Secrets To Pre Foreclosure Profits by Tim Mai

My brother and I escaped Vietnam on a fishing boat in 1986. I was 11 years old and my brother was 18 at the time. We spent seven days and six nights at sea and were mugged by pirate boats. They stripped us of all our valuables, but, luckily, didn't kill us as happened with other unfortunate escapees. Eventually, a Malaysian boat picked us up, and we spent six months in a refugee camp before being transferred to a camp in the Philippines. After a short stay there, the United States accepted us, and we ended up in Houston.

Neither my brother nor I had much money, so we lived in a two-bedroom apartment-with eight to 12 other single guys! Needless to say, it was crowded, and some of our roommates weren't the best people. One day, I came home from school to find out the apartment had been raided by the FBI looking for drugs and illegal hand guns!

Although my brother and I were poor and dressed in clothes bought from charity organizations, we worked hard. I graduated from high school, went to college, and worked in the IT field for two years. I had a good job, but, in 2002, the software company I worked for crashed and went out of business. There I was without a job!

Then, I began knocking on the doors of homeowners for a few months and discovered very quickly that no one wanted to talk to me!

Realizing that door-knocking was not an effective method of getting deals, I become a "bird dog" for other real estate investors. A bird dog finds good leads for investors and then is paid for those leads that pan out. In the meantime, I worked at finding my own deals. After about four months, I found a good one. I bought a home for $55,000 and put $22,000 worth of repairs into it. I sold the home for $134,000 dollars at a five-day auction. I earned a $57,000 profit (minus 3% of the buyer's closing costs)! This kind of profit doesn't happen every time, of course. But through a combination of luck and hard work, I was on my way in a real estate career!

As of this writing, I've bought over 340 properties, including single-family homes, condos, town homes, and vacant lots. I specialize in wholesaling but have also done many rehabs, subject-to's, pre-foreclosures, and short sales.

I've had a lot of success, and I want to share it with you. I want you to make the money you deserve! This book is part of that sharing. It will provide you the fundamental and essential knowledge necessary to operate effectively in the pre-foreclosure market.

Let me be clear. This Lens is designed to provide you with essential basic knowledge, but it's only one part of my real estate "curriculum."

You can also gain access to hot bargain-price property leads at www.3DayBid.com You'll receive the following benefits:

• FREE Motivated Seller Leads
  

• Pre-preforeclosure Leads

--these are homeowners who just got kicked out of bankruptcy. Chances are they're headed into foreclosure.

• Deep-discount Wholesale Deals
  

• Bankruptcy Leads

-- these are homeowners who've just filed bankruptcy and want to avoid foreclosure.

I wish you the very best of luck in your real estate career!

A foreclosure is a legal process. It's initiated by lenders when home owners (and others) fail to meet their mortgage obligations. In other words, home owners fail to meet their payments and, as a result, lenders want the property back. The foreclosure process starts when a lender files a law suit or a notice of default (more on this topic later) in the official public records. We'll cover this process in more detail in the next chapter.

A pre-foreclosure sale takes place between the time when the lender files suit and when the property is scheduled to be sold at a public foreclosure action or a trustee's sale. A pre-foreclosure is not a formal legal process; it's an opportunity for you to assist stressed-out home owners and make a profit at the same time.

Often, people tend to think that foreclosures occur because of poor financial management by home owners and others. While this certainly can be true, there are really many different reasons why foreclosures take place. It's important for you to understand these reasons so you can deal effectively with home owners facing foreclosure and help them to make the best of a bad situation.



One reason can be a poor local or national economy. When jobs are lost due to cuts, outsourcing or other factors, homeowners lose their income and can no longer afford the mortgage payments.

A second reason can be personal problems. Most commonly, foreclosure is caused by divorce, death of the sole provider, or, increasingly, overwhelming medical bills due to the high cost of health care in the United States.

A third reason is the tendency of some first-time home buyers to over-extend themselves. They fall in love with the American dream of home ownership, but fail to have cash reserves to handle unexpected costs and emergency repairs that come with owning property. This means they fall behind and end up in a continual and losing game of "catch up." Eventually, they can't meet their payments, and foreclosure is the result.

A fourth reason is the availability of loans with high loan-to-value ratios. These days, loans are offered at 90 to 100% of the value of the property securing the loan. This means buyers can purchase a home with little or no down payment. Since they have little invested in the home, they may walk away at the first sign of financial trouble.

A fifth reason is the lenient terms offered by such governmental agencies as the Federal Housing Administration (FHA) or the Veteran's Administration (VA). This means lenders can be tempted to offer loans to individuals with suspect credit and job histories. Unfortunately, the result can be foreclosure.

A sixth reason is the existence of predatory lenders. These unscrupulous individuals and institutions target borrowers with low income, low credit scores, bankruptcies, and excessive debt. Since these borrowers can't tap into the conventional loan market, predator lenders offer them "subprime" loans with high interest rates and outrageously high late fees. Again, the result is often foreclosure.

A seventh reason is, oddly enough, low interest rates. Low rates can tempt buyers into purchasing more house than they can afford. Most families these days have two income earners; however when one of the earners loses his or her job, the family can often no longer afford the payments on an expensive home. They fall behind in those payments, and the lender starts the legal process of getting the property back.

As stated earlier, it's important for you to understand all these reasons. It will help you empathize with your customers-the home owners-and, at the same time, avoid bad deals. Now, let's look at the benefits of making a living in the pre-foreclosure market.

There's no doubt about it-the pre-foreclosure market offers many advantages to the careful investor.

1 You can buy properties at a deep discount. Discounts can range from 20% to over 40% of market value. This means you can buy a property, turn around and sell it at under-market value, and still make a great profit.

2 You can structure deals that will cost you very little money or, in some cases, no money at all. This doesn't mean you'll be able to operate in the market without cash reserves. That's just plain foolish. However, it does mean you can get creative and legally use other people's money to finance your deals.

3 You can buy properties quickly without all the rigamarole that goes on with conventional transactions. This not only means that you don't get buried in paperwork, but you're also able to turn relatively quick profits while moving on to the next deal.

4 A great advantage of operating in the pre-foreclosure market is that you're able to research and inspect properties. This isn't possible during the later auction phase of foreclosure which means you could end up with a "pig in a poke" if you're not very careful. Buying a pre-foreclosure avoids this potentially disastrous possibility.

5 You're able to structure sales agreements in a creative fashion. This means you can generate the best terms possible for you while, at the same time, helping a home owner out.

6 You have the opportunity for financial and personal freedom. In effect, you're an entrepreneur, and you can set your own hours, rules, and profit goals. You're no longer slave to a boss and a rigid office routine. Best of all, once you become proficient at buying and selling pre-foreclosure properties, you can ensure a secure future for you and your family since you're not limited to the amount of money you can make. Also, your knowledge of the pre-foreclosure market will transfer to other aspects of real estate, allowing you to expand your efforts into different markets.



Of course, every field has its disadvantages as well as advantages, and it pays to be aware of them so you're prepared to deal with and overcome them. Let's look at the disadvantages next.

Let's face it-foreclosure is not an easy process for the homeowners. That means you're going to deal with people who may be angry, frustrated, and looking for someone to blame. In some cases, they can be very difficult to deal with, and you have to be prepared for these situations. Working with home owners in foreclosure situations calls for tact, patience, and empathy. In effect, you have to be a "people person." We'll discuss this at length later in the book, but the best attitude to take is that you are a problem-solver; that is, you're there to help the property owner out of a bad situation in the best way possible. This attitude will help you maintain your sense of perspective and humor in all your dealings.

Another "disadvantage" is that you'll have to do a considerable amount of courthouse research to make sure your deals are profitable. This is hard work, requiring extensive attention to detail to make sure the property isn't loaded down with unexpected liens and other items that can entangle you in legal procedures over a long period of time and end up reducing your profit-or even resulting in a loss. When dealing with pre-foreclosure properties, the devil is indeed in the details!

Finally, competition is tough in the pre-foreclosure market! After all, other buyers will be seeking the same profit opportunities that you're looking for. This means you have to be up-to-date on local conditions and opportunities and stay on top of the market at all times!

You don't have to be a financial genius to operate successfully in the market, but there are definitely certain pre-requisites you must have. Most fundamentally, you need complete and detailed knowledge of not only the market, but the local, state, and national laws regarding foreclosures. This lens will provide you with the basic information on that subject, but you'll need to study real estate rules and regulations in detail so you can operate effectively and not inadvertently break one or more of those laws.

This means you'll need to do your research and do it well. If you're a person of action and don't enjoy reading all that much, think of it this way: You wouldn't go hunting with an empty gun. You'd just be setting yourself up for failure and wouldn't bag any game at all! So, consider research your ammunition. Once you have a full load, you'll be able to hunt down and bag the best and most profitable bargains possible!

No doubt you've heard the famous saying that there are only three things important in real estate-location, location, location. Well, in the pre-foreclosure market, there are three other things that are very important-persistence, persistence, persistence! Absolutely nothing beats persistence! You have to be willing to dig and dig (in terms of research) and to deal effectively with owners and your competitors. Remember, the race doesn't always go to the smartest person around; it goes to the person who never, ever gives up!


Pre-foreclosure investing is one of those investing strategies that you do not require any money or credit for. Sellers will often deed you their house for free.

Okay, that's the introduction to pre-foreclosures.Now, let's get started on gaining the knowledge you need to become a successful investor in this lucrative niche of the real estate market!

In order to invest profitably in the pre-foreclosure market, it's necessary to understand all aspects of the foreclosure process and how to operate in each of the stages within that process. It's also necessary to understand what options are available to homeowners so you can see the process through their eyes and help them to make the best decision possible as well as the best one for yourself.

Let's start by looking at the three stages of foreclosure-pre-foreclosure, foreclosure and real estate owned (REO or OREO). As an investor, you can operate in any three of these stages, but, as you'll see, the pre-foreclosure stage offers the greatest profit opportunities and the least amount of hassles.

As you learned in the introduction to this Lens, a pre-foreclosure sale takes place between the time when the lender files suit and when the property is scheduled to be sold at a public foreclosure action or a trustee's sale. Here's an overview of the benefits of buying pre-foreclosure properties so you can contrast them with the disadvantages of the foreclosure and REO stages.

Benefits of Pre-Foreclosure

*Deep discounts
*Greater profits
*Ability to research inspect property/more accurate value estimates
*Ability to avoid the potentially expensive bidding process
*Ability to structure sales agreements in a creative fashion
*Less hassle from third parties (lenders, etc.)
*The potential for minimum cash outlay

When institutions (banks, lenders, etc.) lend money to individuals for the purchase of a home or other property, they naturally expect to be paid back. They're in the business of lending money to make a profit. When borrowers (mortgagors) fail to meet their mortgage obligations, lenders want the property returned so they can re-sell it to others for a profit or at least reduce their losses. They regain the property through the foreclosure process.

Of course, both mortgagors and lenders will do their utmost to work out an agreement that will allow people to keep their homes and the lender to keep receiving payments. In addition, neither the mortgagors nor the lenders want the legal complications of the foreclosure process. Unfortunately for them-but fortunately for you!-they can't always work out an agreement, and the lenders have to initiate foreclosure proceedings.

So, how is the foreclosure process begun and what's involved in it? It's important for you to be aware that every state and county has different rules and regulations that you'll need to learn well. Otherwise, you may miss something or make a mistake than can cost you money. However, in general, every state within the U.S. uses one of two types of foreclosure-judicial and non-judicial.

In states with this system, foreclosure can only take place through court action. The process usually begins when the home owner falls behind on his or her mortgage payments due to one of the several reasons described in the Introduction (divorce, health issues, loss of job, etc.). Typically, the foreclosure process goes like this:

1.A lender files a lawsuit with the appropriate court to foreclose on the mortgage or deed of trust.

2.The borrower must respond to the lender's "complaint."

3.A court hearing date is set.

4.During the hearing, the judge evaluates the complaint and either dismisses it or orders foreclosure of the loan.

5.If the decision is for foreclosure, the judge then orders that a public foreclosure auction sale be held on a specified date.

6.The public foreclosure auction date is then advertised to the public.

number1(red): 7.At the auction, the property is sold to the highest bidder. Or, if there's no acceptable bid, the property reverts back to the lender.

8.A "deficiency judgment" may be levied against the borrower. This is a personal judgment against the borrower for the remaining balance on the loan after a foreclosure sale.

9.After the sale, the borrower does have the opportunity to exercise "statutory redemption rights." That is, within a specified amount of time, he or she can regain the property by paying all costs and interest (in addition to the mortgage debt) to the lender.

10.If the borrower does not exercise statutory redemption rights within the specified amount of time, a sheriff's deed or certificate of title is given to the highest bidder.

In states with this process, the foreclosing lender makes use of the "power of sale" covenant specified in the mortgage or trust deed. This is the right of the lender to force the sale of a property without judicial action. Typically, this is how the process works:

1.The lender files a default notice with the appropriate office (county recorder, public record, etc.).

2.A trustee's sale date is set.

3.The sale is publicly advertised.

4.At auction, the property is sold to the highest bidder. Or, it's taken back by the lender if no bids are acceptable.

5.As with judicial foreclosures, the borrower may exercise statutory redemption rights after the sale.

6.After statutory redemption rights have expired, the deed is given to the highest bidder.

At this point, you may be thinking to yourself, "I could pick up some pretty good bargains at an auction sale." And, it's true-you can! However, an auction has several disadvantages that make it a poor choice compared to pre-foreclosure bargains. Here's what they are:

Greater competition-by definition, auctions are public which means everybody and his brother knows about the sale and can enter the bidding. This can drive the price up and have two potential negative results. One, it can put the property beyond your means. Or, two, if you do win the property, it may well reduce the profit you can earn.

Fixed sales terms-at a public auction, there's no opportunity to negotiate sales terms unlike in the pre-foreclosure stage. You have no flexibility and no opportunity to negotiate terms that could earn you more profit.

No inspections-at a foreclosure auction, you buy the property "as is." You have no opportunity to inspect it in order to discover any defects (leaky roofs, etc.) that could end up costing you a lot of money.

Proof of funds is required-if you're a bidder at a public auction, you'll be required to show proof that you have the money necessary to complete the purchase. For example, you may be required to have cash or a cashier's check for X amount of your winning bid (5%, 10%, etc.). Then, it's likely that you'll be required to pay the rest of your bid amount within a short period of time as well as title transfer fees. (This requirement keeps non-qualified bidders from slowing down the process.)

No leverage-since auctions are strictly "cash and carry," you're not able to use the opportunity to line up a lender to finance the balance of the sale price. If you're new to investment and have little free cash available, this means you're effectively shut out of the auction process.

You may not be able to insure the title-title insurers do not like risk, and most of them consider foreclosed properties to be an unacceptable risk. They'll take a very close look at such property titles and, if they find any errors, they may well refuse to insure them. This, in turn, may leave you with unacceptable risk.

Potential for bidder collusion-there's always the possibility that a group of bidders may meet before an auction sale and determine a maximum bidding amount on a desired property. This has the effect of restricting competition among other, less well-heeled, bidders. The result-you don't get the property and end up wasting your time.

Poor property condition-after you win a property, you may find it's in such poor condition that no property or casualty firms want to insure it.

The possibility of unfriendly occupants-if the property is occupied by unfriendly owners or tenants, you may be forced to evict them. This can be expensive and time-consuming. Basically, it means you can't do anything with the property until the occupants are ousted-not a good scenario for making a profit!

The "right of redemption" obstacle-from earlier in this chapter, you'll remember that owners have the right to redeem their property after the sale within a specified amount of time. The redemption period varies with the state and can range from anywhere from 30 days to a year. So, this means you run the risk of losing the property after having bought it.

Technical flaws in the foreclosure process-errors can abound in the foreclosure sales procedure-misspelled names, wrong street addresses, math errors, failure to adhere strictly to procedures, etc. This opens up the possibility for the previous owner to appeal for an overturn of the sale. Resolving these issues can take months and add up to a big headache for you in terms of time and money.

This stage takes place after the property has been foreclosed, and it's been taken back by the lender. The term "REO" stands for "real estate owned." It's also commonly known as "OREO" (other real estate owned). Typically, there are many of these properties available on the market, and, on the face of it, they might look like bargains. But a closer look reveals some real roadblocks to making a profit:

Roadblock 1: Most are sold through real estate brokers. This means they're sold at full market value, so there's little incentive for you to purchase one because there's no real profit in it.

Roadblock 2: There are many rules you have to follow. Many lender-owned properties are HUD (Department of Housing and Urban Development) or DVA (Department of Veterans Affairs) homes. This means you'll need to follow a strict set of rules, rules that are enforced by the federal government. Plus, on other non-HUD and non-VA properties, you'll have to follow the rules set up by the lender. In short, you could be facing a lot of hassles, hassles that you won't face in the pre-foreclosure market.

Roadblock 3: You'll need verifiable proof of funds. As in the foreclosure stage, no one wants amateurs with no money slowing down the sale process, so you'll need to have funds on hand to pay the down payment and closing costs. You'll also need to prove that you've been pre-approved for a loan to finance the purchase.

Roadblock 4: You don't have the opportunity to do an inspection of important home systems. Many REO properties are vacant, and all important systems-electrical, heating/cooling, plumbing, natural gas, water, etc.-are turned off. This means you can't inspect these systems. Since they can be extremely expensive to repair, you definitely don't want to invest in a property without knowing their condition.

Roadblock 5: REO sales are final! All these sales are "as-is," so if there are problems with the property, you're stuck with them. Problems can range from environmental concerns (mold, asbestos, lead-based paint, etc.) to hidden structural damage. They can all be expensive to correct, and, legally, you have no opportunity to seek compensation from the seller.

From the above information, you can see why I feel the pre-foreclosure stage is the best area to target. It offers the greatest profit potential, the fewest hassles, and the least amount of risk.

Now, let's take a look at foreclosure through the eyes of the property owner so you can fully understand the options they have when facing foreclosure. This will help you to show them the benefits of working with you in the pre-foreclosure stage rather than undergoing the difficulties of foreclosure.

In general, property owners have seven options available to them when they're in danger of losing their home or other property to foreclosure.

Loan forbearance/modification -This can be a strategy worth pursuing for property owners. In this situation, the loss mitigation department of the mortgage company may make arrangements with the owner to pay some of the back payments now and the balance within a certain time period.

Here's a typical example: John and Janet Smith owe $9,000 in back payments, attorneys' fees, etc. Since the mortgage company doesn't want the trouble and expense of foreclosure, it may accept $4,500 now and $750 per month for the next six months. Of course, the Smiths would have to resume making their normal monthly payments.

A loan modification is a permanent change to their mortgage that may lower their payments, and the delinquent payments may be added to the mortgage balance. A loan modification or forbearance is easier to arrange prior to the mortgage company filing a foreclosure lawsuit. Some lenders will not consider this after filing, but it's worth trying. Loan modifications are more common in FHA loans.

Reinstatement of the mortgage -As you learned earlier in this chapter, owners have up to and including the morning of the auction to catch up on their payments. So, if the Smiths have the cash, this is obviously a good solution.

Refinancing of the mortgage -It's usually very difficult to arrange new financing when owners are already in default on their existing mortgage. If you can find one, chances are it's rare and they'll only refinance up to 70% LTV*. That means the seller must have a lot of equity.

*Note: "LTV" is an acronym for "loan to value" ratio. It's the percentage of the property's value that's mortgaged. To get the LTV, you divide the mortgage amount by the lesser of either the appraised value or the selling price. Different lenders use different standards to determine whether or not a loan will be granted with a certain LTV. Commonly, owner-occupied residences will get loans at an LTV of 80%. Investment properties are often required to have a higher LTV. Here's an example of an LTV for a home: The home is appraised at $400,000, and there's a $320,000 mortgage on the property. So, $320,000 / $400,000 = .80 or 80% LTV.


Chapter 13 bankruptcy-This can be a viable alternative for property owners if their financial situation has improved. Filing bankruptcy prior to the foreclosure auction will stop the sale. Unfortunately, for most people it only postpones the sale for one or two months. Let's use the Smiths again to illustrate how the bankruptcy process works: Immediately after filing a Chapter 13 Bankruptcy, John and Janet will have to file a repayment plan with the courts. This plan has to show that they have sufficient monthly income to pay basic living expenses such as food and utilities and other monthly payments such as credit cards, car payments etc. In addition, their income must be sufficient to resume making their monthly mortgage payments. All past due amounts are usually spread out between 24 and 60 months. For example, we know they owe $9,000 in missed payments, attorneys' fees, etc. Spread out over 48 months, this would result in an additional $187.50 due each month to the court appointed trustee. So, if they feel they have the income to immediately begin repayment of all their debts and the court agrees, this may be a good choice for them to save their home.

Sell the home on the open market- -This is probably the most under- utilized option available to owners facing the possibility of foreclosure. The fact is, selling their home will give them the most money in their pocket. Did you know that on FHA loans, the lender will postpone the sale and give them 90 days to sell their house?

Sell the home to investors- -If efforts to save their home have been unsuccessful and time doesn't permit selling their home on the open market or they just don't want to, but want a quick sale with no problems, they can sell it to an investor-you!

Let the home be sold on the courthouse steps- Most of the time this is the worst option available to property owners. To be honest, I've experienced times when a house sold at auction for more than what I could have offered the owners. However, this is not all that common. And, as mentioned previously, owners can also face several expensive and embarrassing actions as a result of the foreclosure process-deficiency judgments, evictions, etc

From the information in this chapter, I hope you can see how targeting the pre-foreclosure market is an excellent method of earning a profit and helping out home owners at the same time. With knowledge and professionalism, you can create a "win-win" situation for everyone involved. Now that you have the required basic knowledge, it's time to get started on learning the eleven steps to success in the foreclosure market. Here's an overview of those steps:

The Eleven Steps to Success in the Pre-Foreclosure Market

Step 1: Organizing Your Office

Step 2: Researching the Market and Qualifying Homeowners

Step 3: Selling the Property Owner on You

Step 4: Performing Due Diligence

Step 5: Inspecting the Property

Step 6: Estimating Property Value

Step 7: Negotiating with Homeowners and Others

Step 8: Preparing and Presenting the Purchase Agreement

Step 9: Closing the Sale

Step 10: Maximizing Property Value and Appeal

Step 11: Achieving Maximum Profit

The next chapter will cover the organization of your office. It will show you how to set that office up in the most efficient and cost-effective manner possible.

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