The Reality of Real Estate Investing

Foreclosures

This is where I have focused my attention because I already know there is motivation, urgency, and the greatest chance to buy real estate wholesale. There are different areas of foreclosure in which to profit. These are discussed in later chapters.

It seems that foreclosures have always been and always will be around. It is a part of human nature. As long as there are people experiencing up's and downs in their lives, there will be people not paying their mortgage and facing foreclosure.

What exactly is a foreclosure?

It is the legal means by which a lender using Real Estate as collateral may, upon delinquency or non-payment take away or have ownership of the Real Estate transferred to himself and away from the borrower.

This, of course, then gives the lender the right to sell the Real Estate and keep the proceeds - all the proceeds, even when there is substantial value above and beyond the debt. The profit gained is not always just monetary. Any personal property left behind with the Real Estate goes to the new owner as well. See Case in Point # 1, Harlem Ave.

There is an undeniable negative connotation in the minds of some individuals when you mention "Investing in Foreclosures." They picture you throwing a nice family of a husband, wife, and children out into the streets during the dead of winter. That scenario could not be further from the truth. I have had ownership of up to thirty-two properties at one time and transactions on thousands other properties, from vacant lots to a 76-unit apartment building. I have never been faced with that scenario. If I were to face that scenario, I know without a doubt that I would deal with the occupants better than a bank. They do not deal with the occupants, they just send out the sheriff to evict.

If the bank or another investor gets the property, they may not show sympathy or compassion. They may not even care about trying to make the transition a smooth one for the occupant. Some do not want to bother themselves with talking to the occupant; they just let the sheriff go out and put them on the street. Worse yet, some may take advantage of them by scamming what little money they have away from them. I have heard about a scam many times from those who have already been taken advantage of during all phases of the foreclosure process. A so-called investor tells the people that he can get the occupants financing to save their home. They charge a $200 up to $1000 application fee up front. Of course, the desperate people pay it. Then they never hear from that person again. The good Lord in his wisdom will see to it that these scam artists get their just reward some day!

The bottom line is that I know that problems with people losing their homes to foreclosure exist. Someone is going to profit from it, and it might as well be someone like me who is going to take an unavoidable negative situation for someone else and take the most positive action available and sometimes even be compensated for the effort. That is certainly reasonable, and the people are better off because of my involvement.

There are some situations where I actually help people save their homes by doing some counseling with them, and I make nothing on it. Sometimes it is just a matter of lifting a heavy burden from their shoulders by answering their questions about how the whole foreclosure process works. There are other situations where I assist people with refinancing or selling their homes to save their equity. It all depends on the circumstances. See Case in Point # 22, Midlothian.

Once I have acquired a property via the auction, I always approach the occupants as a middleman person -- a manager for the new owner / investor. It seems to be an easier approach; people are less intimidated. I even go so far as getting business cards and using a d/b/a (doing business as) Property Management Services. It also is wise to remember that their emotions may be sensitive. Use a low aggressive approach; you will get more cooperation with honey than you will with vinegar.

Sometimes the occupant is not the owner at all, he is a tenant who has been paying rent for the last twelve plus months. Once in a while the occupant is a "Contract for Deed" buyer, which means he gave the owner a down payment and the owner financed the balance. Then while the contract buyer was making monthly mortgage payments to the owner, the owner was not making monthly mortgage payments to the bank / mortgage company. Either the buyer did not use an attorney, or the attorney was incompetent in protecting the buyer against this occurrence.

It has always been a part of my procedure to communicate with the occupants to make the transition as smooth as possible and to make an effort to help them with a new beginning. Sometimes this involves keeping them on as tenants, paying their first month’s rent and security deposit, or just giving them $100 - $500 for the keys and possession. The most important point to remember about all this is that an ex-owner has developed a very bad habit of not paying anything for many months for his home. I saw one case where it had been five years. There was a bankruptcy involved, and the mortgage had been sold in a bulk sale, slowing up the process. You never give them anything until they give you the keys and possession. Otherwise, something will always come up to prevent them from moving. The house or apartment they had lined up is not ready; they could not get a truck; the dog died; etc.

The first thing to understand is that every deal, every situation, is different. From my experience one of the major reasons for foreclosure is divorce.

 Divorce: See Case in Point # 3, Forestville. One spouse leaves the other, and with the loss of that spouse's income the remaining spouse can no longer pay the mortgage. Sensible people will of course recognize the reality of the circumstances and either take a boarder or sell before losing the house. However, having human weaknesses as some of us do, especially when emotions are involved in the equation, the spouse with the house sometimes wants to show the other that he / she can hold on to the house. Or, that the other should pay the mortgage, and therefore refuses to do so. You would think that when they have equity in their home, they would reason with one another enough to at least sell their home and split the equity. However, this is not the case when emotional contempt plays a role. Neither one wants to see the other get anything. Eventually, they both get nothing.

My mentor used to tell a story about a friend of his who saw an ad in the newspaper for a Cadillac for sale for $25. He thought it must have been a typing error, but even $2500 was a good price. He dialed the number, and a woman answered. He mentioned the ad and that it said $25. She said, "That's right." He chuckled and asked, "Does it have tires? Does it have an engine?" She assured him it ran perfectly well. He made an appointment, went over, and bought it. Before leaving, he could not help but to ask, "Why did you sell me this Cadillac for only $25?" She said, "My husband recently died after thirty five years of marriage. It turned out that he had a mistress and in his will he left her the Cadillac or the proce