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an impending foreclosure sale, whom do you think has the inside track
on making a good real estate investment?

Preparation for the Meeting
Obtain All Preliminary Information

Preliminary information includes a copy of the notice of default (if any),
a property profile from a title insurance company, and confirmation of
property taxes paid or owed. Bring any pictures of the property that you
have taken. Bring the comparable sales information you have compiled
from a real estate agent or title company.
Include any letters of testimonial you have received from prior
transactions. If you also have character letters, bring them, too. Itemize
the costs to repair and improve the property to a salable condition. Esti-
mate the costs for holding, marketing, and selling the property. Always
include real estate commissions, which can be substantial.
Put together a presentation book, which includes all of this infor-
mation. Add to it the foreclosure options presentation and questions for
the owner. Although you may not use or need all the information at the
meeting, we have found it is much better to be overprepared than

Questions for the Owner

We recommend you ask and get the answers to the following five ques-
tions at the beginning of the meeting. The answers may help you to de-
termine if you should continue on with the meeting or what direction to
emphasize during the meeting.

1. Are you aware of the impending foreclosure? You would be
surprised at some of the answers we have gotten to this question. Some
people stick their head in the sand and want to pretend that everything
is going to be all right.
Most people do not know the timeline for the foreclosure process.
Some people think they have all the time in the world. We are there to
assure them that time is really of the essence for their situation.
At the Meeting 79

2. Do you know what you will have to do to protect your inter-
ests? Most people do not have a clue about what they can do to pro-
tect their interests in their property. This question introduces the
foreclosure options presentation. Some people have a completely mis-
taken idea of what they can do. Other people are resigned to the fact
that there is nothing they can do, even when that isn™t true.

3. Are you willing to take the time and effort to fight the fore-
closure? When people are facing foreclosure, there may be many
other pressing problems occurring at the same time. There may be a job
loss or an illness in the family. Just having enough money to buy food
and keep the lights on may be a struggle. Having the time, energy, and re-
sources to fight a foreclosure action just may not be possible for them.

4. If we were able to get you cash, would you be willing to sell
your equity to us at a discount? This is a testing question. You want
the owners to come to grips with the fact that they may have to make a
deal. You are also letting them know that you are there as a real estate in-
vestor who has to make a profit in order to be able to help them.

5. If you feel comfortable working with us, is there any reason
you can see why we couldn™t do business? This is a trial closing
question. You want the owners to say that if they feel comfortable with
you, there is no reason they can see why you couldn™t do business. How-
ever, the question will also elicit other useful information.
You may discover that the owner is going to deed the property to
his brother-in-law for a quick $5,000. The owner is meeting with you be-
cause he wants to hear about his foreclosure options besides the
brother-in-law route.
Owners may also say that they have an agreement with another in-
vestor and want to see if you are going to make them a better offer. Now
you know whom your competition is.

At the Meeting
Once we have asked the owners the five questions and gotten their an-
swers, we proceed to the foreclosure options presentation if it is appro-
priate. We have decided on several occasions to cut short the meeting
without making the foreclosure options presentation.

The owners may tell us they will not sell their equity to us at a dis-
count. They may say they already have a deal. They may tell us that they
will not do business with us even if they feel comfortable. We may feel
we are wasting our time. The point is that you will have to decide
whether to stay or go.

Foreclosure Options

There are eight actions the owner can take in response to a notice of de-
fault: (1) reinstatement, (2) redemption, (3) deed in lieu of foreclosure,
(4) legal delay, (5) bankruptcy, (6) renegotiate with the lender, (7) sell the
property, and (8) do nothing. We use the foreclosure options presenta-
tion once we are in front of the property owner. We recommend that
you put each of these eight options on a separate sheet of paper. We will
refer to the Texas and California foreclosure timelines for the time peri-
ods to implement these options.

Reinstatement The reinstatement option gives the owner the oppor-
tunity to make up back payments plus any incidental charges such a fil-
ing or posting notices and trustee service charges. The payment of the
reinstatement amount will cancel the foreclosure and enable the bor-
rower to continue as if no default occurred.
In Texas the borrower may reinstate his or her loan within the 20
days from receiving the first official letter from the lender and before re-
ceiving the second official letter. Once the borrower receives the sec-
ond letter from the lender, reinstatement is only possible if the lender
agrees to the reinstatement. In the following figure we match the eight
foreclosure options with where in the foreclosure timeline they can be

Redemption In order to redeem the loan, the borrower must pay off
the loan in full. This may be accomplished through refinancing (with a
cosigner perhaps) or by a relative or friend bailing out the owner in re-
turn for an equity position.
Most states permit redemption up to the foreclosure sale. In Cali-
fornia the owner must redeem after they receive the posting at the
courthouse and have up to the date of the foreclosure sale, unless the
lender agrees to reinstatement.
Texas Foreclosure Timeline

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

No Payments 1st 2nd
Official Official
Letter Letter

1. Reinstatement

2. Redemption

3. Deed In Lieu of Foreclosure

4. Legal Delay

5. File Bankruptcy

6. Renegotiate

7. Sell the Property

8. Do Nothing

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



Deed in Lieu of Foreclosure For owners who know they will have
no opportunity to reinstate, redeem, or even sell their property and just
want out of the property, a deed in lieu of foreclosure may be a viable
foreclosure alternative. Sometimes the owner can turn the ownership of
the property over to the bank and avoid the trauma of foreclosure. This
action will reduce the negative impact on the owner™s credit. In most
states, including Texas, an owner can execute a deed of foreclosure up
till the foreclosure sale.
When a lender takes a deed in lieu of foreclosure from a borrower,
the lender receives the property subject to all junior and senior liens.
This can be potentially hazardous to the lender. The property could be
overencumbered with tax liens, judgments, and other involuntary liens.
It is most important for the lender to get an up-to-date title report the
day the deed is to be accepted.
If the title report shows trouble that the lender doesn™t want to
deal with, the lender should proceed with the foreclosure sale rather
than accept the deed. On the other hand, if the title report shows no
other liens but the lender™s, the lender may choose to accept the deed.

Caution Additional caution should be taken whenever accepting a
deed in lieu of foreclosure. The debtors could later claim that the lender
took unfair advantage of them, by offering them no or low compensa-
tion for the equity they did have in the property.
The courts have been known to rule in favor of the former prop-
erty owner and allow the borrower to reclaim the property or cloud the
lender™s title with a lawsuit. Lenders, to protect themselves, will request
a written acknowledgment from the borrower stating that the borrower
has received fair consideration for the property. Lenders also have the
transaction handled by a title company. That way they have a better
chance of getting marketable title.

Legal Delay If the owner can prove that the amount in default is in-
accurate, often the owner can delay the foreclosure proceeding and gain
additional time to find a more acceptable solution. The maximum time
extension is effectively the time it would take to start the foreclosure
process over again. The owner may also cause a legal delay up to the
foreclosure sale itself. This action is not only possible in California, but in
every other state as well.

File Bankruptcy Although this is not a permanent cure, filing bank-
ruptcy can temporarily halt the foreclosure process. Before considering
At the Meeting 83

this option, the owner should seek the advice of an attorney. The owner
may file bankruptcy up to the day of the foreclosure sale.
Bankruptcy is a serious event that could affect the timing and ulti-
mate outcome of any foreclosure. Bankruptcy is a legal procedure estab-
lished by federal law to assist debtors who can™t meet their financial
obligations. The founding fathers of this country were so opposed to the
traditional British solution of throwing debtors into prison that they cre-
ated an alternative solution.

Two Categories Bankruptcies fall into two categories; liquidation and
reorganization. Liquidation bankruptcies fall under Chapter 7 of the
United States Bankruptcy Code. The debtor who takes this path ends up
turning over all his or her nonexempt assets to the bankruptcy court.
A court-appointed trustee then has the responsibility of liquidating
(selling) the assets and distributing the proceeds to the existing credi-
tors on a pro rata basis. Any debts that remain unsatisfied at that time are
discharged and legally nullified. The trustee works for both the debtor
and the creditors. It is the duty of the trustee to try and preserve the
debtor™s assets as much as possible to satisfy creditors.
Bankruptcies intended to assist the debtor with financial rehabilita-
tion through reorganization come under the categories of Chapter 13
and Chapter 11 of the United States Bankruptcy Code. A Chapter 13 is
intended for individuals with a regular source of income. A plan is pro-
posed by which the debtor will continue to make payments on his or
her debts and make up back payments with interest. A modified, ex-
tended schedule is often used to do this.
A Chapter 11 bankruptcy is used by corporations, partnerships, and
those individuals who do not qualify for a Chapter 13 plan. The court
procedures can be complex and lengthy.

Foreclosure Stops The moment a property owner in default files a pe-
tition for bankruptcy, foreclosure proceedings stop immediately. This re-
sults from a legal moratorium called an automatic stay imposed by the
bankruptcy court. It prevents creditors from pursuing any legal actions
to enforce their claims against a debtor.
If a foreclosure sale is held after a bankruptcy petition has been
filed, the foreclosure will be ruled null and void by the bankruptcy
judge. A lender must first seek relief from the automatic stay in order to
proceed. The Bankruptcy Act states that the court must hear a lender™s
petition for relief from stay within 30 days. If the court fails to do so, the
stay is automatically lifted.

The amount of equity found in the property will affect the judge™s
decision to grant relief from the stay. If there is significant value in the
property being foreclosed, the judge will not grant relief from the auto-
matic stay. The hope is that some of that equity can be used to satisfy
other creditors. If there is very little equity in the property, the judge will
probably grant a relief from the automatic stay and allow the foreclosing
lender to proceed.

Cram Down or Short Sale Lenders are most fearful of the court™s au-
thority to impose a cram down or short sale provision. The court can
move to modify the terms of the mortgage or trust deed. This could in-
clude modifying the payment schedule to help the debtor, or actually re-
ducing the principal amount owed on the mortgage note. The cram
down provision can only be used with reorganization types of bank-
ruptcies (Chapters 11 and 13), where the property plays a key role in
the reorganization plan.
Debtors have come up with some pretty creative ways to stall fore-
closures. Maybe you thought that a person can only file a bankruptcy
once every seven years. That is true of Chapter 7 liquidations but not
true with Chapters 11 and 13 reorganizations.
The law does not prohibit the act of filing bankruptcy, and it is the
filing that brings on the automatic stay. Because of this, a growing num-
ber of debtors are using that loophole to further delay the foreclosure
process. Many judges are now wise to this trickery and will quickly lift
the new stay.

Bankruptcies Filed after a Foreclosure Sale There have been cases re-
ported in which a bankruptcy judge has overturned a foreclosure sale
that occurred just prior to the filing of the bankruptcy petition. The
judge may rule that the equity in the property could have been used to
pay more creditors.
Because the Bankruptcy Code is a federal law, a debtor in any state
can file a bankruptcy petition and stop the foreclosure process. If the
bankruptcy petition is filed 15 days into the foreclosure, the foreclosure
will resume on the 15th day after the automatic stay is lifted. In other
words, the lender does not have to go back to the beginning of the fore-
closure. They resume the foreclosure from where it already is.

Renegotiate with the Lender The most overlooked of all the fore-
closure options an owner has is the opportunity to renegotiate with the
At the Meeting 85

lender. The lender does not want the property back, and any effort by
the owner to negotiate a plan that will enable the loan to be back in ser-
vice for the lender™s loan portfolio will be looked upon with great favor
by the lender.
Generally, the current month™s payment plus a portion of the past-
due amount will be considered. In Texas and all other states, the bor-
rower can renegotiate with the lender right up to the foreclosure sale.

Sell the Property For the owners who don™t care to save their prop-
erty, or who have no other choice but to let the property go, selling the
property may be the smartest choice.This is true even if they have to sell
the property at a bargain price.
This is better for the owners than losing their entire equity and
damaging their credit at the same time. Your purpose with the fore-
closure options presentation is to have them come to the conclusion
that selling you their property is their best and most profitable foreclo-
sure option. Owners can try to sell their property right up to the fore-
closure sale in Texas and elsewhere throughout the country.

Do Nothing The owners always have the choice of just letting things
happen. They will surely lose their hard-earned equity and damage their
credit. They can just about forget getting a new home anytime in the
foreseeable future.
Unfortunately, we have encountered more than a few people who
just put their heads in the sand. They think they are going to win the lot-
tery. They procrastinate until there are no viable options left to prevent
the foreclosure sale.
Part of your job as a real estate investor is to motivate the property
owner to take action that will benefit the property owner. Doing noth-
ing is a form of action that in this situation has only negative results.
In the next chapter we will show you how to buy the owner™s eq-
uity. Buying the owner™s equity may be different than buying the
owner™s property. As part of our Quick Cash strategy, you may want to
flip the owner™s equity to another real estate investor for a fee.
Negotiating with owners becomes more than just buying their eq-
uity. You also have to figure out to whom you are going to flip that
equity.That person is the source of your Quick Cash. Without a buyer for
your good deal, your good deal can turn out not so good.

Buying the Equity
fter you have made the foreclosure options presentation, now is
the time to ask the owner some additional questions. Your inten-
tion is to help the owner make a decision. Since time is really of
the essence for them, having the owners make a decision is in their best
interest. You are doing them a disservice if you allow them to sell you
the “they want to think about it” line.
It has been our experience that when people say they want to
think about it, they never do. We have nothing against people thinking.
But people use “think about it” as a way to procrastinate. There is no
room to procrastinate in the foreclosure arena, especially when you are
the person being foreclosed on!

Additional Questions
There are three additional questions that we ask owners.

1. Which of the foreclosure options (from Chapter 7) do the
owners think makes the most sense for their situation?
If they answer with option seven”sell the property”
we offer to buy their property. If they answer with anything
other than option seven”sell the property”we ask the next


2. Do the owners have the time and financial resources to carry
out the foreclosure option they think makes the most sense?
If they cannot answer yes to both the time portion and
the financial resources portion of the question, we tell them
that that foreclosure option is not going to work. We then
offer to buy their property. If they answer yes to both the time
and financial resources portions of the question, we ask them
the next question.
3. Do the owners want our help in carrying out the foreclosure
option they have decided on?
You have to be careful here. You cannot give the owners
legal advice unless you are an attorney. You don™t want to get
too involved because you open yourself up to liability if things
don™t work out well for the owners. You also can™t waste your
time helping them without making any money.
When the owners say yes, they want our help, we have
found that what works best for us is giving them the names of
several attorneys who specialize in helping people in fore-
closure. We leave the owners our contact information and
keep open the possibility that we will buy their property.
When they say no, they do not want our help, we have
found that what works best for us is leaving them our con-
tact information and keeping open the possibility that we
will buy their property. In other words, we are flexible
knowing they may indeed call us back and offer to sell us
their property.

The Owner Wants to Sell You The Property
Let™s say you have an owner who wants to sell you the property. What do
you offer the owner for the property? You must make your offer based
on your analysis of value. Do not make any offers until you read the next
section on knowing value.
If you are very comfortable with knowing value in your target area,
then you may want to skip ahead to the following section, “Buy the
Owner™s Equity, Not the Owner™s Property.” However, we strongly rec-
ommend you read this section first. You are an investor buying at a
wholesale price. As an investor, you cannot pay a retail price. Make your
offer low, and let the owner decide whether to accept.
The Owner Wants to Sell You The Property 91

How do you know that you are buying at a wholesale price? You
know you are buying at a wholesale price because you know value. You
will become an expert in valuing real estate in your investment target
area. You will know the retail value, the wholesale value, the appraised
value, the loan value, the replacement value, and the property tax value
of every property in which you are investing.

Knowing Value

We are going to take you step by step through the knowledge we have
gained as investors valuing real estate. We will define the six values that
all real estate investors need to know about the property they are in-
vesting in. We will show you the three ways to value real estate that are
used by appraisers. We will explain the four elements of value. Then we
will reveal four great forces that influence real estate value. Finally, we
will teach you seven ways to know value in your target area.

The Six Values Every Real Estate Investor Needs to Know The
six values that every real estate investor needs to know are the retail
value, the wholesale value, the replacement value, the property tax
value, the loan value, and the appraised value. When you know these
six values, you can feel confident and comfortable making a real estate
investment. When you do not know these six values, you will feel unsure
and uncomfortable making a real estate investment.

1. The retail value is the value an end user, such as a home-
owner, places on a piece of real estate. The retail value tends
to be the highest value of all the values placed on real estate.
2. The wholesale value is the value a real estate investor like you
places on a piece of real estate. The wholesale value tends to
be the lowest value of all the values placed on real estate.
3. The replacement value is the value insurance companies
place on the improvements on a piece of real estate. The re-
placement value is determined by the cost approach to value.
4. The property tax value is the value the local property tax as-
sessor places on a piece of property. The property tax value
can be higher or lower than the retail value.
5. The loan value is the value a real estate lender places on a
piece of real estate. The loan value tends to vary as a percent-
age of the appraised value.

6. The appraised value is the value a real estate appraiser places
on a piece of property. The appraised value is typically at or
near the retail value.

Three Ways to Value Real Estate There are three ways to value real
estate. These are the cost approach, the income approach, and the mar-
ket comparison approach. These three approaches are the approaches
used by professional real estate appraisers when they are appraising a
When you understand these three approaches to valuing real es-
tate, you will begin to start thinking like a professional appraiser. As you
encounter a property, you will begin to think what approach to value
makes the most sense to use with that property.

1. The cost approach consists of three parts. First, value the
land. Second, value the improvements and add the value of
the improvements to the value of the land. Third, determine
the accrued depreciation of the improvements and subtract
the accrued depreciation from the combined value of the land
and improvements.
2. The income approach uses the income a property produces
to determine its value. We say it this way:The value of an in-
come property is in direct relationship to the income the
property produces.
3. The market comparison approach uses the value of similar
properties to determine the value of a particular property.You
compare properties that are similar to the property you are in-
terested in to determine its value. We say it this way: No com-
parables, no contract.

Four Elements of Value There are four elements of value. These four
elements are demand, utility, scarcity, and transferability. These four
elements are the constituent parts of value. We remember these
four elements with the acronym DUST: demand, utility, scarcity, and
When you know the four elements of value, you have an advantage
over your competition. You may see a use for a property that no one else
sees. You may figure out a way to transfer a property title that other peo-
ple cannot figure out how to transfer.
The Owner Wants to Sell You The Property 93

1. Demand is the number of people who want the property.The
more people who want the property, the more valuable it be-
2. Utility is the use that a property can be put to or made of. The
more uses a property can be put to or made of, the more valu-
able the property.
3. Scarcity has to do with the supply of real estate available. This
supply could be what is on the market, or it could be the total
possible number of properties in the area. The more scarce
the supply of real estate available, the more valuable the prop-
4. Transferability is the key element of value in real estate. You
can have the best property in the world, worth millions of dol-
lars, and if you cannot transfer the title to your property, your
property becomes worthless. Likewise, if you are a real estate
investor and have written a great wholesale offer that has
been accepted by the owner, your deal is worthless unless you
can get the owner to transfer clear property title to you.

Four Great Forces Influencing Value There are four great forces
that influence value. They are physical forces, economic forces, politi-
cal forces, and social forces. They are called great forces because they
are outside or independent of the property itself. When you under-
stand these four great forces that influence real estate value, you will
have a sense of when and how the real estate market can change di-

1. Physical forces are the availability of schools, shopping,
churches, transportation, and parks. If these physical ameni-
ties are present in your target area, this influences the value of
the area in an upward manner. If these physical amenities are
not present or are minimally present in your target area, this
influences the area in a downward manner.
2. Economic forces are the number and types of jobs available,
the wages being paid, where in the economic cycle the econ-
omy is nationally, and the interest rates for real estate loans.
The economic cycle is a repeating expansion-prosperity-
recession-depression cycle.
Real estate value is greatly influenced by the economic
cycle. Typically, real estate is said to do well in the expansion

and prosperity phases of the economic cycle and poorly in
the recession and depression phases of the economic cycle.
3. Political forces are the types of zoning, pro-growth or no-
growth policies, and environmental regulations. A zoning
change can greatly affect the value of a piece of property. It is
important for you to know the political forces that influence
the value of real estate in your area, for both the present and
future investment climates.
4. Social forces are the quality of the schools and the number in
the area, blighted or well-kept neighborhoods, racial or ethnic
strife, and social amenities like museums, art galleries, and con-
cert halls.

Seven Ways to Know Value in Your Target Area There are seven
ways to know value in your target area. They include sold comparables,
pending comparables, listed comparables, expired comparables, appre-
ciation rates, new or planned developments, and vacancy rates. The
first five of these can be obtained from your local real estate broker. The
last two can be obtained from the local planning commission and
the apartment owner™s association.

1. Sold comparables are comparable properties that have been
sold and have actually closed escrow. Sold comparables set
the floor of retail value for real estate. This means that if a sold
comparable had a sell price of $125,000, a similar property
should sell no lower than $125,000 in a normal real estate
market. Sold comparables are useful for properties that have
sold in the last six months. Anything sold beyond six months
is not considered a good comparable.
2. Pending comparables are properties that have sold but that
have not closed escrow. Pending comparables indicate the di-
rection of real estate value. When the pending comparables
close escrow, they become sold comparables. If the sold com-
parables are indicating a value of $125,000 and the pending
comparables are indicating a value of $127,000, then you have
an indication that the direction of real estate values is going
3. Listed comparables are properties currently on the market
and similar to the property in which you are considering in-
vesting. Listed comparables set the ceiling of retail value for
Buy the Owner™s Equity, Not the Owner™s Property 95

real estate. They set the ceiling because they have neither sold
nor closed escrow. They are merely an indicator of what own-
ers would like to get for their properties.
4. Expired comparables are properties that never sold, let alone
closed escrow. Expired listings indicate the value beyond the
present market in terms of what retail real estate buyers are
willing to pay for property. Retail buyers will buy the lower-
priced comparable properties first, all else being equal.
5. Appreciation rates indicate the annual percentage increases
in market value. Appreciation rates give you a sense of how
hot or cold the real estate market is. Double-digit appreciation
rates indicate a hot real estate market. Single-digit rates indi-
cate a good market, and zero or negative rates indicate a cold
real estate market.
6. New or planned developments indicate the path of develop-
ment. When you can buy property in the path of that devel-
opment, you are helping to ensure that you are buying
property that will appreciate in value.
While this may not seem to be important for the Quick
Cash strategy, it is. You may very well be flipping the property
to an investor who is a long-term wealth builder and who is
thus very interested in the property appreciating.
7. Vacancy rates indicate an area that may have potential or
problems. Low vacancy rates indicate an area that may have
profitable properties. High vacancy rates indicate an area that
may have problem properties.
After you discover low vacancy rates or high vacancy
rates in your target area, you may want to do some more dig-
ging to find out why the vacancy rates are low or high. Do the
vacancy rates reflect the historical trend for the area? Or is the
area in transition?

Buy the Owner™s Equity, Not the Owner™s Property
Now that you know how to determine value, let™s take the next step. We
have a property owner who is in the foreclosure process and wants to sell
us the property. What do we want to buy? Do we want to buy the prop-
erty? Or do we want to buy the equity? We want to buy the owner™s equity.

Why don™t we want to buy the owner™s property? Because we are
not interested in buying or owning property! We are interested in mak-
ing Quick Cash. The property includes too many liabilities, like a loan
that is in the foreclosure process.

What Is the Owner™s Equity?

The owner™s equity is the difference between the value of the owner™s
property and any monetary liens or encumbrances against the owner™s
title to the property. If an owner owns a property free and clear, the
owner™s equity equals the value of the property.
Since the owner we are dealing with is in foreclosure, there is a
monetary lien in the form of a mortgage or trust deed against the
owner™s title to the property.The owner™s equity is the value of the prop-
erty minus the mortgage balance minus the back payments minus any
foreclosure expenses that have already accumulated.
In a non-foreclosure situation, if the retail value of the property is
$200,000 and the mortgage balance against the property is $140,000,
the owner™s equity is $60,000.
In a foreclosure situation the value of a property is no longer the re-
tail value. The property may be run-down. The owner does not have the
luxury of a normal marketing time to bring in the highest price. In other
words, the value of the property is lowered automatically in a fore-
closure situation. Let™s say the value of the property is now $185,000 to
The mortgage lien goes up in a foreclosure situation. The missed
payments are added to the remaining balance of the mortgage. If the
owner is behind in their payments $10,000, then the mortgage lien is
now $150,000.
If the lender has formally initiated the foreclosure process, there
are now foreclosure expenses added to the mortgage balance. Now the
owner™s equity could be substantially reduced. For illustration purposes
we will forgo the foreclosure expenses.
Foreclosure Situation Non-Foreclosure Situation
Foreclosure Value: $185,000 Retail Value: $200,000
Mortgage: $150,000 Mortgage: $140,000
Owner™s Equity: $ 35,000 Owner™s Equity: $ 60,000
Buy the Owner™s Equity, Not the Owner™s Property 97

Your Offer

Instead of the owner™s equity being $60,000 in the non-foreclosure situ-
ation, the owner™s equity is $35,000 in the foreclosure situation. The
owner has suffered a $25,000 loss in equity.
Please be clear on what we are saying here. The owner has suffered
the equity loss. With a new owner back in control of the property, who
is not in a foreclosure situation, the value of the property goes back up.
When the value of the property goes back up, the owner™s equity in-
creases dollar for dollar.
You are going to offer the owner $10,000 for their $35,000 equity.
If you keep the property, you are going to have to pay the lender the
$10,000 in back payments to stop the foreclosure. Now you will have
$20,000 in the property. If you have to make repairs and do fix up, you
may have $3,000 to $5,000 more involved.
Then you add in making mortgage payments, property tax pay-
ments, and insurance payments. Resale costs could add another $5,000
to $10,000 or more to your investment. When you add this all up your
total is $30,000 to $35,000!

Your Offer
Cash to Owner $10,000
Cash to Lender $10,000
Repairs and Fix Up $ 5,000
Carrying and Resale Costs $10,000
Total Invested $35,000

This becomes a negotiating tool for you with the owner. Your
point with the owner is that the maximum you can offer them is
$10,000 cash for their equity. By giving the owner $10,000 for their
equity, you will have $35,000 in the property before you make any
We have found that when we show owners these types of fig-
ures, they are much more amenable to accepting our offer. We are not
trying to be mean to them or take advantage of them. We are trying to
help them. But we (you) can™t help them if we (you) can™t make any
money. Otherwise, we (you) will be in a foreclosure situation our-

Making Money

Speaking of making money, let™s look at the numbers. The mortgage bal-
ance is back to $140,000 (actually a little lower because the back pay-
ments reduced the principal, but really not worth mentioning). The
property restored to retail value is now worth $200,000 (or perhaps a
bit more).
If we sell the property to a retail buyer, we will make a $60,000
gross profit minus the $35,000 invested, equaling a $25,000 net profit.
That is a 70 percent return perhaps over a three-month to six-month
time period. That makes the investment worth the risk.
If we flip the contract to a real estate investor, we will have no cash
to the owner, no cash to the lender, no repairs and fix-up costs, and no
carrying and resale costs. Do you think it is possible to flip our contract
for $5,000 to $10,000? What is the percentage return on our invested
money? Did you say infinite?
Making Money
Retail Buyer Wholesale Buyer
Sales Price: $200,000 Flip Fee: $10,000
Mortgage: $140,000 Mortgage: 0
Gross Profit: $ 60,000 Gross Profit: $10,000
Invested Money: $ 35,000 Invested Money: 0
Net Profit: $ 25,000 Net Profit: $10,000

In the next chapter we will show you how to negotiate with the
owner™s lender. These are negotiations with the lender in the pre-
foreclosure time period. Being successful in these negotiations can ben-
efit you and the owner. The bottom line is the bottom line when you ne-
gotiate with the lender. We devote a later chapter (Chapter 17) to
negotiating with the lender after the foreclosure sale takes place.

Negotiating with the Lender
n this chapter we will show you how to negotiate with the owner™s
lender in the pre-foreclosure time period. This may be before or after
you have put an agreement together with the owner to buy the
owner™s equity. If you are looking for the information on how to negoti-
ate with the lender after the foreclosure sale, please turn to Chapter 17,
“Buying from the Lender.”
Before we talk about negotiating with the lender, we need to give
you some information on how real estate title to property and real estate
financing of property interact. Once you have this information, you will
better understand where real estate lenders are coming from and how
best to negotiate with them.

Real Estate Paperwork
Understanding the paperwork of real estate is critical to your success as
a real estate investor. In this chapter we are going to talk about the
paperwork involved in the owner™s title and lender financing. In the last
chapter of the book we will talk about the paperwork necessary for you
as a real estate investor to make and close deals.
There are three aspects to the title and lending paperwork. First,there
is the paperwork involved on the title side. Second, there is the paperwork
involved on the financing side. Finally, there is the paperwork that bridges
the title and financing sides and that is known as the security side.


Title Side

On the title side there are two types of deeds used throughout the coun-
try to convey the property title from one owner to the next: grant deeds
and warranty deeds. To find out which deed is used in your state please
see Appendix A.

Grant Deed A grant deed is a deed using the word grant in the clause
that awards ownership. This written document is used by the grantor
(seller) to transfer the title of their property to the grantee (buyer).
Grant deeds have two implied warranties. One is that the grantor has not
previously transferred the title. The other is that the title is free from en-
cumbrances that are not visible to the grantee. This deed also transfers
title acquired after delivery of the deed from the seller to the buyer.

Warranty Deed A warranty deed is a deed in which the grantor (usu-
ally the seller) guarantees the title to the property to be in the condition
indicated in the deed. The grantor agrees to protect the grantee (usually
the buyer) against all claims to the property made by anyone other than
holders of recorded liens (matters of record). A warranty deed gives a
warranty to the title holder.

Grant and Warranty Deeds

Grant Deed Warranty Deed

Grantor Grantee Grantor Grantee
(Seller (Buyer) (Seller (Buyer)
or or
Owner) Owner)

Financing Side

The paperwork involved on the financing side is the evidence of the
debt. The two types of paperwork that are used as evidence of the debt
are the promissory note and the mortgage note. This paperwork is used
by lenders and borrowers to create a written agreement about the terms
and conditions for the real estate loan.
Real Estate Paperwork 103

Promissory Note A promissory note is the written contract a bor-
rower signs promising to pay back a definite amount of money by a def-
inite future date to a lender. A promissory note has four basic elements:
the amount of the note, the interest rate of the note, the term of the
note, and the payments, if any, on the note. A promissory note that has
no payments till the due date of the note is called a straight note.

Mortgage Note A mortgage note is a written contract signed by a
borrower in which the borrower agrees to pay back a lender the amount
of money the lender loaned the borrower. Similar to a promissory note,
a mortgage note specifies the amount of the note, the interest rate of the
note, the term of the note, and the payments on the note.

Promissory and Mortgage Notes

Promissory Note Mortgage Note

Borrower Lender Borrower Lender
(Maker of (Holder of (Maker of (Holder of
the Note) the Note) the Note) the Note)

Security Side

The paperwork involved on the security side includes trust deeds and
mortgages. They are regarded as security devices for the promissory
notes and mortgage notes, respectively. Another way to say this is that
the trust deed and mortgages are the collateral for the lender in the
event a borrower defaults on the loan.
They become liens against the property title when they are offi-
cially recorded at the county recorder™s office in the county in which the
property that is the security or collateral for the lien is located. To find
out which security device is used in your state, please see Appendix B.

Trust Deed A trust deed is a document, used as a security device for a
loan on a property, by which the owner transfers bare (naked) legal title
with the power of sale to a trustee. This transfer is in effect until the
owner totally pays off the loan.

There are three parties to a trust deed: the trustor, the trustee, and
the beneficiary. The trustor is the owner/borrower who transfers the
bare legal title with a power of sale to the trustee.The trustee is a person
who holds the bare legal title to a property without being the actual
owner of the property. The trustee has the power of sale for the lender™s
benefit. The beneficiary is the lender of money on a property used in a
trust deed type of loan.

Trust Deed

1. Trustor 2. Trustee
(Borrower) (Power of Sale)

3. Beneficiary

Mortgage Contract A mortgage contract is a document, used as a se-
curity device for a loan on a property, by which the owner/borrower
promises their property as security or collateral without giving up pos-
session of or title to the property.
There are two parties to a mortgage contract. These two parties are
the mortgagor and the mortgagee. The mortgagor is the owner/
borrower who uses a mortgage contract to borrow money. The mort-
gagee is the lender of money on a property used in a mortgage contract
type of loan.

Mortgage Contract

1. Mortgagor 2. Mortgagee
(Borrower) (Lender)

What It All Means

Foreclosure is possible because of the paperwork of real estate. The rela-
tionship of the title paperwork, the financing paperwork, and the secu-
rity paperwork protects lenders when they loan money to a borrower.
The security paperwork”trust deeds and mortgages”is the
bridge between the ownership, or title, side and the finance side. The
Negotiating before You Put the Agreement Together 105

promissory notes and mortgage notes create the security devices that
become liens against the title to the property.
Once you understand the paperwork of real estate, you will be able
to negotiate on an equal footing with lenders. All this paperwork comes
down to contracts. All contracts come down to this: What does the
paperwork say? When you understand what the paperwork says, then
you can control what happens to property. See if this next illustration
helps clarify the paperwork relationships.

The Paperwork

Title Security Devices Finance

(The Bridge)

Grant Deed or Trust Deed ------------------- Promissory Note

Warranty Deed Trustor / Trustee

Grantor / Grantee Beneficiary

(Seller) / (Buyer) (Lender)

Mortgage --------------------- Mortgage Note

Mortgagor / Mortgagee

(Borrower) / (Lender)

Negotiating before You Put the Agreement Together
We suggest negotiating with the lender before you have put any agree-
ment together with the owner. That way, you know how the lender is
going to behave. This will eliminate any nasty surprises from the lender
down the road. You will need the owner™s permission to speak with
their lender.

While we recommend that you dispose of properties quickly, espe-
cially foreclosures, you may have to hold on to a property longer than
you planned. One of the most important areas to negotiate is how the
lender is going to respond if you buy the owner™s equity and want to
take over the existing loan. Most real estate loans have a due-on-sale
clause and/or a prepayment penalty.
If the lender wants to play hardball, foreclosure proceedings can
begin against you if you don™t agree with what the lender wants to do
with the loan vis-à-vis interest rates, assumption fees, payment amounts,
or prepayment penalties. In this section we are going to give you an
overview of the due-on-sale clause. We will also show you the difference
between an assumable loan and a subject-to loan. And what is a prepay-
ment penalty, anyway?

Due-on-Sale Clause

A due-on-sale clause is a type of acceleration clause in a promissory note,
mortgage note, trust deed, or mortgage contract that gives a lender the
right to demand all sums owed to be paid immediately if the owner
transfers title to the property.
The legality of the due-on-sale clause was argued all the way to the
U.S. Supreme Court in the 1980s. To unify all the states under one legal
interpretation, Congress passed the Garn-St. Germain lending bill in
1986. Unfortunately, the due-on-sale clause is legal. It is enforced by the

Assumable Loan An assumable loan is an existing promissory note or
mortgage note secured by a trust deed or mortgage contract, respec-
tively, that is kept at the same interest rate and terms as when the origi-
nal borrower financed the property.
When you assume a loan, you become primarily liable for the pay-
ments and any deficiency judgment arising from a loan default. The
owner/borrower becomes secondarily liable for the payments and any
deficiency judgment.
Remember, a deficiency judgment is a court decision that makes
an individual personally liable for the payoff of a remaining amount
due because less than the full amount was obtained by foreclosure on
the property.
Negotiating before You Put the Agreement Together 107

Lenders typically charge an assumption fee for you to assume a
loan.They also want you to qualify for the loan as if you were originating
a new loan rather than assuming an existing loan.

Subject-To Loan A subject-to loan is an existing loan for which the
buyer agrees to take over responsibility for payments under the same
terms and conditions as existed when the original borrower financed
the property. However, the original borrower remains primarily respon-
sible for any deficiency judgment in the event of a loan default.
The name subject-to loan comes from the fact that the buyer takes
over the existing loan subject to the same terms and conditions. The in-
terest rate is the same. The monthly payments are the same. Everything
about the loan stays the same. There is no lender approval required for
you to take over a loan subject-to as there is when you assume a loan.
We say it this way:When you assume a loan, you are entering into a
formal agreement with the lender. When you take over a loan subject-to,
there is no formal agreement with the lender.
Subject-to loans do not have a due-on-sale clause in their paper-
work. Therefore, the lender cannot threaten you with calling the loan
“due-on-sale” when you have made a deal with the owner to transfer
title. Pre-1988 VA-guaranteed loans and pre-1986 FHA-insured loans are
subject-to loans. Also, many privately held owner financing loans may be
subject-to loans.

Prepayment Penalty

A prepayment penalty is a fine imposed on a borrower by a lender for
early payoff of a loan or any early payoff of a substantial part of the loan.
To find out if there is a prepayment penalty on a loan, as with the due-on-
sale clause, check the loan documents. Most prepayment penalties lapse
once the loan is on the books for five years.
The amount of the prepayment penalty is usually stated as a certain
number of months™ interest in addition to the amount remaining on the
loan as of the payoff date. Prepayment penalties can be six months™ in-
terest or more. This can be quite a substantial amount.
What is the prepayment penalty on a loan if the remaining loan bal-
ance is $200,000, the annual interest rate is 7 percent, and the prepay-
ment penalty is six months™ interest?

Prepayment Penalty
Loan Balance $200,000
Interest Rate 7%
Annual Interest $ 14,000
6 Months™ Interest $ 7,000

A lender cannot legally enforce receiving a prepayment penalty as a
result of a foreclosure sale. The problem for you as a real estate investor
is that the prohibition on the lender receiving a prepayment penalty as a
result of a foreclosure sale is lifted if you buy the owner™s equity in pre-

Whipsaw Effect A lender can have an owner/borrower or, in this
case, you, an investor, caught between the due-on-sale clause and the pre-
payment penalty. As you attempt to help owners out of a foreclosure sit-
uation, we have suggested you buy their equity.You may encounter what
we call the whipsaw effect with the lender.
If you try to take over the owner™s existing loan subject-to and it is
not a subject-to loan, the lender can call the loan all due and payable
using the due-on-sale clause. If you tell the lender you are going to pay
off the loan, and the loan is less than five years old and stipulates a pre-
payment penalty, you may get stuck paying the prepayment penalty!

Negotiating after You Put the Agreement Together
You may prefer negotiating with the lender after you have put an agree-
ment together with the owner. Some investors find it a waste of time to
negotiate with the lender before they have put an agreement together
with the owner. After they have gotten their ducks lined up with the
lender, they have found that when they go back to the owner, they can-
not reach an agreement to buy the owner™s equity.

Talking to the Lender

The earlier in the foreclosure process the lender is contacted, the better
it is for the borrower. Sometimes a borrower will call the lender and say,
“I haven™t missed a payment yet, but I am afraid I am about to.” Lenders
Brain Trust 109

agree that they want to know about a borrower™s financial distress well
ahead of the borrower missing that first loan payment.
As far as the lender is concerned, this is the perfect time for the
owner in distress to call them. A spokeswoman for Fannie Mae puts it
this way:“Don™t hide from your lender. If you contact your loan servicer,
most of the time you will stay in your home.”We will have more on Fan-
nie Mae in Chapter 11.
After you receive an owner™s permission to talk to his or her lender,
we suggest the following approach. Call the lender and identify yourself
as a real estate investor who is working with the owner. Find out from
the lender exactly where the owner is in the foreclosure process.
It has been our experience that half the time, some type of loan
work-out plan is put together. The other half of the time, when a loan
work-out plan is not put together, is where you have your opportunity to
make Quick Cash in foreclosures.
You want to know two things from the lender: How much time will
you have to flip the property? and How much money will it cost to delay
the foreclosure sale?

Brain Trust
We want to give you a Brain Trust idea to keep in the back of your mind
when you are negotiating with lenders. Ask them if they would consider
selling the promissory or mortgage note to you. Of course, you would
want to buy it for a substantial discount from the remaining balance on
the note. After all, the note may be headed to foreclosure if it is not al-
ready in default.
If you do wind up buying the note from the lender, you now have
two options.You can work out a deal with the owner for the equity, as be-
fore. Or you can proceed with the foreclosure as the lender. Just some-
thing to think about. If you want more on this, e-mail us at thetrustee@
In the next chapter we will get into FHA and VA foreclosures. In
fact, the next chapter begins the first of three chapters on dealing with
one or another entity of the federal government. The government wants
to sell you its foreclosures. They are not good at being in the real estate
ownership business.

FHA and VA Foreclosures
n this chapter we will give you information about Federal Housing
Administration (FHA) and Veterans Administration (VA) foreclosures.
Either one of these areas may be a niche that some of you will find
comfortable to make Quick Cash in foreclosures. Remember, the
number-one goal for both FHA and VA is to do a loan work-out plan with
the borrower.
Foreclosure is their last resort. Once the FHA or VA forecloses, the
government is in the real estate business. FHA and VA REOs (real
estate“owned properties) have been the inventory that has made many
real estate investors a lot of money.
Just remember that both the FHA and the VA are government bu-
reaucracies. The rules can change midstream. But once you develop a re-
lationship with someone on the inside, that relationship can be worth its
weight in gold. Be patient if you decide to participate with FHA or VA

The FHA is the mortgage insurance branch of the U.S. Department of
Housing and Urban Development (HUD). Most people in the real estate
arena talk about FHA loans rather than HUD loans. Technically, FHA
does not make mortgage loans. It provides mortgage insurance to real


estate lenders who comply with FHA mortgage insurance loan require-
These loans are made at way above the lender-preferred 80 percent
loan-to-value ratio. There are FHA loan programs that require as little as a
3 percent down payment on the part of the borrower.The lender is mak-
ing as much as a 97 percent loan-to-value ratio loan. Talk about the
lender wanting some mortgage insurance protection! Essentially, the
FHA is the government version of private mortgage insurance (PMI).
Let™s look at some numbers.

FHA-Insured Loan
Purchase Price $100,000
Down Payment $ 3,000
Mortgage Amount $ 97,000

FHA Borrower Counseling
Because of the amount of exposure the FHA has when it insures real es-
tate loans, it has developed an extensive program to counsel borrowers
who are on the verge of defaulting. We present some of this FHA coun-
seling information here, in a question-and-answer format.
We have two purposes in mind. The first is for you to understand
how the FHA thinks and operates. It wants to prevent a foreclosure from
occurring. Second, we want you to see how the FHA presents its version
of foreclosure options. You may glean some valuable information for
your own foreclosure options presentation even if you are not dealing
with an FHA owner.

Q. What happens when I miss my mortgage payments?

Foreclosure may occur. This is the legal means your lender can use to re-
possess (take over) your home. When this happens, you must move out
of your house. If your property is worth less than the total amount you
owe on your mortgage loan, a deficiency judgment could be pursued. If
that happens, you may not only lose your home, but you also would owe
HUD an additional amount.
FHA Borrower Counseling 115

Q. What should I do?

1. Do not ignore the letters from your lender. If you are having
problems making your payments, call or write to your lender™s
loss mitigation department without delay. Explain your situa-
tion. Be prepared to provide them with financial information,
such as your monthly income and expenses. Without this in-
formation, they may not be able to help.
2. Stay in your home for now. You may not qualify for assistance
if you abandon your property.
3. Contact a HUD-approved housing counseling agency. These
agencies are valuable resources. They frequently have infor-
mation on services and programs offered by government
agencies as well as on private and community organizations
that can help you. These services are usually free of charge.

Q. What are my alternatives?

You may be considered for the following.

Special Forbearance Your lender may be able to arrange a repay-
ment plan based on your financial situation and may even provide for a
temporary reduction or suspension of your payments. You may qualify
for this if you have recently experienced a reduction in income or an in-
crease in living expenses.You must furnish information to your lender to
show that you would be able to meet the requirements of the new pay-
ment plan.

Mortgage Modification You may be able to refinance the debt
and/or extend the term of your mortgage loan. This may help you catch
up by reducing the monthly payments to a more affordable level. You
may qualify if you have recovered from a financial problem and can af-
ford the new payment amount.

Partial Claim Your lender may be able to work with you to obtain a
one-time payment from the FHA insurance fund to bring your mortgage
current. You may qualify if the following applies:

1. Your loan is at least 4 months delinquent but no more than 12
months delinquent.
2. You are able to begin making full mortgage payments.

When your lender files a partial claim, HUD will pay your lender
the amount necessary to bring your mortgage current.You must execute
a promissory note, and a lien will be placed on your property until the
promissory note is paid in full.The promissory note is interest-free and is
due when you pay off the first mortgage or when you sell the property.

Pre-Foreclosure Sale A pre-foreclosure sale will allow you to avoid
foreclosure by selling your property for an amount less than the amount
necessary to pay off your mortgage loan.You may qualify if the following

1. The loan is at least two months delinquent.
2. You are able to sell your house within three to five months.
3. A new appraisal (that your lender will obtain) shows that the
value of your home meets HUD program guidelines.

Deed in Lieu of Foreclosure As a last resort, you may be able to vol-
untarily give back your property to the lender. This won™t save your
house, but it is not as damaging to your credit rating as a foreclosure.You
can qualify if the following applies:

1. You are in default and don™t qualify for any of the other op-
2. Your attempts at selling the house before foreclosure were un-
3. You don™t have another FHA mortgage in default.

Q. Should I be aware of anything else?

Yes. Beware of scams! Solutions that sound too simple or too good to be
true usually are. If you™re selling your home without professional guid-
ance, beware of buyers who try to rush you through the process. Unfor-
tunately, there are people who may try to take advantage of your
FHA Borrower Counseling 117

financial difficulty. Be especially alert to equity skimming and phony
counseling agencies.

Equity Skimming In this type of scam a buyer approaches you, offer-
ing to get you out of financial trouble by promising to pay off your mort-
gage or give you a sum of money when the property is sold. The buyer
may suggest that you move out quickly and deed the property to him or
her. The buyer collects rent for a time, does not make any mortgage pay-
ments, and allows the lender to foreclose. Remember, signing over your
deed to someone else does not necessarily relieve you of your obligation
on your loan.

Phony Counseling Agencies Some groups calling themselves coun-
seling agencies may approach you and offer to perform certain services
for a fee. These could well be services you could do for yourself for free,
such as negotiating a new payment plan with your lender or pursuing a
pre-foreclosure sale.

Q. Are there any precautions I can take?

Here are several precautions that should help you avoid being taken by a
scam artist.

1. Don™t sign any papers you don™t fully understand.
2. Make sure you get all promises in writing.
3. Beware of any contract of sale of loan assumption where you
are not formally released from liability for your mortgage debt.
4. Check with a lawyer of your mortgage company before enter-
ing into any deal involving your home.
5. If you™re selling the house yourself to avoid foreclosure, use
How to Sell Your Home Without a Broker by Bill and Chantal
Carey. (Okay, FHA didn™t say that. We™re just seeing if you are
really paying attention.) Seriously, check to see if there are any
complaints against the prospective buyer. You can contact
your state™s attorney general, the state real estate commission,
or the local district attorney™s consumer fraud unit for this
type of information.

We told you that with government entities, the rules can change mid-
stream. As we were writing this book, the Department of Veterans Affairs
altered the way it has done business for 50 years.
The VA can actually loan mortgage money to military personnel.
This happens in very rural areas where a mortgage lender may not exist.
However, the VA predominantly acts as a guarantor of mortgage loans for
veterans purchasing homes. It acts as government mortgage insurance
for real estate lenders.
The veteran can buy a home with no money down and obtain a
mortgage for 100 percent of the purchase price. Talk about the risk to
the lender!
VA-Guaranteed Loan
Purchase Price $100,000
Down Payment 0
Mortgage Amount $100,000

The Department of Veterans Affairs acquires properties as a result
of foreclosures on VA-guaranteed loans.The VA has awarded a contract to
Ocwen Federal Bank FSB in Orlando, Florida, to manage, market, and sell


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