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these properties. (This is the change.) At this time all VA REO properties
have been removed from the market and are accessible only through
Ocwen Bank.


Buying VA REOs

Ocwen Federal Bank began listing VA REO properties in early 2004. The
properties are listed by local listing agents through local multiple listing
services (MLS). A list of properties for sale may also be obtained from
Ocwen™s Web site at www.ocwen.com/.
If you are interested in buying one of the VA REO properties once it
is listed for sale by Ocwen Federal Bank FSB, you should contact a local
real estate broker to see the property and make an offer to purchase that
property through that real estate broker. No longer will the VA Office of
Jurisdiction manage these properties.
VA 119



Our Experience Our experience buying VA REOs or, as we call them,
VA repos, has been positive. At the foreclosure sale the VA tries to get the
highest amount possible for these properties. However, because of the
100 percent financing, very often the VA cannot get anyone to outbid its
credit bid at the foreclosure sale.
Let™s say the VA guarantees a $100,000 loan. Two years go by, and
the owner gets into financial trouble. The VA provides counseling but
winds up foreclosing. The property is worth $105,000. The owner is
$5,000 behind in the six months of payments. The VA bids $105,000 at
the foreclosure. No one is going to bid because the property and the bid
are the same amount.
VA Foreclosure
Property Value $105,000
Credit Bid $105,000
Profit Potential 0

Once the VA has the title to the property, it is going to make deals.
Remember, it has guaranteed repayment of the loan to the actual lender.
The VA is out $105,000. Any deficit between what it paid the lender and
for what it will eventually sell the property for as a repo will be charged
to the veteran-borrower.
We bought this property for $77,850. We flipped this property to
another real estate investor for $84,000. We made $6,250. The VA went
after the borrower for a $27,250 deficiency. Rather than going to court
to get a judgment against the veteran, the VA will withhold benefits if it
is not paid back.
VA Repo
Flip Price $84,000
VA Price $77,850
Profit $ 6,250

In the next chapter we will give you the information to work with
Fannie Mae, Freddie Mac, and FDIC foreclosures. These are properties
that are either in the pre-foreclosure time period or are REOs. For some
of you this will be your foreclosure investing niche.
11
CHAPTER




Fannie Mae, Freddie Mac, and
FDIC Foreclosures
B
efore we get into the meat of this chapter, we think it is appropri-
ate to give you some background information on the origin of Fan-
nie Mae. Fannie Mae and Freddie Mac have been in the news lately
with regard to some of their business practices and risk taking. Appar-
ently, they are making investments that leave them open to substantial
losses if interest rates go up. We won™t even touch the accounting con-
versation!
Suffice it to say that without Fannie Mae and Freddie Mac, real es-
tate lending as we know it would not be possible. You may decide to
make an investment in Fannie Mae, itself, given that it is a publicly traded
company on the New York Stock Exchange.



Secondary Mortgage Market
The secondary mortgage market was created in the 1930s in response to
the failure of banks and thrifts during the Great Depression. People
would put their money in a bank and receive a passbook in return. The
bank would then loan the money from all the passbooks to people in the
community to finance things like real estate purchases.
When the depression hit, people panicked and went to the banks
to get their money out. Unfortunately, the banks were holding mortgage
paper and did not have the liquidity to give all the passbook holders
their cash back. That caused many, many banks to fail.

123
FANNIE MAE, FREDDIE MAC, AND FDIC FORECLOSURES
124



Fannie Mae (the Federal National Mortgage Association) was cre-
ated to keep liquidity in the banking system. People would still put their
money in the banks. The banks would still loan that money out to con-
sumers in the primary mortgage market so they could finance their real
estate purchases. The banks would receive mortgage paper from the
borrowers in return for the loan proceeds.
Now the banks could turn around and sell the mortgage paper to
Fannie Mae for cash. Fannie Mae then packages millions of dollars of
mortgage paper and creates a pool of securities that are backed by the
mortgages. Fannie Mae then sells these mortgage-backed securities to
large institutional investors to get its cash back. Then the cycle repeats.


The Primary and Secondary Mortgage Market

˜˜˜˜˜˜˜˜˜˜˜ Money ˜˜˜˜˜˜˜˜˜˜˜ Money

Primary Secondary

Borrowers ˜˜˜˜˜˜ Lenders ˜˜˜˜˜˜ Fannie Mae ˜˜˜˜˜˜ Investors

Market Market

Paper ˜˜˜˜˜˜˜˜˜˜˜˜˜ Paper ˜˜˜˜˜˜˜˜˜˜˜˜˜


In chapter 6 we told you we would present more information on
the Fannie Mae pre-foreclosure sale program. We present it here with
a caveat. Just as VA REO rules changed, as we pointed out in the last
chapter, Fannie Mae may pull the plug or change the rules on the pre-
foreclosure sale program. If Fannie Mae foreclosures are going to be an
area you invest in, as with any investment choice, you have to keep your-
self informed.
We include in this chapter information on Freddie Mac (Fannie
Mae™s little brother) and Federal Deposit Insurance Corporation (FDIC)
foreclosures. The FDIC is the parent of the Resolution Trust Corporation
(RTC), which handled the savings-and-loan debacle of the 1990s. Every
one of these entities wants to be a lender for and not an owner of real es-
tate. They want to make a deal with you. Be patient. If you don™t like the
numbers, move on to another deal.
The Fannie Mae Pre-Foreclosure Sale Program 125



The Fannie Mae Pre-Foreclosure Sale Program
Fannie Mae is willing to pursue a pre-foreclosure sale at any time prior to
the actual foreclosure. It will do this if Fannie Mae™s acquisition of the
property is the most likely situation at the foreclosure sale. Fannie Mae
will proceed with the pre-foreclosure sale if the proceeds of the sale,along
with the mortgage insurance settlement, will make them whole or result
in a loss less than the one incurred if the property is acquired as an REO.


The Listing Broker™s Responsibilities

Once the borrower/owner has worked with the servicing lender and
Fannie Mae to determine that he or she is eligible for a pre-foreclosure
sale, the borrower/owner will select a listing broker and execute a list-
ing agreement. All parts of the listing agreement are between the broker
and the borrower/owner and are not negotiated by the servicing lender
or Fannie Mae.
Fannie Mae encourages borrowers to enter into a standard listing
agreement that provides for payment of prevailing commissions; how-
ever, it cannot dictate what that agreement will be. Also, it cannot direct
borrower/owners to use a certain real estate broker, although a list of
brokers will be provided by Fannie Mae.
Fannie Mae recommends that the listing broker be prepared to dis-
tribute the submission package (detailed in the next section) and
earnest money agreement to all involved institutions concurrently.These
include the servicing lender, the mortgage insurance company (where
applicable), and Fannie Mae.
The submission of the information to all institutions at one time
will assist in expediting the acceptance and approval process. However,
the listing agent™s direct contact must always be with the borrower and
the servicing lender. The listing broker should provide any assistance
necessary to the borrower/owner in the preparation of the complete
submission package.


Submission Package

The submission package should include the borrower™s letter of hard-
ship, current financial statement, current pay stub, and the prior year™s
FANNIE MAE, FREDDIE MAC, AND FDIC FORECLOSURES
126



tax return. If the borrower is self-employed, Fannie Mae will need a copy
of a year-to-date profit-and-loss statement, all schedules to the tax return,
and a copy of any partnership or corporate tax returns, if applicable.
When Fannie Mae receives the complete submission package, it
will coordinate with the servicing lender its recommendation and all
pertinent loan detail information. Fannie Mae will also coordinate with
the mortgage insurance company to determine any pre-claim settlement
agreement and negotiate the mitigation of its loss.
Once all the information has been received, Fannie Mae will coor-
dinate with all parties through the servicing lender any requirements for
the borrower to participate in the reduction of any potential loss to Fan-
nie Mae.


Earnest Money Agreements

Any earnest money agreements requiring repairs or maintenance to the
property that the borrower/owner cannot financially afford to complete
must be explained. Two written bids must be submitted with the agree-
ment to Fannie Mae for their inclusion in the short payoff. (A short pay-
off is the same as a cram down.)
When Fannie Mae has received an agreement on the proposed pre-
foreclosure sale, it will provide in writing to the servicing lender its ap-
proval and authorization for a short payoff. It should be pointed out that
Fannie Mae does not actively negotiate or sign any of the purchase agree-
ments. Fannie Mae can only agree to the amount of the loss it will ap-
prove. Its intention is to make it as easy as possible for the buying public
(that means real estate investors as well as home buyers) and real estate
professionals to deal with Fannie Mae.


Questions Most Often Asked by Listing Brokers

If I have been requested to list a home that is in foreclosure, to
whom do I present the offer? The initial offer on the property must
be made to the borrower, who is the owner of the property. The bor-
rower is the seller and must negotiate as such. The earnest money agree-
ment must then be presented, in copy form, to the servicing lender,
Fannie Mae, and the mortgage insurer (if applicable), concurrently.
The Fannie Mae Pre-Foreclosure Sale Program 127



Do I need to submit anything else with the earnest money agree-
ment? No. There are additional items that will be requested from the
seller of the property, which could be facilitated by your assistance. Co-
ordinating the distribution of these items can only help expedite the
decision-making process. These items include the borrower™s financial
statements, tax returns to include all schedules, partnership, and corpo-
ration returns, if applicable, hardship letter and supportive documenta-
tion, copies of the listing agreement, and any change addendums.

What other information does Fannie Mae need? Fannie Mae will
request copies of the current payoff statement, collection records, pay-
ment history, mortgage insurance information, and the origination docu-
ments from the servicing lender. This would also include the original
mortgage application package and appraisal.
The servicing lender is also responsible for ordering two indepen-
dent brokers™ price opinions. The set must be ordered from two separate
sources that are not involved in the listing or sale of the property.

Who will be my contact person during the offer review period?
All contact must be made with the servicing lender. Fannie Mae™s deci-
sion and any loss mitigation will be done through this contact person
only. The reason is simple. It is counterproductive for all parties if the
listing and selling agents and the seller and buyer are all calling the
lender, the mortgage insurer, and Fannie Mae for the current status of the
loss review.
If the pre-foreclosure sale submission is distributed in its complete
form to all parties concurrently, you can expect a response within two to
three weeks. Please allow for this amount of time in your agreements.

Is there a preset limit of the closing costs or discount points Fan-
nie Mae will pay? No. Conventional seller percentage closing costs
will be considered in the loss review.

How do I handle repairs that the purchaser wants? All repairs as
listed in the earnest money agreement must be presented with two sep-
arate specific bids for the items in need of repair. If necessary, these
items may be presented and negotiated with the servicing lender and
the homeowner™s insurance company.
FANNIE MAE, FREDDIE MAC, AND FDIC FORECLOSURES
128



Will Fannie Mae consider a sale on an investment property? All
pre-foreclosure offers will be taken under consideration. Whether Fan-
nie Mae will participate in the acceptance of the short payoff will be
based on the review of the circumstances in the request. Other remedies
may be available that have not been reviewed or explored with the bor-
rower. Fannie Mae™s staff can give you more information on remedies in-
volving investment properties.

On what factors does Fannie Mae base its loss evaluation? Sev-
eral items are taken into consideration regarding the acceptance of a
loss. The original appraisal and two current brokers™ price opinions are a
part of the evaluation that is done. As mentioned previously, the addi-
tional information that is evaluated would be the original mortgage ap-
plication and the borrower™s current financial situation.

Is it worth my time and effort if the property is scheduled for fore-
closure within the next few weeks, months, and so on? Yes, it is
possible to postpone a foreclosure sale that is scheduled to be conducted
if there is an active listing and offers are pending. It is worth all efforts to
give borrowers with qualifying hardships all the assistance possible.



Fannie Mae Home Saver Solutions Program

Another loan work-out option used by Fannie Mae is the Home Saver So-
lutions Program. Since starting this program in 1997, Fannie Mae has
spent more than $25 million in work-out incentive fees to lenders from
whom it has purchased mortgages.
Fannie Mae pays its lender service providers $500 each time they
arrange a deed in lieu of foreclosure. They pay $1,000 each time they
arrange a pre-foreclosure sale! Are some of you getting any ideas on how
to make some Quick Cash here?
Both of these solutions require the homeowners to move out of the
property, but their credit rating will not reflect a foreclosure. Fannie Mae
also recommends that its lenders use two other approaches. Both allow
the homeowners to keep their property. The first is a repayment plan.
The second is loan modification.
Repayment plans generally work when the homeowner is just one
month behind. The missed payment is added in increments into future
regular monthly mortgage payments.
FDIC 129



Loan modifications can be arranged for borrowers who can™t afford
repayment plans.The loan servicer changes the terms of the loan to make
it affordable. Variations include lowering the interest rate. Sometimes
past-due amounts will be rolled into an extension of the time of the loan.
Fannie Mae has shown a substantial increase in loan work-outs since
the program began. The percentage of loans worked out has grown from
35 percent in 1997 to 50 percent in 2003. In real numbers this translates
into 26,775 loans worked out; 26,788 properties were foreclosed.



Freddie Mac
The formal name of Freddie Mac is the Federal Home Loan Mortgage
Corporation. Freddie Mac is a stockholder-owned corporation chartered
by Congress in 1970 to keep money flowing to mortgage lenders in sup-
port of homeownership and rental housing.
Freddie Mac purchases single-family and multifamily residential
mortgages and mortgage-related securities, which it finances primarily by
issuing mortgage pass through securities and debt instruments in the cap-
ital markets. By doing so, Freddie Mac ultimately helps homeowners and
renters get lower housing costs and better access to home financing.


Properties for Sale

HomeSteps is the second-largest owner/seller of single-family residential
real estate in the United States (Fannie Mae is the largest). It is a service
brand of Freddie Mac and a free-of-charge service available to home buy-
ers and real estate professionals. HomeSteps handles Freddie Mac™s REOs.
When you visit Freddie Mac™s Web site (www.freddiemac.com/),
you can search the database of homes for sale. Freddie Mac has special fi-
nancing programs.You can also search the database for a local real estate
agent.



FDIC
The FDIC insures the accounts of customers of banks up to $100,000. It
is part of the federal government. If a bank becomes insolvent, the FDIC
FANNIE MAE, FREDDIE MAC, AND FDIC FORECLOSURES
130



takes over the bank and any of its assets, including the bank™s REOs. The
FDIC lists these properties on its Web site, www.fdic.gov/.
The FDIC is another resource for making Quick Cash in fore-
closures. The FDIC also has service centers called field operations
branches in major cities.They have real people that will answer questions
concerning FDIC property sales that are not answered on its Web site.
We include here some of the questions and answers from the FDIC
Web site to give you a feel for how it does business.

How should I use your listing of properties? This listing of real es-
tate is intended to provide interested parties with preliminary informa-
tion only.This list is not a solicitation of offers and does not constitute an
offer to sell. The information is provided for the purpose of inviting fur-
ther inquiry and has been obtained from sources we believe to be reli-
able.

How do I find out more information relating to these properties?
Each property will have a contact name and phone number. The contact
name will either be an individual from an FDIC office or an individual as-
sociated with the sales initiative (e.g., Auction Company, Real Estate Bro-
ker). If a property information package (PIP) has been prepared on a
particular property, it can be obtained from this individual.

How often is this listing of properties updated? It is the FDIC™s
intent to update the listing of properties by close of business each Mon-
day.Therefore, with the volatile nature of the real estate business, it is im-
portant to find out if the property is still available since the last update.

What is the condition of properties sold by the FDIC? All prop-
erties are sold in an as is condition. The FDIC makes no guarantee, war-
ranty, or representation, expressed or implied as to the location, quality,
kind, character, size, description, or fitness for any use or purpose, now
or hereafter. (We think this is the best definition of as is condition for
real estate we have ever seen. Leave it to the government to make sure it
cannot be held responsible.)

How is the listed price established? Listed prices are established
by a variety of factors, which may include independent appraisals, bro-
kers™ opinions of value, and current market conditions. All prices are sub-
ject to change without notice.
FDIC 131



Is seller financing available on the properties? Seller financing
may be available to qualified buyers on residential properties with a min-
imum purchase price of $500,000 or those sold as affordable housing
and on all commercial and land properties, regardless of price. Specific
sale terms and conditions can be obtained from the individual assigned
to market the property.

Once an offer is submitted on a property, how is my offer evalu-
ated? A number of criteria are considered when evaluating offers
from prospective purchasers. These include, but are not limited to, net
funds received after deducting brokerage commissions and sales ex-
penses, and payment terms considered in light of the applicant™s credit-
worthiness and ability to perform.The FDIC reserves the right to accept,
reject, or counter any submitted offer. While reviewing such offers, the
FDIC further reserves the right to continue its sales efforts, including re-
sponding to any inquires or offers to purchase the property.

How can I have my name added to the FDIC real estate mailing
list? The FDIC does not maintain a mailing list of those interested in
purchasing real estate as the corporation sees the Internet as the most
efficient method to communicate its current property listings in a timely
fashion. Auctions and Sealed Bid Sales announcements will both appear
on the Internet, under the National Asset Sales Calendar“Real Estate
Sales, and be advertised in local and regional newspapers.
In the next chapter we will teach you the intricacies of IRS fore-
closures. This is a fairly tricky area. You must know about the IRS even if
you are not buying foreclosures from them. The IRS has special rights
and privileges with regard to foreclosures in general.
If the IRS has a tax lien on a property, you need to find out about it
and deal with it. Otherwise, you may be in for a nasty surprise down the
road long after you think you have clear title to that foreclosure you
picked up four months ago on the courthouse steps.
12
CHAPTER




IRS Foreclosures
T
he IRS is the biggest business in the world. It is in the cash-flow
business. It prefers dealing with liquid assets”money. When it
has to take hard assets like real estate from taxpayers in lieu of
money for unpaid taxes, it becomes similar to a lender. The IRS does not
want to own property. It wants to dispose of property and get the cash.
This creates foreclosure investment opportunities for you. We want
you to pay particular attention to the nature of the title the IRS will pro-
vide, the form of payment it will accept, and the redemption rights of the
taxpayer. Also, notice how the IRS has the right to void the foreclosure
sale when it is the junior lien holder against the owner˜s title. The IRS
will do this if it thinks it can resell the property for a higher amount of
money.
Cold, hard cash is the name of the game with IRS foreclosures. The
IRS is not like a lender who forecloses on a loan and may be willing to fi-
nance your acquisition of the foreclosed property. We say it this way:
“You have to bring the dough; otherwise don™t go.”
To be fair, as you will see in the actual IRS examples we will share,
it will accept a 20 percent down payment within two hours of you mak-
ing a winning bid. You just have to come up with the balance within 30
days, or it will keep your deposit! And if the IRS doesn™t think it is getting
enough money, even if you are the winning bidder, it can void the sale.




135
IRS FORECLOSURES
136



IRS Tax Liens
An IRS tax lien gets recorded against all of the taxpayer™s property. It can
be a junior lien or a senior lien in relationship to other liens against the
property. The tax lien travels with the taxpayer and attaches to any new
property he or she acquires, whether it is real or personal property.
Just remember a famous musician™s IRS problems from about 10
years ago. He took his favorite guitar to one of his houses in Hawaii and
hid it in the jungle in back of the property so the IRS wouldn™t seize it!


Junior Lien

If the tax lien is a junior lien to the foreclosure, the IRS must be notified
by the foreclosing entity. The IRS has the right to sell the property again
within 120 days of the foreclosure sale to generate additional funds to
pay off the tax lien.
Let™s look at some numbers. Let™s say the taxpayer™s lender is fore-
closing on a $140,000 first mortgage. The taxpayer is behind in loan pay-
ments in the amount of $10,000. The property has been appraised at
$210,000.

Value and Back Payments
Property Value $210,000
First Mortgage $140,000
Back Payments $ 10,000

In the normal foreclosure scenario at the foreclosure sale the
lender would make a credit bid of $150,000. This is the combination of
the $140,000 first mortgage and the $10,000 in back payments.

Credit Bid
First Mortgage $140,000
Back Payments $ 10,000
Credit Bid $150,000

If you are the winning bidder with a bid of $160,000, you may just
have made some Quick Cash in foreclosures.
IRS Tax Liens 137



Quick Cash
Property Value $210,000
Winning Bid $160,000
Quick Cash Potential $ 50,000

What happens if the IRS records a $20,000 tax lien against the
owner of the property during the foreclosure process? Same scenario as
above, but the lender does not inform the IRS of the foreclosure sale.
The lender holds a senior lien to the IRS lien. Senior liens are liens
that have been recorded against the property title before other liens that
are recorded against the property title. It is not the size of the lien that
makes it senior. It is the earlier recording date that makes it senior. So, in
this case, the IRS has a junior lien.
You do not investigate the title past the lien of the lender who is
foreclosing. You discover it is the senior lien on the property. You make
the $160,000 winning bid. The lender gives you a trustee™s deed trans-
ferring title to the property to you.
What we know about foreclosures is that when a senior lien holder
forecloses, any and all junior liens are extinguished or wiped out. So you
think everything is fine. But when the junior lien is an IRS tax lien, it is
not wiped out.
Sixty days goes by.You are contacted by the IRS as the owner of the
property.
It informs you that it is going to conduct another sale of the prop-
erty.The IRS knows that the property is worth over $200,000. It thinks it
will be able to get some, if not all, of the $20,000 owed to the IRS by the
taxpayer.
The property is worth over $200,000 now because in the 60 days
that you have owned it, you put $6,000 in repairs and fix up into the
property. The IRS conducts another sale. You are welcome to bid again.
The IRS will make a credit bid of $180,000.
You see, the IRS must pay back the investor for the money the in-
vestor paid at the first foreclosure sale. Because you paid $160,000 at the
foreclosure sale, the IRS has to get enough at its sale to pay you plus, it
hopes, get the $20,000 it is owed on the tax lien. As far as your $6,000 in
repairs and fix up is concerned, too bad! The smart thing to do is not to
do any fix up or improvements to the property until the 120 days has
passed.
IRS FORECLOSURES
138



IRS Resale
Investor Payoff $160,000
Tax Lien $ 20,000
IRS Credit Bid $180,000

What happens if someone bids $180,001? The IRS gets $20,000.
You get $160,001. Are you seeing something smart for you to do here?
Bid! Bid at least $186,000. That way you protect your $6,000 in repairs
and fix-up expenses.
If you are so shaken by this whole IRS resale and just want to get
out, you hope someone will bid $186,001.
IRS Resale
Winning Bid $186,001
Tax Lien $ 20,000
Money to You $166,001

Last piece. What if your $186,000 bid was the winning bid? You
would have to pay the IRS $20,000 to have it release the lien from your
property. A hard lesson to learn, but you still may come out with a nice
profit if you can flip the property for over $200,000. Let™s say you can
get $201,000 at a C.Y.A. sale (just think about it for a second).
You would get back the $160,000 you paid at the foreclosure sale
to the lender. You would get back the $20,000 you paid IRS. You would
get back the $6,000 in repairs and fix-up. You would make a $15,000
profit. How many gray hairs did you say you got on this deal?

C.Y.A. Sale
Purchase Price $201,000
Foreclosure Price $160,000
IRS Lien $ 20,000
Repairs and Fix-Up $ 6,000
Profit $ 15,000


Senior Lien

If the tax lien is senior to the foreclosing lender, the buyer at the fore-
closure sale takes title to the property subject to the existing IRS tax
IRS Tax Liens 139



lien. It may be difficult to receive marketable title to the property for re-
sale while the tax lien remains on the property.
Sometimes the buyer of the foreclosure can negotiate with the IRS.
By paying part of the tax lien amount, the IRS may remove the entire
lien. The IRS tax liens cloud the property title, which affects transferabil-
ity of the title. If you can™t transfer title, it makes a property very difficult,
if not impossible, to sell.
We are going to share with you three types of IRS foreclosures. All
three are in the form of public auctions. The first is a public auction con-
ducted by the IRS that looks very similar to a foreclosure auction. The
second is a mail-in bid for public auction, also conducted by the IRS.This
is similar to an FHA or VA bid process. The third is an IRS judicial auction
conducted under the auspices of a U.S. District Court as a civil action.


NOTICE OF PUBLIC AUCTION SALE
Under authority of Internal Revenue Code 6331, the property de-
scribed here has been seized for nonpayment of internal revenue
taxes. The property will be sold at public auction as provided by Inter-
nal Revenue Code 6335 and related regulations.

Date June 15, 2005
Time 10:00 A.M.
Sale Location South end of the courthouse steps

Nature of Title
The right, title, and interest of the taxpayer in and to the property is of-
fered for sale subject to any prior valid outstanding mortgages, en-
cumbrances, or other liens in favor of third parties against the
taxpayer that are superior to the lien of the United States.
All property is offered for sale where is and as is and without re-
course against the United States. No guaranty or condition of any of
the property, or its fitness for any use or purpose. No claim will be con-
sidered for allowance or adjustment or for rescission of the sale based
on failure of the property to conform with any expressed or implied
representation.

Description of Property __________________________________
Property May Be Inspected At _____________________________
IRS FORECLOSURES
140



The Terms of Payment
20% of highest bid due within two hours from auction conclusion and
balance paid in full within 30 days from auction.

Form of Payment
All payment must be by cash, certified, cashier™s or treasurer™s check
drawn on any bank or trust company incorporated under the laws of
the United States. Payment may also be made by any United State
Postal, bank, express or telegraph money order. Make check or
money order payable to the United States Treasury.

Additional Information
If you want additional information about the property and proposed
sale, please contact the office at the address below.

Mary Beth Justice
Property Appraisal & Liquidation Specialist
Address
Phone Fax

Mary Beth Justice is the IRS version of a combination real estate
broker and lender™s REO manager. Let™s take a look at the second IRS
foreclosure. The mail-in bid may be done for properties located in re-
mote locations.


MAIL-IN BID FOR PUBLIC AUCTION SALE
I, the undersigned, bid $__________ on ____________ offered for
sale by public auction on _______. I enclose my payment of $_____,
which is 20% of my bid and authorize the enclosed payment to be ap-
plied against the sale price if I am the successful bidder.
I understand that this mail-in bid must be received at the address
below by ___________________ to be included in the sale, with the
balance due to be paid in full no later than________________. Note:
The form of payment and/or bid must comply with the Terms of Pay-
ment as stated on the Notice of Public Auction Sale.
Bidder™s Name (Print) _____________________________________
Bidder™s Phone Number ___________________________________
Bidder™s Address _________________________________________
______________________________________________________
IRS Tax Liens 141



By submitting this mail-in bid, I understand that:
This is a mail-in bid for a public auction sale, and it is not a sealed bid
sale; I must comply with all other conditions as stated in the Notice of
Public Auction Sale.
There are advantages that I am forgoing by not being present at the
actual sale, such as inspecting the property, hearing any statement by
the taxpayer or lien holders, and engaging in open, competitive bidding.
Signature of Bidder _____________________________________

Submit the bid in a securely sealed envelope with your name, ad-
dress, and date of the sale on the upper left corner of the envelope.
Address to submit MAIL-IN BID and Deposit.

Mary Beth Justice
Property Appraisal & Liquidation Specialist
Internal Revenue Service
Address

Annotate the envelope with the following statement. MAIL-IN BID”
TO BE OPENED BY PALS (Property Appraisal & Liquidation Special-
ist) ONLY.

Before we get to the third IRS foreclosure, we are going to present
the IRS redemption rights for the property owner. These rights are dif-
ferent than the IRS™s right to void a foreclosure sale within 120 days in
order to resell the property to get more money.


REDEMPTION RIGHTS
The rights of redemption, as specified in Internal Revenue Code sec-
tion 6337, are quoted as follows:

Section 6337. Redemption of Property.
(a) Before Sale.”Any person whose property has been levied
upon shall have the right to pay the amount due, together with
the expenses of the proceeding, if any, to the Secretary at any
time prior to the sale thereof, and upon such payment the Secre-
tary shall restore such property to him, and all further proceed-
ings in connection with the levy on such property shall cease
from the time of such payment.
IRS FORECLOSURES
142



(b) Redemption of Real Estate After Sale.
(1) Period.”the owners of any real property sold as provided
in section 6335, their heirs, executors, or administrators, or any
person having an interest therein, or a lien thereon, or any per-
son in their behalf, shall be permitted to redeem the property
sold, or any particular tract of such property at any time within
180 days after the sale thereof.
(2) Price.”Such property or tract of property shall be permit-
ted to be redeemed upon payment to the purchaser, or in case he
cannot be found in the county in which the property to be re-
deemed is situated, then to the Secretary, for the use of the pur-
chaser, his heirs, or assigns, the amount paid by such purchaser
and interest thereon at the rate of 20 percent per annum.
Section 6339 (c). Effect of Junior Encumbrances.
A certificate of sale of personal property given or a deed to
real property executed pursuant to section 6338 shall discharge
such property from all liens, encumbrances, and titles over
which the lien of the United States with respect to which the levy
was made had priority.

Form of payment
All payments must be by cash, certified check, cashier™s or trea-
surer™s check or by United States postal, bank, express, or telegraph
money order. Make a check or money order payable to the Internal
Revenue Service or U.S. Treasury Department.



IRS AUCTION”JUDICIAL
Pursuant to 28 U.S.C. Sections 2001 and 2002, an Order of Sale en-
tered in United States v. The Taxpayer, et al., Civil No__________; the
United States will offer to sell at public auction, property located at
______________________________________________________
______________________________________________________

Date & Time
Sale Location
Minimum Bid
Description of Property
Terms and Conditions of Sale
IRS Tax Liens 143



At the time of sale, the successful bidder shall be required to deposit
at least 10% of the amount of the bid; made by cash, certified or
cashier™s check payable to: Clerk of the United States District Court
for the________________________. Before being permitted to bid at
the sale, bidders shall display to the Internal Revenue Service proof
that they are able to comply with this requirement. No bids will be ac-
cepted from anyone who has not presented that proof.
The balance of the purchase price for the realty is to be paid to the
Internal Revenue Service, Property Appraisal and Liquidation Spe-
cialist, within 60 days after the bid is accepted by certified or cashier™s
check payable to : Clerk of the United States District Court for the
_______________________. If the bidder fails to fulfill this require-
ment, the deposit shall be forfeited and shall be applied to the ex-
penses of sale, with any amount remaining returned to the bidder. The
realty shall again be offered for sale, under the terms and conditions
of the judgment and decree.
The real property shall be sold to the highest bidder with the United
States having the right to withdraw the property from bidding at any
time prior to the acceptance of a bid, if in the United States™ opinion,
the bids are inadequate. The said real estate shall be sold free and
clear of the federal tax liens, and free of all claims, if any, of the parties
to this action.
Satisfaction of any municipal tax liens shall be from the sale pro-
ceeds, and the properties shall be sold free and clear of such munici-
pal liens. The sale shall be subject to building lines if established, all
laws, ordinances, and governmental regulation (including building and
zoning ordinances), affecting the premises, and easements of record,
if any.
Upon the sale of the property, all persons, if any, occupying that
real property shall permanently leave and vacate the premises taking
with them their personal property (but leaving all buildings, fixtures,
and improvements to the realty).
The property is offered for sale as is and where is and without re-
course against the United States. The United States makes no guar-
antee of condition of the property, or its fitness for any purpose. The
United States will not consider any claim for allowance or adjustment
or for the rescission of the sale based on failure of the property to
comply with any expressed or implied representation.
The sale of the real property shall be subject to confirmation by the
U.S. District Court for the _____________________. On confirmation
IRS FORECLOSURES
144



of the sale, all interests in, liens against, or claims to, the real property
that are held or asserted by the United States or any of the defen-
dants in Civil No._______ will be discharged or extinguished. On con-
firmation of the sale, a deed of judicial sale conveying the real
property to the purchase shall be delivered.

Important Information
This is not an advertisement for the sale of seized property. Instead,
this notice contains information regarding the procedures for the sale
of foreclosed property under the auspices of the U.S. District Court in
Civil No. ______. The information stated in other hyperlinks on the
web page does not apply to this type of sale.



Summary
The IRS property auctions Web site is located at www.treas.gov/
auctions/irs/realty. Now that we have given you all the information on
where to find foreclosures, who conducts foreclosures, and how to buy
foreclosures, it is time to show you how to make Quick Cash in fore-
closures.
In the next chapter we will finally arrive on the courthouse steps.
This is the phase of the foreclosure process that most people think is the
only time period you can invest in foreclosures”at the foreclosure sale
itself. This may be the worst time to invest in the foreclosure market. But
we shall see.
13
CHAPTER




Buying on the Courthouse Steps
F
or those of you who wait until the day of the foreclosure sale to go
after a foreclosure investment opportunity, preparation is of utmost
importance. The bidding on the courthouse steps is often fast-
paced, and you will have little time to make a decision. This may mean a
poor outcome if you have not already inspected the property and made
a title evaluation.
You need to come prepared in the financing department, too. Cash
or cashier™s checks are all that will be accepted by the trustee, sheriff, or
other representative of the foreclosing party.You have to strike a balance
between bringing enough to win the bid and not bringing too much so
that you go overboard and make a stupid purchase.



Gathering Information before You Bid
To assist an investor in getting the information about a property prior to
bidding there are two reports: a lot book report and a judgment lien re-
port. Check with your local title insurance company for their availability
in your area.
They are the most economical way of getting information about
liens against the property short of getting a preliminary title report,
which will cost you more. A property profile will not give you that in-
formation, and you would be foolish to rely on a property profile alone.


147
BUYING ON THE COURTHOUSE STEPS
148



Lot Book Report

The lot book report contains a record of everything that has been
recorded against the property. Every property has a lien for property
taxes. This is true even when the property taxes have been paid and the
property tax account is current. Property taxes create a lien against the
title to the property, which is called a lien that is due and not yet payable.
Any trust deeds or mortgages, which are the security devices for
promissory notes or mortgage notes, respectively, and have been
recorded against the property title can be found in the lot book report.
Also, any other liens or encumbrances that affect the title such as ease-
ments will show up.


Judgment Lien Report

The judgment lien report contains a record of any money judgments
that have been recorded against the owner of record for the property.
These can include IRS liens, civil lawsuit judgments, state income tax
liens, personal property taxes, and family court matters.
You can go down to the county courthouse to research the
recorded liens yourself, if you know where to look and what to look for.
Ask for help from the clerks. They will usually be glad to oblige. We rec-
ommend you do this at least one time so you get a sense of the huge
amount of materials that are recorded.
Why this information is important becomes apparent if you ignore
it. Remember, when you are the winning bidder at the foreclosure sale
and get title to the property from the foreclosing entity, you get the title
subject to all the senior liens and encumbrances.
When we talked about knowing value, we said that transferability
was a critical element of value. You are the winning bidder and proud
owner of the title to a property. You have nothing if you cannot transfer
clear ownership title to another buyer.


Dry Run

To gain the greatest advantage at the foreclosure sale, we recommend
you do a dry run by attending one or two sales on property you are not
interested in prior to the sale of the property you are interested in. This
How Foreclosure Sales Are Conducted 149



rehearsal will help give you the confidence you need to be successful at
foreclosure sales.
Your observation of a foreclosure sale will be even more useful if
you can witness a sale conducted by the same trustee, sheriff, or repre-
sentative of the foreclosing party as the one that will conduct the fore-
closure sale on the property or properties that you are interested in.



How Foreclosure Sales Are Conducted
There are minor differences in the manner in which foreclosure sales are
conducted throughout the country. Your mission is to find out every-
thing about the foreclosure sales in your neck of the woods. For pur-
poses of illustration, we will use the Trustee™s Sales in California as our
guide.


Trustee™s Sales in California

According to regulation, Trustee™s Sales in California are held between
9:00 A.M. and 5:00 P.M. weekdays and may be held at any public place. Al-
though many are held on the courthouse steps, the proximity to the
courthouse is of little importance.
In fact, some lenders who want to discourage other people from
bidding (usually private lenders who want to take the property back) will
often schedule the foreclosure sale at some remote location in the county
where the property is located just to keep away the competition.

Julian, California We attended a foreclosure sale in Julian, California,
for a property located in the city of San Diego. Julian is more than 50
miles from San Diego but is in the same county. Needless to say, not
many people were at the foreclosure sale.
But that was the point. The holder of a second trust deed was fore-
closing. He wanted to make the credit bid and get title to the property. If
no one else came to the foreclosure sale, he would wind up winning the
bid. There was a small first trust deed on the property, and it was a low
loan-to-value ratio.
As a foreclosing second trust deed holder, he could step in and take
over the first trust deed by just making the payments. There was almost
BUYING ON THE COURTHOUSE STEPS
150



a $100,000 equity position for the holder of the second if they could ac-
quire the property in this manner. Unfortunately for him, we had done
our homework and knew what was going on.


Who Conducts the Foreclosure Sale?

The foreclosure sale will be conducted by a trustee (usually from a title
insurance company, but a private individual can also conduct the sale).
The trustee will cry the sale for the benefit of those in attendance. The
trustee™s cry (a description of the property to be sold) will be followed
by a qualifying check of the bidders in attendance to verify that each has
the ability to pay at least the opening bid.
The usual form of acceptable payment is cash or a cashier™s check
drawn on a California bank. The investor can find out in advance the
trustee™s requirements by contacting the trustee the day prior to the
sale. Sometimes you can negotiate with the trustee to come up with a
percentage of the winning bid (see our discussion of IRS auctions in
Chapter 12) at the foreclosure sale with the balance to be paid in 30
days.



When You Bid
Bring the amount you are willing to pay for the property and no more.
Have the cashier™s checks in various denominations so that you can pro-
vide the exact amount of your successful bid. Without the checks in var-
ious denominations, a refund of your excess money could take several
weeks to receive.
It is of utmost importance that you do not share with anyone, or let
anyone discover, how much money you have to bid on a property. This
will weaken your chances for successful bidding because your competi-
tion can form a strategy to squeeze you out.
That is why we recommend you attend several foreclosure auctions
to observe what goes on. It is not just important for you to watch the
person conducting the foreclosure. It is also important for you to see
how your competition operates.
When You Bid 151



Bidding Rings

You may discover that there is a bidding ring at your foreclosure sales.
Although this may be illegal and unethical, you still must be prepared to
encounter one. So much the better for you if a bidding ring does not
exist.
A bidding ring conspires on who is going to get the winning bid. It
works something like this. Three investors get together and agree on
who is going to get what property. Investor 1 will get property A. In-
vestor 2 will get property B. Investor 3 will get property C.
When property A comes up for bid, investor 2 and investor 3 will
not bid against investor 1. However, if investor 1 is encountering com-
petition from you or other investors, investor 2 and investor 3 may start
bidding. They do this for one of two reasons.
The first reason is to try to force you out of the bidding. They do
this by trying to make you think there is too much competition for the
property, hoping you will back off and wait for another property.
Now, one of the three conspirators will have the bid just higher
than yours that is the winning bid. If this is investor 2 or investor 3, they
will defer to investor 1 and let investor 1 have the property.
The second reason is to try to bid up the price of the property and
stick you with the winning bid. They try to get you so caught up in the
frenzy and excitement of the bidding process that you lose your cool.
When you lose your cool, you get auction fever. The bidding ring is try-
ing to give you a lethal case of auction fever. We will talk about auction
fever shortly.
The point is that once you have overbid on that first property, you
may have taken yourself out of the game. Now you don™t have the cash
to bid on other properties coming up for sale. One and done.You are out
of the bidding for the foreclosure sales for that month. That is exactly
what the members of the bidding ring want to happen.
Even though you may be anxious to obtain the property, you must
keep a poker face. Don™t bid too early in the bidding. You will only drive
up the price. We have found that in those circumstances where we
waited until the hammer went down a second time before we made our
first bid, we experienced success.
BUYING ON THE COURTHOUSE STEPS
152



Auction Fever

Auction fever occurs when you bring more than one buyer into a buying
situation. In the normal real estate“buying scenario only one buyer at a
time is making an offer on a property. If there are multiple offers, the
buyers are not together in the same place, so each buyer™s offer is un-
known to the other buyers.
At a foreclosure auction all the buyers are compressed in one place
at the same time. The bidding is out in the open. Every offer is instantly
known to the other buyers. This can create a bidding frenzy. We have
seen people at foreclosure auctions actually faint! They became so ex-
cited during the bidding process that they passed out.
Bidding can be like an intoxicant.To coin a phrase,“You have to bid
in moderation.” If you notice you are coming down with auction fever,
take deep breaths and stop bidding. We recommend you always take a
friend or relative with you to protect against auction fever.


Buying at the Foreclosure Sale

Let™s review something we first discussed in Chapter 3. 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 sellers at the foreclosure sale are really auctioneers. 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.
It is true that the owners can bid at the foreclosure sale. But how
will that be possible since you need to have cash to bid? If owners had
the cash to bid, they would not be in foreclosure!

Credit Bid The opening bid is called a credit bid. The credit bid is put
forward by the trustee, sheriff, 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 own-
ing the property. Any bid made above the credit bid has to be made in
cash. Let™s say the loan amount is $160,000 and the default amount is
When You Bid 153



$10,000. Let™s say the foreclosure sale expenses are $1,900. What would
the opening credit bid be?
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? When the hammer strikes the third time, and you are the
highest bidder, you own the property! It is not a conditional contract but
one that you must immediately honor.
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 may get a better price at the foreclosure sale. But you have to
come up with almost $172,000! Buying from the owner 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?
In the next chapter we will show you how to flip your foreclosure
deals for Quick Cash. This may get you a Quick Cash profit and save you
tens of thousands of dollars from out of your pocket to buy the same
property at a foreclosure sale. Some of you will get very excited about
assigning your foreclosure deals. Some of you will wind up optioning
your foreclosure deals. No matter which of these you choose, you can be
successful making Quick Cash in foreclosures.
14
CHAPTER




Flipping Foreclosures
F
lipping is a two-step process. The first step is to tie up a property.
This is otherwise known as making an offer. The second step is to
find a buyer. This is known as making money on your deal. This is
the point of flipping and is the Quick Cash strategy in action.
When you flip foreclosures, you use the same techniques as flip-
ping non-foreclosures but with a few modifications. In this chapter we
will talk about the flipping techniques for all properties and give you the
particulars for flipping foreclosures. In fact, the next three chapters all
focus on flipping foreclosures. This is where you make Quick Cash in
foreclosures.
We will introduce you to our real estate investment axiom: Buy the
property first, then get the financing. The foreclosure corollary to this
axiom is buy the foreclosure first, then get a buyer. When you follow
these axioms, it makes it easier to write offers. As we have said, writing
an offer is the way to tie up a property. When you tie up a property, you
control a property.



Tying Up a Property
In the 1990s, when we traveled the country teaching real estate in-
vestors Robert Allen™s Nothing Down seminars, we blew them away
with buy the property first, then get the financing. In city after city
people told us we could not buy real estate this way.

157
FLIPPING FORECLOSURES
158



We told them to try it our way and report back to us what hap-
pened. Lo and behold, from Seattle to Orlando, from Los Angeles to Bal-
timore, from Chicago to Dallas, our students found that they could
indeed buy the property first, then get the financing.


Mind-Set

Most, if not all, retail buyers (home buyers) have this mind-set: How
much money do I have to put down, and how much of a monthly pay-
ment can I afford? With this mind-set, they go to a lender to get prequali-
fied for a real estate loan.
What the real estate lender says determines how much of a house
the home buyer thinks he or she can afford. Of course, being prequali-
fied means nothing once you actually apply for a loan. You can be pre-
qualified for a $200,000 loan and actually wind up receiving only a
$175,000 loan at closing.
You are a real estate investor and not a home buyer.You are a whole-
sale buyer of real estate. You are going to do things differently. Everyone,
except us, will tell you to get your financing first, then buy the property.



Buy the Foreclosure First, Then Get a Buyer
Example 1

Buy the Foreclosure First We found a four-bedroom, two-bathroom,
single-family home. The property was headed to foreclosure. The retail
value of the property was $159.000. The seller had an assumable VA loan
with a remaining balance of $129,000. The seller was $3,000 behind in
his payments. The seller™s equity position was $27,000.
Seller™s Equity Position
Retail Value $159,000
First Mortgage $129,000
Back Payments $ 3,000
Seller™s Equity $ 27,000
Buy the Foreclosure First, Then Get a Buyer 159



When the agent asked us what we were prequalified for, this was
our response (and will be yours). We told the agent that we were real es-
tate investors. If the property met our parameters, we had the financial
resources, along with our money partners, to buy the property.
We set up an appointment with the agent and the seller. We made
the foreclosure options presentation. At the end of our presentation, the
seller said he would like to sell us his property. We offered the seller no
money down and agreed to take over payments on the loan and make up
the $3,000 in back payments. The seller accepted our offer. The seller
would pay his agent the real estate commission.
We did not have to qualify for a new loan. We did not have to
qualify to take over the seller™s VA loan. We did not have to come up
with a down payment. We made an offer that worked for us. We let the
seller decide whether to accept our offer. We and you may not have
accepted our offer. Why the seller accepted our offer was the seller™s
business.

Then Get a Buyer We now had a property available to flip. Only by
making an offer can you start the process of flipping a property. We
flipped the property for $139,000 within two weeks to a retail buyer
who was going to live in the property. Why did we flip the property
for so cheap a price? Our strategy is Quick Cash. Could we have
waited and perhaps gotten a higher price? Yes, but our Quick Cash
strategy embraces the principle “A bird in the hand is worth two in
the bush.”
The buyer was going to assume the VA loan on the property. The
buyer was actually a veteran. He was going to use his VA eligibility to as-
sume the loan. The buyer was very happy to get a good deal. The seller
was happy because he was out from under the foreclosure with no defi-
ciency judgment hanging over his head. We were happy because we had
made $7,000.

Our Profit
Sales Price $139,000
Purchase Price $129,000
Back Payments $ 3,000
Profit $ 7,000
FLIPPING FORECLOSURES
160



Example 2

Buy the Foreclosure First We found a three-bedroom,two-bathroom,
single-family home with a pool. The property was in foreclosure. The
lender had sent the first formal notice of default letter. The sellers were
in a panic.
The retail value of the property was $210,000. The first mortgage
on the property had a remaining balance of $155,000. The sellers were
$9,000 behind in their payments. The sellers™ equity position was
$46,000.

Seller™s Equity Position
Retail Value $210,000
First Mortgage $155,000
Back Payments $ 9,000
Seller™s Equity $ 46,000

We offered the sellers $10,000 for their equity in the form of a
promissory note secured by a second trust deed on the property. The
promissory note was a straight note for three years. This means there
were no payments until the final balloon payment of principal and inter-
est at the end of the three years.
We also agreed to pay the $9,000 in back payments and reinstate
the loan. The total cash out of our pocket was $9,000. Remember, the
$10,000 we offered the sellers for their equity was a promissory note
and not cash. We were not worried about this promissory note because
we were going to flip the property.

Then Get a Buyer We flipped the property for $185,000. The buyer
was a real estate investor who was planning on renting the property.The
buyer assumed the first mortgage of $155,000 from the lender and our
second mortgage of $10,000 to the sellers.
We were now off the hook to pay the sellers. Because the $10,000
second mortgage had no payments, the real estate investor would be
able to have a positive cash flow.
How did we make out on this deal? We invested $9,000 cash and re-
ceived our money back plus an $11,000 profit. The sellers avoided fore-
closure and had $10,000 plus interest coming their way three years
down the road. The investor was happy because she got a good deal.
Buy the Foreclosure First, Then Get a Buyer 161



Our Profit
Retail Value $185,000
First Mortgage $155,000
Second Mortgage $ 10,000
Back Payments $ 9,000
Profit $ 11,000

Some of you are thinking, “Why didn™t you guys hold on to the
property like the investor you flipped the property to, rent it out, and
have a positive cash flow?” That is good thinking if you are using the
long-term wealth-building strategy. We have a Quick Cash strategy, so
landlording is not on our agenda.


Example 3

Buy the Foreclosure First Early on in our real estate investing ca-
reer, we tied up a three-bedroom, three-bathroom, single-family home
with a pool. The seller was in pre-foreclosure. We negotiated a deal with
the seller and bought their equity. We then spent $8,000 fixing up the
property.
We are presenting this example to coach you on what not to do.
This was not one of our finest hours. We were still in the more tradi-
tional mind-set of trying to make everyone in the deal happy. By the time
this deal blew up, no one was happy.

Then Get a Buyer We found retail buyers who said they were in love
with the house. To make the deal work, we agreed to repaint (again!) the
inside of the house, which we had just repainted, the colors the buyers
wanted.
We also agreed to run a natural gas line to the utility room so the
buyers could use their gas dryer. Finally, we had a tree removed from the
pool area because the buyers were concerned that the roots were going
to crack the bottom of the pool.
Can you guess what happened? The buyers came down with a dis-
ease all retail buyers get during the course of a real estate transaction.
Some buyers get a mild case of the disease. Some buyers get a severe
case of the disease. Unfortunately for us, these particular buyers came
down with a terminal case of the disease.
FLIPPING FORECLOSURES
162



Buyer™s Remorse What is this dreaded disease? Buyer™s remorse! All
buyers experience the onset of the disease, once their offer is accepted
by the seller. Even as a real estate investor, you will experience buyer™s
remorse. There is no known antidote or medication. The disease just has
to run its course.
The symptoms of buyer™s remorse usually strike at night, when a
buyer is about to go to sleep. Sometimes the symptoms strike after the
buyer has fallen asleep and they awaken as if from a nightmare.
The buyers start having doubts about the purchase. Are they doing
the right thing? Should they look at more properties? Did they offer too
much? Can they really afford the monthly payments? Is the house big
enough? Is the house too big?
They start to sweat. They get out of bed and get a drink of water.
They go back to bed, but they can™t fall asleep. The questions begin
swirling again in their heads. What if they don™t qualify for a loan? What
if they do qualify for a loan? Who is going to take care of the pool? What
if the pool does leak?
In our case, three weeks after we had accepted the buyers™ offer,
and three days after we had finished repainting, installing the gas line,
and removing the tree, the buyers backed out. Their case of remorse be-
came terminal for them and for us. Our deal was dead.
Bottom line: Provide allowances for the work to be done after clos-
ing, if you must, to make the deal work, but don™t spend your time or
money on it before closing. Oh yes, and our profit on this deal? Don™t
ask. You got the point, right?


Example 4

Buy the Foreclosure First The other problem with retail buyers is
they usually do not pay cash for their real estate purchases. They have to
qualify for and obtain a loan from a real estate lender. This means you
will have to wait longer to get your money. Forty-five days is a fairly stan-
dard closing period from the time an offer is accepted to get a loan
processed and funded.
In the case of a government-insured loan or a government-guaranteed
loan such as FHA loans or VA loans, it may take anywhere from 45 to 75
days to fund the loan and close the escrow!

Then Get a Buyer Again, early on in our real estate investing career,
we tied up a three-bedroom, one-and-a-half-bathroom condo that was in
Buy the Foreclosure First, Then Get a Buyer 163



pre-foreclosure. We bought it for nothing down and took over the
seller™s existing loan. We flipped the condo to a retail buyer who made
an FHA offer to us for $89,000. This looked like a sure moneymaker for
us because we only had $2,000 into the property for back payments on
the loan.
Our Profit
Sales Price $89,000
Purchase Price $77,000
Back Payments $ 2,000
Profit $10,000

The escrow was to close in 45 days or sooner. When it finally closed
after 79 days, we had several unexpected surprises. The first surprise
was that the deal actually closed. That was a nice surprise. The other sur-
prises were not so nice.
We had almost three months of interest due on the old loan being
paid off. We had almost three months of property taxes to pay. And we
had almost three months of homeowner association dues to pay as well.

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