Lesson 2 - Relevant Terms :

If you understand the process and couple it with a knowledge of the terms you will encounter in foreclosure investing, you will have a winning mindset. A winning mindset is a positive and profitable mindset.

You will need a positive mindset because you will encounter misery, heartbreak and grief in the eyes and words of people who are losing their homes. You have to understand, and accept, the fact you didn’t cause their predicament. You have to understand, and accept, the fact that you are there to help them.

Having said all that, let’s talk terms. Because this book’s theme is short sale investing you should know that a short sale is nothing more than the lender accepting less than what is owed on the property. Please note I said lender and NOT the current homeowner.

In a short sale, you will be buying the note from the lender. By extension, that means you will be buying the home on which the note is held. When you as a home buyer get a loan, you surrender your rights to the property should you enter into default.

This means if you can not pay for it or otherwise violate its terms and conditions, the lender can foreclose and claim the property. If you are in payment default, i.e. have missed more than one payment, you are in one of the three foreclosure phases.

Hence, if you can’t sell your house for what you owe or more than you owe before the sale date, you will lose your home. This is where a short sale enters the picture. I will use one of my client’s home as an example.

They (husband and wife) are four payments behind and contacted me to help them. They owe approximately $30,000 more than the house is worth. It doesn’t take a Rhodes Scholar to figure out they can’t sell it for more than they owe or for even what they owe.

If they sell it for less than what they owe, they will have to bring cash to the closing so the new owner can get a release of lien from the current lender. Even if you don’t know a thing about investing, you can figure out this scenario is not happening anytime soon.

As I assessed the situation, the only solution I saw was a short sale. The homeowners agreed. The short sale will benefit the homeowners because their credit will not have the stigma of a foreclosure. It will show they were late in making their payments but it won’t show a foreclosure.

The lender has not commenced the foreclosure process at this point in time so they won’t even have their credit dinged by a NOD filing.

Now, how do I get the lender to sell me the house for less than what is owed? I have to call them and ask for their short sale package. A short sale package is a list of documents the lender wants completed in order to say yes or no to my offer. That’s all it is.
A typical short sale package asks for the current borrower’s financial statement. The lender wants to know how their financial situation has changed since their initial loan application.

They also want a Hardship Letter which is sometimes called an Explanation of Hardship. The lender wants to know in writing what has changed in their life since the loan origination (original loan) that has caused the homeowner to fall behind. They want to know how this impaired the ability of the homeowner to make their mortgage payments. And, as you might guess, they want to know when these changes/events happened.

A Hardship Letter should also contain a statement to the effect that the homeowner does not anticipate his/her/their financial situation to improve in the near future. All parties on the loan should sign and date the Hardship Letter.

A copy of a Hardship Letter is in the attachments. Sometimes the borrower won’t receive a form so they have to write one out in long hand. You should never write one out for the homeowners. You don’t want any liability should the short sale start to take an ugly turn. You can help the borrower phrase the letter so it is coherent but you should never be the author.

Before you can do anything in a foreclosure situation you will need An Authorization To Release Information, sometimes called a Third Party Authorization Form, signed by all parties on the loan. This form should not only be signed by the parties but their social security numbers should be on the form along with the loan number.

If the borrowers have a first and a second loan, have them execute two Authorizations so you can talk with both lenders. This client has two loans from the same lender. I only needed one Authorization. My other client also has two loans. Each is from a different lender. I needed two Authorizations signed.

A sample Authorization form is in the attachments. Remember, make sure you have an Authorization for each lender. Sometimes you will encounter a homeowner with three loans.

The short sale package will almost always ask for the homeowner’s most recent checking and savings account statements for each person on the loan. It will tell you to provide proof of all sources of monthly household income such as pay stubs for the last 30 days.

If the homeowners are self employed, they will have to provide profit and loss statements for the last two quarters (or more) along with their most recent federal tax return. And, if applicable, copies of leases, social security, pension and/or disability statements.

If the house has been listed, they will want to see a listing contract along with listing history even if the listing period has expired.

At the time the package is submitted it must also contain a sales contract signed by the buyer (that’ll be you) and the homeowners and made subject to the lender’s approval. In other words, one of the clauses in your purchase agreement will say something like:

“This offer is made subject to the approval of XYZ Lender.”

If you can word it better, please do.

You will also have to include an estimated settlement statement. This statement goes by the formal acronym: HUD 1. It is a form devised by HUD and is used in all real estate transactions involving residential property. It lays out in dollars and cents how much each party will have to pay and to whom the funds will be paid.

A sample HUD 1 is in the attachments.

The lender will always want to see proof of the buyer’s financing. This could be a prequalification letter from a lender, bank statement showing cash on deposit or anything that proves the buyer is qualified to buy the property should the lender agree to the short sale offer.

The lender may also ask for a BPO. BPO means broker price opinion. A BPO is generated by a real estate broker from your community and it is his/her opinion of value for the property. For example, with my client’s property the BPO will probably show the value to be anywhere from $30,000 to $60,000 below what is owed.

Some people offer advice on how to influence the broker who is doing the BPO. I say you shouldn’t overtly attempt to influence their decision. It is alright to point out all the flaws and items in disrepair and damages and other maladies of the house but nothing else. They sometimes miss these things so pointing them out is actually helping them to make a more informed decision.

However, don’t make remarks to the broker that might be interpreted as a threat or demeaning. This will not help your cause.

Last but not least is any other documentation or information you feel may be relevant to the situation. For example, let’s say the roof has a hole in it. Take pictures from the interior of the house and take pictures from the roof. I also take pictures of the back and front yard because it is almost always in bad condition. I also have a contractor give me an estimate as to how much it will cost to fix up the house to make it sellable.

Remember, they are asking for information you feel is relevant to the situation. I also tell them the economic facts of the neighborhood. Things like the number of sales on the block, how long the houses have been on the market and how many buyers there are in the market along with the number of foreclosures in the immediate area or city or county.

The best source of this knowledge is a realtor. I use a lady who has been in the business in good times and bad. She has staying power and knows the housing market inside and out in this county.

For example, Nevada is number one in the nation for foreclosures. 1 in 62 homes are in foreclosure in this state. In my county, there is only 1 buyer for every 12 homes on the market. The average market stay for a home is close to 180 days.

This is important to pass along to the lender because this tells them that if they foreclose on the property they might be stuck holding a non performing asset for up to six months or maybe even longer. Holding a non performing asset means more of the lender’s money is going down the proverbial black hole.

Plus, while they own the home, they are subject to lawsuits and liability claims should anyone get hurt, injured or die on the property while it sits there waiting to be sold. Should homeless people or squatters break in and trash the home, it will sit on the market forever. Should someone set it on fire, the bank will own a burned shell.

They also have to keep the property taxes current or the county will put a tax lien against the property and sell it after a certain period of time. Tax liens take priority over all other liens. The lender doesn’t want to lose even a non performing asset to the tax man.

If you got the idea a foreclosure is an expensive proposition for a lender you are right. To add more misery to their fortunes, after a certain number of them are on the books, the federal government prohibits them from making any more loans.

They lose their line of credit with the government agencies which is almost certain death as a business. If they don’t have access to a line, or lines, of credit, they can’t keep their doors open.

I don’t want to belabor this point. Suffice it to say, lenders have many incentives to look at your offer. They also have the option to decline your offer. They also have the option to counter your offer.

Going back to my client’s house as the example and putting numbers on paper. Let’s say I offer the lender $100,000 for the property. The lender declines but counters with $125,000. I now have the option to decline or counter their offer.

If I feel the house is worth between $200,000 and $230,000, I’d be a fool to decline the counter. Let’s say I accept the $125,000 amount and turn around and sell the house for $160,000. How much did I make?

$35,000 less some expenses for driving, pictures, copying, postage, etc. That is a good day’s work, right? This is what I’m talking about when I say you can make this kind of money in this business.

I already have the house sold by the way should the lender accept my offer or counter with an amount that will guarantee me a profit. You will learn how to find buyers later in this manual.

I want to repeat something I said earlier. You have to work at this business for it to work for you. If you are lazy, slip shod or don’t handle your business or personal affairs very well, you won’t succeed in foreclosure investing or, for that matter, in any other field.

Print out this book and read every word. Before you attempt your first deal, re-read this book again. In the next chapter I will tell you about your investing team. You need one and they are indispensable to your success.

I provide a checklist in the attachments of the steps in this process. If you are new to foreclosure investing, use it as an outline to stay on track. Once you complete a deal or two, you’ll have it down pat. But, keep it handy so you can stay on point.

Since you will encounter different types of deeds in your real estate investment career, here are the definitions of the most common. If you have specific questions about any type of deed, please ask your title officer. She will know the answer.

Quit Claim Deed – A quit claim deed transfers to the grantee any and all of the legal rights the grantor has in the parcel of real property.  The quit claim deed makes no warranty about the extent of the grantor’s interest in the parcel of real property.

Grant Deed – A grant deed transfers to the grantee all or part of the legal rights the grantor has in the parcel of real property.  The grantor deed implies certain warranties - that the property has not been transferred to someone else and that the property is free from any liens placed on the property by the grantor.

General Warranty Deed – A general warranty deed transfers to the grantee all of the legal rights the grantor has in the parcel of real property and explicitly warranties that the grantor has good title to the parcel. (A copy is in the attachments for your use.)

Special Warranty Deed – A special warranty deed transfers to the grantee all of the legal rights the grantor has in the parcel of real property but warranties only what the deed specifically states is warranted.

Fiduciary Deed – A fiduciary deed is a deed used to transfer property when the grantor is a fiduciary such as a trustee, guardian, conservator, or executor acting in his official capacity.  A fiduciary deed usually only warranties that the fiduciary is acting in his appointed capacity and within his allotted authority.

Trust Deed – A trust deed is a written instrument which transfers property to a trustee to secure an obligation such as a promissory note or a mortgage.  The trustee has the power to sell the real property in the case of a default on the obligation.

Go To: Part 3 - Your Foreclosure Team