Hey Moguls, one of our awesome newer esteemed experts is back again for another terrific lesson. Lex Levinrad is still pretty new around here, so we want to refresh your memory about why he is so worthy of a Faculty position here at Mogul…
Lex has been an investor since 2003 doing rehabs, wholesales, fix and flips and rentals, and he specializes in buying foreclosures, short sales and bank-owned properties (REOs). He’s actually racked up more than 500(!) transactions. Also a licensed Realtor, he even trains newbie investors in his own company, the Distressed Real Estate Institute.
Lex shares his expertise at speaking engagements across the country at national news and radio shows (he even hosts his own radio show), and he’s been featured in numerous print and digital publications, websites and blogs. (See what we mean by expert?!)
So, we’re just gotta let you have him – enjoy…
From Lex Levinrad…
Hey Moguls, welcome back for part 2. In the last lesson we talked about distressed sellers – why distressed sellers will sell way below market… and we focused primarily on properties that were damaged by either flood, fire or hurricane.
In today’s lesson, we’re going to focus on a different type of distressed seller...
A much more common seller that you will encounter – who is also distressed and is definitely very desperate. We are going to talk about the homeowner who is facing foreclosure or is about to go into foreclosure.
You ready?
Make sure you are taking notes because there is a lot of money to be made investing in foreclosures, pre-foreclosures and short sales. And I want you guys to start cashing in on this opportunity like I have and many of my students have.
Unfortunately (or fortunately for you) most real estate investors never really take the time to learn how the foreclosure process works. And this is a huge mistake, because when you are talking to homeowners in foreclosure you need to know what you are talking about.
Luckily for you, most of your competition will not, so if you can learn how the foreclosure process works, you will be way ahead of your competition.
Getting Ahead with the Basics
The first thing you will need to understand is the foreclosure laws in your state and how they work. Some states are judicial states (court) and some States are non-judicial states (no court). Properties can be sold at auction via a trustee sale, a sheriff sale or a court house sale.
So it is very important for you to understand the foreclosure process in your state and the foreclosure laws in your state.
A judicial state requires that a court review the foreclosure case before the property can be sold at auction at the courthouse. In a judicial state the foreclosure begins with the seller filing what is called a Lis Pendens (which stands for ‘Lawsuit Pending’ in Latin). The seller has to sue the owner of the property in order to eventually get the property back via the foreclosure process. In most cases the seller is the bank or the lender. The lender may be a private individual or a bank, but in most cases it is a bank.
The final sale in a judicial state is usually through the courthouse, although some states like New Jersey, Pennsylvania, Delaware, Indiana, Louisiana, Nebraska and Ohio are judicial states but process foreclosures via a sheriff sale.
Most auctions are held live at the courthouse, although in the past few years more and more counties are moving to an online format for bidding on properties.
The following states are judicial states:
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Connecticut
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Delaware
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Florida
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Illinois
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Indiana
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Kansas
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Kentucky
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Louisiana
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Maine
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Maryland
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Massachusetts
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Nebraska
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New Jersey
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New Mexico
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New York
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North Dakota
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Ohio
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Pennsylvania
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South Carolina
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Vermont
In non-judicial states, the lender or the trustee files a Notice of Default with the county recorder’s office to begin the foreclosure process. In non-judicial states the foreclosure process does not need to go through the courts like it does in judicial states.
States that are non-judicial include Michigan, New Hampshire, Tennessee, Utah, Washington D.C., and West Virginia.
All of the remaining states allow both judicial and non-judicial foreclosure.
Still with me? I hope so, because now it’s gonna good. Now that we have the heavy legal stuff out of the way let’s move forward...
Here’s When That Boring Law and Process Talk Comes in Handy
Depending on what state you live in, you are either looking for Notice of Defaults (NOD) or Lis Pendens leads.
In other words, you want a list of people that are in foreclosure or about to go into foreclosure. These are your desperate sellers who you are going to be targeting.
You can buy properties from these sellers who are in foreclosure and flip these properties by wholesaling them or fix and flip them for an even bigger profit.
So you need to get hold of these homeowners in foreclosure. I will show you how to find them, but before we do that… I want to review something with you.
Let’s fast forward a second…
Imagine you had a foreclosure lead of someone who was about to go in to foreclosure or who already was in foreclosure. And imagine that you drove over to their house and you rang their doorbell to see if you could talk to them about buying their house.
Let’s say the homeowner was there and nice enough to let you in. Based on my experience, this is rare – they’re either not there or not nice. Oftentimes, they are more likely to throw a rotten grapefruit at you or chase you away than let you in…
But let’s assume you found a nice homeowner in foreclosure who was actually up for a chat and a cup of coffee. In other words – a nice, desperate seller who is in foreclosure that you could sit down and talk to about buying their house.
What on earth would you say to them?
Do you see how if you don’t understand the foreclosure law and how the foreclosure process works in your state that you are kind of stumbling in the dark?
Now you don’t need to be an attorney and you don’t have to hire one – but you do need to at least have a basic understanding of the foreclosure process in your state.
You will need this when you talk to desperate sellers who are in foreclosure. The better your knowledge, the easier it will be for you to communicate with them and offer them viable solutions.
You see, people who are in foreclosure are desperate. In many cases, they don’t know what to do. They are people who, just like you, worked hard to build the American dream but something went horribly wrong. And now they find themselves in a situation of deep embarrassment.
Many homeowners in foreclosure have always paid their bills on time – which is why being in foreclosure can be so very embarrassing to them.
They certainly don’t want their kids or the neighbors knowing that they are in foreclosure – so keep that in mind when you talk to them or approach them.
What they need most is consoling and understanding…
They would like to tell you why they are in foreclosure and how they got into this situation. And if you are lucky enough to get to the point where they are willing to let you in and chat with you, then my advice is to simply stop talking – listen – and let them do the talking.
The more they talk, the more they will like you. New investors always mess this up. After five minutes they are making an offer. This is a huge mistake. First let them warm up to you, talk, get the foreclosure off their chest and make them feel better.
Why?
You can make $30,000 or more in profit on a good foreclosure deal, so invest your time and effort into building up a relationship with the seller.
And when it is time for you to talk and to offer advice and maybe offer to buy their house, you need to understand how the foreclosure process works in your state. You need to know more than them.
So make sure you take the time to understand this before you start marketing to distressed sellers. Otherwise you will be wasting your time and your money. You can put out all the bandit signs in the world or mail thousands of postcards. But if you don’t know what to say when they call, then you have a big problem.
The Stages of Foreclosure
Foreclosure is basically broken down into 3 different stages.
Pre-Foreclosure
In pre-foreclosure, the homeowner is not yet in foreclosure. They are still making their payments on time – but they are struggling. They might be calling the bank and trying to negotiate their payments or adding the principal on to the back end of the loan. They might be attempting to do a loan modification, which reduces either the interest rate on their mortgage, the principal or both.
In many cases the homeowner is under water – meaning they owe the bank a lot more than what their property is worth.
They are trying to figure out a viable solution. In some cases, they have an adjustable rate mortgage that has reset and they simply can’t continue to make their payments. Or maybe they lost their job, got disabled, divorced or had some other financial hardship that is causing them to have a difficult time making their payments.
These are the best deals to get since there is less competition for them.
Foreclosure
Someone who is already in foreclosure has typically not made a payment for a few months or longer. They may be a few months behind on their payment or they could even be as much as a few years behind in some extreme circumstances (depending on the state).
I know a guy who lived in his house for three years without making a payment. For real! It happens.
Sellers who are already in foreclosure are more desperate because they are being sued by the bank or the lender. Most people don’t like being sued, so these homeowners are even more desperate, have run out of choices and the clock is ticking down to the sale date at the courthouse.
Some homeowners in foreclosure are in denial, and there are many attorneys out there who charge a lot of money to stall the foreclosure for as long as possible. This keeps the homeowner even more in denial. I have seen many cases where the attorney was telling the homeowner not to worry… and then at the last minute the judge overruled and set a sale date a few weeks out.
In a lot of foreclosure cases the homeowner is living for free in the property and is not making the mortgage payments. He or she may have been living there for a long time without making any payments. And some properties that go into foreclosure are rental properties that may be vacant or have a tenant in the property who may or may not be paying rent.
Foreclosure Auction
When the homeowner loses their home via the foreclosure process, the house has already been sold to the highest bidder at either the courthouse, sheriff sale or trustee sale (depending on your state).
These properties are listed on the MLS and are known as REOs - Real Estate Owned (by the bank). These are the easiest properties to find since they are right on the MLS and can be seen on many real estate sites. However, because they are so visible competition is fierce.
Now, make no mistake, you can flip REOs. We do it every day and you can too. In fact, we flip more REOs than any other type of property. There are so many bank-owned properties out there that they are not difficult to find – as long as you can beat out the competition.
There is one other type of distressed seller who could either be in foreclosure or pre-foreclosure.
When a distressed seller has decided that they want to get out of their house but they owe the bank far more than what their house is worth today, then they can either lose their house via foreclosure or they can attempt to complete a short sale….
Short Sale
With a short sale, a homeowner may or may not be current on their payments. But they would like to sell their property to an investor so that they can get out of their situation.
In most cases, they either cannot afford the payments or the property is very underwater and they owe a lot more to the bank than what they could sell the house for.
This was a very common scenario over the past few years since so many homeowners had negative equity and were underwater.
The investor who would be purchasing a short sale would have to be a cash buyer who can purchase the property and close quickly…
The investor would have to present their offer to the bank in a way that the bank would be willing to accept the investor’s offer. The investor would need to justify their offer, the price, the comparable sales, the condition of the property, etc. in order to get the bank to agree.
If the bank agrees to the investors offer, then the homeowner avoids foreclosure and the bank agrees to take less than the amount owed on the original mortgage. There could be tax liabilities to the seller, so make sure you understand how that works before you start negotiating short sales.
But short sales are properties that can be flipped easily. And marketing for underwater homeowners is less fierce than looking for bank-owned properties.
Okay, so now that we have covered the basics of the types of distressed sellers we can start digging a little deeper…
Next Up…
In the next lesson on distressed real estate, I’m are going to show you how to market to homeowners in pre-foreclosure and foreclosure, what to say to them and how to figure out your best plan of action to turn desperate seller leads into dollars in your bank account.
I’m Listening
Do you have any questions about this lesson in distressed real estate? Ask your question in the comments section below and I will respond as soon as I can.
Know if your state is a judicial or non-judicial state
Spend some time learning the foreclosure laws in your state
Understand the different stages of foreclosure including pre-foreclosure
Beat your competition by finding people in foreclosure before they do
Understand how to negotiate a short sale or hire a short sale negotiator