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Short Sales/REOs

What is a Short Sale?
 
A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. For example: A homeowner, who is facing foreclosure, has an existing first mortgage of $300,000. You write an offer  for $220,000, which is accepted as full payment for the loan. This is a short sale. Why are they willing to take such a discount? Several reasons. First of all, banks do not like excess inventory and bad loans on their books; therefore, if they see an opportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished with the headache of it all.
 
At the time of this writing, foreclosures are at an all time high, which basically translates into more opportunities for you. Since foreclosures are increasing, this is the perfect time to jump into this because there will be more and more lenders discounting properties. It is safe to say that most lenders will accept a short sale, however, you may come across one or two lenders who will not discount. If the numbers work out for the lender they will do it.
It is best to do a short sale when the property is in the pre-foreclosure state. Yes, you can perform a short sale when the bank owns the property, however your profits will more than likely be smaller. There are two stages within pre-foreclosure. The first stage being those individuals who are behind on payments and the second stage are those who are behind on payments with a notice of default. In order for this to work properly and for you to successfully get a short sale, you must find the homeowners who are in the second stage of pre-foreclosure or more than 3 payments behind on their mortgage. Once the notice of default has been recorded, banks become motivated as well, so you are more likely to get a discount. Until that time, very rarely will a bank ever discount a mortgage that soon. Why would they? The homeowners still have time to cure the loan and make up the back payments.
 
 
The following chart shows a comparison of the processes of Mortgage Judicial Foreclosure and Trust Deed Non-Judicial Foreclosure.
Mortgage Judicial Foreclosure
Trust Deed Non-Judicial Foreclosure
Borrower Defaults
Borrower Defaults
File Complaint (Initiate Law Suit)
Beneficiary authorizes Trustee to proceed with Foreclosure
Record Lis Pendens
Record Notice of Default
Court Hearing Date set for Sale
Period of Equitable Redemption Trustor can reinstate
Advertise the Sale
Advertise the Sale
Sell to highest bidder Buyer pays cash at sale.
Sell to highest bidder Buyer pays cash at sale.
Buyer receives Certificate of Sale
Trustee conveys Trustee's Deed to Buyer
Period of Statutory Redemption (Right of Redemption)
Deficiency Judgment Unlikely
 
Sheriff's Deed Conveyed to Buyer Evict Mortgagor
 
 
Possible Deficiency Judgment
 

 
 

Foreclosure Scams on the Rise!

Foreclosure Scams are on the rise because of the increasing number of foreclosures. It's very important as homeowners to know about these scams and avoid them like the plague. They may cause you more harm and headache as they prey on desperate homeowners looking for solutions.

Common Foreclosure Scams

 

1. EQUITY SKIMMING:

You are in a situation where you can't make payments anymore on your home. You are desperate and put your home up for sale. You are approached by a "buyer" who offers to buy your home at full asking price. The potential buyer claims he will solve all your financial problems by "promising" to pay off your mortgage. He claims to take over the existing mortgage and give you a sum of money after the property is sold. But in order to do so, he suggests that you move out right away and deed the property over to him. So you move out and assume the "buyer" will continue to make the mortgage payments. However, the "buyer" collects rent for the next 6 - 8 months and does not make any mortgage payments. The lender has no choice but to foreclose and all the while you have no idea what's happening because you've moved out. Now your credit is shot for the next decade and explains why you couldn't qualify for a credit card.

 

As a homeowner, you need to know there is a right way and a wrong way of doing this. Taking over a property "subject to" the existing loan is a great technique and is used by many investors. Signing over your deed to someone else does not relieve you of your obligation on your loan. Your name stays on the loan until it's paid off. So if someone ever tries to take over your property promising to make the payments, you need to be involved. Don't just walk away thinking everything will be fine. One of the most common things to do is set up some sort of a loan servicing company or trust company to collect and disburse the payments. This way you know the payments are being paid.

 

2. THE BAIT-AND-SWITCH:

Very similar to taking over "subject to", but the acclaimed buyer is only after the equity. The buyer tells the homeowners he will bring the mortgage current and tells them they can stay in the home. But in order to do so, he must have a few documents signed that protect his interest and gives him ownership of the property. Then a few weeks down the road, the homeowner receives an eviction notice. Again, you've got to protect yourself.

 

 

3. THE BAILOUT:

Again very similar to the previous two, where the homeowners sign over the deed with the assumption that they will be able to remain in the house as a renter or lease it back from the buyer and eventually buy it back over time. The terms of these types of scams are so harsh that they make it nearly impossible to buy-back which was the plan to begin with. The homeowner is left with nothing and the buyer walks off with most or all of the equity.

 

This is a common strategy used by investors but the terms must be appropriate. This strategy can be very effective if used the right way and is a great way to help homeowners. It's unfortunate a few have to ruin it for the rest of us trying to do good. Make sure you sign a contract with the potential rescuer and if there are any terms you're not sure about and don't know what they mean, go see an attorney.

 

4. PHANTOM ASSISTANCE:

Typically these are online companies claiming to have the magic touch in stopping the foreclosure auction. They know all the ins and outs and what to say to the lender to stop the auction. Then these companies charge outrageous fees for simple phone calls and paperwork the homeowner could have done themselves at no cost and the end result is the same. You actually end up no better off then you were before, except your credit card bill is higher now. This predatory scam gives homeowners a false sense of hope and prevents them from seeking qualified help.

 

 

5. COUNSELING AGENCIES:

Some groups, most of them online, calling themselves "counseling agencies" may approach you or ask you to submit your information for a personal consultation to review your situation. They then proceed to offer certain services for a fee. Most of the time these "special services" you are paying for are FREE, such as negotiating a new payment plan with your lender, working out a forbearance, or lowering your interest rate. These are all things your lender will assist you with at no charge. Be careful giving ANYONE money online who claims they can assist you out of foreclosure. There are dozens of good, non-profit organizations and free counseling agencies who are ready and willing to assist.

 

One of the largest foreclosure assistance programs right now is 888-995-HOPE. This is available to any homeowner in America having trouble paying their mortgage. It is provided free of charge by the Homeownership Preservation Foundation, a nonprofit dedicated to preserving homeownership.

If you are facing foreclosure, more than likely you will be contacted by someone wanting to assist or help you out of your situation. Being an investor, I know some of these companies or individuals mean well and want to help, while others are out there preying on desperate homeowners. So how can you determine which ones are out to take advantage of you and who is out there to help. We have outlined a few things you can look for in determining a foreclosure scam and ways to avoid them.

Here are a few things you can do to avoid foreclosure scams...

  • DON'T SIGN any papers that you don't fully understand, or you could make bad matters worse.
  • DON'T SIGN any papers that you feel pressured into signing. Take your time.
  • DON'T MAKE mortgage payments to anyone other than your lender.
  • DON'T SIGN over the deed without some closure or agreement for your protection. Talk to your attorney or title company if you need help.
  • DON'T EVER pay anyone who claims to stop foreclosure. You can stop the auction yourself. There are several foreclosure assistance programs all over to assist you for free.
We hope this information is helpful for you if you are facing foreclosure.
 
 

What are the Options of Homeowners in Foreclosure?

1. You can call your bank or lender and ask them to reinstate the loan. You may be allowed to reinstate or make the loan current by paying a lump sum or making scheduled payments to your lender over a given amount of time. Just explain to them you had a few bad months and things are now better and most lenders will try to work something out with you.

Here is an example:
Ed falls behind 3 payments on his house. He pays $2000 a month for a mortgage payment. Then we add on $500 in late fees. Ed owes a total of $6500 to reinstate the loan. He sells a bunch of his personal belongings for $10,000. So he pays the bank, they say "Thank You", and Ed continues to make his regular monthly mortgage payment. The Notice of Default (NOD) is canceled, the home is brought out of foreclosure, and everyone is happy. However, Ed's credit was still hit with the NOD which will hurt a little.

Something similar to reinstating the loan is called a Forbearance Agreement. This is when you actually negotiate a "deal" with the bank. You can ask the bank if they will add on the amount owed in back payments to the back of the loan. You could even ask if the bank would be willing to take a smaller portion upfront and add the rest to the back of the loan. Another option is to ask to pay some upfront and forgive the rest. Or you could even ask to forgive the whole thing. You never know unless you ask. Banks want to work with you, trust me.

2. You can refinance your home. If there is lots of equity in your home and you're not to far behind on payments, this is a great option. Usually the lender would refinance the existing loan and include as part of the new loan any late payments, and fees that you would need to regain control. It would all be "wrapped" into one mortgage. The challenge that most homeowners have is they have leveraged their home to the max. Therefore, very little equity is in the home especially when you add on back payments and fees so it becomes very difficult to refinance.

3. You can list your home with a realtor.  An experienced agent knows the ins and outs of this situation- may already be working with investors and can orchestrate all the details necessary to close the property.
5. You can give the property back to the lender. If there are no other liens on the title, the lender may agree to take the property back. This process of transferring ownership from you to the lender under these circumstances is called a Deed in Lieu of Foreclosure, and is sometimes referred to as a "friendly foreclosure" because in essence that what it is. You just walk away. A deed in lieu of foreclosure does not protect your credit, nor will it cut off the rights of junior lien holders. In other words, the lender would take the property back subject to the junior lien holders. This will avoid the possibility of a deficiency judgment in the event the property fails to produce enough to cover the outstanding debts after it goes to auction. So if you have equity in the property this is not a good option. You will give up all rights to receive any surplus from the auction.

6. You can sell your home to us. We will negotiate with your lender to accept a discount on your loan. This is called a short sale. What this does is allow us to buy your home under market value so you can avoid the foreclosure auction. Then we can help you move and get you into a place that will fit your needs.

7. You can file bankruptcy. It is very important you understand how bankruptcy works. Many people use bankruptcy as a scare tactic. There are several different "chapters" of bankruptcy. Some are work-out others are wipe-out, but here is the general idea. When someone files bankruptcy it's almost like someone builds a "bullet-proof" barrier around the house. No one can touch you! However, you are not free of all responsibility and most people do not understand that. We are not a bankruptcy attorney, but you need to know the difference between a Chapter 7 and a Chapter 13 bankruptcy so you know what happens.

Like we mentioned earlier, some bankruptcies are "work out" others are "wipe out". The two that we will focus on are the Chapter 7 and Chapter 13. These are the most common in your situation. Chapter 7 is the "wipe out" and Chapter 13 is the "work out". Bankruptcy is a federal court action designed to help individuals repay their debts or eliminate their debts depending on their circumstances. Chapter 13 bankruptcies are designed to reorganize debts in an effort to repay all debt. Chapter 7 bankruptcies are geared more towards liquidation of assets. Both Chapter 7 and Chapter 13 immediately stop the foreclosure process and any creditors from taking further action against you.

Here is how Ch 7 works.

When someone files a Chapter 7 bankruptcy, all assets are frozen. The attorney will create what is called an automatic stay. Meaning everything "Stays" put. The homeowners can't buy anything, they can't sell anything, and they can't even give away anything. If they try to sell their home, they couldn't. If they try to give away money in savings, they can't. Any unsecured debt like credit cards, unsecured loans, etc. are eliminated or wiped out. They do not exist anymore. Then the trustee or attorney who represents the court and the creditors will look at all the assets (house, car, furniture, equipment) anything of value and decide what must be liquidated to pay some of the debt that was wiped out.

If the homeowners are in the middle of foreclosure, a Chapter 7 will stop the foreclosure process. Usually banks will then ask the trustee to release the property from the automatic stay so they may continue with the foreclosure process. Once the property has been released from the bankruptcy, the foreclosure process starts right where it left off. Typically you have anywhere from 3-5 weeks until the foreclosure process begins again.

Chapter 13 is a little different. When someone files a Chapter 13, they don't take all the assets and sell them. Instead they take all the monthly payments and discount them for penny's on the dollar. It's like a debt consolidation plan. Whatever amount is agreed upon has to be paid to the bankruptcy count every month for the next 3-5 years. So the homeowners get to keep their house, their cars, and all their assets. Now, as long as the homeowner stays current with the mortgage payments and pays the amount agreed upon, they will be fine. However, if any payments are missed, the trustee will dismiss the bankruptcy and the foreclosure process will begin again.

[Note: Bankruptcy should be the last alternative or option and should not be used to stop foreclosure unless you have no other option or else you need the protection of a bankruptcy due to other circumstances or situations you are currently up against. If you feel this may be your best option, please seek legal advise from a competent professional in this field.]

8. And finally, you can just let it go to foreclosure. Basically you don't do anything. Typically you will get evicted after about 2-3 weeks. You leave with nothing in hand and a foreclosure on your credit report. This is without question the worst option of all. Don't let anyone convince you to just give up and do nothing. At least try something. You have nothing to lose. It could mean the difference between a few thousand dollars in your pocket compared to nothing and a foreclosure on your credit.

You should also beware of one other thing that can halt foreclosure. It is called the Soldier Relief Act of 1940. When a property is owned by a person who is in the military and the mortgage payments are not made, then this relief act may stop foreclosure based on certain criteria. The person has to be in active duty in order to qualify. The mortgage loan had to be established before the soldier was called out to active duty. Not only will this stop foreclosure, but it will stop seizure of any personal property while the soldier is actively serving and several months thereafter.

We hope with this knowledge, you now can make the right decision about your home.

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