used by the FHA to facilitate the auction anddisposition. The VA manages the process directly from regional offices. Theproperties are offered from regularly occurring lists and sold pursuant tosealed bid. The current list of properties are available without charge fromthe local offices of the Veterans Administration which also acts as the

disposal agent, and by the local or regional property manager acting as thedisposal agent for FHA offerings, and may be downloaded from the localweb sites. All bids must be presented through designated brokers pursuantto the qualifying requirement.

Government Services Administration (GSA) Government sales occurwhen the United states government offers property to the public for the

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purpose of raising revenue or liquidating disposable real estate. Informationabout these properties may be obtained by writing for the "U.S. RealProperty Sales List". The address is:

PropertiesE. Consumer Information CenterPueblo, CO 81009

Visit the local VA and FHA (disposal agent) web sites. Review the sitescontents for buyer qualification requirements, the current property list andthe procedure for presenting bids. Arrange to contact an authorized brokerfor a property tour and to review the property listings and bidding process indetail.

THE WHOLESALE MARKETS

It was noted at the beginning that the markets consisting of "fixers", "flips"(wholesale) and foreclosure were integrated because they could be bothdifferent and the same. We should note, however, that while all foreclosureshave the potential of a wholesale property, not all wholesale properties beginas a foreclosure. The wholesale market will be defined here as a "fixer", or"flip" purchased below market value of comparable properties that may, ormay not, be free of repair or deferred maintenance requirements. Thefixer" is a property bought with the intent of removing repair and deferred

maintenance and then sold at market for the value of comparable properties.The "flip" is a property bought for immediate resale usually belowmarket, and often with the intent of never taking title. It is a bargain that youare passing on to other bargain hunters just like yourself. You are brokeringthe property for a quick profit usually in the range of 4%-8% above yourcontract price. The check lists used for foreclosure are applicable, all or inpart, to the wholesale market.

The "fixer", or rehab, is a very profitable strategy made possible by thesimple fact that retail (market) buyers will not compete with the wholesalebuyer because they are not willing to accept the time and work necessary torestore the "fixer" to market condition. The key to success in this market isassembling a dependable project team of tradesmen, designers and realestate agents. Be particularly sure that the tradesmen will be available toperform the needed work in a timely manner. Lost time can result in added

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carrying costs if you intend to sell, or lost income if you intend to hold forinvestment.

"Fixer" strategy has the potential for a high powered income stream that canbe created with an efficiently planned part time effort. As with any "fixer"the more skill you can bring to the project the more profitable it will be. But,in the end, your profit will be directly related to your ability to skillfullymanage the contractors you bring to the job, and your understanding ofmarket value. The rehab business, however, is not a fast track to richesunless you plan to exchange or refinance the profits for investment. If this isyour intent you should use the "Real Estate Investment Guide And FieldReference Manual" for planning your strategy. The Manual offers anoutstanding pyramid model for investing in single family houses.

Locating The "Fixer" This may very well be the easiest part of the process.It is made particularly easy by the high visibility of the property. "Fixers"are an exceptional target of opportunity since the general condition of theproperty implies a lack of interest, or the inability of the owner to providefor the property's needs. There is generally some level of discontent locatedwithin the property, or associated with the owner. Death, divorce, illness,loss of income, loss of a job or an unmanageable tenant are likely tomanifest in the appearance of the property. If "fixers" could speak theywould be saying, "Something is wrong here, can you fix it?". If your answeris yes, then a new door to your financial future has opened.

Locating The "Fixer" This may very well be the easiest part of the process.It is made particularly easy by the high visibility of the property. "Fixers"are an exceptional target of opportunity since the general condition of theproperty implies a lack of interest, or the inability of the owner to providefor the property's needs. There is generally some level of discontent locatedwithin the property, or associated with the owner. Death, divorce, illness,loss of income, loss of a job or an unmanageable tenant are likely tomanifest in the appearance of the property. If "fixers" could speak they

would be saying, "Something is wrong here, can you fix it?". If your answeris yes, then a new door to your financial future has opened.

Six Critical Resources In addition to foreclosure there are six basicresources, or opportunities, for identifying a "fixer". The greater yourresourcefulness for using each the more successful you will be.

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The Real Estate Agent The real estate agents in your community are thebest source for property information. The local MLS (multiple listingservice) data base is the most comprehensive resource for propertyinformation of any kind, and is the "fixer's" best friend. Work closely withthe real estate agents in your area and develop a close business relationshipwith them.

Distressed Or Poorly Maintained Property Drive your market routinelywatching for any property that appears to be in distress. Don't think thatsimply because you have done it once that you can ignore the area in thefuture. Each time you drive a market you will see an opportunity that youdid not see, or overlooked before.

Absentee Owners An absentee owner is an excellent rehab prospect since

virtually all tenant occupied properties require significant rehab and repairwhen sold. Maintain a data base of absentee owners using a simple mailmerge word processing program. Mail to your data base at least twice threetimes a year.

For Sale By Owner (FSBO) These property owners resist paying realestate commissions based on some kind of misguided principal and,therefore, tend to be poorly informed about market value. These propertiestend to be the more poorly maintained as well. Watch for them.

Referrals Talk about your business. Ask your friends and acquaintancesto let you know about properties that you may be interested in. Offer areferral fee.

Advertise The newspaper is not likely to be a cost effective source ofadvertising. But you may want to run some trial ads to determine the valueof this medium in your area. The best way to use advertising is to findlocations for the permanent placement of your message. Signs along thehighway placed on private land are very effective. A simple sign including aphone number might read, "I Buy Houses - Fast Close" Place a magneticsign with the same

Documents

Secrets to Foreclosure Investing E-book