Foreclosure Process: The 3 Stages Real Estate Investors Need To Know

If you’re investing in real estate properties, then you have likely looked into the foreclosure process. The foreclosure market is teeming with incredible deals, and knowing the right stage to buy at will help you get make the most of your investment. Depending on your local economy, each stage will offer a different type of potential for your investment portfolio.

The Pre-foreclosure Stage

Pre-foreclosures are known as short sales in the real estate world. This is likely the most advantageous stage of the foreclosure process of investors because lenders are willing to work out better deals. Pre-foreclosures occur after the borrower has missed mortgage payments, but before the home goes to an auction sale. There are actually two stages of a short sale. The first is when the home owner defaults on his mortgage, or is more than 30 days late on his payment. The second part is when the home owner actually receives a legal letter known as a Notice of Default.

As a property investor, you want to find sellers who have actually received a Notice of Default on their mortgage because they are more than 3 months behind on payments and will likely work with you on a purchase. Before they receive this notice, sellers have ample opportunity to catch up their payments and cure their loans.

The Foreclosure Stage

The foreclosure stage begins after the home owner receives a notice of default and the lender takes legal action against them. They will be evicted from the home and the lender will seize the property. When this happens, the lender must place the home on the foreclosure auction. In some states this is known as a trustee sale.

Trustee sales are great because they give you a lot of bargaining power. Foreclosure notices are placed in the newspaper, allowing you plenty of time to research properties before you decide to bid on a house. Once you find a property you want to bid on, you can go the auction and place your bid.

The foreclosure auction does have many pitfalls, but if you do your research and understand the market, you can score really great homes in good neighborhoods. Many real estate investors use bidding services that will bid on homes for them. If you choose this route, all you need to provide is your requirements for a home and the bidding service will do the research for you.

The Post-foreclosure stage

After a home goes through the short sale and foreclosure auction stage, it ends up as a post-foreclosure property. This is known as a bank owned property or real estate owned REO. These homes end up back on the original lenders books as a non-performing asset. This essentially means they bank owns the home again, but isn’t making any money on it.

At this point the lender has spent a good deal of money going through foreclosure and they may actually try to recover fees and monies lost during foreclosure by taking them onto the sales price. At this stage, the home is selling for the highest price in the entire process.

One advantage to purchasing REO is that banks are highly motivated to get the property off their books. They are likely more willing to negotiate at this stage as the property is costing them money.

Pros and Cons of Using a Forbearance Agreement to Prevent Foreclosure

A forbearance agreement is sometimes offered to borrowers struggling to meet their home loan obligation and those entering into preforeclosure. When lenders enter into a real estate forbearance contract they agree not to proceed with foreclosure action as long as mortgagors remain in compliance with the terms.

The forbearance agreement allows borrowers to obtain special financing terms for a specific period of time. The average duration of mortgage forbearance contracts is usually 2 or 3 months. However, banks can extend the terms for up to 12 months when extenuating circumstances exist.

While a mortgage forbearance contract can assist borrowers in getting their finances in order to meet future loan obligations, there are risks with this type of agreement. Using the forbearance agreement, banks temporarily reduce or suspend mortgage payments. Once the agreement expires, borrowers must be financially capable of repaying the amount of missed or reduced payments.

For example, if a borrower’s monthly home loan installment is $1200 and their lender reduces the payment to $600 for 4 months, they must be able to repay $2400 at the end of the forbearance contract. If unable to pay the full amount, the lender can proceed with foreclosure action.

Additionally, home loan payments are reported to the three major credit bureaus of Equifax, Experian, and TransUnion. Deferred payments are often reported as delinquent, which can have an adverse effect on borrowers’ credit scores.

Those who are already in a low credit bracket can quickly slide into the high-risk category, which can limit their ability to obtain credit in the future. Bad credit can prohibit borrowers from qualifying for other types of foreclosure prevention strategies such as loan modifications and mortgage refinance.

Another concern of real estate forbearance is the effect deferred payments have on escrow. Home mortgage loans incorporate required funds for homeowners insurance and property taxes. A portion of each installment is placed into escrow to cover annual expenses.

If insurance premiums or property taxes become due during the forbearance plan the escrow account may come up short. Mortgagors are responsible for paying these expenses out of pocket. If property insurance and taxes are not paid, banks can void the forbearance agreement and initiate foreclosure proceedings.

With that being said, mortgage forbearance can be a good option for those facing temporary financial setbacks. Borrowers must be extremely proactive in getting financial affairs in order during the contract period to ensure they can afford deferred payments once the plan expires.

Borrowers facing chronic financial problems due to long-term unemployment, health problems, divorce, or death of a spouse should contact their lender’s loss mitigation department to discuss foreclosure prevention strategies.

Mortgagors must obtain authorization to enter into mortgage forbearance from their lender. Most banks require borrowers to submit financial documents and a letter of hardship.

Hardship letters provide borrowers with the opportunity to provide details of events that caused their financial crisis. Lenders typically require mortgagors to provide a chronological timeline and summary of hardships, along with any action taken to improve finances.

Borrowers must contact their mortgage provider at the first sign of financial hardship. Banks are usually more willing to work with mortgagors who are proactive in finding solutions. If lenders are unwilling to provide assistance, borrowers may need to retain the services of a real estate attorney.

Mortgage Modifications – The Dirt the Mortgage Loan Mod Companies Would Like to Hide

So here you are. You are in a sticky financial situation and due to recent hardships; you would like to change the terms or your loan. What do you do, you call or do a search for a mortgage modification company.

Guess what the rep tells you when you contact them! You have to pay anywhere from $1500 – $5000 for them to go to bat for you. Guess what else! Many of them do not even have a guarantee of the end result NOR will they give you your money back if they cannot perform on your behalf. Garbage I say!

 

Here is what they do not want you to know.

 

Just a mere two to three years ago, they had no idea how to modify a loan. Beyond that, they were probably working as a loan officer and were instructed to tell customers that asked about a mod that the bank did not offer that service.  

 

So how did all the people that are doing mortgage mods learn how to do it?

 

1.       They were either coached personally how to do it by someone that had a good working knowledge on the successful execution of a change in terms on a home loan.

 

OR

 

2.       They learned from a book or training manual. Basically, if you can follow instructions, you have as good a chance of succeeding as any of these companies do. Seriously, 6 months ago or a year or two ago many of these folks had no idea how to do it. 

 

The bottom line is this; you do not need to pay thousands of dollars to modify your mortgage loan. You CAN do it yourself. 

Closing Short Sale Deals With the A-B-C Transaction

A little skepticism about Short Sales is a healthy thing. I understand that a lot of people out there are unfamiliar with how they work. That’s why it’s so important for real estate investors to get the right training and be able to answer questions like the ones I’ve been blogging about for the past week.

Just last week I received a letter from a lawyer who advised her client (the homeowner) against proceeding with a Short Sale with a real estate investor. I’ve been posting my point-by-point responses to the attorney.

Here’s another excerpt from the attorney’s letter, followed by my response:

The only way such a transaction could possibly be insurable is if the following requirements have been met:

1. There are no violations of any restrictions listed in the short sale payoff letter or closing instructions.

2. There have been no misrepresentations as to the value or ownership of the property to the existing lender, the new lender, or the purchaser.

3. All disbursements must be made exactly as stated on the HUD-1 settlement statement, and only to parties involved in this specific transaction.

4. Each half of the simultaneous closing must be kept separate and stand on its own. The sale from A to B must be fully funded and disburse with money coming from and going to all appropriate parties. The sale from B to C must also stand on its own. The money from C’s lender must not be used to fund any portion of the A to B transaction.

Yes, Ms. Attorney, you’re right on. Clearly you’ve read the advisory letter from your title underwriter (from where you appropriately copied these items). YES – this is how back-to-back Short Sale transactions should be structured and if the investor is appropriately trained (the way I teach it) then this is exactly how the investor will want to do it.

Like I said, a little skepticism is a healthy thing. We’re in absolutely unprecedented, historic times for the real estate market and especially for Short Sales. And yes, there are a lot of scams and bad-faith opportunists out there trying to rip people off out there.

However, when done the right way, Short Sales are win-win opportunities that only work if the deal works for all parties. If your seller is not on your side cheering for you, then I suggest you go find another house!

How do you set things up so your Seller is “cheering for you”? That’s one of the major real estate investor skills I teach!