Buying distressed homes not easy in today's market

How to get it on foreclosure, short-sale properties


By Robert J. Bruss
Inman News

Are there any foreclosures, short sales or distress properties in your town or neighborhood? If you answered "no," you probably aren't paying close attention to the local real estate market.

Good times or bad, these situations always occur. Even during the peak years of 2004 and 2005 for home sales, there were still mortgage lender foreclosures and distress property sales. Today, the numbers of these sales are rapidly rising. If you're interested, the current buyer's market in most cities is a great time to acquire these below-market-value properties.

WHAT CAUSES FORECLOSURES AND DISTRESS PROPERTIES? There are many reasons, but the cause usually is the property owner isn't thinking straight. Reasons for foreclosures include divorce, unemployment, drugs, alcohol, death or serious illness in the family, disputes between owners, local economic conditions, mental problems, and good old-fashioned greed.

But the real reason for foreclosures and distress property situations usually is the borrower isn't acting rationally to solve the problem. Imagine you can't afford the increased monthly payments because your adjustable-rate mortgage just "adjusted" and your payment went up by $300. To make matters worse, home market values in your neighborhood are stagnant or slipping so your market value is no longer appreciating.

You consider selling. But local Realtors tell you there is a glut of listings for sale nearby and you would be lucky to sell for the amount of your mortgage balance. Should you stop making mortgage payments and walk away? Of course not. That would ruin your credit and you need a place for your family to live.

Rather than face foreclosure, the obvious solution is to increase your monthly income by at least $300. Maybe you can get a part-time evening job. Or perhaps your spouse or teenage child can get a part-time job to help out. One way or another, virtually every foreclosure and distress property situation can be avoided.

SOMEONE PROFITS FROM EVERY FORECLOSURE. The grim reality is somebody will profit from every foreclosure and distress property situation. If you didn't cause the problem, you might as well profit from someone else's problem.

Most institutional mortgage lenders do not want to foreclose and acquire the property. It costs lenders thousands of dollars to hold foreclosure property instead of keeping their mortgage money earning interest.

However, if you understand the simple foreclosure rules, you can profit from someone else's distress. That's why it pays to understand the basic foreclosure profit opportunities.

STEP 1 -- THE JUDICIAL FORECLOSURE LAWSUIT OR NOTICE OF DEFAULT. Until the mortgage lender gives up on the borrower, the public usually does not know there is a problem. But when the lender records a judicial foreclosure lawsuit on a mortgage, or files a notice of default on a deed of trust, the borrower's default becomes public knowledge at the local court house.

At this point, bargain hunters swing into action to contact defaulting borrowers to see if there is a "preforeclosure opportunity" during the lender's reinstatement period before the official foreclosure auction.

This reinstatement period, which can be as short as 21 days in Texas but generally is three to six months in most states, gives borrowers time to either sell the property or reinstate the mortgage before losing the property at a foreclosure sale.

SHORT SALES USUALLY ARE NOT BARGAINS. Sometimes during the mortgage reinstatement period it becomes evident the home's fair market value is less than its mortgage balance. When that happens, the real estate listing agent confronts the mortgage lender to accept a "short sale." That means the lender agrees to accept less than the mortgage balance as full payment of the mortgage.

For example, suppose a mortgage balance is $250,000 but recent comparable sales prices of similar nearby homes are only $225,000. If the mortgage lender agrees to a $225,000 short sale, the buyer can purchase for $25,000 less than the existing mortgage balance.

The defaulting borrower on a short sale walks away with nothing. However, the borrower gets rid of his mortgage obligation without a foreclosure on his credit record. But the downside, in this example, occurs when the lender sends the borrower an IRS 1099 form showing $25,000 of taxable debt-forgiveness income.

As a general rule, the buyer of a short-sale house does not get a bargain purchase price. Lenders are usually very demanding to insist that the home sell for as much as can be obtained.

Another problem with short sales is lenders often take 30 to 90 days before deciding to accept or reject a short sale purchase offer. For this reason, smart buyers set a reasonable deadline, such as 15 days, for the lender to accept or reject a short sale offer.

STEP 2 -- BUY AT THE FORECLOSURE AUCTION. If a property buyer cannot purchase the home from the defaulting borrower during the reinstatement period, the house will go to either a judicial court foreclosure sale or a nonjudicial trustee's sale.

The advantage of buying at such an auction is any junior liens are wiped out. To illustrate, if a house has a first, second and third mortgage, plus a judgment lien and a mechanics' lien, they will all be wiped out when the first mortgage lender holds a foreclosure sale.

But the disadvantage of buying at a foreclosure auction is cash (actually cashier's checks) are required either at the sale or shortly thereafter. This is one place your MasterCard, Visa and American Express cards are not welcome.

Raising enough cash to bid at a foreclosure sale can be difficult, especially when the amount of the defaulted mortgage is large, often $100,000 or more.

Another problem is foreclosure auctions are "as is," meaning there is no opportunity to inspect the house before purchase and the foreclosing lender will not pay for any repairs. In most states, foreclosure-sale sellers are not required to disclose even known defects at the auction.

STEP 3 -- BUY AFTER THE FORECLOSURE AUCTION. When there are no bidders at the foreclosure auction, title to the property then goes to the foreclosing lender. This is called REO (real estate owned) property. Lenders are usually very anxious to get rid of REO property, which costs money to maintain and incurs liability risks.

Astute buyers often approach foreclosing lenders who acquired property immediately after the sale to make a purchase offer. My favorite tactic is to send a FedEx overnight letter to the lender's president, offering to purchase for the amount of the foreclosed mortgage (presuming the property is worth that much).

Of course, the lender's president never sees the letter, but it will get referred to the right decision-maker in the REO department.

www.LagretRealEstate.com

Transferring title into LLC could trigger loan repayment

Why strategy to protect asset is likely to upset lender

By Ilyce R. Glink
Inman News

Q: I purchased a fourplex, and wanted to protect my personal assets. I formed a limited liability corporation (LLC) and transferred the title to the fourplex into the LLC.

My mortgage has a clause in it that states that the lender can accelerate the repayment of my debt because of this transfer. However I do not think they will find out unless I don't pay the debt I owe them.

But now my insurance company is going to notify my lender to change the insurance policy to the name of the LLC. What should I do? I am the only member of this LLC.

A: For the most part, you may be correct. As long as a lender obtains its payments and the property is insured, the lender may not find out that there has been a transfer of the property title. Your insurance company, of course, has to tell the lender that the policy has changed and that the new entity is the owner of the property.

While the lender may not care, particularly since you are the sole member of the limited liability company (LLC), you probably should have called the lender prior to setting up the LLC and transferring title to the new company.

Now that you have done that, if the insurance policy still names you and the LLC, you may find that the lender doesn't care. If the lender does care, you will have to explain to them why you transferred title to the LLC and hope that they do not accelerate the debt.

Most, if not all, mortgages have a clause that says that if a property is sold or title to the property is transferred, the lender has the right to call the loan. "Calling the loan" means that the lender has the right to tell the borrower that it's time to pay up and pay off the loan in full.

The lender reasons that it made a loan to a particular borrower and wants to make sure that that borrower always has an interest in the home. If the borrower sells the home, the lender wants the right to quit the arrangement and get repaid.

It's time to call the lender and see if it will work with you in the transfer. Many lenders will send you a letter and tell you what you've done is OK; others may not.

One possibility is that the lender will approve the change but maintain the right to call the loan in the future.

But if you knew in advance that your lender would not approve the transfer and did it anyway, you're playing with fire. I hope you have enough cash on hand or can refinance the property quickly.

Q: I am purchasing a lot next door that has an easement giving me a right of way to my otherwise landlocked home. In order to preserve this lot next door as a lot plus the easement, do I have to deed the property to a limited liability company?

I have been told that if I deed it to myself, the entire lot would become one giant easement, instead of a lot plus an easement.

A: Someone is giving you good information. If you are the beneficiary of an easement -- in this case the easement gives you access to your landlocked property -- and you buy that property, the easement is no longer needed and merges into the newly formed property.

The easement does not become a "giant easement." The easement is eliminated.

Whoever gave you the advice of buying the property in the name of a limited liability company -- or in any other manner other than in the name in which your landlocked property is owned -- is giving you sound advice to preserve the separation of the adjacent lot and easement.

But if you are consolidating the two properties and plan to always use them as one, you wouldn't have to worry about the easement and could buy the adjacent property any way you want.

You may have various options in buying the adjacent property and you should really consult with a real estate attorney in your area.

www.LagretRealEstate.com