10 Steps to Make Money by Flipping Foreclosures Before They Go To Sale



By John Brown of http://www.CacheValleyHomeInfo.com

How to find, value, purchase, and profit from foreclosures before they go to sale.

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STEP 1: IDENTIFY THE MINIMUM AMOUNT YOU WANT TO MAKE

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The first thing you must do is identify how much money you must make for a purchase to be worth your time, money, and effort.

You can state this is flat dollars or in a rate of return.

For example, you may say that you have to make about $20,000 per transaction or it isn't worth your time. Or you may say that you want to make at least 20% on the money you invest.

Why do this?

Because it will be THE deciding factor on which homes you will make an offer for and those you won't.

How do you determine the right number?

One way is to ask yourself what else you could do with the money. If you can make 10% annually putting your money in a mutual fund and do nothing but watch football or ballet all year, then why in the world would you want to make 5% annually by flipping a foreclosure property? Unless you just love the process. But from an investment point of view, it doesn't make sense.

Of course, you may take a smaller gain in the beginning because you want to learn the ropes and hope it will lead to bigger gains. That's a reasonable strategy.

But you've got to figure out you're number. It doesn't matter how you state it, what matters is that you have this target before you do anything else.

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STEP 2: DETERMINE YOUR STATE'S MORTGAGE THEORY

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Mortgage theory describes who owns the property while you're still paying off the loan and, therefore, how the lender gets the property if you default. Here are the general types of theories:

•Title theory

•Lien theory

•Intermediate theory

You need to know exactly what theory is practiced in your state because it will affect who you make the offer to--the lender or the borrower.

How do you find this out?

Easy, look up the telephone number for your state's division of real estate in the yellow pages or online, then call and ask them.

Once you know it, what then? Well, you first have to understand mortgages.

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LENDERS NEVER GIVE MORTGAGES

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If you're going to make money on foreclosures then you need to know what you're talking about or you'll get confused fast. First, everybody talks about going to the bank to get a mortgage, but the truth is that the lenders--be they banks, credit unions, or mob associates--never give anybody a mortgage.

Never!

But isn't that what everybody says?

Sure, but it's wrong. And that's fine to let people go on saying it because who wants to be the word police? But if you're going to make money purchasing properties in foreclosure, then you need to know how borrowing works.

Lenders give promissory notes, which are simply signed documents containing a written promise to pay a stated sum to a particular person, at a specific date, under certain terms.

Aha, you say. So "promissory note" a fancy term for mortgage, right?

Wrong. Promissory notes and mortgages are two different animals. Mortgages are what the borrowers give to lenders.

Huh?

It's true.

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WHAT IS A MORTGAGE THEN?

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A mortgage is a document pledging something of value, in this case the real property, to ensure the performance of paying back the lender's money. The mortgage says in effect: I will pay you back, and if I don't, then I forfeit the property stated in the mortgage.

Other terms for "mortgage" are "pledge," "security," and "pawn." Yes, as in "pawn shop." What's the difference between a pawn shop and a lender, besides the fact that criminals seem to always be running pawn shops in the movies?

Pawn shops keep the pledge until you pay. Lenders let you pledge without taking the property--you get to own the home.

But why the weird word "mortgage"?

That's a great question. Mortgage is a combo word like policeman. "Mort" is old French, Latin too, for "dead." "Gage" is old French for "pledge," so it means "deadpledge." Which, of course, doesn't make too much sense unless we go back a few centuries to Sir Edward Coke, who, in 1628 wrote in his "The first part of the institutes of the lawes of England: or a commentarie vpon Littleton" the following:

"It seemeth that the cause why it is called mortgage is, for that it is doubtful whether the Feoffor will pay at the day limited such summe or not, & if he doth not pay, then the Land which is put in pledge vpon condition for the payment of the money, is taken from him for euer, and so dead to him vpon condition, &c. And if he doth pay the money, then the pledge is dead as to the Tenant, &c."

Ah, "the land which he pledged, if he doesn't pay, is taken from him for ever, and so is dead to him."

So lenders give promissory notes, which are promises to pay somebody some money. And borrower's give mortgages, which are promises to hand over property if they don't meet the terms specified for how they need to pay the money back.

So the mortgagor ("or" = person giving) is the borrower, the mortgagee ("ee" = person receiving) is the lender.

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IS A TRUST DEED A MORTGAGE?

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You will hear a lot about trust deeds. Trust deeds are NOT mortgages.

Just as there are different types of promissory notes, there are different ways to pledge property. One way is with a document called a mortgage. Another is with a document called a trust deed.

A deed is simply a document that shows ownership. Ownership consists of four main rights:

•The right to occupy the property (possession)

•The right to hold it, sell it, or give it away (disposition)

•The right to use it

•The right to not be bothered by people claiming they own it (quiet enjoyment)

So what's a trust deed?

A trust deed is created when the borrower/owner gives a third-party the right, in case of default, to sell the property. The borrower is called the trustor ("or" = giver), the third-party is called the trustee ("ee" = receiver), and the lender becomes the beneficiary and has the right to tell the trustee to sell the property when the borrower is in default.

The key point for us to know here is that when a lender accepts one of these types of pledges, they also accept a specific way of foreclosing on the property.

A mortgage allows lenders to foreclose via a judicial process that requires specific steps and time periods. It can take up to a year to foreclose with a mortgage.

A trust deed, on the other hand, allows lenders to foreclose via a different, non-judicial process, that requires different steps and time periods. Foreclosure can take significantly less time with a trust deed.

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MORTGAGE THEORIES

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TITLE THEORY

This theory states that the lender owns the property until it's paid off. The fancy way of saying "owning" is "hold legal title." So the lender holds title (owns the property) until the debt is paid. That's why this is called title theory.

On the other hand, the borrower only holds equitable title, which simply means he has the right to hold legal title if he pays off his debt. If he doesn't pay, then the lenders just treat his payments as rent, repossess the property, and kick him out.

This is very bad for the borrower. What if the note was for $100,000 and the borrower paid all but the last $4 of the loan? Don't they have $99,996 dollars of equity that's theirs?

No, not in a title theory state.

Can you see big bad lenders in the wild West playing every trick in the book to get the property away from little old ranch widows and basically steal their equity? Yes, you can. And, yes, conniving lenders did this all the time.

Luckily, we have other theories.

LIEN THEORY

This theory states that the lender holds a lien on the property. They do NOT hold title. The borrower holds full, legal title, meaning the borrower owns the property even though he doesn't own it free and clear of any liens.

So what's a lien?

A lien is simply the right, when the borrower defaults, to take the property pledged in the mortgage to satisfy the debt. This right continues until that debt is paid off. At that time the lien, or right, is removed.

This is much better for the borrower. If the borrower pays all but the last $4 of the loan, then the lender can force them to sell, but they only get the $4, not everything else.

INTERMEDIATE THEORY

This theory states that the borrower holds legal title until she defaults. At that time legal title passes to the lender. However, when the lender sells, she can only keep what is owed plus back-payments, penalties, and damages.

WHAT THE THEORIES MEAN FOR FORECLOSURE FLIPPING

If you attempt to purchase the property before the foreclosure sale, it shouldn't make too much difference. If you purchase it at the time of the sale, it could mean quite a bit of difference.

For this reason in this article we're going to focus on making an offer before the property goes to the Sheriff's Sale (for mortgages) or Trustee's Sale (for trust deeds).

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Step 3: Identify Properties That Are Being Foreclosed On

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So you know how much money you want to make. You also know how your state treats ownership when borrowing. Now you need to identify the properties being foreclosed on. And you want to get those that have not gone to sale yet.

With both a mortgage and trust deed, lenders are required to file a public notice with the county that they are initiating foreclosure. This usually happens after the borrower has fallen behind on his payments for three months. Some lenders begin foreclosure earlier, but the average lender waits three months.

When the lender has a mortgage, they are required by law to file a "Lis Pendens" (Latin for "pending legal action") before they do anything else. When the lender has a trust deed, they are required by law to file a "Notice of Default."

Because these notices are public records, you can get access to them. You simply go to the county courthouse and ask for them. You will be charged a fee for each page they print. Some counties provide these records on-line and you can pay to have access to them.

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Step 4: Identify Sellers Who Are Already Listing Their Properties

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Some of these owners are working desperately to pay the penalties, fees, and back-payments to bring themselves current. Others have already decided that they won't be able to pay. Which ones would you want to contact?

You can and should contact both, but those who have already decided to sell will be more open to your offers. Contact them first.

So how do you find them?

You have your realtor look for the properties on the MLS. Some might try to sell their property themselves. But most will get a realtor, hoping to get more than they might with the Sheriff's Sale or Trustee's Sale.

Remember, these folks have been worrying about their default for probably a number of months. They are ready to accept help.

But you're still not ready to make an offer.

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Step 5: Calculate Property Value

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Remember that number you needed to specify in the first step? You still don't know if a property will yield that return. You first need to see how much you might sell the property for and how much is still owed the lender.

In this step you find out what the market price is likely to be. Now market value is simply the value established by a willing buyer and a willing seller who is not under duress, as in a foreclosure.

Can you ever nail down the market value with 100% accuracy?

No, not until the property is sold. Anytime before that, it's just an estimate. This means you might not get the price you expect.

Well, duh, you say. But many people think the estimated value is "owed" them. It's not. Value is simply what a willing buyer and willing seller agree upon. And that value may change depending on any number of things.

So how do you get a reasonable estimate? You pay an appraiser. However, you can also get a comparative market analysis (CMA) from your realtor for free. The CMA for our purposes is often just as useful as an appraiser's estimate.

The final step is to figure out what you'll list the property for. Will you list it for the top of the estimated value range, the bottom, or in the middle? Discuss with your realtor the pros and cons of each position.

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Step 6: Identify How Much You'll Offer

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How much should you offer?

First, think about the seller at this stage in the foreclosure process. If the owner sells for less than the lien amount, then it's possible the court will order that they pay the rest by selling personal property (boat, car, jewelry) or by garnishing wages. The owners don't want that. They want to be done with this house.

If you offer them less than the lien amount they'll most likely reject your offer and wait for other buyers. So you need to find out what they owe. And this includes the amount left on the loan plus fees, penalties, and back-payments.

How do you find this?

It's a little trickier. For more info on the rest of the steps see http://www.cachevalleyhomeinfo.com