BANK OWNED PROPERTIES

If no buyers bid on a property at the auction, or the lender is the resulting highest bidder, the lender officially reclaims the home and it becomes a real-estate-owned property (REO). While REO properties typically offer more time for evaluation and a more standard bank-managed transaction, their prices are usually closer to full retail market value.

The (REO) properties are readily available to all buyers; they are often marketed through a realtor and listed openly on the MLS. The bank is not in a financially stressful situation, so they are not likely to take much less than fair market value for the home. Buyers have time available to evaluate and secure financing, thus the pool of ready and able buyers is much larger. Bank Owned properties can be a great place to start for the Investor interested in fixer uppers. Fixer uppers will often be listed below value, so an Investor with a Handyman’s touch can add value to the home through various renovations and make a sizable profit for his time. Read our In=Depth Manual on Fixer-uppers for in depth detail on when to rehab and when to sell AS / IS. 

Secure financing early

It is important for a buyer to be pre-qualified before engaging in discussions with a seller. This ensures that the buyer is in a financial position to purchase the property, and is in the strongest possible position to negotiate. It is best to work with a lender who understands the foreclosure process, and can guide the buyer through certain steps, such as ensuring that a property is FHA-compliant. Another reason to consider pre-qualification is that not all lenders finance foreclosure properties.
Having approved financing on-hand makes negotiations with both the seller and the lender easier, and may even make it possible for the buyer to simply cure the default and take over the existing loan to reduce loan processing fees.

3. Engage a real estate agent as a buyer’s representative

Most people hire a real estate agent to sell their home. These seller s representatives are charged with making the sale and negotiating the best deal for their clients. Buyer s representatives have the home buyer s interests at heart, and are charged with finding the right property and negotiating the best price for their clients. Picking the right real estate agent will make a buyer s life much easier. There are agents who specialize in the foreclosure market, with specific experience in REO properties. Look for an agent with foreclosure transaction experience, as well as knowledge of local, regional and state laws. But it s also important to consider the agent’s knowledge of the area; their ability to close a deal; and their access to other professionals (attorneys, lenders, mortgage and title professionals) to ensure that the buyer is in good hands.

4. Do your homework
Stocks offer higher potential returns for investors than traditional savings programs, but are also riskier. Similarly, purchasing foreclosure properties is somewhat more risky than buying traditional real estate properties, but offers much higher potential savings. With the right examination and due diligence, buyers can significantly reduce the risks. It makes sense to give any property under consideration a thorough examination. Here are eight steps for doing a professional-level exam.

5. Make a realistic offer
Despite what you may see on late-night cable TV, investing in foreclosure properties isn t a sure fire get rich quick formula. Lenders aren t likely to give properties away, particularly in a real estate market where prices continue to rise. And homeowners in financial distress may be difficult to deal with, particularly early in the foreclosure process. The keys to a successful foreclosure property purchase are diligence and patience.

As a rule of thumb, the best savings can be made at the pre-foreclosure stage, where home owners can avoid a foreclosure and lenders can save the time and cost involved in going through the process. Another critical point in the process is immediately prior to the auction date, when all parties might be most open to a last-minute solution. It s not unusual to save from 10-30% of the market value on a foreclosure property, and certain properties offer savings of 50% or even more. An educated buyer one who knows how much is owed on the property and what its market value is can usually come up with a realistic offer; one that offers significant savings, while meeting the requirements of the lender.

Can you buy homes below market?

While a typical buyer may look at five to 10 homes before making an offer, an investor who make bargain buys usually go through many more. Most experts agree it takes a lot of determination to find a real "bargain." There are a number of ways to buy a bargain property:

• Buy a fixer-upper in a transitional neighborhood, improve it and keep it or resell at a higher price.
• Buy a foreclosure property (after doing your research carefully).
• Buy a house due to be torn down and move it to a new lot.
• Buy a partial interest in a piece of real estate, such as part of a tenants-in-common partnership.
• Buy a leftover house in a new-home development.

What types of foreclosure are there?

Judicial foreclosure action is a proceeding in which a mortgagee, a trustee or another lien holder on property requests a court-supervised sale of the property to cover the unpaid balance of a delinquent debt.

Non-judicial foreclosure is the process of selling real property under a power of sale in a mortgage or deed of trust that is in default. In such a foreclosure, however, the lender is unable to obtain a deficiency judgment, which makes some title insurance companies reluctant to issue a policy.

Are foreclosures an option?

A foreclosure property is a home that has been repossessed by the lender because the owners failed to pay the mortgage. Thousands of homes end up in foreclosure every year. Economic conditions affect the number of foreclosures, too. Many people lose their homes due to job loss, credit problems or unexpected expenses.

It is wise to be cautious when considering a foreclosure. Many experts, in fact, advise inexperienced buyers to hire an expert to take them through the process. It is important to have the house thoroughly inspected and to be sure that any liens, undisclosed mortgages or court judgments are cleared or at least disclosed.

What are problems buying foreclosures?

Buying directly at a legal foreclosure sale is risky and dangerous. It is strictly caveat emptor ("Let the buyer beware").

The process has many disadvantages. There is no financing; you need cash and lots of it. The title needs to be checked before the purchase or the buyer could buy a seriously deficient title. The property's condition is not well known and an interior inspection of the property may not be possible before the sale.

In addition, only estate (probate) and foreclosure sales are exempt from some states' disclosure laws. In both cases, the law protects the seller (usually an heir or financial institution) who has recently acquired the property through adverse circumstances and may have little or no direct information about it.

Where can you find foreclosures?

In most states, a foreclosure notice must be published in the legal notices section of a local newspaper where the property is located or in the nearest city. Also, foreclosure notices are usually posted on the property itself and somewhere in the city where the sale is to take place.

When a homeowner is late on three payments, the bank will record a notice of default against the property. When the owner fails to pay up, a trustee sale is held, and the property is sold to the highest bidder. The financial institution that has initiated foreclosure proceedings usually will set the bid price at the loan amount.

Despite these seemingly straightforward rules, buying foreclosures is not easy as it may sound. Sophisticated investors use the technique so novices may find themselves among stiff competition.

Resources:

• "The Smart Money Guide to Bargain Homes, How to Find and Buy Foreclosures," James I. Wiedemer, Dearborn Financial Publishing, Chicago; 1994.
• "Real Estate Principles," Charles O. Stapleton III, Thomas Moran and Martha R. Williams, Dearborn Financial Publishing, Chicago; 1994.
• "Real Estate Investing From A to Z," William H. Pivar, Probus Publishing, Chicago, 1993.

How do you get financing for a foreclosure?

One reason there are few bidders at foreclosure sales is that it is next to impossible to get financing for such a property. You generally need to show up with cash and lots of it, or a line of credit with your bank upon which you can draw cashier's checks.

How do you find government-repossessed homes?

The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner-occupants and investors.

You can only purchase HUD-owned properties through a licensed real estate broker. HUD will pay the broker's commission up to 6 percent of the sales price.

Down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from the conventional market's 5 to 20 percent.

One caution. HUD homes are sold "as is," meaning limited repairs have been made but no structural or mechanical warranties are implied.

Can I get a HUD home for as little as $100 down?

If you are strapped for cash and looking for a bargain, you may be able to buy a foreclosure property acquired by the U.S. Department of Housing and Urban Development for as little as $100 down.

With HUD foreclosures, down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from 5 to 20 percent. But when the property is FHA-insured, the down payment can go much lower.

Each offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price, not to exceed $2,000 but not less than $500.

The U.S. Department of Veterans Affairs also offers foreclosure properties which can be purchased directly from the VA often well below market value and with a down payment amount as low as 2 percent for owner-occupants. Investors may be required to pay up to 10 percent of the purchase price as a down payment. This is because the VA guarantees home loans and often ends up owning the property if the veteran defaults.

If you are interested in purchasing a VA foreclosure, call 1-800-827-1000 to request a current listing. About 100 new properties are listed every two weeks.

You should be aware that foreclosure properties are sold "as is," meaning limited repairs have been made but no structural or mechanical warranties are implied.

Where can you find foreclosed HUD homes?

The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner-occupants and investors.

You can only buy HUD-owned properties through a licensed real estate broker, whose commission will be paid by HUD.

Down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range 5 to 20 percent. When the property is FHA-insured, the down payment can go much lower. Each accepted offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price not to exceed $2,000, but not less than $500.

You should be aware that HUD homes are sold "as is," meaning limited repairs have been made but no structural or mechanical warranties are implied.

You can only purchase a U.S. Department of Housing and Urban Development property through a licensed real estate broker. HUD will pay the broker's commission up to 6 percent of the sales price.

One good source is their Web page http://www.hud.gov .

What about buying a foreclosure "as is"?

Buying a foreclosure property can be risky, especially for the novice. Usually, you buy a foreclosure property as is, which means there is no warranty implied for the condition of the property (in other words, you can't go back to the seller for repairs). The condition of foreclosure properties is usually not known because an inspection of the interior of the house is not possible before the sale.

In addition, there may be problems with the title, though that is something you can check out before the purchase.

Fixer-uppers

You can find distressed properties or fixer-uppers in most communities, even wealthier neighborhoods. A distressed property is one that has been poorly maintained and has a lower market value than other houses in the immediate area.

Ascertaining whether the property you're interested in is a wise investment takes some work. You need to figure what the average house in a given area sells for, as well as what the most desirable houses in that area are like and what they cost.

Some experts suggest that buyers who take this route try to find a "cosmetic fixer" that can be completely refurbished with paint, wallpaper, new floor and window coverings, landscaping and new appliances. You should avoid run-down houses that need major structural repairs. A house price that looks too good to be true probably is. A smart buyer will find out why before buying it.

The basic strategy for a fixer is to find the least desirable house in the most desirable neighborhood, and then decide if the expenses needed to bring the value of that property up to its full potential market value are within one's rehab budget.

How do you find out the value of a troubled property?

Buyers considering a foreclosure property should obtain as much information as possible from the lender about the range of bids being sought.

It also is important to examine the property. If you are unable to get into a foreclosure property, check with surrounding neighbors about the property's condition.

It also is possible to do your own cost comparison through researching comparable properties recorded at local county recorder's and assessor's offices, or through Internet sites specializing in property records.

Are there programs for fixer-uppers?

If you need home loan to buy a "fixer-upper" and remodel it, look at the U.S. Department of Housing and Urban Development's Section 203(K) loan program. The program is designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.

A 203(K) loan is usually done as a combination loan to purchase a "fixer-upper" property "as is" and rehabilitate it, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan.

Investors must put 15 percent down while owner-occupants are required to come up with only 3 to 5 percent. HUD requires that a minimum of $5,000 be spent on improvements.

Two appraisals are required. Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.

Return on remodeling jobs

Remodeling magazine produces an annual "Cost vs. Value Report'' that answers just that question. The most important point to remember is that remodeling a home not only improves its livability for you but its curb appeal with a potential buyer down the road.

Most recently, the highest remodeling paybacks have come from updating kitchens and baths, home-office additions and extra amenities in older homes. While home offices are a relatively new remodeling trend, for example, you could expect to recoup 58 percent of the cost of adding a home office, according to the survey.

Government programs for rehab

The U.S. Department of Housing and Urban Development's Section 203 (K) rehabilitation loan program is designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.

The 203(K) loan is usually done as a combination loan to purchase a fixer-upper property "as is" and rehabilitate it, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan.

Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.

For a list of participating lenders, call HUD at (202) 708-2720.

If you are a veteran, loans from the U.S. Department of Veterans Affairs also can be used to buy a home, build a home, improve a home or to refinance an existing loan. VA loans frequently offer lower interest rates than ordinarily available with other kinds of loans. To qualify for a loan, the first step is to apply for a Certificate of Eligibility.

Another program is the Federal Housing Administration's Title 1 FHA loan program.

Resources:

• "Rehab a Home With HUD's 203(K)" brochure, U.S. Department of Housing and Urban Development, 7th and D streets S.W., Washington, DC 20410.

Resources on home improvement

If you're getting ready to embark on a home improvement project involving contracting help, "Ready, Set, Build: A Consumer's Guide to Home Improvement Planning Contracts" lays out a road map for selecting the right contractor, obtaining competitive bids up to what to include in a contract. There also is information on consumer rights, liens and financing.

The book is available for $9.95 through Consumer Press and Women's Publications, Inc., Dept. SR01, 13326 Southwest 28th St., Fort Lauderdale, FL 33330-1102; (954) 370-9153.

Resources:

• Profiting From Real Estate Rehab, Sandra M. Brassfield, John Wiley & Sons Inc., New York; 1992.
• Remodeling magazine's annual "Cost vs. Value Report", available for a nominal fee from the magazine; call (202) 736-3447 to order a copy.

Tax breaks for historic rehab

Qualified rehabilitated buildings and certified historic structures currently enjoy a 20 percent investment tax credit for qualified rehabilitation expenses. A historic structure is one listed in the National Register of Historic Places or so designated by an appropriate state or local historic district also certified by the government.

The tax code does not allow deductions for the demolition or significant alternation of a historic structure.

Resources:

• National Trust for Historic Preservation, Washington, D.C.; (202) 588-6000.

Trustee sales

Trustee sales are advertised in advance and require an all-cash bid. The sale is usually conducted by a sheriff, a constable or lawyer acting as trustee. This kind of sale, which usually attracts savvy investors, is not for the novice.

In a trustee sale, the lender who holds the first loan on the property starts the bidding at the amount of the loan being foreclosed. Successful bidders receive a trustee's deed.

Get-rich-quick real estate schemes

Most real estate experts say there is no such thing as getting rich quick in real estate. But there are no end of get-rich-quick programs presented to the public as alternative methods of buying real estate. Some are reputable while others depend on your financial circumstances to work. A handful are simply scams.

Many get-rich-on-real-estate programs offer advice on how to buy government foreclosure properties and participate in other government programs. Most of this information can be obtained by calling the government offices involved directly.

Anyone interested in real estate investments would be wise to explore a variety of sources. Most investors view real estate as a long-term investment. Deals that sound too good to be true often are.

CONDOS

Where do I get information on condos?

The major interest group for condominium projects and other so-called common-interest developments is the nonprofit Community Associations Institute,1630 Duke St., Alexandria, VA 22314; (703) 548-8600. Also, check the Internet, where CAI operates an informative site, as does CIDNetworks.

How do you choose between condos and single-family homes?

Using appreciation as a measure, condominiums in some areas have been as profitable an investment as single-family homes in the last five years. And in some markets, condos appreciated even more, according to some experts.

While single-family homes have been the preferred investment by home buyers, changing demographics are helping make condos more popular, especially among single home buyers, empty nesters and first-time buyers in high-priced markets.

Also, the condominium community has worked hard in the last few years to overcome image problems brought on by homeowners association and developer disputes as well as all too frequent construction-defect litigation.

Are condos a good investment?

Condominiums have held their value as an investment despite economic downturns and problems with some associations. In fact, condos have appreciated more in the last few years than when they first came on the scene in the late 1970s and early 1980s, experts say.

While there are lots of reports about homeowners association disputes and construction-defect problems, the industry has worked hard to turn its image around. Elected volunteers who serve on association boards are better trained at handling complex budget and legal issues, for example, while many boards go to great lengths to avoid the kind of protracted and expensive litigation that has hurt resale value in the past.

Meanwhile, changing demographics are making condominiums more attractive investments for single home buyers, empty nesters and first-time buyers in expensive markets.

Are condominiums risky to buy?

While condos never had the kind of appreciation experienced by single-family homes in the 1980s, most ultimately have not lost value, say some experts. And with high prices in many urban markets and more single home buyers in the market than ever before, the market for condos is strong. (Is this good for potential buyers?)

As with any home purchase, you should do your homework about the neighborhood or development before you buy. In the case of condominiums, it is important to read the past six months of homeowners association minutes to see how effective the board is and to learn about any possibly detracting issues (such as protracted litigation with the developer).

The condominium community has worked hard in the last few years to overcome image problems brought on by disputes and lawsuits. Associations are becoming more sophisticated about property management and taking steps to prevent legal problems and disputes.

Are one-bedroom condominiums a good investment?

One-bedroom condominiums historically have not been considered as good an investment as condos with two bedrooms or more. But in high-cost markets, such as Manhattan or the San Francisco Bay Area, one-bedroom condos have proven to be equally good investments. Helping that along are changing demographic trends. With more single home buyers in the market today than at any time in history, there is more demand for one-bedroom condos.

• "The Condominium Bluebook" by Branden E. Bickel, B&B Publications, San Francisco, CA; 1994; call (415) 433-1233).
• Community Associations Institute, Alexandria, VA; (703) 548-8600.

INVESTING IN REAL ESTATE

Investing in Real Estate

Home ownership is a highly leveraged investment that can yield substantial profit on a nominal front-end investment. However, such returns depend on home-price appreciation.

As for evaluating the risk associated with home ownership, David T. Schumacher and Erik Page Bucy write in their book "The Buy & Hold Real Estate Strategy," John Wiley & Sons, New York; 1992, that "good property located in growth areas should be regarded as an investment as opposed to a speculation or gamble."

What is the best time to buy?

Because many buyers prefer to move in the spring or summer, the market starts to heat up as early as February. Families with children are anxious to buy so they can move during summer vacation, before the new school year begins. The market slows down in late summer before picking up again briefly in the fall. November and December have traditionally been slow months, although some astute buyers look for bargains during this period.

Should I buy a vacation home?

Today a vacation home can be purchased for investment purposes as well as enjoyment. And yes, there are tax benefits.

Some people buy a vacation home with the idea of turning it into a permanent retirement home down the road, which puts them ahead on their payments. Another benefit is that the interest and property taxes are tax deductible, which helps to offset the cost of paying for a second home. A vacation home also can be depreciated if you live in it less than 14 days a year.

Resources:

• "Real Estate Investing From A to Z," William Pivar, Probus Publishing, Chicago; 1993.
• "The Ultimate Language of Real Estate,'' John Reilly, Dearborn Financial Publishing, Chicago; 1993.

What do you think of a vacation home as an investment?

You can buy a vacation home today for investment purposes as well as enjoyment. And yes, there are tax benefits.

Some people buy a vacation home to use as a permanent retirement home later, which allows them to get ahead on their payments. Another benefit is that the interest and property taxes on a vacation home are tax-deductible.

Some real estate experts predict that vacation homes will appreciate in value due to rising demand from the aging Baby Boom generation. You also can depreciate the property if you live in the house less than 14 days a year.

You also need to consider whether you can afford to carry two mortgages, pay for the extra utilities and maintenance costs, and how this investment fits into your total personal finance picture.

Get-rich-quick real estate schemes

Most real estate experts say there is no such thing as getting rich quick in real estate. But there are no end of get-rich-quick programs presented to the public as alternative methods of buying real estate.

Some are reputable while others depend on your financial circumstances to work. A handful are simply scams.

Many get-rich-on-real-estate programs offer advice on how to buy government foreclosure properties and participate in other government programs. Most of this information can be obtained by calling the government offices involved directly.

Anyone interested in real estate investments would be wise to explore a variety of sources. Most investors view real estate as a long-term investment. Deals that sound too good to be true often are.

Recommendations

Take a deep breath, relax and plan your success.
You'll need information, resources and knowledge.  Find a local investment club, ask where and when they meet, go to all the meetings, absorb everything you can and make contacts.  Evaluate the books and information you have seen, pick a source and start reading.  Follow the web site discussion groups, print articles that have resources or solid information and save them.  Read all the articles you can find on different web pages, it will add to your knowledge.
Consider completing a Real Estate Licensing Program
Many established real estate companies provide subsidized Real Estate Licensing School.  If you do not have a background in real estate, this is a fairly inexpensive way to get an education regarding the technical processes involved, what is necessary to sell a home plus all sorts of additional knowledge.  Many companies charge a higher fee if you do not get your license and work for their company, so be sure to shop, an independent school might be cheaper.  Look in the Yellow Pages under Real Estate Schools.   Keep in mind that if you actually obtain your real estate license, you have different legal considerations than if you are unlicensed.  Even if you don't actively sell property full-time, when licensed, you are considered a real estate professional.
Go to Open Houses
Every weekend houses are held open by Realtors.  Go to all the open houses in your area every weekend.  You'll learn what sells, what doesn't, what the price ranges are in different areas and start to build a knowledge base of property in your area.  It takes gasoline and time, but it's the best way to get a feel for what values are in a given area. 
Build your Resource File
Organize your information and file it.  Individual properties will come and go, but six months from now, you don't want to find a property that suits a cash investor's requirements and discover that you cannot find the investor's phone number.  Or you were supposed to check back with a property owner this week, but you can't find the paperwork and don't remember the address.  The only way to keep track of everything is to have organized files that you use.
Understand it doesn't happen overnight.
Honestly, the first few times you try to put a transaction together, I would expect problems.  It's part of the education process.  As long as you don't make the same mistakes again, you'll only get better at what you do.  Education is the first big hurdle, the second one is experience, and there's only one way to get that.  To just do it.
When everything is looked at, MOTIVATION is the base for all of it.  You have to be motivated to get the education, you have to be motivated to get the experience and you especially have to be motivated to keep on doing it through the times where nothing seems to be going right.
ARE YOU MOTIVATED?

PREFORCLOSURE INVESTING

The advantages to buying properties from homeowners in default can only be measured by the individual investor. Some do not see enough reward, some think it's too risky, while others are plagued by moral issues. Are you helping the troubled homeowner or taking advantage of his misfortune?
Both the lender and the homeowner lose in a foreclosure action. Neither want it to happen. Both parties are motivated to resolve the situation. Motivated parties are key to the process.

The investing window of opportunity opens the day the Lis Pendens, the notice that a legal action is pending, is filed. The window closes the day the property is sold at auction. The time between these two events enables an investor to work with the homeowner and lender to create a workout strategy or a purchase of the property from the homeowner before the sale date.

The amount of time the window remains open depends solely on state and local laws, as well as the behavior of the property owner. Some states sell properties within 90-120 days from the first notice of default.

As for the moral question, keep in mind that by dealing with a homeowner in default, you not only help him, you generally rescue the loan and maintain the value of the property (and surrounding properties) as well. If there is enough equity in the property, there is the potential to work out an arrangement that satisfies all parties and allows for a handsome profit. That's what pre-foreclosure investing is all about: buying the equity in the property, working out an arrangement with the lender and the homeowner, then selling the property for a profit.

Investors follow these basic guidelines to ensure a successful purchase and sale:

1. Locate loans in default
2. Evaluate choices and narrow selections
3. Contact homeowner
4. Inspect property and loan documents
5. Determine homeowner's needs
6. Calculate your selling price and profits
7. Negotiate with lender, owner and lien holders
8. Close the deal, repair as necessary and sell

Locating Loans in Default

The Lis Pendens is the first public notice (document) that announces a loan in default, so it makes sense to start there. Access these notices at the county courthouse, newspapers that routinely advertise these notices or through a reputable Foreclosure Service Provider.

Evaluate Selections & Determine Potential

You know the default amount from the legal notices or service provider's information. Now you must estimate the property's market value. Subtract the default amount from the estimated market value to determine the gross equity in the property. This figure also reflects your gross profit potential. If there is little or no difference in the amount of debt and the market value, move on to another property. If there is a big difference, there may be enough equity in the property to make a sizeable profit.

Contact the Homeowner

This is easier said then done. The homeowner is probably being bombarded with letters and calls from attorneys and bill collectors and has creditors showing up at his door. The only way to contact the homeowner is by phone, mail or in person, and chances are you will have a difficult time getting in touch with him.

Start with mailings. Indicate in your letter that you are a private investor looking for property in that part of town. Let the property owner know that you may be able to help him with his financial problems.

Demonstrating an understanding the homeowner's dilemma will help your efforts. Indicate in your letter that you may be able to stop the foreclosure, save his credit rating and provide cash for use in paying his bills and/or for relocating.

Be professional and gracious in your correspondence. Invite the homeowner to call you at his convenience. If you don't hear from him in a reasonable amount of time, say three or four weeks, follow up with another letter, perhaps worded a bit more urgently. As you get closer to the auction date you may want to send two or more letters per month.

Follow up with phone calls if you can. Be courteous, never pushy. Never interview the owner on the phone. Merely state that in order to determine whether or not you can help him, you will need to meet with him at the property. Make sure he understands that the meeting will be more productive and less time consuming if he will have the loan, mortgage and insurance documents available, as well as the foreclosure notices.

If you are going to make an offer on the property, you must have the loan, ownership, and debt or lien information. You must also assess the condition of the property and the property owner. Combined with the market value and the default amount, you have all the ingredients necessary to formulate your offer.

If you feel comfortable with it, you can visit the property in person. You may be confronted by an angry homeowner. Be polite and leave if you are asked to. Never, under any circumstance, snoop around, inspect or generally trespass unlawfully on somebody's property.

Meeting the Homeowner

Use common sense and dress appropriately, something casual but not sloppy. Be sympathetic. Does the homeowner need cash? Is he waiting for a bailout? Will he go bankrupt? Find out. Review the loan and mortgage documents. Verify the loan amount, monthly payments, interest rates, taxes, etc. Review the insurance policies as well. Get all the pertinent information you can. Ask the owner if there are any other liens or judgments he may be aware of.

Inspect the property with the homeowner. Never comment on the owners lifestyle, just the physical condition of the property. Point out the obvious defects or items in need of major repair. Use an inspection checklist and record your information and estimated costs of repair.

Make no promises at this point. Make no offer or give the homeowner any money. Make an appointment to meet with him again if you think you want the property.

Preparing Your Offer

Determine the net equity in the property. This is the difference between the market value and the default amount plus liens and repair amounts.
Negotiate with the lien holder. You may offer to satisfy the lien for 20% of the amount. Chances are the lien holder will lose everything when the property sells at auction. Buying out the lien puts more equity in the property and more money in your pocket.

Remember to include closing costs in your calculations for the purchase and sale if you intend to flip the property. Also included the carrying costs, the mortgage payments and taxes and insurances, while you hold, repair, and then resell. Also include a seller's commission if you use a broker.
Calculate every legitimate expense associated with buying, repairing, carrying and selling the property. If a large enough figure remains, you may have a very nice deal. This bottom line figure has to pay the homeowner for his property and produce a profit for you.

How much do you offer the homeowner? Some investors itemize every expense, show their calculations to the owner and offer to split the profits. Some itemize the expenses and pay the owner the remainder on the bottom line. The investor then earns his profits by the reduction in lien amounts as negotiated, savings in repairs by doing them himself, negotiating a lower seller's commission, or selling the property himself. Others still make offers based on the bottom line, and negotiate from there.

The Purchase Contract

When the owner decides to sell, you will both need to sign an Equity Purchase or Real Estate Purchase and Sale Agreement. All parties recognized in the mortgage contract must sign.

Check with your attorney before signing any contract and make sure he is knowledgeable in real estate equity purchases.

Investing experts agree that the terms of the agreement must be clearly stated in the contract. Leave nothing to verbal understandings. Your best defense against future problems is the manner in which you present your evidence. Have everything documented properly.

Make sure to include the following in your purchase agreement:

1. A "Subject to" clause that allows you to bow out of the deal if something is not as originally agreed upon. This could be for unknown damages, general condition of the property or loans, termite damage, etc.
2. A statement that allows you to show the property.
3. 3. A statement indicating that the property has to appraise at a certain value.
4. The property must be vacant, all tenants and possessions out by the specified date.
5. An agreement between buyer and seller that the payments for the current loans equal "X."
6. A statement indicating the sale is subject to the condition of the loan and/or encumbrances against the title.
7. A statement indicating the buyer shall pay all closing costs.
8. A statement indicating the seller shall: Deed the property to the buyer... Authorize the buyer to record said d