buying property before, during
and after foreclosure
the good, the bad & the ugly
What you pay
for an income property is important, but what you finally earn on your money
and effort is even
A Certificate of Course Completion is now available for this Course.
e-course provides lessons and discussions regarding the real estate
foreclosure process and then buying those properties. We will take you step-by-step through
understanding the subject of buying foreclosures before, during and after the
sale. However, the course will assume that
students have some prior knowledge of basic real estate concepts and
The pre-course quiz will test your existing knowledge of the
subject and a final quiz will help you to see how much you learned. You
may repeat all or parts of the course as many times as desired. Some of
the issues covered in this course are covered from different perspectives in
various other of our pages throughout the CSES family of Webs.
This course is
useful for Buying & Selling Income Property.
have completed this, or other csu e-courses, it may be worth your while to
review them periodically for new resources, support documents and updates in the
Please Take the
Quick & Simple
Introduction & Overview
Cutting through the hype and BS
Every other day you hear, read or see a new a
way to get rich quick in the real estate investing business with no money
down, bad credit and little or no work. One of the most over hyped
and misrepresented real estate investing come-ons is buying properties in
The Internet is polluted with web sites wanting
to sell you access to their lists of property you can "steal" for 50% of
value; coupled with books, tapes or other packaged BS on how to do it. Some
are legitimate and valuable, most are not.
It is easy to find the lists; we link to some at
the end of this course and you can find many more on your own. Do a search
using "foreclosure" and you will find a whole list of lists. After you pay
for access you will also find that you probably just missed the really good
deals. "We're sorry".
Now here's the truth
If RHOL had a list of real estate investments
that can be bought for 50% of value, we are not going to share it with
anyone but our children, our very best friends, and perhaps my wife's
deadbeat brother. We don't have such a list and neither does anyone else.
Now, that is not to say that great foreclosure
property deals do not exist. They do. But whoever finds them first buys them
and only tells you about it after closing. You will learn how to find those
that actually do exist
here, but you will also learn that it will take some effort and
follow-through to find them and actually buy them. It is one thing to have the knowledge,
we will help with that, it is quite another to get you to use it before your
Information is everything
You will obviously need to know what
properties are or will be for sale in order to buy foreclosures. You will
need to learn how much the loan amounts are and what timeframes you are
dealing with. Local newspapers will publish the properties scheduled for
sale. That will provide some information and all you have to pay for is the
newspaper subscription. You can go to the county recorder and research
documents yourself. You can also subscribe to a legitimate service that
obtains records and sells the information. The best services give complete,
accurate information and others provide the basic minimum, but it saves time
spent looking them up for yourself.
Another option is to go to the auctions in your
area and ask the bidders who show up for the sale what local information
providers are available. If they don't want to tell you, start smiling and
ask someone else until you get the information you need.
Once you know which properties are in default,
you can approach owners directly to buy their equity, arrange favorable financing
with the existing lender, or whatever seems appropriate to benefit all the parties involved.
Whatever you decide to do after completing this course will be based on
knowing which properties that are for sale fit your criteria.
Pretty and profitable are not synonymous
The real money to be made in any real estate investment is finding
something ugly that no one else wants; but with the right things wrong with
it. A sagging porch, pealing paint,
broken windows and other things that can be repaired inexpensively with not
much more than a facelift will make
a huge improvement in the curb appeal and therefore the market value of a property.
Property owners facing
foreclosure usually have financial problems which may prevent them from
doing even basic maintenance on their property. Additionally, they are
probably in a state of depression with no incentive to keep the
property looking good. Those unhappy facts are often good news for an
educated investor who has learned how to look past the skin-deep ugly to
find the valuable investment opportunity underneath that others can't
Thou shalt not steal
The days of stealing a really good repossessed property
from a lender for a song
are, for the most part, long gone. Now-a-days banks, and even government
agencies, know the value of painting and fixing before they offer their
foreclosed property for sale. In fact, the first obligation of a broker
representing lenders and government agencies is doing whatever can
reasonably be done in the way of repairs or decorating to maximize the sales
Need we remind you here that wherever there is a profit to be
made in real estate, a line has already formed? The line got so long at CitiBank that they now charge investors $50.00 just to see a list of their
Professionals are in the picture
Most lenders now hire
professionals to handle the entire foreclosure and resale process for them
in order to maximize their profit or minimize their loss. As a result, REO
(Real Estate Owned) properties
are almost always fixed, painted and sold for something near their true
Don't be discouraged yet. If opportunities did
not still exist we wouldn't be writing this course. Your mother was right; where there is a will there
is a way.
There are many opportunities to see and do what someone
less informed and motivated misses during every step of the foreclosure process; before
during - and after the foreclosure auction.
After you have completed this course you will know as
much or more than most property owners, lenders and their agents about what
is happening, and what is likely to happen next in the foreclosure. That
will do a lot to at least level the playing
field for you and give you at a better chance at what deals are out
Understanding the foreclosure process
Many new investors believe that the only way to buy foreclosure properties
is directly from the bank. You will learn here how wrong that assumption is.
Most home loans today are made through a mortgage company, credit union or
savings and loans; while banks specialize in business and commercial loans.
Additionally, most home loans are sold to the mortgage securities market, so
the originating lending institution may have no ongoing interest in the
mortgage other than a contract to service the loan; which may include
handling any foreclosure.
It is natural to assume that the bank owns the
property because that's where the money came from to purchase it However,
whether a Deed of Trust or a Mortgage, the title to your property is either
held by the property owner, a third party, or is pledged as security for the
loan. Therefore, a bank does not own the property unless and until they
successfully complete the legal process of foreclosing a loan and buying the
property by out-bidding any other interested parties at a Sheriff's sale or
When you borrow money you give a
mortgage to the lender or a trust-deed to a trustee as the security
instrument utilized to protect the lender from loss should you default on
Types of foreclosure
Judicial, Non judicial, Strict Foreclosure
A foreclosure is the legal process of a lender taking ownership of the
collateral for a mortgage or promissory note that is in default. The process
of foreclosing is a little different from state to state, but there are
basically two types of foreclosure: judicial and non-judicial. States,
like California, may permit both types of
proceedings, but it is common practice to use one method or the other
almost exclusively within a state.
Review your State Foreclosure
Law Summary from the dropdown menu under
The goal of the foreclosing
institution is to recover the balance of the loan and costs by gaining
possession and ownership of the property.
What do they
are mostly about money, not real estate or blood. The goal of a lender
pursuing foreclosure is the recovery of the
principle loan balance, accrued interest, late fees, penalties, taxes paid
on behalf of the property owner, court costs and attorneys' fees.
states, the laws are written so that the lender can only attempt to recover
these widely accepted standard losses. A pound of flesh or a little blood is
now illegal and debtor's prison was outlawed in America under Andrew
However, the lender will add in every legitimate
expense they can when foreclosing, and that will include the total the
lender claims is owed by the property owner. In most states, that is the
maximum amount the lender can collect.
Laws have also been written to protect property
owners from unfair practices during foreclosure. Some of them will be
covered in this course.
The belief that a lender must sell a repossessed property for the loan
balance and the amount it cost them to gain possession is untrue. Once the
lender owns the property they can keep it, sell it, or even rent it for all they can
get, and keep the profits.
Accelerating the debt
Most mortgages or land
contracts contain an acceleration clause which states that in the event of
default the lender may declare the entire balance due and payable. However,
states have laws requiring a reasonable notice to the defaulting borrower
before the lender can accelerate the debt.
Remember, a lender will also have to comply
with any relevant provisions of the
Federal Fair Debt Collection Practices Act. If the borrower does not cure the default after being served legal
notice, the lender may then elect to foreclose their loan.
Reinstating the Loan
A borrower may be able to "cure" the loan before the date of sale. This may
simply require paying the amount in arrears, plus interest and attorney's
fees. This may have some value to an investor if the mortgage is assumable;
as is the case with VA and some other government guaranteed loans.
than half the states allow judicial proceedings for a foreclosure. A lawsuit
is brought by the lender ("mortgagee") against the borrower ("mortgagor") to
acquire possession of the property (security). Like all lawsuits, it must
start with a summons and complaint served on the borrower and any other
parties with rights in the property. That is because all junior liens
(second mortgage), including lease-hold tenancies, are wiped out if the
foreclosure is successful. Superior liens include the IRS and property
taxes. Those liens will survive a foreclosure sale.
You better answer
lawsuits require the defendant (borrower) to answer the lawsuit, or the
plaintiff (lender) will get a default judgment. After judgment a referee
will be appointed by the court to ascertain the total amount of money,
including interest and attorney's fees, that is due the plaintiff. The
lender must then publish a legal notice of sale for several weeks, according
to the state law. If the total amount due is not paid by the date ordered
by the court, a public sale is conducted by the referee or sheriff on the
The sheriff's sale is conducted like an auction with the
property going to the highest bidder. However, the only bidder at the sale
may be a representative of the lender because if there had been a
significant amount of equity in the property the borrower would likely have
been able to sell and prevent the foreclosure. We will get to that in lesson
If the lender does not bid at that
sheriff's sale or auction, it probably doesn't want the property. This may
be due to excessive superior liens, such as IRS or other tax liens. It might
also mean that there are contamination or other environmental problems.
Sheriff or trustee's deed
The deed commonly received when
purchasing a property at a foreclosure sale is called a Sheriff or Trustee's
Deed and does not contain the warranties embodied in the Warranty Deed
usually used to transfer real property ownership. Consequently, it is often necessary
to pay any outstanding taxes and tax liens, then file a legal action to quiet title and perfect the deed.
If the loan was full recourse, and the proceeds from the sale are
insufficient to satisfy the amount owed to the lender, the lender may be
entitled to a deficiency judgment against the borrower and any guarantor on
Some states prohibit deficiency judgments. (See, Alaska Statutes
§34.20.100, California Code of Civil Procedure §580b and Washington Revised
Code §61.24.010 ).
legal process can take from three months to twelve months, depending on
state law and the volume of court cases in the county where the property is
states permit a lender to foreclose without a lawsuit using what are
commonly called forfeiture or a "power of sale." When the parties use
a land contract or the borrower ("grantor") gives a "deed of trust" to a
trustee to hold for the lender ("beneficiary"), the lender simply files a
notice of default and publishes a legal notice of sale. The entire
forfeiture or power of sale process usually takes less than 90 days.
There is another however, however. Judges
sometimes do strange stuff. If the borrower has a significant amount of
equity, or a sufficiently sad story, judges have been known to grant extended
periods of redemption. Conversely, bankers often have friends in high places
and a wink or nod could expedite the process. (Sorry about the real world
stuff in an academic setting.)
Connecticut is one of the
few states that still uses strict foreclosure. There is not foreclosure sale
at all, not even at the courthouse steps. The lender must go to court and
obtain a court order showing the borrower to be in default under the terms
of the mortgage. At that point, title shifts to the lender. However, the
borrower has a length of time set by the court to redeem the property. If
the borrower fails to come up with the money during that time, then the
borrower is forever barred from asserting a claim to the property and title
becomes absolute in the lender.
states give a borrower the right to "redeem" the amount owed and get title
to their property back after the sale. The length of the redemption period
varies from state to state; usually from six months to a year. The first right of redemption is from the
owner, borrower or guarantor on loan. Then would come the junior lien holders
who are in danger of having their interest wiped out by the foreclosing senior lien holder.
before the sale
The best time to buy a
foreclosure property is usually just before foreclosure. If the property is worth
enough in excess of the mortgage balance to make it interesting, an investor can often make the best deal with
the owner before the auction. As you will learn, that will not normally be
quick and easy, but the most challenging will usually produce the highest
Even when the equity spread is not large there
are still possibilities. Remember your leverage lessons. If you can buy for
little or no money down, your rate of return on investment could be as large
as Bill O'Riley's ego. Consider too that there are times when an investor is paid
something by the borrower to buy their
property because it will help solve their problems and protect their credit.
Now that we have your interest, let's get right
to it. We have made buying before foreclosure the first lesson.
Are you ready to learn and grow
Lesson 1 -
Ten steps to success
Buying at the Foreclosure Sale
Lesson 3 -
Buying After the Foreclosure Sale
- Ten steps to success
- Simple Examples
Buying Foreclosures Resources
Summary & Conclusions