Foreclosures / Short Sales / Auction Information

In these economic times, an increasingly large percentage of Real Estate transactions fall into these categories, presenting many new opportunities to the investors and home buyers. Here at Real Time Finders we'll be glad to help you with any questions you may have on these kinds of transactions. Please feel free to read the following information on:

Short Sales	Pre Foreclosures	Foreclosures	Tax Liens	Sale by Owner	Auctions

Short Sales

Short Sale Negotiation

Negotiation through the loss mitigation department will be the key factor in getting your new home at a deep discount. If opportunities emerge in which lenders can sell distressed properties without registering big losses, they will do it. For example, consider that a homeowner with a $200,000 mortgage is late on his or her loan payments and is facing foreclosure. With the consent of the homeowner, you offer his or her lender $150,000 as full payment for the loan, which is accepted. That means you instantly save $50,000 on a real estate investment. This is a short sale.

Getting started

Negotiating a short sale with a lender can be complicated. But with careful research and patience, it is possible for you to earn big profits with short sale deals. Naturally, closing the first one will be the most challenging.
The first step in this process is to identify potential investment opportunities through your Real Time Finders agent. Pre-foreclosure properties are ideal because you can make more money with them versus homes that are already bank-owned. To be most successful, we recommend reaching out to homeowners who are more than three payments behind on their mortgages. At this point, each of these homeowners has received a Notice of Default (NOD) and is very close to losing their home. Time is running out and the chances of them curing the loans and making up the back payments are slim. The homeowners understand this and may be grateful for your assistance. The lenders understand this, too, and are motivated to recoup their losses as soon as possible.

Calling lenders

It's important to gather as much information as possible about the properties and the homeowners prior to getting on the telephone with lenders. Because when you do get a lender representative on the line, he or she will have questions.
Using the contact information contained within the listings you have targeted from your source, it's time to call a lender and inquire about the possibility of a short sale agreement. Traditionally, the "Loss Mitigation Department" will handle these types of requests. If you can't get in touch with anyone, move onto the next listing.
The negotiating can begin only when you get in touch with the right person. Once you have reached a representative for the lender, inform him or her that you represent the homeowner. This is all you need to say - avoid revealing that you are an investor. The representative will usually want basic information about the property, the homeowner and the proposed deal. He or she will also want to know the value of the property and the financial situation of the homeowner (borrower). Aside from making the initial introduction, the goal of this conversation should be to request a short sales or workout packet. This packet will provide you with everything you need - instructions, forms and procedures - to close a successful short sales deal.

Broker's Price Opinion (BPO)

Lenders generally hire local real estate brokers or appraisers to evaluate properties in the foreclosure process prior to selling them at public auction. These are referred to as a Broker's Price Opinion (BPO). Essentially, a Realtor® - based on the condition of the home and current market conditions - provides the lender with an estimate for the value of the property. The BPO is the key piece of information that a lender will rely on to make a decision regarding a short sale. The lower the estimate, the better it is for you. Lenders want to get rid of distressed properties as soon as possible, but they aren't going to sell them for ridiculously low prices.
Many short sales, in fact, fall through if the BPOs come in too high. When properties are in good condition, it is hard to convince lenders that they are worth much less than the appraised values.

Hardship letter

Most lenders will request a hardship letter that details the reasons a homeowner has not made his or her mortgage payments. This is a bit strange because the borrower who is in default must prove that he or she is broke and unable to afford the payments. This is a fairly extensive request, which may require the homeowner to submit pay stubs, tax records and other personal financial records, along with the letter. It is essential that you submit everything that is requested. Otherwise, your offer will not be accepted.
Creating an effective and compelling hardship letter requires creativity. Without lying, the letter should paint a very bleak picture of the situation. If neither you nor the homeowner possesses decent writing skills, it may be in your collective best interests to seek the assistance of a professional - it's worth it.

HUD-1 settlement statement

A lender will generally require a written contract between you and the homeowner. A preliminary HUD-1 settlement statement will reassure the lender that the homeowner isn't receiving any cash from the deal. The HUD-1 form requires you to itemize all charges imposed upon you and the homeowner for the real estate transaction. Essentially, it is a complete list of the incoming and outgoing funds. The contract should be written so that you pay all costs associated with the deal. And, that the "net cash" to the homeowner is the precise amount of the short pay to the lender. If you have difficulty completing the form, a title or escrow company may help you prepare it in advance of the closing.

Supporting materials

A lender will often agree to a bigger discount if a property requires significant repairs. The more work that needs to be put into the property, the less it is worth and the harder it is to sell on the open market. Hire a professional(s) to appraise the home and provide you with a bid for repair estimate (the higher the better). This is not a requirement because as mentioned above, the lender will get its own BPO. However, providing independent appraisals and comparable sales information that support your offer are critical. There are other things you can also do if the home is not in ready-to-move-in condition. Always remember, it is in your best interests to submit with your paperwork as much negative information about the property as possible. For example, newspaper clippings that discuss "bad news" nearby or in the neighborhood can help reduce the price of the property in negotiations.

Waiting for an answer

It usually takes about three to six weeks to receive an answer from the lender once you have submitted the HUD-1 settlement statement and all of the other supporting materials. It's always good to call the lender to ensure that he or she has received the information, as well as make it clear that you are always available to answer questions and provide additional information, especially if something is missing. If the auction date for the property is approaching, ask the lender to extend it until he or she has had time to consider your offer. If your offer is legitimate, the lender will almost always grant your request.

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Pre Foreclosures

A pre-foreclosure occurs when a property owner has defaulted on their loan payments. The foreclosure process is usually initiated by the property owner's lender in the form of an official "Notice of Default" document to the property owner. However, the property will still belong to the owner as long as the pre-foreclosure period lasts (which will depend on the foreclosure process's type and applicable legal documents signed at the time of property purchase). The foreclosure timeline varies from state to state, in Florida the initial document is called Lis Penden and the aproximatly time between the Lis Pendens and the auction for that property will be 5-6 months. Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright. The borrower/owner can walk away with something to show for any equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20-40 percent below market value.

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Foreclosures

Foreclosure is the legal right of a mortgage holder or other third-party lien holder to gain ownership of the property and/or the right to sell the property and use the proceeds to pay off the mortgage if the mortgage or lien is in default. It is a concept that has existed for centuries.
Initially, the law had it that a mortgage default resulted in the automatic ownership of the property by the holder of the mortgage (sometimes referred to as the mortgagee). But the law developed over the years so as to allow mortgagors time to pay off mortgages before their property was taken away. This process of taking away the mortgagor's property because of default is what constitutes foreclosure.

Today, numerous state laws and regulations govern foreclosure to protect both the mortgagor and the holder of the mortgage from unfairness and fraud. In the United States, although states have their own variations, the basic premises of foreclosure law remain the same.

Types of Foreclosure

The mortgage holder can usually initiate foreclosure anytime after a default on the mortgage. Within the United States, there exist several types of foreclosures. Two are widely used, with the rest being possibilities only in a few states. The most important type of foreclosure is foreclosure by judicial sale. This is available in every state and is the required method in many. It involves the sale of the mortgaged property done under the supervision of a court, with the proceeds going first to satisfy the mortgage, and then to satisfy other lien holders, and finally to the mortgagor. Because it is a legal action, all the proper parties must be notified of the foreclosure, and there will be both pleadings and some sort of judicial decision, usually after a short trial.
The second type of foreclosure, foreclosure by power of sale, involves the sale of the property by the mortgage holder not through the supervision of a court. Where it is available, foreclosure by power of sale is generally a more expedient way of foreclosing on a property than foreclosure by judicial sale. The majority of states allow this method of foreclosure. Again, proceeds from the sale go first to the mortgage holder, then to other lien holders, and finally to the mortgagor.
Other types of foreclosure are only available in limited places and are therefore considered minor methods of foreclosure. Strict foreclosure is one example. Under strict foreclosure, when a mortgagor defaults, a court orders the mortgagor to pay the mortgage within a certain period of time. If the mortgagor fails, the mortgage holder automatically gains title, with no obligation to sell the property. Strict foreclosure was the original method of foreclosure, but today it is only available in New Hampshire and Vermont.

Acceleration

The concept of acceleration is used to determine the amount owed under foreclosure. Acceleration allows the mortgage holder the right when the mortgagor defaults on the mortgage to declare the entire debt due and payable. In other words, if a mortgage is taken out on property for $10,000 with monthly payments required, and the mortgagor fails to make the monthly payments, the mortgage holder can demand the mortgagor make good on the entire $10,000 of the mortgage. Virtually all mortgages today have acceleration clauses. However, they are not imposed by statute, so if a mortgage does not have an acceleration clause, the mortgage holder has no choice but to either wait to foreclose until all of the payments come due or convince a court to divide up parts of the property and sell them in order to pay the installment that is due. Alternatively, the court may order the property sold subject to the mortgage, with the proceeds from the sale going to the payments owed the mortgage holder.

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Tax Liens

A tax lien sale is the sale, conducted by a governmental agency, of tax liens for delinquent taxes on real estate. It is one of two methodologies used by governmental agencies to collect delinquent taxes owed on real estate, the other being the tax deed sale.

Sale process

In a tax lien state, the lien (consisting of delinquent taxes, accrued interest, and costs associated with the sale) is offered to prospective investors at public auction. Traditionally, auctions were held in person; however, Internet-based auctions (especially within large counties having numerous liens) have grown in popularity as this method allows for bidders from outside the area to participate. In the event that more than one investor seeks the same lien, depending on state law the winner will be determined by one of five methods:

• Bid Down the Interest. Under this method, the stated rate of return offered by the government is the maximum rate of return allowed. However, investors can accept lower rates of return, including zero percent in some cases (though this is rare in practice). The investor accepting the lowest rate of return is the winner. In the event more than one investor will accept the same lower rate, a random or rotational method will be used to break ties. (Florida and Arizona use this method)
• Premium: Under this method, the investor willing to pay the highest "premium" (or excess above the lien amount) will be the winner. The premium may or may not earn interest, and may or may not be paid back to the investor upon redemption of the lien. (Colorado uses this method)
• Random Selection: Under this method, a bidder will be randomly selected from those offering a bid. Usually a computer is used to make the selection, but in smaller jurisdictions more rudimentary methods may be used (Larry Loftis, a professional tax lien investor from Orlando, Florida and an author on the subject, mentions in his book of an Iowa county whose random selection method consisted of drawing numbered ping-pong balls from a fried chicken bucket).
• Rotational Selection: Under this method, the first lien offered for sale will be offered to the investor holding bidder number one, who has the right of first refusal. If bidder number one refuses the lien, bidder number two may then bid. However, bidder number one will not be offered another lien until his number comes up again in the rotation. The next lien will go to the next number in line. Under this method, the investor has virtually no control over which liens s/he will obtain in the bidding, except to take or refuse what is offered.
• Bid Down the Ownership: Used in Iowa and few other states, the investor willing to purchase the lien for the lowest percent of encumbrance on the property will be awarded the lien. For example, a bidder may agree to take a lien on only 95% of the property. If the lien is not redeemed, the investor would only receive 95% ownership of the property with the remaining 5% owned by the original owner. In practice, few investors will bid on liens for less than full right to the property or sale proceeds. Therefore, with multiple owners bidding on 100% encumbrance, the process then generally reverts to the random selection.

Liens not sold at auction are considered "struck" (or sold) to the entity (usually the county) conducting the auction. Some states allow "over the counter" purchases of liens not sold at auction. However, in most instances the unsold liens are on marginal or worthless properties, the liens on better properties having been purchased at auction.

Redemption process

The investor must wait a specified period of time (referred to as the "redemption period"), during which time the lien (plus interest and any other fees) may be repaid. Usually the lien holder is not permitted during this period to contact the property owner (or anyone else having an interest in the property, such as the mortgage holder) to demand payment or threaten foreclosure, or else the certificate can be forfeit. In some jurisdictions, the lienholder must agree to pay subsequent unpaid property taxes during the redemption period in order to protect his/her interest. If the lienholder does not pay such taxes, a subsequent lienholder would "buy out" the prior lienholder's interest. Once the redemption period is over, the lien holder may initiate foreclosure proceedings.
The proceedings (the costs of which must be paid by the lien holder, though a redeeming property owner may be required to pay them as part of redemption) may result in either acquiring title to the property (normally this will be a quitclaim deed and not insurable title), or a tax deed sale of the property where the lien holder has the right of first bid (and may participate by making additional bids if s/he so chooses).

During the period between the initiation of proceedings and actual foreclosure, the property owner still has the opportunity to repay the lien with interest plus the costs incurred to foreclose. If the lien holder does not act within a specified period of time as defined by state law, the lien is forfeit and the holder loses his investment. Also, a lien issued in error of state law is repaid, but usually at a far lower interest rate than had the lien been valid.

Benefits of tax lien investing

The maximum rate of return on a tax lien can be far higher than other investments. For example, Florida offers a maximum rate of 18% (1.5% per month), while Arizona offers a maximum rate of 16%. Iowa offers a guaranteed 2% per month (or 24% annual return). However, as an incentive to encourage bidding, Florida law guarantees a 5% minimum return regardless of the rate bid (except if the bid is zero percent) or when the lien is redeemed. Thus, if a Florida certificate is purchased at auction on one day and redeemed on the next, the investor will earn 5% over the certificate price for one day's holding, or a mind-boggling 1,825% return! Loftis, the author mentioned above, in his book tells another story where he went to pay for a lien, only to find a redemption check waiting for him on the lien he bought; thus, he states that he obtained a return rate of infinity (to be mathematically correct, since it involved division by zero, the rate of return is actually not calculable). In practice, the majority of tax liens are redeemed before the property is foreclosed; thus, the risk of loss is minimal.

Pitfalls of tax lien investing

Payment is usually required at purchase or within a very short time afterward (often no more than 24-72 hours). Failure to pay the full amount results in all lien certificates purchased by the investor being cancelled, and may result in the investor losing his/her deposit and/or being barred from future sales. In many states further actions must be taken to protect the lien holder's rights after purchase of a lien. Failure to comply exactly with these requirements may make the lien worthless. Tax liens on "choice" properties are quickly purchased by major institutional investors having sufficient time and resources to research valuable properties vs. worthless ones and who can afford the occasional poor choice; smaller liens usually involve properties that are generally worthless (such as odd strips of land). (In addition, Florida does not allow auctions or sales of tax liens of less than $100 on homesteads.)
In "random" and "rotational" jurisdictions, investors have even less control over which liens they purchase. In "bid down the interest" jurisdictions, valuable properties are usually bid to the lowest rate possible greater than zero percent. (For example, Florida permits the interest rate to be bid down to a minuscule 0.25% - though it guarantees a minimum 5% return - while Arizona allows the bid to be as low as 1%.) Similarly, in "premium" states, valuable properties are bid up above the means of an average investor.
Unlike a certificate of deposit, tax liens are illiquid. They cannot be "cashed in" (resold to the taxing authority), but must be held until either they are repaid or the holder takes action to foreclose. (It is possible, however, to assign one's interest in a tax lien to another party.) Some experts tout tax lien sales as a means of acquiring property at highly discounted prices. In practice, except for very rare instances all of liens of any value are redeemed well before the property can be foreclosed (especially where a mortgage is involved, as the mortgage holder is secondary in line to a tax lien), and where tax deed sales are used to foreclose, numerous bidders participate, thus making the chances of actual acquisition remote. For example, in one Illinois county with a population of over 500,000 the County Clerk's office said only 3 residential properties were not redeemed in 35 years. If someone is successful in attaining the deed to the property, the property might have environmental problems for which the new owner will be responsible. Depending upon the state, this could be very disadvantageous and the investor might have to pay a large amount of money to have the problem taken care of, or be fined daily until the problems are fixed.

Deeds obtained are usually quitclaim deeds, which do not provide insurable title. The owner would then have to file a quiet title action to obtain marketable title to the property, which involves additional cost. There may also be other governmental liens (such as weed liens or demolition liens) that the investor must pay off when attaining title to the property. These are not part of the lien sale and remain even if the lien holder acquires the property. If the owner of the property declares bankruptcy, the bankruptcy court may lower the interest rate to be paid, or may discharge part or all of the lien, leaving the lien holder with nothing.

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Sale by Owner

Sale by Owner is an alternative to paying real estate commissions on your property sale. Since your home is your largest financial asset, a 6% commission amounts to $18,000 commission on a $300,000 home. The savings look very attractive, however, is it really worth it? Please feel free to read the following booklet to gain insight on this process, then decide for yourself, or call us if you have questions! We're here to help. (324 KB, PDF, Adobe Acrobat required)

FOR SALE BY OWNER

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Auctions

A real estate auction is an innovative and effective method of selling real estate. It is an intense, accelerated real estate marketing process that involves the public sale of any property -- most certainly including those that are nondistressed -- through open cry, competitive bidding. The real estate auction is a win-win proposition for everyone involved.

BENEFITS TO THE SELLER:

• Buyers come prepared to buy
• Quick disposal reduces long-term carrying costs, including taxes & maintenance
• Assurance that property will be sold at true market value
• Exposes the property to a large number of pre-qualified prospects
• Accelerates the sale
• Creates competition among buyers - auction price can exceed the price of a negotiated sale
• Requires potential buyers to pre-qualify for financing
• The seller knows exactly when the property will sell
• Eliminates numerous and unscheduled showings
• Takes the seller out of the negotiation process
• Ensures an aggressive marketing program that increases interest and visibility

BENEFITS TO THE BUYER:

• Smart investments are made as properties are usually purchased at fair market value through competitive bidding
• The buyer knows the seller is committed to sell
• In multi-property auctions the buyer sees many offerings in the same place at the same time
• Buyers determine the purchase price
• Auctions eliminate long negotiation periods
• Auctions reduce time to purchase property
• Purchasing and closing dates are known
• Buyers know they are competing fairly and on the same terms as all other buyers
• Buyers receive comprehensive information on property via due diligence packet

BENEFITS TO THE REALTOR®:

• Generates a list of ready, qualified buyers
• Offers clients and customers new selling and purchasing options
• Increases revenue and market share
• Develops your own market niche
• Assurance that property will be sold at true market value
• Property is sold within a relatively short period of time
• Exposes the property to many potential purchasers
• Auctions bring people in to look at all your listings, not just the auction listing
• Successful auctions result in referrals and return business
• Agents can earn commissions as referring agent/broker, cooperating agent/broker, or as the listing agent/broker

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