1. real estate

Bible on Buying
Foreclosure
Properties from
Government
CONTENTS
Building a Foreclosure Portfolio
Buying a Foreclosure Home With No Money Down
Buying A Home With Bad Credit: How To Clean Up Your Credit Score
Creative HUD Home Financing
The Pros of 203k Loans
The Cons of 203k Loans
Adjustable Rate Mortgages (ARM) and Your Foreclosure Home Purchase
FICO Scores, What Affects Them And How Mortgage Lenders Look At Them
FICO Scores and Interest Rates
First Time Homebuyer Advantages
Lower Interest Rates For First Time Homebuyers
Tax Exempt Status For Foreclosure Homes
Exemption of Real Estate Appraisal
Early Bidding Window For Foreclosure Homes
No Current Home To Sell
Termite Inspections and Foreclosure Home Repairs
Familiarize Yourself With Your Real Estate Marketplace
What does the average home sell for in your area?
What is the average time a home is on the market in my "backyard"?
How many foreclosure home deals come available on an annual basis?
Rank The Areas Containing Foreclosure Homes in Your Marketplace
Shop For Equity First. Then Marketability.
Foreclosure Home Buying Advantages
Foreclosure Home Bidding Rules
How Much To Bid For the Foreclosure Home
HUD Foreclosure Homes
HUD/FHA Government Foreclosure Bidding Formula
VA Foreclosure Bidding Formula
Foreclosure Home Investing: Entry Level Homes
Foreclosure Homes With Zero Down
Foreclosure Real Estate and Home Ownership
Foreclosures In 15 Minutes
How to Determine Equity
How much can I get the foreclosure home for?
How much can I sell the foreclosure home for?
How much will it cost to repair the foreclosure home?
Foreclosure Tips
How Much Home Do I Qualify For?
How To Buy a Bank Foreclosure Home
The Foreclosing Lender’s Profits
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Condition of Title
Property Disposition
Bank Foreclosure Investing Overview
Disadvantages of Buying a Bank Foreclosure Home
How To Buy a Fannie Mae Foreclosure Home
How To Buy a Freddie Mac Foreclosure Home
How to Buy A Hud Foreclosure Home
Find a Good Real Estate Agent – It’s a Necessity
Contact a Well-Informed Mortgage Lender
The Bottom Line in HUD Foreclosure Homes
How To Buy A VA Foreclosure Home
Understanding VA Foreclosures
Term Offer vs. Cash Offer
Term Offer for a VA Foreclosure Home
Cash Offer for a VA Foreclosure Home
Investing in Foreclosure Homes: Risks and Rewards
Buying Pre-Foreclosure Homes
Buying a Foreclosure Home at Auction
Buying REOs
Investing In Real Estate: How To Sell Your Foreclosure Home
Real Estate Investment Strategy 2 – Buy and Rent Option
Real Estate Investment Strategy 3 - LIC to Sell
LIC to LIC
Quick Foreclosure Facts
Why buy a foreclosure home?
Real Estate Investment vs. The Stock Market
Save $100,000 On Foreclosure Home
Understanding Mortgage Interest Rates
Frequency of Mortgage Payments
Secrets of HUD Foreclosure Homes
The Easy Way to Win the Mortgage Game
The Importance of A Foreclosure Home Inspection
What Are Bank REO (Real Estate Owned) Properties
What Are Escrows?
What Everyone Should Know About Equal Housing
What Is a HUD Foreclosure Home?
How Does a Home Become a HUD Foreclosure Home?
The Importance of a HUD Foreclosure Home Inspection
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Building a Foreclosure Portfolio
If you are just beginning to build your real estate portfolio, it is important that you
understand the choices you need to make now that will have an effect on your flexibility
later.
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What is my short-term real estate investing goal (i.e., how many foreclosure
homes the first year)?
Am I trying to generate revenue from my foreclosure homes now or in the future?
How much?
Do I want to be a landlord or not?
What is my credit like? (If you need to improve your credit, do it now.)
How much cash am I working with?
What are long-term real estate investing goals?
Be sure to ask yourself these questions before beginning your real estate investing and
foreclosure portfolio. If you already have investment properties, you should still ask
yourself these questions. Write your answers down and refer to this list before making
any decisions with regard to purchasing your next foreclosure home. Do not be afraid to
reassess your goals to be sure that you current actions are still in track with your longterm real estate investing goals.
Buying a Foreclosure Home With No Money Down
Federal Housing Administration (FHA) foreclosure homes are different from any other
type of foreclosure home in that there are several methods of buying a property utilizing
low money down or no money down techniques. It is essential to first understand the
several different ways in which the FHA lists the foreclosure homes that they are selling.
IN = Insured
IN indicates a foreclosure home that currently meets minimum property standards (MPS)
and is currently in livable condition. These foreclosure homes are not currently available
with no money down, but can be obtained with no money by applying these techniques.
Simply bid on the foreclosure home using an FHA 203b mortgage (as seen on the HUD
contract) and then have the foreclosure home inspected. Be certain that you are with the
home inspector and that the home inspector understands that you are interested in finding
the deficiencies of the foreclosure home. Be sure the foreclosure home deficiencies are
included in the necessary MPS items, including structural, heating and plumbing—paint
and carpet will not be enough.
Send the foreclosure home inspection along with your request to include the necessary
funds in the price you are paying for the foreclosure home. Repair funds requested must
exactly meet the increase of the purchase price for the foreclosure home. Be sure that the
amount requested is less than $5500 and that is approximately the three percent you were
required to put down on the mortgage.
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You could increase the amount of money received for repairs by applying for a 203k
mortgage after the foreclosure home has been inspected. This raises the amount of funds
received to a possible limit of 110% of the value of the foreclosure home after repair.
IE = Insured with Escrow
IE indicates a foreclosure home that requires some degree of repair in order to meet MPS.
Additionally, IE foreclosure homes are not currently in livable condition. These
foreclosure homes are not currently available with no money down but can be had with
no money by applying these techniques.
Simply bid on the foreclosure home using an FHA 203b mortgage (as seen on the HUD
contract) and then have the foreclosure home inspected. Be certain that you are with the
home inspector and that the inspector understands that you are interested in finding the
deficiencies of the foreclosure home. Be sure the foreclosure home deficiencies are
included in the necessary MPS items, including structural, heating and plumbing—paint
and carpet will not be enough.
Send the foreclosure home inspection along with your request to include the necessary
funds in the price you are paying for the foreclosure home. Repair funds requested must
exactly meet the increase of the purchase price for the foreclosure home. Be sure that the
amount requested is less than $5500 and that is approximately the three percent you were
required to put down on the mortgage.
You could increase the amount of money received for repairs to the foreclosure home by
applying for a 203k mortgage after the foreclosure home has been inspected. This raises
the amount of funds received to a possible limit of 110% of the value of the foreclosure
home after repair.
UI = Uninsured
UI indicates a foreclosure home that requires repairs in order to meet FHA standards and
that is currently not in livable condition. These foreclosure homes are available with low
money down but can be obtained with no money down. It is even possible to buy these
foreclosure homes and make a substantial profit if you apply the following techniques.
Simply bid on the foreclosure home using an FHA 203k repair mortgage (as seen on the
HUD contract) and then have the foreclosure home inspected. Be certain that you are
with the home inspector and that the inspector understands that you are interested in
finding all of the deficiencies of the foreclosure home. Be sure that the foreclosure home
deficiencies are included in the FHA minimums, including structural, heating and
plumbing—paint and carpet will not be enough.
The home inspector will send the foreclosure home inspection to the mortgage lender
along with the financial requirements to do all of the noted repairs. The inspector’s
assessment of the repair cost can be adjusted up or down in order for you to get enough
money to complete the repairs. Be sure to allocate enough so that you can break even on
the purchase. If you have any need for additional cash, include a margin so that you can
either add to your savings or pay some additional debt off. The maximum mortgage
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allowed is 110% of the value of the property after repairs. The bank generally frowns on
this practice, but if you act as the general contractor and work on the foreclosure home
yourself, you can pay yourself for the work performed.
Buying A Home With Bad Credit: How To Clean Up Your Credit Score
Repos, bankruptcies and even late payments on your phone bill can be the difference
between being qualified to buy a home or not.
Negative items on your credit can be removed quickly and easily if you know how. The
only reason credit problems ever become an issue is when they are ignored. By hiding
from the issue you allow the credit problems to gain momentum and the cycle of
ignorance continues to grow.
It is not difficult to understand that when a credit reporting agency annotates that you
have paid late on your car payment that they do not actually gain financially by doing so.
These credit agencies merely post information that was given to them by the creditor.
This is important to understand in order to appreciate how and why the system discussed
here has been so successful.
By disputing the accuracy of the negative credit item through a series of challenges to the
credit reporting agency you are challenging the reporting agency to defend their
information. If the credit agency elects to meet the challenge and go to court they may be
found to be accurate, but what have they gained?
The credit reporting agency will have lost because the process of defending the credit
report in question is costlier to them than any financial reward they could possibly
receive. Remember that the credit reporting agency is not a creditor itself, therefore win
or lose they lose because of the cost involved. This is why so few challenges are taken up
by the credit reporting agencies. Fewer than one in one hundred challenges to a credit
report are fought when the challenger has done the appropriate paperwork and done it
correctly.
In order to properly challenge each credit agency a professional service is recommended.
You can challenge a credit agency on your own with some prepackaged programs, but
the likelihood of success is magnified 100 times by using a credible firm that is well
versed with this segment of the credit industry.
Creative HUD Home Financing
What’s the easiest way to make money on a foreclosure home? Purchase a foreclosure
home that needs some repairs (over $5,000.00) and apply for a 203k loan. The FHA
(Federal Housing Administration) insures 203k loans and allows you to borrow a
predetermined amount of money to finance repairs to your foreclosure home.
The Pros of 203k Loans
• 203k loans are the most flexible way for you to customize your foreclosure home
to meet your specific needs. Floor plans can be changed or updated, kitchens can
be modernized and almost any other feature of your new foreclosure home can be
improved using a 203k loan.
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By taking advantage of a 203k loan, you can skip up to eight months of mortgage
payments on your foreclosure home.
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A 203k loan allows you to bill yourself for hours worked on your own home and
MAKE MONEY!
The Cons of 203k Loans
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203k loans are slightly more expensive than the usual FHA loan.
203k loans are slightly more complicated than the usual FHA loan.
The 203k loan program is an FHA insured loan that has similarities to construction loans
with some added bonuses. A booklet explaining 203k loans in more detail can be
downloaded from the link below or requested from your local real estate agent. This
booklet can answer most questions with regard to a 203k loan and how it relates to your
foreclosure home.
Adjustable Rate Mortgages (ARM) and Your Foreclosure Home Purchase
If you qualify for the particular home you wish to purchase with a fixed interest rate, then
you should choose the fixed rate mortgage 99% of the time. In this article you will learn
why the ARM can be such a bad idea and how you can overcome the anxiety of your
decision based upon the facts. Because the current interest rate is so low—and has been
that way for sometime now—making a choice with regard to an adjustable rate mortgage
versus a fixed rate mortgage is not difficult.
You may be apprehensive of mortgage payments now, but within a very short period of
time you will become comfortable. Generally, the first monthly mortgage payment is the
most intimidating. After the first payment, the mortgage payment becomes just another
monthly payment.
The bank would not have qualified you for the foreclosure home you are interested in if
they had not already determined you were capable of sustaining the payment. Don't
forget that banks are pretty clever about what they do and don't often lose money.
Because the bank is safe, you are safe.
Only use an ARM for qualifying reasons. The current rate rotates between seven to eight
percent. If you absolutely must go with an adjustable rate mortgage then there is no better
time than when buying a government foreclosure home, as you may be able to include all
points and closing costs into the loan.
Do not be misled by the erroneous loan programs that abound in the market today. CDA
loans and Farmers home loans are among the many other loan programs that simply will
not work when purchasing a foreclosure home. In general terms, these loans are not good
for much and in with specific regard to foreclosure homes they are actually bad. The
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single reason that these loans are such a bad idea is that they are not compatible with the
type of properties, specifically foreclosure homes, that you are interested in buying.
It is true that CDA promises a lower interest rate, as does the Farmers home loan
program. However, because the wait for the funds can be 90 to 120 days, no government
agency is willing to wait that long to remove the foreclosure home from their foreclosure
home inventory. Additionally, the money is not guaranteed to be there when you are
finally ready to purchase your foreclosure home.
FICO Scores, What Affects Them And How Mortgage Lenders Look At Them
FICO stands for Fair Isaac & Company. Credit scores are reported by each of the three
major credit bureaus: TRW (Experian), Equifax, and Trans-Union. The credit score does
not come up exactly the same with each credit bureau because the bureaus each place a
slightly different emphasis on different items. The credit score itself can range from 300
to 900. The formula for exactly how the credit score is calculated is proprietary
information and owned by Fair Isaac. Here, however, is an approximate breakdown of
how it is determined:
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35% of the credit score is based on your payment history. This makes sense since
one of the primary reasons a mortgage lender wants to see the score is to find out
if (and how timely) you pay your bills. The credit score is affected by how many
bills have been paid late, how many were sent out for collection, any
bankruptcies, etc. When these things happened also comes into play. The more
recent, the worse it will be for your overall credit score.
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30% of the credit score is based on outstanding debt. How much do you owe on
car or home loans? How many credit cards do you have that are at their credit
limits? The more credit cards you have at their limits, the lower your score will
be. The rule of thumb is to keep your card balances at 30% or less of their limits.
15% of the credit score is based on the length of time you've had credit. The
longer you've had established credit, the better it is for your overall credit score.
Why? Because more information about your past payment history gives a more
accurate prediction of your future actions.
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10% of the credit score is based on the number of inquiries on your report. If
you've applied for a lot of credit cards or loans, you will have a lot of inquiries on
your credit report. These are bad for your credit score because they indicate that
you may be in some kind of financial trouble or may be taking on a lot of debt
(even if you haven't used the cards or gotten the loans). The more recent these
inquiries are, the worse for your credit score. FICO scores only count inquiries
from the past year.
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10% of the credit score is based on the types of credit you currently have. The
number of loans and available credit from credit cards you have make a
difference. There is no magic number or combination of types of accounts that
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you shouldn't have. These actually come into play more if there isn't as much
other information on your credit report on which to base the score.
The credit score is actually calculated using a "scorecard" where you receive points for
certain things. Creditors and lenders who view your credit report do not get to see the
scorecard, so they do not know exactly how your score was calculated. All that the
creditors and lenders see are the final scores.
Basic guidelines on how to view the FICO scores vary a little from lender to lender.
Usually, a score above 680 will require a very basic review of the entire loan package.
Scores between 640 and 680 require more thorough underwriting. Once a score gets
below 640, an underwriter will look at a loan application with a more cautious approach.
Many lenders will not even consider a loan with a FICO score below 600, some as high
as 620.
FICO Scores and Interest Rates
Credit scores can affect more than whether your loan gets approved or not. They can also
affect how much you pay for your loan, too. Some lenders establish a "base price" and
will reduce the points on a loan if the credit score is above a certain level. For example,
one major national lender reduces the cost of a loan by a quarter point if the FICO score
is greater than 725. If it is between 700 and 724, they will reduce the cost by one-eighth
of a point. A point is equal to one percent of the loan amount.
There are other lenders who do it in reverse. They establish their base price, but instead
of reducing the cost for good FICO scores, they "add on" costs for lower FICO scores.
The results from either method would work out to be approximately the same interest
rate. It is just that the second way "looks" better when you are quoting interest rates on a
rate sheet or in an advertisement.
First Time Homebuyer Advantages
The advantages of being a first time homebuyer are plentiful and can be utilized if you
know and understand your options and the ways in which you can save money.
Lower Interest Rates For First Time Homebuyers
As a first time homebuyer, you are offered far lower interest rates than an investor. If the
standard interest rate you are being quoted is 7.5%, then you can be sure that the real
estate investor who is interested in your hopeful new foreclosure home is going to be
faced with an interest rate of at least 9.5%. When the real estate investor is planning to
rent the home after purchase, this increase of 2% interest plays into the financial viability
of the purchase for the investor. Knowing this should help you understand the benefits of
getting out to the foreclosure home you are interested in sooner and moving on it faster.
Tax Exempt Status For Foreclosure Homes
Most states recognize the need for government-owned homes to be removed from the
ledgers of the taxpayer. In order to make these foreclosure homes more attractive to a
potential homebuyer, many standard items are not required.
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For example, most counties in the United States have special tax exemptions for buyers
of foreclosure homes. This reduces and, in some cases, removes entirely the requirement
to pay county transfer taxes when the home is purchased directly from the federal
government.
In Maryland, for instance, a first time homebuyer is allowed an exemption from paying
the Maryland state transfer tax. That equates to a 0.25% savings on the purchase price of
the foreclosure home at the settlement table.
Exemption of Real Estate Appraisal
Another example of savings for a first time homebuyer is the exemption of a real estate
appraisal when buying a foreclosure home from the Veterans Administration (VA) or
Housing and Urban Development (HUD). As long as you are asking the government
agency selling the foreclosure home to help finance the same house, you are not required
to have the home appraised. These agencies allow this because they have already
appraised the foreclosure home and therefore do not require you to do the same. You can,
in fact, use their appraisal to determine value when the need arises.
Early Bidding Window For Foreclosure Homes
Because HUD strives to make more Americans homeowners, an owner occupant you
wishing to bid on a foreclosure home is offered a five-day window of opportunity to bid
on a given home during its first five days on the market. During this time, a real estate
investor that wishes to bid on the same foreclosure home is not legally able to offer a bid
at all. After the five-day window has closed investors are permitted to come out of the
woodwork with a vengeance. Use this window to your advantage by getting out to a
foreclosure home that you might be interested in quickly and either moving on it or
moving away from it.
No Current Home To Sell
First time homebuyers are not hindered in bidding no a foreclosure home by needing to
unload another home before buying the property they are bidding on. This keeps many
thousands of would-be homebuyers out of the foreclosure home arena. Use this to your
advantage.
Additionally, there is no such thing as a contingent contract when making an offer on a
foreclosure home. The word “contingent” refers to the situation that homebuyers find
themselves in when they currently own a home and must sell that real estate it before
buying a new home. When the seller accepts a contingency, the homebuyer has no
obligation to purchase if their house does not sell. Use the lack of contingent offers in the
government foreclosure arena to your advantage.
If you do happen to be an owner of a home and are looking into the purchase of a
government foreclosure home, be content with the knowledge that every contract has a
financial contingency and, therefore, you are indirectly not obligated to make the
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purchase unless you qualify to carry two mortgages at the same time, which is highly
irregular.
Termite Inspections and Foreclosure Home Repairs
Whereas most homes require a complete termite inspection and repairs paid for by the
homebuyer, the VA and HUD have both found it beneficial to cover these costs with
regard to foreclosure homes so long as the homebuyer is financing the home with their
respective help.
If you are buying an Insured Property, FHA/HUD will pay for all necessary repairs
required in order for the foreclosure home to meet minimum property standards (MPS).
MPS is not the same as traditional FHA standards. MPS is quite a bit less rigorous. Do
not let this scare you off, as termite testing and treatment are fairly standard and MPS
should have no effect on the quality of termite treatment.
Familiarize Yourself With Your Real Estate Marketplace
First, become familiar with your real estate marketplace. Real estate markets sometimes
differ from town to town and sometimes from zip code to zip code or even block to
block. It is important that you know how your real estate market differs from that of the
markets around you. Determine your perimeters geographically. As your experience
grows, your perimeters can and should expand so that with enough experience and a
sizable financial cushion the idea of buying foreclosure homes in different states will
become a reality. First, however, you must get comfortable with the foreclosure home
market in your own "backyard".
What does the average home sell for in your area?
The answer to this question will enable you to determine the spread between the future
target purchase price of your foreclosure home and the average sales price (your equity).
To use the top-end selling price for that area will not give you an accurate picture. Hope
for the best but prepare for the worst.
What is the average time a home is on the market in my "backyard"?
The answer to this question will help you calculate the carrying costs of your future
purchase as well as determine if one neighborhood is more desirable than another. If your
future purchase has a days-on-the-market time which, when calculated, consumes all of
the possible profits then you need to know this in advance. Do not assume that because
you are more aggressive or intelligent than the average homebuyer you will be able to
reduce the time the home is on the market. Often, time on the market has nothing to do
with your ability to advertise your home or negotiate. Sometimes interest rates increase
quickly (spike), contractors that you hired are late or events that are out of your control
will affect the selling date of the home.
How many foreclosure home deals come available on an annual basis?
The answer to this question will help you recognize an opportunity from an option. If
such deals are rare, then you may have to reduce your expected returns in the short term
for a great upside in the future. If a neighborhood has few (if any) home buying
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opportunities that indicates a strong market. If you have a personal guideline of 15%
equity before purchasing a home, you may decide that a particular neighborhood is still
desirable even though you can only find a 10% equity position. The appreciation of the
foreclosure home in one year will make up the difference.
Rank The Areas Containing Foreclosure Homes in Your Marketplace
What are the most desirable medium to low cost housing areas in your "backyard"? Break
down the neighborhoods on your list of foreclosure homes. Assign each neighborhood a
number from one to five. One is terrible and five is the best neighborhood for foreclosure
home investing purposes. Medium to low cost housing is specified for several reasons:
After you have assigned each neighborhood a value it will be far easier to recognize good
opportunities. Foreclosure homes in neighborhood A might be a possible option, in
neighborhood B there may be great foreclosure home opportunities and neighborhood C a
terrible idea.
Many skilled investors do not know how to make a determination between
neighborhoods and may make expensive mistakes that can be easily avoided with this
simple system.
Shop For Equity First. Then Marketability.
Many would-be investors make the simple mistake of repeating what they have heard
regarding what makes a good real estate investment. They believe that a 3-bedroom/2bath free standing home is the only investment worth making. This is absolutely not true.
What you want is equity. You do not want to end up with an oddball property. If onebedroom condominiums are commonplace in your real estate market then they are every
bit as valuable as a single family/free standing home.
Shop for equity first and then for marketability. Leave all the foolish notions for those
who know less than you. Your potential market has just increased because your
knowledge with regard to buying a foreclosure home has increased.
Foreclosure Home Buying Advantages
There are numerous advantages to buying a foreclosure home, including the incredible
savings that can be enjoyed financially, as well as the possibility of buying a larger and
more valuable home via foreclosure than you could ordinarily afford.
Divorce, loss of employment and loss of life are the most common reasons for a
foreclosure to occur. A foreclosure occurs when the mortgage lender of the home loan
money to buy the home is not paid back in a timely way. When one of the three situations
listed above transpires and the homeowner is not adequately prepared, a foreclosure is
most likely to be the end result. Soon after one of the “big three” occurs, the homeowner
is several months behind in payments and the mortgage holder will not negotiate with the
homeowner as special exemptions cannot be made for every homeowner going through
difficult times. It seems oppressive, but very often a foreclosure can be the best thing for
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the homeowner because it removes the pressure and allows the foreclosure party to
potentially live in the foreclosure home for several months free of charge.
After the foreclosure party has vacated the foreclosure, the foreclosure home is given to
the foreclosure agency that insured (FHA) or guaranteed (VA) the mortgage. This
government agency will begin the process of cleaning and appraising the foreclosure
home. The fact that these foreclosure homes are so plentiful keeps the federal government
from determining the debt of each home independently. The foreclosure homes are sold
for the appraised value at the time of foreclosure. When a foreclosure home is underappraised, it is given a list price below the market value. These under-appraised
foreclosure homes are not a rarity.
In truth, the sheer number of these foreclosure homes results in countless under-valued
foreclosure homes. Appraisers are asked to perform ten to twenty appraisals on
foreclosure homes in a single week, far more appraisals than can be performed with the
degree of accuracy normally associated with a “normal” appraisal. These appraisers bid
on the job of appraising thousands of home foreclosures at once and rely on volume in
order to make a profit. With volume come mistakes. These mistakes can and do go both
ways. When you see a foreclosure home that has obviously been over appraised, find
solace in the knowledge that right around the corner there is bound to be a foreclosure
home that is under appraised.
Take advantage of the volume of foreclosure homes that these government agencies are
dealing with and profit from it. As a first-time homebuyer, you hold all of the cards.
Foreclosure Home Bidding Rules
If you are looking at a bank foreclosure, then the rules of bidding are fairly simple.
Contact your real estate agent or the listing agent and express your interest in the
foreclosure home. Then:
Have your mortgage loan officer draw up a preapproval letter for no more than the price
you plan to offer on the subject foreclosure home.
Have your real estate agent send the listing agent a letter of intent for the foreclosure
home. The letter of intent differs from a full-blown contract in that it covers only the
generalities of the transfer of the foreclosure home (i.e., price, financing, proposed
closing date, etc.).
Once the listing agent receives the letter of intent for the foreclosure home from your real
estate agent, the listing agent will send the letter of intent to the bank holding the
foreclosure property. Be prepared to wait at least a week from this point, as banks work
slowly and cautiously.
How Much To Bid For the Foreclosure Home
Obviously, one of the main considerations when thinking about placing a bid on a
foreclosure home is how much to bid and, moreover, how to bid just enough to win the
bid for the foreclosure property without overpaying. This is where the trouble potentially
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begins. Unlike HUD or the Veterans Administration (VA), which are both government
agencies, banks determine the price they are willing to accept for a foreclosure home on a
per property basis. Ask your real estate agent to pull the tax records in order to determine
the amount mortgaged prior to the foreclosure. Do not try to bid less than the bank owes
on a foreclosure home until it has been on the market for three to six months.
Do not be afraid of bidding below the mortgaged amount for the foreclosure home. A
discount of 10-15% is the most you can expect, and the bank may still not be able to be
this flexible regarding sales price. If you do not offer full price for the foreclosure home,
be prepared to lose the foreclosure property to another homebuyer.
HUD Foreclosure Homes
Housing and Urban Development (HUD) is the largest single resource for real estate
foreclosures in the country due to the fact that everyone qualifies for an FHA loan. (In
contrast, the VA requires that you be a true veteran in order to initiate a veteran loan,
thereby limiting the number of qualified loan applicants.) FHA loans also provide a lower
down payment than conventional loan programs, as most first-time homebuyers opt for
reduced down payments. Whereas the first-time homebuyer would be responsible for five
percent down with a conventional loan program, an FHA loan requires only three percent
down.
HUD/FHA Government Foreclosure Bidding Formula
Per the HUD/FHA government foreclosure bidding formula, you can bid five percent
below the asking price at a maximum. If you bid less than five percent, the bid will not be
accepted and your bid for the foreclosure home will be thrown out. If you require closing
cost assistance, you must ask for it during the bidding process and this figure must be
allowed in your final tabulation. HUD allows for a maximum of five percent for closing
cost help, and in some states that amount is far less. Ask your real estate agent or
mortgage lender for guidance.
VA Foreclosure Bidding Formula
A similar formula exists for VA foreclosure homes. The Veterans Association has the
ability to be a little more flexible regarding sales price as the amount owed on the
foreclosure home can play a larger role with regard to repairs. Whereas HUD allows no
more than a five percent price reduction, the VA will sometimes take as much as ten
percent off the price of the foreclosure home. The VA will also allow for six percent
closing cost help. While one percent may not sound like a lot, it becomes fairly
impressive when one percent of the price of the foreclosure home equals several thousand
dollars.
Get educated, get a good real estate agent and get into a low-priced foreclosure home.
Foreclosure Home Investing: Entry Level Homes
Four percent of all homes mortgaged are foreclosed upon. This percentage is stacked
more heavily toward the segment of the real estate market referred to as "entry level
homes". This does not mean that higher-priced homes do not also become foreclosure
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14
homes, however the higher priced the home, the greater the financial resources the
homeowner normally has at their disposal.
This financial generality works well to your needs as a real estate investor as the market
for entry-level homes is by far the strongest, most active segment of the real estate market
and will be for the foreseeable future. The first-time and second-time homebuyer
encompasses a wide variety of homes from one-bedroom condominiums to two-bedroom
townhouses or even three and four bedroom single-family homes.
The type and style of foreclosure homes available to you are more heavily weighted to
your geographic areas of interest (where you live) rather than toward what is generally
perceived as wise investment choices.
The real estate investing community has been focused on types of homes more than on
the true value to a wise investor. Profits should be the single guiding light in your search
for real estate investment success and financial freedom. Profits are driven by equity
balanced with repair and carrying costs. Understanding how to balance these three
variables is paramount.
Foreclosure Homes With Zero Down
There is an old saying in real estate that goes: “If you want to play in the game, you fist
must show up.” In other words, you must first build a relationship with a particular
lending institution in order for the lender/mortgage holder to have a lower perceived risk.
By allowing a homebuyer—you—to purchase a home without risking any of your own
money, the mortgage lender assumes all the risk. If, for any reason, you were to be
foreclosed on, the mortgage lender will, of course, lose additional funds on the home.
This risk brings responsibility on the part of the mortgage lender. The downside for the
loan officer that approves your no-money-down scenario is that the mortgage lender’s
board could fire him or her for losing additional money on a home that has already lost
money.
It is a popular misconception that lending institutions make money foreclosing on homes.
The foreclosure process is a negative cash experience for the mortgage lender. The
lending institution is not in the business of real estate management. They are in the
business of making money just as it was lent to the initial homebuyer. The interest and
time frame are precisely how the mortgage lender wants to be paid.
Prove your value to the mortgage company by presenting a good credit score and your
current real estate portfolio. If your credit is not as good as it could be, make it better. If
you do not have a current real estate portfolio, start building one now.
Do not make the mistake of asking for no-money-down scenarios from the lender without
at least one of aforementioned qualifiers. The worst that can happen is that you are turned
down. The idea of a real estate portfolio and good credit is to increase the number of
times you hear “Yes.” Once you have proven your ability to help the lending institutions
out of their predicament, they will begin coming to you when they need your special kind
of help.
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15
Finally, always remember that the relationship with the mortgage lender is more
important than any single deal. When you put people first, you will win. Put money first,
and you are bound to lose.
Foreclosure Real Estate and Home Ownership
There is a system to purchasing foreclosure real estate that can be broken down into six
basic steps. Following these steps will simplify a foreclosure real estate transaction while
avoiding common mistakes made by the typical consumer.
Step 1 – The pre-approval process.
The most common mistake made by the typical homebuyer is shopping for a home
without having financing pre-arranged. A qualified mortgage lender will help the
homebuyer figure out the amount that the homebuyer is qualified to borrow and
determine any options available to the homebuyer to increase borrowing power.
Homebuyers need to explore alternative lending programs, such as those backed by the
Federal Housing Administration (FHA), the Veterans Administration (VA), The Federal
National Mortgage Association (Fannie Mae) and private sources of funds. The preapproval process is much more involved than a simple pre-qualification process. Preapproval converts a homebuyer from “contingent” to “all cash,” improving one’s
negotiation position.
Step 2 – The interviewing process in selecting a real estate agent.
Homebuyers need to select the real estate agent that will best serve his or her needs with
regard to finding and purchasing a foreclosure home.
Step 3 – The actual hunt for a foreclosure home.
A common mistake made by many homebuyers is that they select a foreclosure home too
rapidly. In a hot market, however, a quick decision may be necessary. Buyers should
view at least five or ten homes within their price range. The importance of step one,
prequalification, is that homebuyers are only looking at homes they can afford, thus
expediting the shopping process.
Step 4 – The negotiating process.
Once a homebuyer finds the right home, it is time for negotiations. If you have followed
this outline in its proper sequence you are ahead of the game. In an active real estate
market, being pre-approved prior to finding your home will improve your chances of
getting the home desired should there be competition for the home with multiple offers.
Home sellers are more likely to accept an offer from a prospective homebuyer if they
have the assurance that they homebuyer can complete the transaction for the home
rapidly.
Step 5 – Loan Processing and Approval.
Once the home is selected and the terms have been negotiated, your mortgage lender will
take the homebuyer from the loan application to the final approval of the home loan.
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16
There are many steps along the way that will need constant supervision and involvement
from all parties.
Step 6 – The Closing Process.
A homebuyer that does not come to the closing fully prepared may run into unpleasant
surprises that could not only delay closing on the foreclosure home, but could very well
dissolve it altogether. The homebuyer’s team—their real estate agent, mortgage lender
and closing representative—will coach the homebuyer on what happens at the closing,
who needs to be present, and what documents to bring.
The loan professional that has made this information available to you specializes in
assisting those individuals with obtaining a home loan whether for purchase or refinance.
Your loan professional in most cases can advise you on the best approach and help you
with the specific loan requirements necessary for purchasing the foreclosure home you
desire.
Foreclosures In 15 Minutes
Investing in foreclosure homes for resale is not that different from investing in
foreclosure homes for rental income. Many of the same rules apply and many guidelines
remain constant. As with any type of investing, the point at which you enter will
determine how profitably you exit. The single largest distinction between real estate
investing and stocks, bonds, mutual funds or precious metal is that real estate allows the
investor the opportunity to have a more direct and immediate impact on the investment
vehicle—the foreclosure home—through rehab, paint, carpet, etc. This article
demonstrates how to quickly make an assessment of a potential real estate investment.
This guide should allow the average investor to make a rapid and well-thought-out
decision. An informed real estate investor will not "lose out" because of third-party
factors such as obtaining appraisals or contractors and repair people. An aggressive,
proactive approach by the real estate investor can reduce the time it takes to obtain
foreclosure homes. A passive approach or an offhand attitude does not promote good
opportunities. Remember, work WITH your real estate agent and get proactive!
How to Determine Equity
The old adage about the only the three words in business being "Location, Location,
Location" is as true as ever. In real estate, however, those three words are "Equity,
Equity, Equity." The difference between what is owed on a property and its market value
is called equity. As a real estate investor, the goal is to buy the foreclosure home for less
than the full value and sell for market value in order to make a profit in the process. The
question is, at what point does caution balance against risk to make a profit on a
foreclosure home?
A strong equity position is generally targeted at 25% after repairs. An equity position less
than 25% can work for rental investments, but for resale purposes 25% is a safe figure. In
order to determine if 25% after repairs can be achieved there are only three variables that
need to be weighed in the mind of an investor:
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17
•
•
•
How much can I get the foreclosure home for?
How much can I sell the foreclosure home for?
How much will it cost to repair the foreclosure home?
It is not difficult to obtain answers to these questions as long as the readily available data
can be obtained quickly and accurately distilled into usable information. By using the
following guide and examining each foreclosure home in terms of these three variables it
should not take more than fifteen minutes to determine if a particular foreclosure home is
a wise investment.
How much can I get the foreclosure home for?
First, ask what your real estate agent knows about the particular foreclosure home:
1. How long has the home been on the market? (Not vacant, but available for sale.)
2. Can investors bid on the home? (Some properties are for owner/occupants only.)
3. What does your real estate agent think about the home? (A good real estate agent
is worth his/her weight in gold.)
Second, look at the foreclosure home yourself. Is it a "fixer upper" or is it "market
ready?" The cost to make a foreclosure home ready to sell has to be considered as part of
the cost of buying a property. Usually a good look will tell you how much of a
commitment in funds will be required.
Third, be sure that you are willing to own the foreclosure home for the duration. While it
is certainly possible to get in and get out without a serious commitment of finances, be
ready to own the foreclosure home until it is sold. Some banks have regulations stating
you must take possession of a property before you can sell it again. If, for whatever
reason, your buyer is unable to complete his end of the transaction, you need to be
prepared to be the owner of the investment property until it eventually sells.
Fourth, bid quickly and often. Nothing is more frustrating than investing a lot of effort
into a project for nothing. When considering investments, do not hesitate and risk missing
an opportunity. If a deal looks only “so-so” (only a 10% equity position, for instance)
BID LOW to achieve that 25% potentiality. It could be a good rental, or even a modest
resale. And there is always the chance you might win the bid. In investing, as in life, "he
who hesitates is lost." After submitting a bid, start looking for the next investment. Don't
delay a possible "big dessert" while waiting on the first course.
How much can I sell the foreclosure home for?
As a general rule of thumb, most investors are motivated to purchase with a minimum
25% equity position (after repairs). This requires two separate deductions in order to be
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sure of a 25% equity position: the true market value of the subject property (after repairs)
and the actual repairs.
In order to determine the true market value without ordering a full-blown appraisal (both
time and financially prohibitive), an investor must look at comparable sales. "Comps" are
available from your real estate agent or online from services like HomePriceCheck.
While the online services may serve as a general guide, the comparables your real estate
agent can obtain will take into consideration many more factors. Look at the entire
neighborhood in print format. Then consider the most recent sales that reflect the style
and neighborhood of the subject property and compare them to your investment home.
How much will it cost to repair the foreclosure home?
After looking at the comparable sales, the investor need only reduce the repairs to
understandable figures in order to calculate if the foreclosure home can be purchased and
repaired for 75% of its market value (the 25% equity magic number).
To estimate repairs one could have any number of contractors offer bids and submit
proposals, however the time required for meeting with three contractors and getting
proposals may not be available. A quick-thinking, fast-acting investor can estimate work
required by walking through the subject foreclosure home and tallying the figures without
a second appointment.
These figures are not concrete numbers, but should allow a quick and easy comparison of
value allowing a decision to be made after the estimates of repair have been performed.
The following should offer some averages for the more common repairs to a 1200 square
foot rancher without a basement.
Paint w/minor drywall repairs: $800.00-$1000.00 per house
Carpet (one grade above builders): $1000.00-$1200.00 per 1,000 sq. feet
Kitchen and Bath flooring: $300.00-$500.00 per room
New Roof (try to repair first): $2,0000.00-$3,000.00 per house
New Heating and Air: $1,000.00-$2,500.00
Appliances (Save Money-buy used): $250.00 per appliance
Miscellaneous Expenses: add 10% to total
Foreclosure Tips
Tip #1 - The rewards are greatest when the real estate investor is a knowledgeable, proactive force in the process. Take an active roll in your foreclosure home investment.
Tip #2 - The figure for how many days on market (DOM) a property was available before
its eventual sale will be found on the MLS listing. Be sure to ask your real estate agent
for these figures specifically so that a determination can be made regarding the
desirability of a particular neighborhood, style of home, and other factors.
Tip #3 - Along with "sold" properties, take a look (in print) at other homes that are still
"available" or "withdrawn" from the market to determine the health of the market.
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Tip #4 – Be sure that you are true to your investigation and do not allow passion or
trepidation to sway your decision-making either way. It is more important that you swing
than it is that you hit a home run. Bid often!
Tip #5 – Once the subject property is under contract, be sure to get a foreclosure home
inspection and estimates from more than one contractor.
How Much Home Do I Qualify For?
Determining how much home you can afford will greatly affect your home buying
decision. Even if you have been pre-qualified for your home purchase, you may want to
have your information reviewed by your mortgage lender to determine if there are ways
you can be qualified for a higher amount or a lower interest rate.
The major factors that determine your home mortgage qualifying amount are:
•
•
•
Your Income
Your Monthly Expenses
Your Credit Score
In order to give yourself a snapshot of what you qualify for, multiply your annual
household income by a factor of three and add $10,000.00. For example, if your annual
household income is $50,000.00 multiply that by three giving you $150,000.00. Add
$10,000.00. You qualify for a $160,000.00 mortgage.
This home mortgage amount is not representative of any debt that you may have such as
car payments and credit card debt. Remember, only recurring debt counts against your
qualifying amount.
By pre-qualifying online, your mortgage lender will review your credit reports free of
charge and ask you a few questions about your monthly expenses and income. In some
cases you may need to provide information about a co-signer or clean up your credit to
increase the amount of home for which you qualify.
You will be required to gather past tax information, pay stubs, receipts, or other
documentation. Talk with your mortgage lender about what information he will need to
get the ball rolling on the purchase of your home
How To Buy a Bank Foreclosure Home
Many new real estate investors want to buy foreclosure homes directly from the bank.
The attraction to bank-owned properties is understandable, as you borrow money from
the bank to purchase a home. It is natural to assume that the bank owns the home;
however, whether through a Deed of Trust or Mortgage, the title to your home is either
held by a third party or pledged as security for the loan. So, in fact, the bank does not
actually own the foreclosure home at all.
You borrow money from and give mortgage to the bank. The mortgage is the security
instrument utilized to protect the bank from loss should you default on the home loan.
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Unless you bought a bank foreclosure home directly from the bank, the bank has never
owned the foreclosure home at all.
The Foreclosing Lender’s Profits
The goal of the foreclosing lender is to gain possession of the foreclosure home. The
financial goal of the lender is the recovery of the principle loan balance, accrued interest,
late fees, penalties, taxes paid on behalf of the home owner, court costs and attorneys’
fees. In most states, the laws are written so that the mortgage lender can only attempt to
recover these widely accepted standard losses.
The mortgage lender will add in every legitimate expense when foreclosing on a home.
This is what is sued for: the total the mortgage lender claims is owed by the owner of the
foreclosure home. In most states, this is the maximum amount the mortgage lender can
collect. The laws are written this way to protect homeowners from unfair practices.
The commonly held notion is that a bank (or any other lender) must sell a foreclosure
home for the same amount it cost in order to gain possession of the home and, therefore,
cannot make a profit. This is false. If the foreclosing lender is the successful bidder on the
foreclosure home at auction, it will take possession of the foreclosure home for the very
first time. When this happens, all the rules change. The lender, now the legal owner of the
foreclosure home, can do anything it wants with the home, including sell the foreclosure
home for any amount it desires.
Condition of Title
When purchasing foreclosure homes, homebuyers are often concerned about the quality
issued by the mortgage lender. A common belief is that there may be liens or judgments
clouding the title of the foreclosure home. This is a myth. The mortgage lender will bid
on a foreclosure home at auction only if it wants the home. The mortgage lender,
typically the senior lien holder, wipes out all junior lien holders or judgments against the
foreclosure home in the process.
If the foreclosing mortgage lender does not bid at the sheriff’s sale or auction, it probably
doesn’t want the foreclosure home. This may be due to excessive superior liens, such as
IRS or tax liens. (Tip: If the mortgage lender doesn’t bid for the foreclosure home at
auction, you probably shouldn’t bid on the home either.)
The mortgage lender, in an effort to recoup its losses, will bid on the foreclosure home,
wipe out lien holders, and then pay the balance of outstanding taxes on the foreclosure
home to secure the home’s clear title. No mortgage lender will go through the time, effort
and expense of foreclosing on a home only to lost the foreclosure home for a few
thousand dollars in back taxes.
Having absorbed these costs, the mortgage lender generally adds them to the asking price
of the foreclosure home and will sell the home with a clear title. The lender does not have
to sell the foreclosure home for what was paid at auction.
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Another myth is that all banks are bending over backwards to give away foreclosure
homes. Lenders want to sell their foreclosures. Lenders—banks in particular—are
corporations. These corporations are driven to make money, not to lose it. A bank has to
answer to its shareholders just like other corporations do and thus will not “give away” a
foreclosure home.
The business of repossessing homes is not new. Over the years, many mortgage lenders
have developed effective methods of selling their foreclosure homes quickly with
minimal loss.
Property Disposition
Lender practices and procedures with regard to foreclosure homes vary greatly. Some
lenders widely market their inventory of foreclosure homes, while others practically hide
them. Some banks advertise foreclosure homes in daily newspapers, while others demand
that you maintain an account with them—or better yet, become a stockholder—just to get
their list of foreclosure homes.
Lenders are in the money business, not the real estate business. Thus, most foreclosure
homes are marketed through recognized real estate brokers or real estate agencies. Some
real estate agencies specialize in foreclosure homes and may represent several lenders’
homes.
Real estate brokers may have several real estate investors line up just waiting for a good
foreclosure home to turn up. Real estate brokers can also assist the mortgage lender in
determining market prices of foreclosure homes, suggesting marketing strategies,
recommending appraisers or contractors with expertise in foreclosure homes, etc.
Some mortgage lenders establish a set price for a foreclosure home and will only allow
the sales agent to consider offers for less. Many mortgage lenders dispose of their own
foreclosure homes. Depending on the size and complexity of its foreclosure home
inventory, the mortgage lender may have one part-time clerk working on foreclosure
homes sales or an entire staff of special asset managers handling the sale of foreclosures.
Bank Foreclosure Investing Overview
Purchasing foreclosure homes directly from the bank is the most popular way to buy
foreclosures. It’s fairly easy and less of a headache than other real estate investing
methods because it involves less complications and risks.
Locate bank or government foreclosure homes in the newspapers or by researching them
at the county courthouse. You can also contact a real estate agent or use a good listing
service. Locate foreclosure homes that meet your investing criteria, those that are in your
area, price range, size and style. Determine whether you are buying a foreclosure home to
resell or to secure a home for yourself. Decide if the foreclosure home is a bargain by
deducting the lender’s asking price for the home from the average market price of very
similar homes in the immediate area.
Your goal as a real estate investor is to realize a tidy profit. You can buy a foreclosure
home at a 15-20% discount and earn a 35-40% return. As a homebuyer, you should buy a
Bible on Buying Foreclosure Properties from Government
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foreclosure home below market value with a low down payment, low interest rate and
reduced closing costs.
Contact the mortgage lender or the real estate broker and meet him at the foreclosure
home so you can inspect it. Record any damages to the foreclosure home and deduct the
home repair estimates from your price. Use a good home inspection checklist.
Real estate investors must deduct all expenses associated with buying, repairing,
borrowing, holding and closing on the foreclosure home again from the price they think
they can get.
Homebuyers should negotiate around the four discount factors: price, down payment,
interest rate and closing costs. The bank, being a lender, can negotiate all these items.
If you still like the numbers and the foreclosure home, proceed with a written offer for
the home containing the following:
•
•
•
•
•
•
•
•
•
•
A statement indicating your intent to purchase the foreclosure home
The physical address of the foreclosure home
The legal description of the foreclosure home
The price you are willing to pay for the foreclosure home
Your down payment terms
Your financing terms
The date you desire to close on the home
Any contingencies
Your deposit information
Your name, address and phone number
Depending on the foreclosure home and several other variables, you may want to buy a
property at 15-25% below market value. Start your offers accordingly.
Unrealistic offers on foreclosure homes will be rejected quickly. Learn to work with the
banks. You can negotiate around interest rates, price and down payment, just stay within
reasonable boundaries if you want to succeed in purchasing a home.
Some mortgage lenders sell thousands of foreclosure homes every year. Many sell their
foreclosure homes at or near market price. We know one lender who has sold almost
10,000 properties in the last three years, with average sales of 99% of market value.
Not all lenders behave the same way. Try to locate those that are more flexible in their
property disposition policies. When the bank accepts your offer, close on the foreclosure
home as quickly as possible. Avoid delays and complications from competitive offers.
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Disadvantages of Buying a Bank Foreclosure Home
In the real estate industry, the rewards follow the risks. Therefore the payoff from this
investing method is typically lower than that of buying pre-foreclosures or buying a
foreclosure home at auction.
An REO investor should have no problems achieving a 10-20% discount from the market
value of comparable homes. Savings of 25-35% are harder to find. Savings of 40-60% are
possible, but are getting more rare.
Other disadvantages to buying a bank foreclosure include: a lender that moves at a slow
pace; a lender selling the property “as is” with no cooperation in making repairs to the
home or allowances; and the rare but possible problem of evicting a tenant or homeowner
from the foreclosure home.
How To Buy a Fannie Mae Foreclosure Home
Fannie Mae foreclosure homes are owned by the Federal National Mortgage Association.
These foreclosure homes are homes that were previously purchased using a conventional
loan (as opposed to a VA loan or FHA loan). Fannie Mae “guaranteed” the loan to the
mortgage lender by providing “mortgage insurance,” which is paid by everyone who
seeks a Fannie Mae insured loan. A Private Mortgage Insurance premium (PMI) is paid
to Fannie Mae by each borrower. There is an upfront cost that is included in your home
closing costs, as well as a monthly premium paid with each monthly mortgage payment
you make.
The funds collected from your closing costs and monthly premium are used to reimburse
a mortgage lender for any losses incurred by the default of a borrower. For example, if a
borrower does not pay their mortgage and the mortgage lender decides it must foreclose
in order to be repaid, the lender will serve notice and eventually auction the foreclosure
home. If the auction of the foreclosure home does not generate enough money to repay
the loan in full, the mortgage lender can apply to Fannie Mae for payment in full. Fannie
Mae repays the mortgage lender and obtains the deed to the foreclosure home.
Once Fannie Mae obtains the deed to the foreclosure home, it will evaluate the home and
put it up for sale. All PMI premiums collected and all proceeds from foreclosure home
sales enable Fannie Mae to continue insuring loans and actually “buy” mortgages from
banks and other lending institutions. This process allows mortgage lenders to keep
lending, thereby “recycling” the banks’ cash on hand (so they do not have to wait 30
years to be repaid.)
How To Buy a Freddie Mac Foreclosure Home
Freddie Mac is chartered by Congress and does not actually lend money. Instead, Freddie
Mac buys mortgages from various mortgage lenders, sets lending criteria and puts loan
programs for mortgage lenders to use when evaluating your creditworthiness for a
mortgage. This process, in turn, makes money available to banks to lend and encourages
mortgage lenders to take a risk with certain borrowers.
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Freddie Mac is actually a competitor to Fannie Mae (although Fannie Mae has been
around since 1938, while Freddie Mac was established in the 1970’s). This competition
enables consumers to get the lowest mortgage rates possible.
Freddie Mac also offers special loan programs to homebuyers from time to time. Freddie
Mac has properties to sell as a result of the loan guarantees it issued to various mortgage
lenders. Once Freddie Mac goes through the process of reimbursing the mortgage lender
for any foreclosure losses, it will take the deed to the foreclosure home and put the home
up for sale.
Since Freddie Mac’s revenue comes from a combination of Private Mortgage Insurance
(PMI) premiums and the actual sales proceeds, you can often find some real bargains.
How to Buy A Hud Foreclosure Home
Before you begin the process of buying a HUD foreclosure home, you need to know what
obstacles you must overcome to make your purchase and how to manage the "risks" of
buying real estate foreclosures. (For basic background on how a home becomes a HUD
foreclosure home in the first place, check out the article “What is a Foreclosure?”)
Anytime you sign on the dotted line to purchase a foreclosure home "as is" without even
a financing contingency, you had better know what you are doing. This sounds scary, and
it should, but there are clear steps you can take that will help make buying a foreclosure
home a better experience for you and make it the best single real estate investing
opportunity of your life!
Find a Good Real Estate Agent – It’s a Necessity
First of all, find a good real estate agent. Yes, there are thousands of real estate agents
and there are many very good ones. The bottom line is that you need a good real estate
agent who has experience dealing with HUD foreclosure homes. There are web sites that
can assist you in your real estate agent search. (A good one to reference is
www.USHUD.com, which not only contains educational information, but also includes
Real Estate Agent and Mortgage Lender Experts knowledgeable in real estate
foreclosures whose references have been checked.)
There some clear differences you and your real estate agent must understand when
dealing with HUD Foreclosure Homes. The contract is very different and you must use
the HUD foreclosure sales contract and HUD Addendum. This is critical because you
cannot just buy the HUD foreclosure home without these forms and your real estate agent
should be sure to explain both sides of the HUD foreclosure contract. The back side of a
HUD foreclosure contract contains all the fine print. (Note: Teachers and police officers
are eligible for special programs—the Officer/Teacher Next Door Programs. Although
guidelines for teachers and police officers are different from other prospective
foreclosure homebuyers, it is still recommended that the services of a knowledgeable
HUD real estate agent be retained.)
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HUD also has an online bidding system and you want a real estate agent familiar with
this system. Even if you do not use your real estate agent to find a foreclosure home for
you, and instead use other tools available to locate a foreclosure home on your own, you
still need a real estate agent registered with HUD to bid on these foreclosure properties.
The real estate agent’s broker must be registered with HUD before their real estate agent
can even submit bids. You should discuss this with your real estate agent during your
very first conversation and know in advance that there are bidding deadlines to be
concerned about.
All bids on foreclosure homes are due at midnight on the bid deadline published on the
HUD listings. Bids for foreclosure homes can be submitted until midnight each day
Monday through Friday (you can submit bids on the weekend, but they count as if done
on Monday). In most states, New HUD Listings are posted each Friday, usually by
midday, with bids due the following Tuesday for full price Owner-Occupants only. An
experienced real estate agent will know this and explain this to you, but remember the
exact days are different in many areas. Also, be sure to ask your agent to PRINT the Bid
Confirmation that HUD presents on the computer screen after a foreclosure home bid is
submitted. This is the only way to “find” your bid if it gets lost.
The new HUD foreclosure home listings are made available to Owner-Occupant bidders
who are prepared to pay full price for a HUD foreclosure home during the initial bid
period. HUD tries to give new homeowners a short period of time to bid against other
new homeowners (as opposed to experienced real estate investors.). If the foreclosure
home is not sold during this initial bid period, it will be made available to OwnerOccupants who want to make an offer less than full price (of course you could always
offer full price at any time if you really want the foreclosure property). If the foreclosure
home is not sold during the next seven days, it will be made available to All Purchasers
(including real estate investors). Anyone can bid on these foreclosure homes and you can
bid any price; it does not mean that HUD will take the offer. After all, this is not a HUD
auction but is rather a sealed bid process.
The exact number of days between each category change listed above can differ from
state to state, which is yet another reason to be sure to deal with a real estate agent who
has experience with HUD foreclosure homes. HUD has also been known to change the
rules often as they have different M&M Contractors handling HUD property sales in
various states.
Contact a Well-Informed Mortgage Lender
In addition to a good real estate agent it, is a good idea to speak to a mortgage lender
familiar with HUD foreclosure homes and, in particular, find a mortgage lender who is
knowledgeable about FHA 203k HUD Loan Program. These HUD loans will help you
get the money to make the foreclosure home purchase AND get the funds you will need
to fix up the foreclosure property. It is this FHA 203k HUD Loan Program which helps
you get the maximum benefit and the maximum "sweat equity" when buying a HUD
foreclosure or any foreclosure home. Part of the American Dream is to buy a home and
Bible on Buying Foreclosure Properties from Government
26
fix it up so that it is worth more than you paid for it - the FHA 203k HUD loan is one of
the best ways to achieve this.
The FHA 203k HUD loan helps to protect you from yourself. It requires a HUDapproved inspector to thoroughly review the foreclosure home, point out the required
repairs and discuss with you the repairs you would like to have completed. This is sort of
a "wish list" because they will lend you all the money as long as you qualify for the HUD
loan amount. The minimum is $5,000.00, but these HUD loans include paint, carpeting,
kitchens, baths, windows and more.
The best part of FHA 203k HUD loans is that the person who inspects the foreclosure
home for you in the beginning is the same person who inspects the foreclosure home as
the work is completed in order to approve draw requests. You have to complete some
work before the repair money is released to you, therefore you have to be prepared to lay
out the money or get a contractor willing to wait for the draw inspection.
While you are not required to get a FHA 203k HUD loan and there are many foreclosure
properties that do not need extensive repairs, the HUD program is very helpful in making
you think about what you are getting into and providing independent inspectors to make
sure the work is done properly and that the foreclosure home is in overall good condition.
If you are purchasing an Insured property (IN), no repairs or appraisal are required, but
you should absolutely get a foreclosure home inspection from a certified home inspection
company. Your real estate agent should be able to tell you the procedure for turning
utilities on before the inspection (HUD doesn't always get the condition of major systems
right). Your real estate agent must make the request to turn on the utilities after HUD
accepts your contract. You will then have 21 days in which to conduct the inspection of
the foreclosure home. There is a separate HUD Addendum Form that covers many
specifics regarding this process and explains why you should get a foreclosure home
inspection. A good real estate agent will know this and be very helpful in explaining and
coordinating the process.
The Bottom Line in HUD Foreclosure Homes
The real point is to do your homework. Before you even begin your HUD foreclosure
home search, you should determine how much house you can afford to buy. This is
absolutely critical to do BEFORE you start looking. It’s easy to fall in love with a home
you cannot afford to buy. Find the home you think you like and (with the help of your
real estate agent) determine what the homes sell for in that immediate area. You will find
that HUD foreclosure homes can be great values, sometimes even great bargains, but they
can also sell for market value if they are in good shape and in a desirable area.
Once you determine that the foreclosure home will work for your family and is a good
value for you, figure out how much you want to pay for the foreclosure home. Anytime
you bid very low you risk losing the bid to someone else who really wants the foreclosure
property. Pay what you can afford to pay for the house you will call home. If you only
want the foreclosure home if it is a "super bargain," then take your chances and bid
whatever you want. However, a word of caution: good HUD foreclosure homes in
Bible on Buying Foreclosure Properties from Government
27
desirable areas come and go very fast. Be prepared to be decisive, but do not rush into
anything.
If you do your homework up front you will be better prepared to take advantage of that
"great deal" that comes your way and requires you to move quickly in order to get it.
There is no substitute for being well informed, especially when it comes to preparing for
one of the largest, more important investments you can make.
How To Buy A VA Foreclosure Home
Few people know the number one best-kept secret of buying foreclosure homes: it is
possible to purchase a foreclosure home with no money down. Even real estate agents
often don’t understand how to get their homebuyers into a foreclosure home with zero
money down. These easy tactics will show you how.
#1 Little Known Fact About VA Foreclosure Homes - You do not have to be a veteran to
buy a VA foreclosure home or to have the VA guarantee the financing on the foreclosure
home.
#2 Little Known Fact About VA Foreclosure Homes - You can buy a foreclosure home
from the VA and receive a free charitable contribution from the Ameridream Foundation
for your payment regardless of your financial status.
Understanding VA Foreclosures
Homes designated as VA foreclosures—also known as Veteran’s Administration
foreclosures—were last purchased with a Veteran’s home loan. This means that the past
purchaser was a Veteran of one of the branches of the United States Military and that the
previous mortgage was made possible by the Federal Government which guaranteed the
home loan. By guaranteeing the home loan, the Department of Veterans Affairs agreed to
repay the mortgage lender for all money lost by the lender in the event the home was
foreclosed on. This situation benefits the mortgage lender greatly, as their investment in
the home is 100% guaranteed. The Federal Government protects itself by charging each
buyer of a VA mortgage a funding fee. The funding fee is a percentage of the mortgage
amount and is helpful in several ways.
The funding fee enables the Veterans Administration to allow the Veteran to purchase a
home with no money down. By purchasing a VA foreclosure home from the list of
Veterans Administration foreclosures you can proceed with the loan as though you are a
Veteran and purchase many of these foreclosure homes for sale with no money down and
without mortgage insurance.
Term Offer vs. Cash Offer
A VA foreclosure home provides for two separate ways to write an offer:
Term Offer for a VA Foreclosure Home
When writing a term offer for a VA foreclosure home, the homebuyer is asking the VA to
hold financing on the foreclosure home. This provides an opportunity to buy the
Bible on Buying Foreclosure Properties from Government
28
foreclosure home with no money down; however, there are still closing costs to contend
with. Closing costs can run anywhere from one to six percent of the purchase price of the
home. Ask your local real estate agent or loan officer for more information.
Cash Offer for a VA Foreclosure Home
When writing a cash offer for a VA foreclosure home, the homebuyer is not actually
offering to pay cash, but is rather not requesting that the VA hold the financing on the
foreclosure home. The VA is even more flexible with pricing and closing costs with a
cash offer, as they will not be responsible for the mortgage.
Write the cash offer for the foreclosure home and ask for the maximum contribution
required towards closing costs (consult with your local real estate agent). As soon as the
contract is accepted, contact the Ameridream Foundation. The Ameridream Foundation
will give you the closing costs as a free contribution. Learn more about the Ameridream
Foundation (www.ameridream.org) and buy your foreclosure home from the VA with no
money down.
Investing in Foreclosure Homes: Risks and Rewards
The mortgage foreclosure process creates three sets of real estate investment
opportunities: the "Default/Pre-Foreclosure" phase, the "Auction/Sale" phase and the
"REO" phase. This article discusses the risks and the rewards of each opportunity.
Buying Pre-Foreclosure Homes
Buying pre-foreclosure homes involves working directly with the homeowner and
sometimes the mortgage lender. Your goal is to create a win-win scenario. One “win” is
for the homeowners (they make a sale) and the other “win” is yours (you buy the
foreclosure home at a substantial discount).
To accomplish a successful foreclosure home purchase, most experts recommend the
following:
•
•
•
•
•
•
•
locate loans in default
evaluate and narrow foreclosure homes to pursue
inspect the foreclosure property
evaluate the property owner's needs
determine the market value of the foreclosure home, fix-up costs, potential sales
price and profits
arrange default work out by negotiating with the owner and the mortgage lender
close on the foreclosure home, repair and resell it quickly
Pros of buying pre-foreclosure homes: Pre-foreclosure homes are a great investing
opportunity if done correctly. Discounts off market value can range from 20% to 35% on
average. A low cash down payment is possible if structured properly. Also, you have
ample time to research homes and unique and flexible sales agreements are possible.
Bible on Buying Foreclosure Properties from Government
29
Cons of buying pre-foreclosure homes: Sometimes it is difficult to contact the property
owner. Also, you will usually have a lot of competition for pre-foreclosure homes. The
courthouse research involved with pre-foreclosure homes can be cumbersome. And you
may need to negotiate with the lien holders.
Buying a Foreclosure Home at Auction
Buying a foreclosure home on the courthouse steps at the auction can be the most
rewarding way to buy properties as well as the most dangerous. The foreclosure home is
publicly auctioned off to the highest bidder, and the process moves very quickly. When
bidding at the auction, you compete against the lender and other investors.
Auction buyers research foreclosure homes prior to the sale date, pursue realistic
opportunities, calculate values and potential profits, determine bid price and follow the
home to the auction and participate.
Pros of buying a foreclosure home at auction: Very good to excellent discounts. Investors
can achieve 35% to 45% savings off market values and earn an excellent return on
investment. This is the only investment method where you can really hit the jackpot.
Cons of buying a foreclosure home at auction: Auctions are frequently postponed, which
can result in a waste of your time and effort. It is rarely possible to inspect the foreclosure
home in question. To be safe, you should have a title search performed, which can be
costly. Unusually large cash outlays deter most investors (note that this can also be seen
as a benefit). Certified checks for 10% of the purchase amount may be required with the
balance due in weeks, days or even hours. Improper research can lead to devastating
results.
Buying REOs
Perhaps the easiest way to buy foreclosure property is to buy REOs ("real estate owned").
An REO occurs when the mortgage lender takes back the home to gain possession and
cut its losses. The lender, however, does not want the home because it is not in the real
estate business and is therefore usually motivated to move the property quickly.
Pros of buying an REO: The lender is almost always the senior lien holder, thereby
wiping out all other liens at the auction. This means an REO will always have clear title,
which saves a lot of time, expense and worry when buying a foreclosure home. Most
likely, the mortgage lender will also have paid any property taxes in arrears. The lender
may either repair the property to acceptable standards or allow a discount to the buyer to
accomplish the repairs.
Cons of buying an REO: Rewards follow risk: this is a low risk investing method and the
rewards can be on the low side as well. Average savings may range from only 5% to 15%
off market value, although discounts of 25% or more are possible if you know how.
Bible on Buying Foreclosure Properties from Government
30
Investing in foreclosure homes can provide excellent profits. Each of the three
foreclosure opportunities presented here offer both rewards and certain risks. Be sure to
do your homework before you buy.
Investing In Real Estate: How To Sell Your Foreclosure Home
When investing in real estate, there are numerous strategies available to help maximize
your equity depending on your short and long-term investing goals. Designing your exit
strategy is as important as the home purchase itself. This article outlines some strategies
that can potentially increase your return when investing in real estate.
Real Estate Investment Strategy 1 – Buy and Cash Out
Buying to cash out is the most easily understood form of real estate investment. Despite
its simplicity, there are some useful strategies for increasing your return:
1. Begin advertising and showing the foreclosure home the day the contract is
ratified.
2. Strategize the way in which you want to present your offer to the buyer regarding
closing costs and mortgage amount on the foreclosure home.
3. Understand Hart, Ameridream and other no-money-down foundations and how
they relate to your foreclosure home.
4. Determine your break-even point and build it into your profit.
Real Estate Investment Strategy 2 – Buy and Rent Option
The difference between rent options and conventional rentals is that with rent options the
contract is contingent upon a sales contract which is conversely contingent upon the
rental contract. The sales contract has the purchase price and closing date preset to allow
the tenant enough time to repair credit if necessary and save enough money.
The attributes that distinguish a rent option from a non-rent option are:
1. A predetermined price with a built-in appreciation of four percent per year.
2. A non-refundable deposit in an amount that you feel secures your real estate
investment. Five percent of the sales price is a starting figure.
3. A rental contract and sales contract are endorsed simultaneously.
The transfer of real estate can be accomplished in several different ways. Renting out the
home with the option to purchase is a strategy that allows the owner to maintain
ownership of the foreclosure home while simultaneously creating a cash flow. The
average property owner that rents the home out with the option to purchase realizes a
20% higher return over a conventional rental situation.
In addition to the reasons already listed, rent options can also be advantageous because:
1. The tenant’s perception is one of ownership, which could translate into the home
being better cared for.
2. The tenant is willing to pay more for the feeling that they have a greater sense of
ownership over the home.
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31
3. The tenant is willing to put an above-average deposit down on the home, which is
generally five percent or greater depending on tenant’s credit.
4. The tenant is more likely to stay in the home for over three years because there is
perceived ownership.
5. If the tenant reneges on the contract there is no need for you to absorb the expense
of foreclosing on your tenant.
Despite the advantages listed above, the maintenance of the foreclosure home remains
solely the responsibility of the homeowner until the foreclosure home is purchased,
which can be a disadvantage. Further, tenants can be over-extended when attempting to
pay both rental and option payments.
Real Estate Investment Strategy 3 - LIC to Sell
A Land Installment Contract (LIC), also known as a Land Trust, is a method for
transferring a home from one party to another without creating a new mortgage. This tool
allows a real estate investor to transfer the ownership of a foreclosure home to a buyer
without that buyer having credit worthy of a mortgage. This opens the same doors as a
Rent Option with one small difference—it requires the seller to perform a foreclosure in
place of an eviction. The foreclosure process can cost between $5,000 and $100,000,
while an eviction should cost little more than $500.
An LIC can be favorable because it makes it more difficult for the buyer to be evicted
and in some circumstances the buyer is willing to pay a greater amount in order to initiate
the transaction over a rent option.
Real Estate Investment Strategy 4 - LIC to Rent
An LIC to Rent is also possible and has been done for many years by land installing the
property from the seller and rent optioning the property to the buyer. This option requires
that you read all “For Sale By Owner” periodical and call the seller directly.
Once contact it made by the seller, ask the following questions:
• Do you need to cash out?
• Are you willing to hold a mortgage?
• How much are you willing to hold?
If the answer to first question is not “yes,” skip the remaining steps and move on to the
next seller.
LIC to LIC
The mistake that many investors make is not fully understanding the options that they
have available. A great way to make a profit in real estate is to buy and retain the
property.
Rent optioning the property is far more advantageous than Land Installment Contracts for
the seller. Land installments offer the buyer more control over the property than is
required, giving them a sense of ownership and responsibility.
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32
Are you ready to purchase a home? Ask yourself these three questions:
1. Does this foreclosure home meet my minimum requirements?
2. How much does it cost to buy this foreclosure home initially?
3. How much will this foreclosure home cost per month?
If you have already answered these three questions, then you have a plan for purchasing a
foreclosure home. If you allow the situation to become any more complex that the three
questions above, you have overcomplicated the process of buying a home. Don’t listen to
that little voice in your head telling you that you will miss the perfect home. There is no
such thing as the “perfect” home. There are homes— lots of homes—that you can make
perfect. But first, you have to buy one.
The search for the “perfect” home has kept more than a few people in the trap of home
rental years longer than they would have been if they had not built their expectations to
an unrealistic level. The process of buying a home can be much less intimidating and
frustrating if you just focus on the three questions above and keep them in mind when
looking at a potential first home.
From there, contact an experienced real estate agent familiar with foreclosure homes to
help you navigate the particulars and you are on your way. Be sure to also look for a
mortgage lender who specializes in foreclosure homes.
Quick Foreclosure Facts
Why buy a foreclosure home?
Foreclosure homes are less expensive to buy and less expensive to own on average than
any other type of home purchase. For instance, if you purchase and finance a foreclosure
home through the VA (Veteran’s Administration), there is no charge for mortgage
insurance. [Note: you do not need to be a veteran to purchase a foreclosure home through
the VA.] The savings on mortgage insurance alone will save you $45.00 per month every
month as long as own that mortgage. (Based on $100,000.)
HUD foreclosure homes do not require that the homebuyer pay for an appraisal if the
foreclosure home is financed with an FHA mortgage. Remember that FHA (Federal
Housing Administration) is part of HUD (Housing and Urban Development).
Is it always better to finance a foreclosure home through the bank or branch of
government selling the home?
Most of the time this is the best option. For example, the bank that foreclosed on the
home has lost money 99% of the time. The bank can regain some of their losses by
financing the foreclosure home again. It is strongly advised, however, to contact the real
estate agent or mortgage lender in your area familiar with foreclosure homes.
Real Estate Foreclosures
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REO is an acronym for “Real Estate Owned,” which indicates that the home has been
foreclosed upon and is currently on the market or soon will be. The foreclosure homes
have been collected and assimilated from literally hundreds of REO warehouses from
every state in the United States, Puerto Rico, US Virgin Islands and Guam
For years, banks were not willing to allow their REO inventory be published for fear that
their shareholders would look upon their foreclosure home inventory as a failure to
secure mortgage money wisely. The outlook on foreclosure homes (REOs) that banks
have does not take into consideration the 4-5% foreclosure rate that has remained
consistent for the past 20 years. Many stockholders do not understand this simple
constant. Fortunately, banks and lending institutions have become wiser and have
educated their stockholders about the basic facts of foreclosure homes.
Pre-foreclosure homes and REOs are different. Pre-foreclosure homes have not gone
through the foreclosure process and therefore cannot be purchased from anyone other
than the current mortgage holder (homeowner). This method of buying homes for real
estate investing purposes has been well documented on television commercials and video
series available for purchase. This type of investing is not the best use of a real estate
investor’s time as the homeowner, more often than not, is able to avoid or delay the
foreclosure process.
The reason this type of foreclosure opportunity is so popular is because of the illusive
nature of the deals. This logic is lost on most would-be investors. In short, if the deals are
hard to locate then why focus on them?
Buy a home that has already gone to foreclosure (REO) then sell or rent it. Buy another
foreclosure home and sell or rent it and by the end of the year you will have completed
twice as many transactions and made more money in the process.
Real Estate Investment vs. The Stock Market
There are investing opportunities, but none are as lucrative as real estate investment.
Unlike the stock market, investing in real estate offers real profit.
Investing in real estate offers you direct control over the value of your investment. Paint
the home and it is worth more. Add a deck and the value goes up again. This simple truth
escapes most investors and opens the door for you to make a far greater rate of return in
real estate than a similar investment of capital would make in the stock market.
An investment of $100,000 in the stock market would allow you to control 2000 shares of
a stock with a price of $50.00 a share. You control $100,000 of assets. The same
$100,000 investment in real estate would allow you to buy 10 houses, at 10% down on
each home, with a value of $100,000 per home. You control $1 million dollars of assets,
ten times the amount of assets controlled with an identical initial investment in the stock
market.
Bible on Buying Foreclosure Properties from Government
34
In short, buy real estate as part of your investment portfolio. Foreclosure homes are the
best bet for an equity position.
When buying foreclosure homes for accumulation or for resale, the same math used
above can be put into practice. Use the calculator provided in order to determine the
investment value of the subject property.
Save $100,000 On Foreclosure Home
All homeowners are interested in paying less for their potential new home. You can save
$100,000 or more on the total cost of your new foreclosure home without refinancing or
strapping yourself into an uncomfortable mortgage payment. The system is easy, takes no
work or fancy calculations, and can be used in purchasing your first foreclosure home or
your tenth foreclosure home.
In order to use this system you need only understand a little about mortgages and how
they work. By the time you finish this article, you will have the tools and knowledge
necessary to save $100,000 on your new or existing foreclosure home.
Understanding Mortgage Interest Rates
First, you should realize that mortgages are fairly new in the world of finance. For
centuries, if you wanted to buy real estate your only option was cash. In the 1800’s banks
began to offer the middle classes the opportunity to finance a home. In short, banks and
lending institutions have been at this a lot longer than you or I, so they keep the rules
somewhat quiet in order to maximize their profits.
In order to grasp the rules of the mortgage game, you must first know and understand
how interest works, as well as comprehend some easy terms and their meanings.
Interest is the percentage you are paying the bank for the ability to borrow a very large
sum of money (your mortgage). Using simple math, if you are purchasing a $100,000
home, at 8% interest you would be paying the bank $800.00 each month until the loan is
virtually paid off. That equates to $288,000.00 in interest paid over a 30-year term,
resulting in the $100,000 foreclosure home costing $388,000. In order to reduce this
amount by roughly $100,000, you need only make one additional payment per year. By
making this additional annual payment towards principal, you reduce the amount of the
total loan, thereby reducing the amount that you are being charged in interest.
Frequency of Mortgage Payments
Other options are available, such as getting a 15-year mortgage rather than a 30-year
mortgage. Keep in mind, though, that the 15-year mortgage forces you to pay a higher
monthly payment and locks you into that payment in good and bad times.
Another option is to get a biweekly mortgage. This requires you to pay the same amount
each month, but you pay it in 50% portions every other week. A biweekly mortgage
results in one extra payment each year. Although it can be a bit of a hassle to become so
regimented, a biweekly mortgage is a great way of saving some money. But use caution.
Call your mortgage holder and tell them you want to switch to a biweekly schedule and
would like them to send you a payment book. There is no need to refinance or go through
Bible on Buying Foreclosure Properties from Government
35
any hoops, just follow up with the mortgage holder as soon as you get the book and make
certain that they are fully aware of what you wish to do.
The best option that we know of for saving money on your mortgage is simply to make
one extra payment per year. Many people save a small amount each month and make two
mortgage payments in December. Others use their income tax returns to make the
additional payment. Although discipline is required, the return on the investment is very
much worth the effort.
One final caution: a problem can occur if you do not make a clear notation on the check
that the additional payment is being made toward “principal”. Make this notation large
and clear on the check and follow up on the payment with a telephone call to your
mortgage holder.
These basic tips should help you in saving money on your foreclosure home purchase.
For more information, contact your local loan officer and make an appointment to ask a
few questions.
Secrets of HUD Foreclosure Homes
If the home you are interested in buying is a HUD (Housing and Urban Development)
foreclosure home, then the home was last purchased was an FHA (Federal Housing
Administration) mortgage. The federal government nsured the home loan, making the
previous FHA loan possible. By insuring the loan, the federal government agrees to epay
the mortgage lender for all money lost by the lender in case the home is foreclosed on.
This is a good deal for the mortgage lender as their investment in the home is 100%
insured. The Federal government protects itself by collecting a Mortgage Insurance
Premium (MIP) on each transaction of a federally financed property at the time the home
is purchased. The MIP is 2.25% of the mortgage amount and is helpful in several ways.
Because the MIP is charged, the FHA can allow a homebuyer to reduce their initial outof-pocket cash expenditure from 5% to 3% of the purchase price of the home, thereby
making it possible for many more Americans to purchase homes. HUD reports in their
mission statement that homeownership is the goal of the majority of Americans. This
goal of homeownership has been the driving force behind HUD and their decisions and
directives since HUD’s inception.
The MIP is pooled with all the other premiums and allows the federal government to
continue helping homebuyers save money on their foreclosure home purchases by
keeping the costs associated with the home down.
Most importantly to you, the MIP paid by all the former homeowners allows HUD to sell
the foreclosure homes in their home inventory at a substantial discount.
Each foreclosure home has its own financing options. For the best information on a
purchase strategy for the particular foreclosure home that you’re interested in, contact a
real estate agent in your area familiar with HUD foreclosure homes.
Bible on Buying Foreclosure Properties from Government
36
The Easy Way to Win the Mortgage Game
When applying for a mortgage, be sure of your credit. If your credit is not above a certain
beacon score (525 +/-) be prepared to pay a high interest rate on your mortgage. Or, if
you don't understand the difference between points and interest rate, you may find
yourself paying tens of thousands more for the same foreclosure home than you would if
your credit score were higher. This difference can literally cost you as much as new car.
Don't let this happen to you!
Here a few tips that should allow you to understand more completely how to win the
game of getting a mortgage.
Never pay points. Points are also referred to as "discount points." This refers to the
discount you receive on your mortgage interest rate for paying points upfront on your
mortgage. One point equals 1% of your mortgage amount.
Compare points and interest rates between two or more mortgage lenders.
Allow for slightly higher interest in place of paying more than one to two points.
Get your mortgage from some one "in the know" rather than some one "that you know."
If you are buying a second home or investment property, be prepared to pay a higher
interest rate due to the higher rate of foreclosures on mortgages in the real estate
investing arena.
The Importance of A Foreclosure Home Inspection
Regardless of which type of foreclosure home you are interested in buying—VA or
HUD—the foreclosure home inspection can help make your home buying experience
easier. The sequence of buying a foreclosure home is generally helpful in determining the
viability of the home you are buying. Apply what you read here and you could gain
several thousand dollars in repair or associated cost by using the foreclosure home
inspection correctly.
The information that can be gleaned from a quality foreclosure home inspection can also
save you from making a mistake that could cost you tens of thousands of dollars. Find out
how this small step can get you into or keep you out of a financial jam.
Always keep in mind that no matter where you are in the foreclosure home buying
process you can always get out of the contract using the home inspection results. Because
every foreclosure home has some problematic issues, you can escape the confines of the
contract by submitting the problems to the mortgage lending company and instantly
having your approved loan promptly disapproved. Since every contract has a financing
contingency, like magic you are free of the contract.
Do not use this escape clause just because you get nervous. Getting nervous is standard.
Bible on Buying Foreclosure Properties from Government
37
Beyond the ability to nullify an undesirable contract, you can use the foreclosure home
inspection to gain some needed repairs and create a little additional cash depending on
the entity that you are buying the foreclosure home from.
If the property is a HUD foreclosure home, get an FHA loan. Remember that there are
three different types of FHA mortgages depending on how the property is offered:
•
203b identified as "IN". The foreclosure home is offered insured, meets minimum
property standard (MPS) and is not offered with any additional funds depending
on what you might find out during the home inspection. This does not mean that
you won’t receive additional repair funds towards your foreclosure home; it just
means the option is not offered that way. Armed with the written foreclosure
home inspection, your real estate agent or you can appeal to HUD for a repair
escrow in order to bring the house up to MPS. The requested repair escrow cannot
be more than $5000.00 or HUD will determine that you must get a full 203k
mortgage.
•
203b Repair Escrow identified as "IE". The foreclosure home is offered "insured
with a repair escrow" and has already been assigned an amount to bring the home
to minimum property standards MPS. If you find that the repair escrow is not
enough to get the foreclosure home in livable condition, you or your real estate
agent can increase the amount of the repair escrow with the use of the home
inspection. Just like with a 203b, you cannot request more than $5000.00 or HUD
will determine that you must apply for a 203k mortgage.
•
203k mortgage. The foreclosure home requires $5000.00 or more worth of repairs
to bring the home to MPS. This situation is not a negative. In fact, the 203k loan
has the greatest possibility of make positive cash on an initial foreclosure home
purchase.
Remember that you can always take a 203b with or without an escrow and convert it to a
203k, but you can never take a foreclosure home offered with a 203k and try to go 203b.
If this is attempted, HUD will not be permitted to allow you to close escrow of the
property and take possession of the foreclosure home.
All repairs to the foreclosure home must be performed after settlement when buying a
HUD.
If the foreclosure home is a VA (Veterans Administration) home, the home inspection
can be used in order to make repairs performed by the VA prior to settlement. The VA
will not give you an escrow for repairs as HUD will. The VA will, however, have many
repairs made prior to settlement on your foreclosure home so long as the repairs are
required to pass the FHA inspection. This is only possible when financing the property
through an FHA insured mortgage (203b).
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What Are Bank REO (Real Estate Owned) Properties
Bank REO (real estate owned) properties are the most time consuming and most
complicated foreclosure homes to become involved in. Information on bank REOs is
rarely easy to obtain. A great deal of research is required and the only way to conduct
bank REO research is to spend countless hours in the county courthouse.
There is financial risk involved with bank REO properties as well because after the
research is done and the potential purchaser is prepared to go to the auction, a
nonrefundable cashiers check is required for ten to fifty thousand dollars. It is possible to
find higher price range homes in this arena, but the home in question may not be vacant
and gaining access is sometimes difficult.
Most Bank REOs have a third-party manager who is responsible for the upkeep of the
foreclosure home while the bank owns it, and they are your liaison with the bank. Offers
must be made through the third-party manager and they will relay counter-offers from the
bank. In general, banks do not negotiate much on prices, so if you offer less than asking
price be prepared to go through the negotiation process several times for a minimal
discount.
What Are Escrows?
Mortgage lenders generally take over responsibility for the payment of taxes and
insurance so that they can be sure that the payments are made. They require that an
escrow account be established with the borrower's funds, from which the mortgage lender
makes the payments as they come due. The escrow account is established with a deposit
that the borrower provides at closing. Mortgage lenders ask for more than they actually
need as a "cushion" in order to assure themselves that there will always be enough money
in the account.
Since mortgage lenders usually get to keep the interest on escrow accounts, in years past
many of them maintained unreasonably large cushions. To deal with that, the Department
of Housing and Urban Development (HUD) issued a ruling that placed a ceiling on the
size of escrow accounts, which in turn limited the amount the lender could ask the
borrower to deposit at closing.
The rule is that the deposit cannot exceed the amount needed to prevent the balance from
falling below an amount equal to two months worth of tax and insurance payments at its
lowest point during the year. Although HUD does not do a lot of enforcement, all but a
handful of mortgage lenders follow the HUD rules.
How do I calculate the maximum initial deposit?
Add the annual taxes and insurance premiums and divide by 12. This is the amount that
will be added to your mortgage payment every month.
List 12 months running down the page beginning with the month in which your first
mortgage payment is due.
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In the second column, enter the tax and insurance payments next to the month in which
they are due.
In the third column, show the amount in the escrow account assuming there is no initial
deposit. The monthly payments made by you add to the account while the tax and
insurance payments made by the lender reduce it.
Scroll down to the month that has the largest shortfall. To the shortfall add two months of
payments (the allowable cushion). The total is the maximum deposit under HUD's rules.
Here is an example:
Assuming no upfront deposit, the low point of the escrow account is reached in August
when school taxes are due. Through August, total payments from the escrow account are
$3468 whereas only 10 payments have been made into the account totaling $2890. The
account would therefore be short by two monthly payments, or by $578. The lender is
also allowed a cushion of two months, which is $578. Hence, the total required deposit to
the escrow account would be $1156.
Borrowers who don't want to be bothered checking the mortgage lender's calculation of
the required escrow deposit are unlikely to be taken advantage of because lenders can't do
it without violating the law. Focus your attention on the many legal ways that mortgage
lenders and mortgage brokers can pick your pocket.
At the same time, unintentional mistakes do occur at the closing table that can affect the
allocation of costs between sellers and buyers. A recent letter described a $500 mistake of
this sort, which the letter-writer discovered by accident. It is a good idea, therefore, to
check out every number.
What Are Escrows?
Mortgage lenders generally take over responsibility for the payment of taxes and
insurance so that they can be sure that the payments are made. They require that an
escrow account be established with the borrower's funds, from which the mortgage lender
makes the payments as they come due. The escrow account is established with a deposit
that the borrower provides at closing. Mortgage lenders ask for more than they actually
need as a "cushion" in order to assure themselves that there will always be enough money
in the account.
Since mortgage lenders usually get to keep the interest on escrow accounts, in years past
many of them maintained unreasonably large cushions. To deal with that, the Department
of Housing and Urban Development (HUD) issued a ruling that placed a ceiling on the
size of escrow accounts, which in turn limited the amount the lender could ask the
borrower to deposit at closing.
The rule is that the deposit cannot exceed the amount needed to prevent the balance from
falling below an amount equal to two months worth of tax and insurance payments at its
lowest point during the year. Although HUD does not do a lot of enforcement, all but a
handful of mortgage lenders follow the HUD rules.
Bible on Buying Foreclosure Properties from Government
40
How do I calculate the maximum initial deposit?
Add the annual taxes and insurance premiums and divide by 12. This is the amount that
will be added to your mortgage payment every month.
List 12 months running down the page beginning with the month in which your first
mortgage payment is due.
In the second column, enter the tax and insurance payments next to the month in which
they are due.
In the third column, show the amount in the escrow account assuming there is no initial
deposit. The monthly payments made by you add to the account while the tax and
insurance payments made by the lender reduce it.
Scroll down to the month that has the largest shortfall. To the shortfall add two months of
payments (the allowable cushion). The total is the maximum deposit under HUD's rules.
Here is an example:
Assuming no upfront deposit, the low point of the escrow account is reached in August
when school taxes are due. Through August, total payments from the escrow account are
$3468 whereas only 10 payments have been made into the account totaling $2890. The
account would therefore be short by two monthly payments, or by $578. The lender is
also allowed a cushion of two months, which is $578. Hence, the total required deposit to
the escrow account would be $1156.
Borrowers who don't want to be bothered checking the mortgage lender's calculation of
the required escrow deposit are unlikely to be taken advantage of because lenders can't do
it without violating the law. Focus your attention on the many legal ways that mortgage
lenders and mortgage brokers can pick your pocket.
At the same time, unintentional mistakes do occur at the closing table that can affect the
allocation of costs between sellers and buyers. A recent letter described a $500 mistake of
this sort, which the letter-writer discovered by accident. It is a good idea, therefore, to
check out every number.
What Everyone Should Know About Equal Housing
The sale and purchase of a home is one of the most significant events that an individual
will experience in their lifetime. It is more than the simple purchase of housing, for it
directly impacts the hopes, dreams, aspirations, and economic destiny of those involved.
For this reason, the Fair Housing Act and other federal and state laws were enacted to
guarantee a right to a national housing market free from discrimination based on race,
color, religion, sex, handicap, familial status, and national origin.
THE LAW
Civil Rights Act of 1866
The Civil Rights Act of 1866 prohibits all racial discrimination in the sale or rental of
property.
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Fair Housing Act
The Fair Housing Act declares a national policy of fair housing throughout the United
States. The law makes any discrimination in the sale, lease or rental of housing, or
making housing otherwise unavailable, because of race, color, religion, sex, handicap,
familial status, or national origin illegal.
Americans with Disabilities Act
Title III of the Americans with Disabilities Act prohibits discrimination against persons
with disabilities in places of public accommodations and commercial facilities.
Equal Credit Opportunity Act
The Equal Credit Opportunity Act makes discrimination unlawful with respect to any
aspect of a credit application on the basis of race, color, religion, national origin, sex,
marital status, age or because all or part of the applicant's income derives from any public
assistance program.
State and Local Laws
State and local laws often provide broader coverage and prohibit discrimination based on
additional classes not covered by federal law.
THE RESPONSIBILITIES
The home seller, the home seeker, and the real estate professional all have rights and
responsibilities under the law.
For the Home Seller
As a home seller or landlord you have a responsibility and a requirement under the law
not to discriminate in the sale, rental and financing of property on the basis of race, color,
religion, sex, handicap, familial status, or national origin. You cannot instruct the
licensed broker or salesperson acting as your agent to convey for you any limitations in
the sale or rental because the real estate professional is also bound by law not to
discriminate. Under the law, a home seller or landlord cannot establish discriminatory
terms or conditions in the purchase or rental, deny that housing is available, or advertise
that the property is available only to persons of a certain race, color, religion, sex,
handicap, familial status, or national origin.
For the Home Seeker
You have the right to expect that housing will be available to you without discrimination
or other limitations based on race, color, religion, sex handicap, familial status, or
national origin.
This includes the right to expect:
•
•
•
•
Housing in your price range made available to you without discrimination;
Equal professional service;
The opportunity to consider a broad range of housing choices;
No discriminatory limitations on communities or locations of housing;
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•
•
•
•
No discrimination in the financing, appraising, or insuring of housing;
Reasonable accommodations in rules, practices and procedures for persons with
disabilities;
Non-discriminatory terms and conditions for the sale, rental, financing, or
insuring of a dwelling;
Freedom from harassment or intimidation for exercising your fair housing rights.
For the Real Estate Professional
Agents in a real estate transaction are prohibited by law from discriminating on the basis
of race, color, religion, sex, handicap, familial status, or national origin. A request from
the home seller or landlord to act in a discriminatory manner in the sale, lease or rental
cannot legally be fulfilled by the real estate professional.
Filing Discrimination Complaints
Complaints alleging discrimination in housing may be filed with the nearest office of the
United States Department of Housing and Urban Development (HUD) or by calling HUD
directly.
What Is a HUD Foreclosure Home?
In 1999, many things changed with regard to the way HUD sold homes as HUD moved
toward the privatization of its effort to sell its inventory of foreclosure homes. As a result,
you can now find a list of HUD foreclosure homes on the internet, pick one out that you
like and buy it - right? Well, not exactly, but we will offer you some specific pointers for
navigating the maze and the myths of HUD foreclosure homes.
How Does a Home Become a HUD Foreclosure Home?
First of all, you should know that a home becomes a HUD foreclosure home because
someone who had an FHA Insured loan defaulted on that loan and was foreclosed on by
their mortgage lender. The mortgage lender, in turn, collects any losses they incurred
from foreclosing from FHA (Federal Housing Administration). FHA is part of HUD
(Housing and Urban Development). HUD, in turn, eventually gets the deed to the
foreclosure home and offers the home for sale to the general public.
The reason mortgage lenders can recover their losses is that everyone—yes, everyone—
who gets an FHA Insured loan pays what is called "mortgage insurance." These insurance
premiums show up on your settlement sheet as an initial premium, which is usually added
to your loan amount. An additional monthly premium is then added as part of your
mortgage payment. These premiums go into a fund to payoff mortgage lenders.
It takes 6-12 months for HUD to get the deed to a home so it can try to evaluate and sell
the foreclosure home. It takes the mortgage lender 3-6 months to complete the
foreclosure buying process and another 3-6 months to get reimbursed by HUD in order
for HUD to obtain and inspect the foreclosure home, appraise the foreclosure property
and put it on the market. All the while the foreclosure home is usually vacant. The total
timeframe could easily be 12-18 months from the date of foreclosure, but 8-12 months is
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probably the norm. These factors contribute to the reasons that HUD sells foreclosures
homes strictly on an "as is" basis.
The Importance of a HUD Foreclosure Home Inspection
HUD foreclosure homes have typically been vacant for an extended period of time, often
without any utilities turned on. HUD is working with its private Marketing and
Management contractors (M&Ms) to come up with an efficient way of getting utilities
turned on in a foreclosure home before the appraisal is completed and keeping things like
sump pumps running through the process. Until recently, appraisers did not necessarily
have the benefit of having gas and electric service. How could they give a reasonable
determination of foreclosure home value without knowing if the plumbing, electric,
heating and air conditioning are in working order? These procedures have been changing
and resulting in better appraisals of foreclosure homes. However, foreclosure home
inspections should be conducted to see for yourself exactly what the condition of a
foreclosure home is so that you go to the settlement knowing what to expect from the
foreclosure home and what repairs will be needed.
Remember, HUD foreclosure homes are sold in "as is" condition. If the repairs needed
exceed $5,000, HUD has a program to lend you the money called the FHA 203k Rehab
HUD Loan Program. This program is covered in further detail in “How Do I Buy a
Foreclosure?”
HUD wants you to use a real estate agent to assist you with submitting the appropriate
contracts and forms if your foreclosure home bid is accepted. You can find the HUD
property list online at www.hud.gov . Take your time reading the screens and you will be
able to select your state and view your particular listings. Many subscription sites offers
this same list of foreclosure homes and provides some easy-to-use bells and whistles, as
well as some other real estate content you will find very helpful in your search for a real
estate agent or a mortgage lender who has experience working with HUD foreclosure
homes and FHA loan programs.
HUD Foreclosure Homes and Minimum Property Standards
It is also important to understand the difference between Insured (IN), Uninsured (UI)
and Insured with an escrow (IE) foreclosures. Briefly:
Insured means that the foreclosure home meets HUD's minimum property standards and
has been appraised for the stated value and your mortgage lender will not need a new
appraisal (which saves you $400.00 on a new FHA appraisal!).
Insured with an escrow means that HUD's inspections and appraisals indicate that there is
less than $5,000 in repairs needed for the foreclosure home to meet HUD's minimum
foreclosure property standards. This is important because you need to know that the
minimum foreclosure property standards are, in fact, very minimum. Do not give up on
your right to a home inspection just yet. First, take a look at the HUD minimum
foreclosure property standards. You need to know that HUD expects you to complete the
repairs to the foreclosure home and then get your mortgage lender to inspect and approve
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the repairs before you can get the funds from the repair escrow. This means that you need
to get someone to do the repairs that will wait to get paid when you do or you must lay
out the money and get reimbursed by your mortgage lender.
Uninsured properties require you to pay cash or get some kind of rehab loan. These
foreclosure homes need more than $5,000 in repairs (often $10,000 to $20,000 or more).
HUD offers the FHA 203k Rehab HUD Loan, which works very well if the "team"
helping you knows what they are doing. An experienced real estate agent, as well as a
mortgage lender experienced in the processing of FHA 203k HUD loans, will help save
you time and money. The interest rates and the amount of HUD loan discount points is
usually a little higher than a standard FHA loan, but you can often buy these foreclosure
homes significantly below market prices if you are willing to put up with the higher fees
and the hassle of fixing them up.
This article addresses the basics of how a home becomes a HUD foreclosure home. Now
that you have an understanding of the foreclosure home buying process, you need to
know what obstacles you must overcome to purchase a HUD foreclosure home. For
detailed information
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