. 2
( 7)


You would also get the property subject to the $160,000 loan. Your
total in the property would be $179,000. The property is worth
$200,000. You have a $21,000 profit potential, which is more than a 100
percent return on your $19,000 investment.
Four Reasons to Buy Foreclosures 35

Profit Potential
Loan Amount $160,000
Buy Seller™s Equity $ 9,000
Default Amount $ 10,000
Amount in Property $179,000
Appraised Value $200,000
Profit Potential $ 21,000
$21,000 $19,000 = 111%

Buying at the Foreclosure Sale Foreclosure sales are conducted at a
public auction. The highest bidder gets the property. The seller at the
foreclosure sale is a trustee or representative of the lender. So the seller
at the foreclosure sale is really like an auctioneer. They are professional
sellers. Yet they do not have any financial stake in the property. They are
just doing their job.
Once it gets to the foreclosure sale, the owners are out of luck. If
you have not been able to help them, or work out a purchase for their
equity, the owners will lose all of their equity at the foreclosure sale.
You must have cash or cashier™s checks to bid at the foreclosure
sale. It is best to check with the foreclosure-sale seller before the actual
foreclosure-sale date to find out how the seller wants payment.

Credit Bid The opening bid is called a credit bid. The credit bid is put
forward by the trustee or the representative of the lender. The credit bid
is the total of the remaining loan balance, payments in default, and any
costs associated with the foreclosure sale. If no one bids above the credit
bid, then the lender winds up owning the property. Any bid made above
the credit bid has to be made in cash. Let™s say the foreclosure sale ex-
penses are $1,900. What would the opening credit bid be? Again, we will
continue to use the same numbers we have used throughout this chapter.

Opening Credit Bid
Loan Amount $160,000
Default Amount $ 10,000
Foreclosure Expenses $ 1,900
Credit Bid $171,900

Winning the Bid What if you bid one dollar more than the opening
credit bid? If you could buy the property at the foreclosure sale for

$171,901, would that be a better deal than if you could have bought the
property from the owner before the foreclosure sale for $179,000?
The answer is that it depends. While it certainly looks like getting
the property at the foreclosure sale for $7,099 less is the better deal,
maybe it isn™t the better deal. This is a price-versus-terms conversation.
You get a better price at the foreclosure sale. But you have to come
up with almost $172,000! Buying from the seller, you didn™t get as good
a price”$179,000. But you only have $19,000 in the deal. Will that
$7,000 lower price be worth tying up an additional $153,000?

Buying from the Lender What about buying from the lender after
the foreclosure sale? Usually, the lender has the biggest financial stake in
the property. After all, they originally made an 80 percent loan to the
borrower to buy the property. Can you get a better deal from the lender
once the property goes out of the lender™s loan portfolio and into the
lender™s property portfolio?
Lenders™ property portfolios are called real estate“owned port-
folios, or REOs. Real estate lenders are in the business of making real es-
tate loans. Real estate lenders are not in the business of owning real
Although lenders want to sell their REOs for as much as possible,
they want to move these REO properties as quickly as possible. After all,
we know what they are going to do with the money they get from sell-
ing the property. They are going to make another real estate loan!
Depending on the real estate lender, you may be able to pick up
this REO property from them in the neighborhood of $155,000 to
$165,000. Sounds like the best deal in the price department. What about
the terms department? Ah, there is the rub. Are you going to have to put
up a lot of cash and qualify for a new loan?
While real estate lenders are professional sellers, sometimes their
own bureaucracy gets in the way of them making an effective deal. Our
recommendation to you is to work with several lenders™ REO depart-
ments and see what happens. Our overall recommendation is to work
out a deal with the seller in distress.Then you have more Quick Cash op-
tions available.

Reason 3: Less Competition Than Retail

As competitive as the foreclosure market may seem, it is less competitive
than the retail market. There are fewer people involved in the fore-
Four Reasons to Buy Foreclosures 37

closure market. Of the total number of real estate mortgages, a maxi-
mum of 2 percent of them will be in the foreclosure process at any one
time. Once you become familiar with the material in this book, you will
know more than 98 percent of the people trying to make money invest-
ing in foreclosures.
Hell, you will know more about foreclosures than 99 percent of the
attorneys out there. (Maybe we should retract that endorsement about
you knowing more than 99 percent of the attorneys.) The point is that
we think one of the best reasons to check out the foreclosure scene is
that there is very little knowledgeable competition.

Reason 4: Make Quick Cash

You can make Quick Cash in the foreclosure arena. We recommend you
work with the seller in distress before the foreclosure process gets too
far down the line. We call this the pre-foreclosure stage. Once you make
a deal with the seller in distress, then you flip your foreclosure real estate

Assign Foreclosure Contracts You may find it easier to assign fore-
closure contracts than it is to assign non-foreclosure contracts. When
people in general, and real estate investors in particular, hear the word
foreclosure, they automatically think there might be a good deal here.
When you drop the word foreclosure at a social gathering, everyone
turns around to catch the conversation.

Rent Busters In the 1990s in California there was a company called
Rent Busters. It offered foreclosed homes to buyers for no down pay-
ments. The concept was simple. The company would advertise for peo-
ple to find foreclosure deals.
The company was paid $1,500 by a client to take the client to a fore-
closure sale to buy the client a property. The client had to agree to go to
10 fore-closure sales. If, after going to 10 foreclosure sales, Rent Busters
had not bought the client a property, the client got the $1,500 back.
If Rent Busters did buy a property at one of the 10 foreclosure
sales, the client™s $1,500 would be applied to closing costs.The company
would go to the foreclosure sale and buy the property. It would pay no
more than 80 percent of the retail value. Of course, since the company
was buying the property at the foreclosure sale, it would pay cash.

Then Rent Busters would sell the property to the people who had
brought the foreclosure to them. They would sell the property to the
client for no money down. Rent Busters would carry the down payment
back in a promissory note secured by a second mortgage.
The client would get a new 80 percent loan on the property. The
proceeds of the loan would go to Rent Busters as the seller. This would
replenish the cash that Rent Busters used to purchase the property at
the foreclosure sale. Then the down payment financing would become
the profit for Rent Busters collectable over the agreed time frame.

Example Let™s say Rent Busters got a $200,000 property for $160,000
at the foreclosure sale and financed the $40,000 down payment for the
buyer for three years at 10 percent annual interest.
Foreclosure Sale
Retail Value $200,000
Foreclosure Price $160,000
Equity for Rent Busters $ 40,000
Sale to Client
Purchase Price $200,000
New Financing $160,000
Seller Financing $ 40,000
Profit to Rent Busters
Seller Financing $40,000
10% for 3 Years $12,000
Gross Profit $52,000

When you buy foreclosures, you are buying wholesale real estate, you are
buying from a wholesale seller, you have less competition than buying re-
tail property, and you have the opportunity to make Quick Cash.
In the next chapter we will teach you how to buy foreclosures. The
key is getting to the seller in distress before another investor does. Your
goal is to help them out of their foreclosure situation and find a great
real estate investment for yourself that you can flip for Quick Cash.

How to Buy Foreclosures
n this chapter we will teach you how to buy foreclosures. Most of
you think that buying a foreclosure has to occur at a foreclosure sale.
Foreclosure sales are usually conducted on the courthouse steps in
the county the property is located. We will teach you how to buy a fore-
closure on the courthouse steps. We will also teach you how to buy a
foreclosure before it gets to the courthouse steps.
At one of the recent courthouse foreclosure sales we attended,
there were over one thousand properties being auctioned in one day!
This was the number of foreclosure sales for our county for one month!
It was a total zoo. There were at least five hundred people trying to fig-
ure out what to do, whom to talk to, and where to bid. We bought noth-
ing that day.
We are going to start you out with a better idea. Let™s talk to the
property owner who is in financial distress. They are headed down the
road to a full-blown foreclosure. If we can identify these owners in dis-
tress early enough, we may be able to help them at the same time we
help ourselves.

Owners in Financial Distress
There are two time periods to work with owners in financial distress.
There is the time period before the lender files a notice of default at the
county recorder™s office. And there is the time period after the lender


files a notice of default at the county recorder™s office but before the
foreclosure sale takes place.
If you are able to develop a rapport with the owners and make a
foreclosure options presentation to them, you will have a good chance
of helping the owner in distress as well as making a good deal for your-
self. We present the following guidelines to help you when dealing with
the owner.


1. Know the Area Make sure you are familiar with the properties that
have sold. In other words, know the comps. Get sales information from
title insurance companies. Talk with neighbors of the owner and to local
real estate agents. Make sure you know value in your target area. (See
Chapter 8 for a complete discussion on value.)

2. Inspect the Property Ask the owner to show you around the
property. Take notice of faulty conditions or red flags, which may indi-
cate problems with the property. Use a clipboard and write down your
observations. This will serve as a memory aid for you. It will also show
the owner that you are serious about the property.

3. Arrive with a List of Questions Dress appropriately for the meet-
ing. Don™t overdress or arrive in too fancy a vehicle. Have a calm de-
meanor. Don™t seem overly anxious to make a deal. Treat the owner with
respect, diplomacy, and understanding. Listen more than you talk.
Take the time to develop a rapport before you get into your ques-
tions. Be prepared to discuss details with the owner that will make it clear
what the owner needs financially. In other words, discover the owner™s
true motivation and needs. Ask the questions in a friendly manner.

4. Avoid Making Any Proposals There are no oral agreements in
real estate. At this initial meeting you are gathering information about
the owner and the property. Any proposal you make should be in writ-
ing and done when all the decision makers are present. This may occur
immediately after you have inspected the property or at a later sched-
uled foreclosure presentation.

5. Use Your Foreclosure Options Presentation For best results,
follow a written outline when discussing the owner™s options. We rec-
Owners in Financial Distress 43

ommend setting up an evening appointment for your foreclosure op-
tions presentation.
Your goals are to have the owner understand the foreclosure pro-
cess, clearly see the owner™s options, recognize your knowledge of the
subject, and put together a mutually beneficial contract.

Setting an Appointment with the Owner

When setting the appointment with the owner for the foreclosure pre-
sentation, plan on only one presentation per evening. This is important
because some owners will take longer to make a decision than others. In
circumstances where you have planned appointments too close to-
gether, each one will be rushed, and opportunities to acquire properties
may be missed.
No appointment should be set unless all owners will be present. If
you get to the appointment and one of the owners cannot be present,
reschedule for another time. Otherwise, you are wasting your time.
It is important that the owner feels relaxed and is able to discuss
their situation with you at the stated time. Accordingly, as with any real
estate contract presentation, the time for the appointment should be at
an hour when distractions such as kids and favorite TV shows are not
Let™s turn our attention to your initial phone conversation with the
owner. The purpose of the conversation is to set an appointment with
the owner. At this appointment you will make the foreclosure options

Phone Appointment Script Hello, my name is __________ , and I
am calling because I may have an interest in buying your property.
Are you the owner? What is your name?
Wait for their response. If they are not the owner, ask to speak to
the owner.
According to public records, I understand that your loan may be
in trouble, and that you might be able to use some help. Is this a con-
venient time to talk?
Wait for their response. If they say no, ask when would be a good
time for you to call back.
As I said, my name is ________ , and I am a private real estate in-
vestor who makes it my practice to understand the foreclosure process

and how to avoid it. My interest in your property stems from the fact
that I can often find a good investment by talking to people who have
a problem loan.
I sometimes find that they have a desire to sell their property at a
price that will save some of their equity, help them protect their credit,
and, at the same time, I may find a property to acquire.
I have developed a presentation that will show you your many
options to avoid foreclosure. I recognize that nearly 9 out of 10 own-
ers will be able to save their property with this information.
I am willing to share this information with you without cost or
obligation.The properties I do buy have made it worth my time to help
many property owners such as yourself avoid foreclosure entirely. Do
you have an interest in finding out about the eight options you have
with regard to your pending foreclosure?
At this point you have aroused the curiosity of the owner and set-
ting the time for an appointment should almost be automatic.
I have time on my schedule tonight or tomorrow night. Since
time is of the essence for some of these foreclosure options, would
tonight or tomorrow night be better for you?
Wait for their response.
Would seven o™clock or eight o™clock be better for you?
Wait for their response.
After you have set a time ask this last question: Do you have
younger children at home?
Wait for their response. If the say they have younger children, say:
I recognize that it is important that parents spend quality time
with their children, and I do not wish to disturb that. Is there a time,
perhaps after your children have gone to bed, that we can talk?
Such consideration will make an impression on the owner, show
great respect for their family, and assure you of an uninterrupted ap-

At the Appointment

Your purpose at the appointment is to create a mutually beneficial solu-
tion to the foreclosure problem for you and the property owner. After
you have no more than five minutes of chitchat conversation during
which you are building rapport with the owner, you should begin your
foreclosure presentation at the owner™s kitchen table.
Owners in Financial Distress 45

We recommend you sit with your back to an outside wall. That way
the owner(s) are giving you their full attention and will not be distracted
by what is going on in the rest of the house. Please ask that TV or loud
music that can be heard in the kitchen be turned off or down.
Ask questions first. Expand on your knowledge of the owners™ situ-
ation. Make sure you understand the owners™ situation completely be-
fore you propose any solutions to their foreclosure problem. Then make
your foreclosure options presentation. We give you the complete fore-
closure options presentation in Chapter 7. For now we will just sketch
the foreclosure options for you.

Foreclosure Options The eight foreclosure options are reinstate-
ment, redemption, deed in lieu of foreclosure, legal delay, bankruptcy,
renegotiate, sell the property, or do nothing. Some of these foreclosure
options are time-sensitive. Others require an expenditure of money that
the owner probably doesn™t have.
By analyzing the owners™ situation, you can determine the best so-
lution. If they have the ability to get their hands on some money, they
may be able to reinstate, redeem, or renegotiate their loan with the
lender. If they want to go the legal route, they may seek a legal delay or
file bankruptcy.
If they have enough time, the owners may be able to sell the prop-
erty or negotiate a deed in lieu of foreclosure with the lender. If the own-
ers do nothing, they will lose their property at the foreclosure sale.

Foreclosure Solutions You are the solution to the owners™ fore-
closure problem. Let™s assume the owners have neither the money nor
the time to make something positive happen on their own with the in-
formation you have shared with them. This is where you step in and pro-
pose some very creative solutions.
The simplest solution is for you to “buy” the owner™s equity. The
owner would give you a quitclaim deed to the property. You would
reinstate the loan and own the property. Or you could flip the prop-
erty for Quick Cash and let the new buyer work things out with the

Buy the Equity Let™s say the property is worth $210,000. The loan
balance is $150,000. The owner is behind $12,000 in payments. The
owner™s equity position is $48,000.

Owner™s Equity
Property Value $210,000
Loan Balance $150,000
Behind in Payments $ 12,000
Owner™s Remaining Equity $ 48,000

You offer the owner $11,000 for the remaining equity. You, or the
new buyer, will have to come up with an additional $12,000 to reinstate
the loan.You would be paying $173,000 for the property. If the property
has a value of $210,000, this looks like you have $37,000 in equity.

Purchase Price
Loan Balance $150,000
Behind in Payments $ 12,000
Equity Offer $ 11,000
Purchase Price $173,000

Equity Sharing Let™s get more creative. We have the same owners
with the same numbers. They really want to keep their property. They
have had a temporary financial setback. They feel that if they can buy
some time and get some financial help they will be able to keep their
You propose paying the $12,000 they are behind in their payments
to the lender in return for a 75 percent equity position in the property.
Remember, the equity in the property will be $60,000 after the loan is
reinstated ($210,000 property value minus the $150,000 loan balance).
You will pay 25 percent of the future monthly loan payments, and
the owners will pay 75 percent of the future monthly loan payments.
You will pay $12,000 cash and have a $45,000 equity position in the
property. The property owners will retain a $15,000 equity position in
the property.
This deal is a win for you and a win for the property owners. Plus,
instead of having just a renter living in the property who may tear the
property up, you have co-owners who have a stake in the property.

Equity Sharing
Your Equity Owner™s Equity
Property Equity: $60,000 Property Equity: $60,000
Equity Percentage: 75% Equity Percentage: 25%
Equity Position: $45,000 Equity Position: $15,000
Owners in Financial Distress 47

Equity Sharing Redux Equity sharing is a way in which two or more
parties, one being an owner-occupant and the other being a real estate
investor, pool their funds to buy or hold a property.There are many ways
that equity sharing can work. In the usual equity-sharing agreement,
a non“owner-occupant puts up the down payment, and the owner-
occupant, in effect, becomes the tenant.
The owner-occupant will pay the fair-market rent and both the
owner-occupant and non“owner-occupant split all the expenses of the
property based on their ownership percentage. It does not have to be
50-50 (see previous example).
From a tax point of view, the owner-occupant will usually get the
write-off of their share of the interest on the loan and the property
taxes. The non“owner-occupant will include half of the rent as income
and deduct their share of the interest, property taxes, and all expenses
on the property and depreciation on their ownership interest.
The portion of the Internal Revenue Code (IRC) that relates to eq-
uity sharing is section 280A. One of its main purposes is to make sure
that fair-market rent was charged in an equity-share arrangement, espe-
cially between family members. Section 280A is somewhat vague and
provides no definitive guidelines on equity sharing.
Additionally, thus far, there have been no court cases, few rulings,
and no specific regulations dealing with the subject. Your tax advisor
should be included in any decision you make regarding equity sharing.
We include a synopsis of section 280A for your review because of its
specific foreclosure application.

IRC 280A Equity sharing can be used in foreclosure by having the
non“owner-occupant supply the cash needed to reinstate the loan and
share in the monthly operating expenses. Owning half of the property,and
therefore being obligated for only half of the expenses of the property,will
be a great relief to the owner-occupant, allowing them to maintain an eq-
uity interest in the property and keep a foreclosure off their credit record.
The non“owner-occupant owns a portion of a property with a ten-
ant owner, which should eliminate the need for a property manager. A
buy-out or refinance arrangement can be structured in the “Shared Eq-
uity Financing Agreement” to the satisfaction of all parties concerned.

Reverse Lease Option (Sale Leaseback with Option to Purchase)
As a final creative solution we give you the reverse lease option. When
we think of lease options, we think of leasing the property with an op-
tion to purchase the property at some point in the future at some
agreed-upon price.

A foreclosure twist on this technique is to purchase the property in
default and lease it back to the owner. You also give them an option to
purchase the property at some point in the future at some agreed-upon
price. If the loan has a due-on-sale clause, you should discuss it with the
lender. Keep in mind that most lenders do not want more property in
their REO portfolio and will probably not call the loan.
The agreed-upon future price should include any cash you put into
the property to reinstate the loan plus any negative cash flow (if appli-
cable) and an acceptable return on your investment. As with the equity-
sharing arrangement, consult with your attorney for assistance in
structuring the transaction.

At the Sale
Georgetown, Texas

We conclude this chapter with one of our experiences at a real estate
auction in Georgetown,Texas. While this was not a foreclosure sale, we
present it here as an example of how to bid and when to bid.
We were in Georgetown doing a marketing promotion and were
doing some sightseeing. We drove past an old Victorian home with signs
in the front yard announcing an estate sale for the weekend. We stopped
to look and discovered two things.
An estate auctioneer had rented the vacant property and brought
their inventory of estate-sale items to this property. The auctioneer
wanted the ambiance of the property to create an atmosphere for the
estate sale. We actually thought this was a very smart marketing ploy.
We also discovered that on Sunday afternoon at the conclusion of
the estate sale auction, the auctioneer was going to hold an auction for
the property. This was now becoming very exciting!
We toured the house and grounds and decided to participate in the
property auction. We had determined that the property needed about
$150,000 in renovations. Once the work was completed, we felt the
property would sell in the $450,000 to $600,000 range.

The Auction The auction was conducted in the back yard under a
canopy. We registered for the auction and got our bidding number.There
were 30 to 40 people sitting in chairs at the back of the auction area. We
walked in and sat down toward the front so we would have an unob-
structed view of the auctioneer.
At the Sale 49

The auctioneer made an announcement that there would be a bid-
der making bids over the phone to one of the members of the auction-
eer™s staff. The auctioneer then began the auction by asking for an
opening bid of $400,000. When no one would bite, the auctioneer asked
the bidders to make an opening bid.
The first bid was for $50,000. The second bid was for $100,000.
The third bid was for $150,000. We were watching and listening and
waiting. Finally there were only two bidders bidding; the bidder on the
phone and one of the bidders on site. They were bidding back and forth
in $5,000 increments.
The bidder on the phone bid $195,000. The auctioneer asked for a
$200,000 bid. The bidder on site said nothing. The auctioneer an-
nounced “$195,000 going once. $195,000 going twice.” That is when
Bill raised his bid card from his lap and held it in front of him.
The auctioneer pointed at Bill and said,“$200,000.” Our bid was re-
layed to the phone bidder. You could tell the phone bidder was stunned
by our bid from the reaction of the auctioneer™s staff person. Finally, they
came back with a bid of $205,000. We immediately bid $210,000.
This was going to be our final bid no matter what. We had deter-
mined that we would bid no more than $210,000 before the auction
started. The auctioneer asked for a $215,000 bid. None was forthcom-
ing. The auctioneer announced “$210,000 going once. $210,000 going
twice. $210,000 going three times. Sold, for $210,000.”
We had won the bid. We were very happy. People came up and
congratulated us. What we want you to learn is our technique for bid-
ding. We made sure we were well situated to be seen by the auction-
eer. We didn™t bid until the end of the bidding process. We knew what
our top bid was going to be. We didn™t go over our predetermined top
In the next chapter we will show you the four time periods or
phases in the foreclosure process to buy foreclosures. Phase 1 is a pre-
foreclosure time period before the notice of default is posted. Phase 2 is
still a pre-foreclosure time period after the notice of default is posted
and before the foreclosure sale occurs. Phase 3 is at the foreclosure sale.
Phase 4 is after the foreclosure sale.
Our recommendation is that you buy foreclosures before the fore-
closure sale. It may not be as exciting as buying at the foreclosure auc-
tion. But you will have far less competition! And you will have an
opportunity to make Quick Cash.

When to Buy Foreclosures
n this chapter we are going to show you the different times you can
get involved in the real estate foreclosure market. There are four time
periods or phases when you can buy foreclosures. As we have said
before, when we say “buy” foreclosures, we are using the term buy
loosely. With our Quick Cash strategy, we prefer flipping property rather
than buying property.
In our book The New Path to Real Estate Wealth: Earning Without
Owning, we emphasize flipping the paperwork of real estate. We are
not interested in buying or owning anything. Because the foreclosure
market is so technical, we have presented the material as if you were
buying foreclosures. We will show you how to flip foreclosures no mat-
ter what time period or phase you choose to get involved in the fore-
closure market.

Timing the Foreclosure Buy
In situations where the property owners are in financial distress and
their property is headed to a foreclosure sale, you have four distinct time
periods in which you have an opportunity to acquire the property. Each
of these time periods has benefits and drawbacks.
These four time periods are (1) before the notice of default is filed
or posted at the county courthouse, (2) after the notice of default is
filed or posted at the county courthouse, (3) during the foreclosure sale,


and (4) after the foreclosure sale when the property belongs to a new
owner who is either the foreclosing lender or another real estate investor.
Let™s take a look at the foreclosure timeline in Texas. While your
state may have a different foreclosure timeline, you will find the same
buying opportunities available. Let™s see where the four time periods or
phases occur on the Texas foreclosure timeline. This will help you see
where the four time periods occur on your state™s foreclosure timeline.

Texas Foreclosure Timeline

2 “ 3 Months 20 Days Can Be 1 Day 21 Days Minimum

No Payments 1st 2nd
Official Official
Letter Letter

Phase 1: Before the Posting of the Notice of Default

Whether the posting is called a notice of default in the case of a deed of
trust or a lis pendens in the case of a mortgage, this marks the official be-
ginning of the foreclosure. Once the foreclosure process begins, it may
lead to the forced sale of the owners™ property, the loss of their equity,
and the resulting damage to their credit.
If you can make a deal with the owner before the commencement
of legal action, you will help the owner reduce the negative effects of
foreclosure. And you may find that you can obtain a better buy because
there will be less competition from other real estate investors for the
property prior to the public notice of default or the lis pendens being
recorded at the county recorder™s office.
The drawback with trying to make a deal in this time period is that
you may find that the owners are not as motivated as they will be in the
next time periods. We have found that owners at this point are still cling-
ing to the unrealistic hope that a financial miracle is going to happen.
Using the Texas foreclosure timeline, this is the time period up to
the posting of the notice of default at the county courthouse. The own-
ers are several months behind in their payments. Their lender may have
already sent them a warning letter. The owners are starting to feel some
Timing the Foreclosure Buy 55

pressure. Your job is to show them that the pressure is only going to get
more intense. If they act now with you, the pressure will dissipate.

Early Resolution Few borrowers intend to default on their loans.
Sometimes economic developments beyond their control can create the
situations leading to foreclosure. They may have been fired from their
job. Their job may have disappeared. Interest rates may have increased
on their adjustable rate mortgage and made their mortgage payments
Divorce, premature death, disability, illness, addiction, and accidents
can all lead to foreclosure. Poor money management, like too much
money in the stock market, can be a recipe for financial disaster. The re-
sult of the foreclosure can be embarrassing to the borrower, besides suf-
fering the devastating financial consequences of losing their property
and equity.
Early resolution of the pending foreclosure benefits the borrower
and can produce better results for you as the real estate investor. Addi-
tionally, completing a transaction before the foreclosure period begins
(once the posting occurs) can often avoid specific legislative guidelines
that become restrictive on certain transactions.

Phase 2: After the Posting of the Notice of Default

Once the notice of default has been posted, there are a number of things
for you to consider. First, there may be certain restrictions and legal re-
quirements that your individual state may enforce when a property is of-
ficially in foreclosure. Second, once the notice of default is recorded,
there is public knowledge of the default, and you will find you have com-
petition from other real estate investors for the property.
Using the Texas foreclosure timeline, this is the time period after
the posting of the notice of default and before the actual foreclosure
sale.This can be a period of time as short as 21 days in Texas. Check with
a title insurance company in your area to find out what the time period
is in your state.

Legislative Requirements In California, once the notice of default is
posted at the courthouse, you, as the real estate investor, have to comply
with several state laws. These laws were enacted by the California legis-
lature to protect homeowners from real estate investor sharks.

Unfortunately, as with many well-intentioned laws, this law has had
unintentional negative effects. It has inhibited defaulting homeowners
from being able to sell their homes to legitimate real estate investors
who are trying to create a win-win situation for the defaulting home-
owners and themselves. Yes, it may protect some defaulting homeown-
ers from unscrupulous people. But it puts onerous restrictions on
homeowners™ property rights.

California Foreclosure Timeline

2 “ 3 Months 3 “ 4 Weeks 3 Months 20 Days Next Day

Redeem Sale
No Payments 1st 2nd
Official Official
Letter Letter

In California, if you are buying a property that is owner-occupied,
and one- to four-dwelling units (a single-family up to a fourplex), and a
notice of default has been posted against the property, you must include
in your real estate purchase contract two notices required by California
You must include a five-day cancellation-of-contract notice and a no-
tice informing the homeowners that they cannot be asked to sign a deed
transferring title to their property to you until the five-day cancellation
of-contract period expires. If you don™t do this, the homeowners can
come back against you and have the courts void your deal and impose
fines and penalties against you.


Until your right to cancel this contract has ended _______(buyer)

or anyone working for ____________(buyer) CANNOT ask you to

sign or have you sign any deed or any other document. You may
Timing the Foreclosure Buy 57

cancel this contract for the sale of your house without any

penalty or obligation at any time before ___(AM/PM) on ______,

20__. See the attached notice of cancellation form for an expla-

nation of this right.



(Enter date contract signed)

You may cancel this contract for the sale of your house, without

penalty or obligation, at any time before ________________. To

cancel this transaction, personally deliver a signed and dated

copy of this cancellation notice, or send a telegram

to_________________ (buyer) at ___________________(address)

NOT LATER THAN _____________________________________

I hereby cancel this transaction _______________________(date)



(Sellers™ signatures)

Benefits and Drawbacks of the Notice of Default One benefit of
the notice of default is the sense of urgency it creates for the property

owner. Once the foreclosure process has begun, it is only a matter of
time before the property will be sold to the highest bidder. Coupled
with the ever-shrinking equity that remains for the owner as time goes
by, you can often make a good investment if you can get in touch with
the owner during this time period.
Of course, every other real estate investor who follows the notice-
of-default postings is now aware of these properties. This can be a huge
drawback to you because you now are competing with many other in-
vestors for the same properties.
However, you can turn this potential drawback into an advantage
once you get in front of the owner and make your foreclosure options
presentation. No one else will be interested in helping the owner like
you are.

Phase 3: At the Sale

For those of you who wait until the day of the foreclosure sale to get in-
volved, preparation is of the utmost importance. The time you spend in
researching both the property and the title will pay huge dividends
when you are bidding. Again, we reiterate that you must know value be-
fore you make any bids.
We suggest you attend several foreclosure sales as dry runs to get a
sense of how things occur, especially with regard to the trustees con-
ducting the sales. Perhaps even more important is going to foreclosure
sales to observe your competition before you actually start bidding.
While at the foreclosure sales in which you wish to participate, ob-
serve the habits of the successful bidders. Some of these faces you will
see again and again. Note their habits and what they do when they enter
the bidding.
On properties bidders want, do they enter the bidding at the be-
ginning, middle, or end? Are some of the bidders working together to
squeeze out the competition? Also take note of what a bidder does
when he or she folds.
The advantage of buying at the foreclosure sale is the finality of it.
You will receive your money back if the owners can exercise their right
of redemption. All junior liens will be wiped out. You have the protec-
tion of your state™s foreclosure laws for the winning bidder. It is a can™t-
lose proposition for you. And you have an upside potential because you
bought the property wholesale.
Timing the Foreclosure Buy 59

The big disadvantage of buying at the foreclosure sale is the fact
that you have to pay cash, and a lot of it. The other disadvantage is the
sheer number of other investors you may encounter who want to bid on
or buy the properties you are interested in.

Phase 4: After the Foreclosure Sale

When a property does not sell at the foreclosure sale, the lender will
take it back. If the lender is an institutional lender, the property will be-
come an REO (real estate owned). Lenders are anxious to liquidate these
properties. Because they are not in the resale business, lenders some-
times mishandle these properties.
To find out about a lender™s REOs, don™t rely on the branch manager
of a bank for much help. REOs are kept quiet, and it will take some prob-
ing to discover the pearls.
Your best source for REOs may be a real estate agent who handles
them in your area. An agent may specialize in REO properties and have
useful contacts already in place with several lenders. Do some calling
around to find out who these real estate agents are.
If you have no other contact, establish a rapport with the branch
manager of your bank or savings association. Ask the manager to make
an introductory call to the REO manager.
This manner of making the appointment will give you a personal
introduction to the person in charge of the bank™s REOs. You will not
have to waste your time going up the food chain over the phone.

Private REOs What if the lender who winds up with the property
after the foreclosure sale is a private lender? A private lender may have
even less motivation to own the property than the institutional lenders.
Typically, these lenders were owners of the property in the past. They
sold the property and helped the buyer with seller carry-back financing
in order to make the deal work.
They may have moved out of the area. The private lender may not
want to take the time to remarket the property. What about the ex-
penses of holding the property while the lender resells it? And the pri-
vate lender certainly doesn™t want to have to find a tenant and become a
We recommend you talk to the lender or the lender™s representa-
tive immediately after the foreclosure sale. They may have gotten title to

the property back, no money in their pockets, and be facing the
prospect of having to make payments on an existing senior lien.
This can make private lenders extremely motivated to discuss a
deal. Some of you may find your foreclosure-investing niche working ex-
clusively with REO private lenders. Remember, they have made a credit
bid for the amount of their loan balance, plus the back payments, plus
foreclosure expenses, plus payments on the senior lien.
If no one bids, they get the title to the property. They may sell their
position to you for a lot less than their credit bid once they wind up with
the property. Let™s look at some numbers.
Let™s say the lender is in a second position with a $25,000 loan bal-
ance, $1,250 in back payments, $750 in foreclosure expenses, and five
months of payments on the senior lien of $4,000.
Credit Bid
Loan Balance $25,000
Back Payments $ 1,250
Foreclosure Expenses $ 750
Senior Lien Payments $ 4,000
Credit Bid $31,000

No one has bid above the $31,000 credit bid. You may be able to
offer $15,000 cash and have the lender give you title to the property. Do
you think that may be a good deal? Our answer is that it depends.
What is the value of the property? What is the amount of the senior
lien? Are there other liens against the title that you will be stuck with
once you have the title to the property?
Our point is that just because you are getting what looks like a
good deal from the private REO lender, as with all foreclosure deals,
caveat emptor, let the buyer beware! You still have to do your due dili-
gence and know about the property and the condition of the title before
you make an investment.

Another Real Estate Investor You may find you are able to make a
deal with the real estate investor who makes the successful winning bid
at the foreclosure sale. This investor may be buying the property with a
plan to fix it up and put it back on the market. You didn™t bid higher dur-
ing the auction because you had reached your predetermined top bid.
But you already have a buyer who will pay $10,000 more than the win-
ning bid.
Summary 61

You could offer the other real estate investor $5,000 more than
they paid to sell you the property on the spot. While they have a prof-
itable plan, they may sell you the property for the immediate $5,000
profit. You would then flip the property to your buyer and make your
own $5,000 profit.

There are four time periods or phases to invest in foreclosures. While the
foreclosure timeline varies from state to state, every state™s foreclosure
process includes these time periods.
These four time periods are before the notice of default is filed or
posted at the county courthouse, after the notice of default is filed
or posted at the county courthouse, during the foreclosure sale, and after
the foreclosure sale when the property belongs to a new owner who is
either the foreclosing lender or another real estate investor.
You can make Quick Cash in foreclosures no matter what phase
you make your investment. The key is to find your niche. Your niche is
where you feel the most comfortable and confident. Your niche is also
where you consistently make money. As you are getting started, try to
make something happen in each foreclosure phase and discover for
yourself where you belong.
In the next chapter we will teach you where to find foreclosures.
There are foreclosure opportunities everywhere. There are foreclosure
opportunities in a good economy and a bad economy. We will also show
you how to access the largest holder of REOs in the world.

How to Find Foreclosures
n this chapter we will teach you how to find foreclosures. You have
to be a pretty good detective if you are going to be a successful real
estate investor. You have to be a great detective if you are going to be
successful investing in foreclosures.You are looking for the owner in dis-
We are going to give you the 13 key words or phrases that we look
for when we go through classified ads, work with our personal contacts,
do our own scouting, visit open houses, or work with a real estate agent.
When you see or hear one or more of these words or phrases, you™ll
know that you have found the right seller.

Finding Properties in Pre-Foreclosure
Finding properties before the notice of default occurs can be difficult.
There is no official public record available to you that would alert you to
a property owner™s financial troubles. Instead you have to search for
clues to their financial troubles as well as being proactive seeking op-
portunities in the pre-foreclosure phase.
Clues to an owner in distress include deferred maintenance on a
property or the look of a property being abandoned. Other clues are
general lack of care by the owner or tenant or frequent official deliveries
of notices to pay.


It takes a keen eye to observe some of these subtle hints to a pre-
foreclosure condition. Networking with neighbors and service providers
such as delivery companies, utility providers, and postal carriers can pro-
vide you with extra eyes.

13 Key Words or Phrases

1. Must Sell Any time you encounter the phrase must sell, you have
come upon the right seller. It is perfectly acceptable to ask must-sell sell-
ers why they must sell. You may discover that they are selling because
they are behind on their mortgage payments.
We have heard some pretty strange reasons for selling, as well as
the fairly standard legitimate reasons for selling. The point is that a
seller™s must-sell reason is his or her own.

2. Under Market The phrase under market can let you know that
you have come upon the right seller and the right property. As a real es-
tate investor you are a wholesale buyer. A property that is advertised as
being under market puts you ahead of the game from the get-go.
Of course, you have to investigate to be able to determine if the sell-
ers really know what they are talking about.“Under market”to a property
owner may still mean overpriced to you as a real estate investor.

3. Below Appraisal Below appraisal is a phrase we like to hear. This
occurs when a real estate agent tells us the property they are marketing
for the seller is priced below the appraisal value. We know we have the
right property and the right seller.
Again, you have to be careful here. Below what appraised value?
Are we talking below the appraised value for insurance purposes? Are
we talking about the appraised value for property tax purposes? Are we
talking about below the appraised value for a home equity loan? Or are
we talking about below the appraised value for a recent market compar-
ison? The last value is the only one that counts.

4. Transferred Transferred can simply mean transferred. Or, trans-
ferred can be a code word for an owner in distress. In today™s economy,
when someone is transferred, they are often happy to have a job to be
transferred to.
Finding Properties in Pre-Foreclosure 67

But they may have been out of a job for a while and be in pre-fore-
closure. This is not a pretty sight for the seller. You may be able to put to-
gether a very profitable deal.

5. Divorce When you see or hear the word divorce, there is often a
real estate deal close by. There are 2 to 3 million new marriages each
year in the United States. There are 1 to 1.5 million divorces. What hap-
pens to the family home when there is a divorce? Statistics tell us that
most real estate in a divorce winds up being sold so that the assets can
be divided between the ex-spouses.
We have found the best offers in a divorce-involved property are all-
cash offers. Each side is willing to take a hit on the purchase price be-
cause each wants as much of their equity in cash as possible. Sometimes
we have been able to put a deal together several months after the di-
vorce when the property becomes too much for the remaining party to

6. Foreclosure Ad Usually, you see something like this in a real estate
classified ad:

Seller in foreclosure.
Bring all offers.
3Br/2Ba $169,500
Good area.
(817) 555-2455

Call on the ad. Identify yourself as a real estate investor. Find out
when the foreclosure sale is scheduled to occur. Set an appointment to
meet with the owners to show them the foreclosure options presenta-
tion. Make an offer to buy their equity.

7. Illness Ad Unfortunately, illness is a fact of life. Sometimes your job
as a real estate investor can really help people out of a tough situation. A
real estate ad we saw read something like this:

Illness forces sale.
Great family home in good area.
Priced to sell. $275,000.
Call Jon. (972) 555-2455

We called Jon and found out that his wife had multiple sclerosis.
They had a two-story home, and Jon™s wife could no longer climb the
stairs. They were selling because they needed a one-story home, and
they needed money for medical bills. This was a pre-foreclosure waiting
to happen.

8. Death “Death forces sale.” This was the heading of a classified ad
we read one morning in our local newspaper. Pretty tough situation. But
the widow needed to sell after her husband was killed in a traffic accident.
The notice of default had already been posted. We made an equity-
share offer on the property. We agreed to a price for today and to split
any future appreciation 50-50. We would split the monthly payments
50-50. That way she could stay in the property.

9. Owner Will Carry When you see or hear the phrase owner will
carry, you have found a built-in real estate lender to finance the deal.The
owner is going to act as the lender.They are going to carry a mortgage or
trust deed for part or all of the purchase price.
We have found that an owner in pre-foreclosure will offer to carry
financing in order to make their property more attractive to more buy-
ers. We have asked owners to carry the financing on our equity purchase
in order to make the deal work.

10. Nothing Down No down payment. Zero. Nada. Nothing down
means a seller wants their property to be the most competitive one on
the market. This can also be an indication that the owner does not have
a lot of time because of an impending foreclosure.
The owner may just want someone to take over the loan payments
and get on down the road. Of course, nothing down may just mean noth-
Finding Properties in Pre-Foreclosure 69

ing down, and you still may be able to make some Quick Cash because of
the great terms.

11. 100 Percent Financing A variation of nothing down is 100 per-
cent financing. We may have a worried seller who has to sell the prop-
erty and is willing to finance the sale rather than lose all his or her equity.
This is one of those phrases that we never pass up when we encounter it.
One thing to look out for when you see “100 percent financing” is a
property that will go with VA financing. This means the seller will coop-
erate with a VA buyer. Although there is no down payment for the VA
buyer, this is not seller financing that you can use as a real estate investor.

12. Motivated Seller A motivated seller is the right seller. As a real
estate investor you are looking for motivated sellers. Sellers in pre-
foreclosure are motivated sellers. A motivated seller might just give you
the deed to their property and walk away!
It would be fair to say that all the sellers with whom we have done
business in the foreclosure arena are motivated. When we encounter
sellers who are not motivated, we usually have a very hard time doing
business with them.

13. Lost Job/Laid Off The color pink is an anachronism from the
twentieth century when people actually got a pink slip to let them know
that they were either fired or laid off. In the twenty-first-century econ-
omy, companies want fewer workers doing more work.
As a real estate investor, when you see lost job or laid off in a real
estate ad or when one of your personal contacts gives you an alert about
someone losing a job, more than likely there is a real estate deal to be
made. It is a fact that most people live paycheck to paycheck. When they
lose the paycheck, the family home may not be far behind.


Sometimes a well-placed advertisement in the newspaper or notices
posted on public bulletin boards in supermarkets or business establish-
ments can place an inquisitive owner in contact with you in the pre-
foreclosure stage. We have had continuing success with the following
verbiage as a newspaper, bulletin board, or Internet ad.

Private party will share ways to save
your home/protect your equity.
Learn 8 ways to avoid foreclosure.
Free! Call (817) 555-1212

Searching the Public Record

There are two ways to search the public record to glean information
about foreclosures or potential foreclosures. You can do it yourself. Or
you can pay a foreclosure service to provide you with the foreclosure in-

Do It Yourself For most of you, the public records are at your local
county courthouse. For some of you, the public records may be at your
city hall. More and more, you can access the public records through the
The problem with checking the public records yourself is the
tremendous amount of records there is to check. That™s why title insur-
ance companies have to do a title search on a property before they will
issue title insurance. This process can take several weeks. The title insur-
ance company will issue a preliminary title report as a prelude to issuing
a policy of title insurance.
We recommend you plan on an entire day to visit the county
recorder™s office for your county. You will probably find the public
records section buried deep in the bowels of your county courthouse.

Ask for Help Ask for help from the staff to direct you to the foreclo-
sure postings for the current month. Once you have the legal descrip-
tion of the property from the foreclosure posting and the property
owner™s name, you can look up the property in the public record and
also check for liens against the owner.
The property record will reflect any liens against the owner. If you
are going to do business with a new buyer, you might also want to check
the buyer out. For example, if you are going to flip a foreclosure prop-
Finding Properties in Pre-Foreclosure 71

erty and carry back financing, this would be a good idea. Sometimes the
new buyer will bring clouds to the property title because of liens associ-
ated with the buyer personally, like IRS liens.

Brain Trust Divorce is the number-one cause of property foreclosures
in this country. A Brain Trust hint for those of you who like being detec-
tives is to follow the public record on filings for dissolution of marriage
(the official name for divorce). Then make contact with property owners
who are involved with the divorce. This may give you a head start on
identifying properties that are headed down the foreclosure path.

Foreclosure Service You can get information about foreclosures from
a foreclosure service. A typical price may be $35 a month for the fore-
closure list for your county. A typical price for the year may be $225. Shop
around because there may be more than one foreclosure service in your
area. You don™t need anything fancy; just the basic information will do.
We recommend spending the money for a one-month copy. If you
decide you like working foreclosures after the notice of default is posted
and are going to get into it big time, then pay for six months or a one-
year subscription. If this is not the foreclosure phase you are interested
in, then you haven™t spent too much money for nothing.

Foreclosure Letter For some of you, face-to-face contact with
strangers about a subject of such a sensitive nature as foreclosure may
prove uncomfortable. Also, it may be tough for property owners facing
foreclosure to come to grips with their shame and embarrassment. For
both of these reasons, a letter campaign may be a good method to con-
sider in your pursuit of eligible properties.
Although nothing beats personal contact, a program of contacting
owners in distress via mail is often the only way of reaching owners who
are difficult to find.They may be occupying the property but have an un-
listed or disconnected telephone number. They may have vacated the
property but left a forwarding address. Just as in the personal contact
and telephone meetings, your letter should be honest, sincere, and offer
the owner hope.
In addition to the letter, we want you to include a picture of the
property, which will create a better impact for the owner. The picture
will show the owner that you have a strong interest in the property.
After all, you came out to look at the property to take the picture! Make
sure you keep a copy of the picture for your files should the property
owner contact you at a later date.

The following is the letter we have used. You may want to consider
using it. Change it to fit your style and needs.You will notice that this let-
ter is not a short-and-sweet letter. It is a short-and-to-the-point letter. The
purpose of your letter is to get the owners™ attention”and to have the
owner contact you because they feel you can help them.

Dear Property Owner,

According to the public records, the loan on your property may
be in trouble. We are writing to you with an offer to help. We are
real estate investors who have studied the foreclosure process.
We are familiar with the procedure and understand the many
ways in which owners can halt the foreclosure and perhaps save
their property and equity.
We have made it a practice of contacting owners like yourself
who have received official notice of a pending foreclosure. We
believe we may be able to help you by providing information
about your foreclosure options. Sometimes we find excellent in-
vestment opportunities when owners have decided that they no
longer wish to keep their property.
Specifically, there are eight actions you can take when your
home is in foreclosure. We would like to share these options
with you at no cost or obligation to you. We do this to in-
crease our chances for investment opportunities and, at the
same time, we have an opportunity to help some owners who
would otherwise lose their properties.
Time is running out! We urge you to contact us today before
any more of your hard-earned equity is lost forever. We can be
reached by phone, e-mail, or letter. We will keep our conversation
confidential. We hope we can provide you with the information
you need to save your property. DON™T WAIT! Contact us today!

Chantal and Bill Carey
(817) 555-2614; thetrustee@hotmail.com
P.O. Box 274, Bedford,TX 76095-0274
Finding Properties in Pre-Foreclosure 73

VA and FHA Foreclosures

You can find out about VA and FHA foreclosures from your local VA and
Housing and Urban Development (HUD) offices. They will likely refer
you to a list of VA- and FHA-approved real estate brokers in your area
who are authorized to list and give access to VA and FHA REOs (real
estate“owned properties).
These properties are auctioned off to the highest net bidder. The
highest net bidder is the bidder whose bid, after real estate commissions
and expenses, generates the most cash to the VA or FHA. Incidentally,
your bid must be submitted in writing through an approved real estate
broker. These are sealed bids that are opened by the appropriate VA or
FHA representatives on a designated date.

Federal National Mortgage Association/Fannie Mae

Fannie Mae (which stands for Federal National Mortgage Association) is
a stockholder-owned, congressionally chartered corporation. Its stock is
traded on the New York Stock Exchange and other major exchanges. It
is listed on the Standard and Poor™s 500 Stock Price Index. By buying and
selling VA, FHA, and conventional loans in the secondary mortgage mar-
ket, Fannie Mae is the largest real estate lender in the country.

Fannie Mae Foreclosures Being the largest real estate lender, Fannie
Mae has its share of foreclosures. Being a stock corporation, it is profit-
oriented and interested in minimizing losses. One method of doing so is
the Fannie Mae Pre-Foreclosure Sale program.
The result to real estate investors can be the purchase of property
from potential borrowers-in-default at prices below the existing loan
and with new loan terms that are better than terms available on the
open market. This is done on a case-by-case basis.
Why would Fannie Mae be willing to do this? The answer is to min-
imize losses. It is expensive for Fannie Mae to foreclose on, maintain, and
then remarket a portfolio of properties. If it can dispose of the proper-
ties in pre-foreclosure, before it takes them into its property portfolio,
Fannie Mae can save money.
In Chapter 11 we will present more information about the Fannie
Mae pre-foreclosure program. Suffice it to say here that Fannie Mae is
willing to pass on some of the money it saves to real estate investors

who purchase property under this program. Some of you are going to
make some Quick Cash doing this type of foreclosure investing.
The program is directed toward real estate agents as the contact
source with defaulting borrowers, potential retail or wholesale buyers,
and the lenders, including Fannie Mae. Just as with the VA and FHA fore-
closures, you have to discover who the real estate brokers are who are
handling Fannie Mae properties. Whether Fannie Mae moves to a new
program, it will always be a source of foreclosure opportunities. Once
you have established contact with a Fannie Mae broker, he or she will be
able to keep you informed on any changes.
You are now ready to come full circle and learn to negotiate with
the owner in the pre-foreclosure time period. In the next chapter we
will show you how to present the eight foreclosure options to the
owner in distress. This is the beginning of where the rubber meets the
road on your journey to making Quick Cash in foreclosures.

Negotiating with the Owner
n this chapter and the next, we will teach you how to negotiate with
owners and buy their equity. Once you have contacted an owner
who is in the pre-foreclosure phase, either by phone, letter, or in per-
son, and have set up an appointment, your next step is to prepare for a
face-to-face negotiating meeting.
After we show you how to prepare for the meeting, we will show
you how to make the foreclosure options presentation. Negotiating with
the owner then becomes a simple task of helping them choose their
best option. Of course, the best option for you is that the owner agrees
to sell their property to you. It is important to realize, though, that you
may not wind up making a deal right away.

Benefits to the Owner
Many of the foreclosure options benefit just the owner. But we have
found that even when we help an owner and don™t come away with a
deal for us, we still benefit. Many times owners solve their foreclosure
problem only temporarily. If they can™t resolve the root cause of the prob-
lem that led to the foreclosure to begin with, they are likely to wind up in
foreclosure again. Our experience is that this occurs 9 times out of 10.
Whom do you think they will call the next time they are in trouble?
They will call us (you). We helped them the first time. Maybe we can
help them the second time. And if there is nothing they can do to avoid



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