Now that you have a general understanding of a short sale and you are fully operational it’s time to secure your first deal. Assuming you have either done some form of advertising, made direct contact through a foreclosure listing, or by word of mouth, you are now ready to get started. If your phone does not ring immediately don’t panic. Sometimes homeowners will hold on to your number until they feel like there is nothing that they can do on their own. When it finally does ring you will respond along these lines: “Good Morning, Real Estate, how can I help you?” or “Good Afternoon, John speaking!” Avoid greetings such as, “Good Morning, Thank you for calling ABC Real Estate Company!”

Some people that call are a bit skeptical and by mentioning your company name they become more concerned with whom you are rather than how you can help them. The proper response to anyone that asks for more information or references would be, “I’m a private investor that specializes in obtaining properties pre-foreclosure. If your property qualifies then I may be able to take your property off your hands and help you avoid any further damage to your credit.” You want to eliminate the perception that you are a huge company with lots of offices and employees.

Besides, someone that has a potential foreclosure hanging over their head most likely will feel more comfortable speaking with an individual rather than a corporation. You are someone with a possible solution to their problem, get straight to the point and do not waste anytime attempting to justify your service offering. If it is not right for that individual then move on to the next. Don’t get me wrong; don’t be rude or obnoxious because you will have some people that won’t go any further until they feel comfortable with who’s on the other line.

What I’m saying is if you feel that someone is being difficult although they are the one with the problem, then you have to decide whether or not it is worth your time. I have had people call me that gave me a hard time at first but after I met with them face to face and explained how I can help, they immediately warmed up.

Once the ice is broken then it’s time to take down some personal information. Try not to sound like you are reading from a script but rather hold a conversation and get your questions answered in that manner. (Go to the back of the book and review the property profile sheet). Use this form every time you get a prospect on the phone. Make sure that you fill the form out completely, this will give you all of the information you need to start your initial qualification. If the homeowner is facing a possible foreclosure they will often let you know that they are behind on their payments or have received calls or letters from their lenders. You let the person know that you may be able to work with their lender to delay or even prevent the foreclosure. Ask to set up appointment to see the property ASAP.

I usually ask to come and take a look at the property the same day. If you don’t, they may speak with another investor. If you can’t meet with them the same day ask them to please not speak with anyone else until you can sit down face to face with them. Often, homeowners will agree to your request and be very open minded when you meet with them.

Anyone who has ever profited from doing a short sale has also without a doubt had one or two rejected at some point. Guess what? It is just the nature of the beast…As with all types of sales you’re playing a numbers game.

There are very few investors who truly know how to successfully negotiate a Short Sale. We find that most investors have the perception that all that is necessary is to submit an offer and wait for the bank to give you an answer. If all goes well the offer will be accepted but in many cases it’s not that simple. That’s why a strategic plan is necessary. A strategic plan means making the deal go your way by persuading the lender to agree with your offer.

There are several steps that will ensure your success when negotiating with lenders:

First of all, you must be able to determine if you indeed have a short sale opportunity on your hands. Many investors are under the misconception that every homeowner facing foreclosure is a good short sale candidate. This could not be any further from the truth. One of the most common mistakes made by investors is attempting to fit a square peg into a round hole. Not all deals are good short sale opportunities. You must know the difference between a good and a bad deal. Period! You’ll have to analyze the deal and develop an excellent plan of attack if you want to truly master the art of the Short Sale.

Second, you must not take no for an answer. No can never be the final chapter to your negotiation. If the lender says no you must ask yourself why. There must be a reason. Why did they say no? Is there anyone else I can speak with? Was my offer to low? How does the lender determine their bottom dollar? What else can I do? What was the BPO amount? These are just a few of the questions that need to be addressed each time you are met with some resistance from the lender.

We’d like to share an awesome deal that one of our students closed recently. His name is Thomas Stockman.

Thomas got a call off of one of his signs from a gentleman that had two properties in foreclosure. The two properties were on the same street and were bought as rental homes within the last year. Consequently, they were also financed by the same mortgage company. One property had a mortgage balance of approximately $150,000 and was in need of several thousand dollars worth of repairs. The other had a mortgage balance of $156,000 and was currently being rented for $1,100 per month. Both properties had very little equity but the neighborhood had been very active over the last 9 months. After qualifying the two potential deals he decided to attempt short sales.

He contacted the bank and began the process. His offer on the first house was $89,900 and $95,800 on the second house. The bank rejected both and asked for higher offers. After several conversations and some additional documentation to justify his offer, Thomas was able to get both properties for a total of $60,000 below market value. Thomas rehabbed the first property for $3,500 and put it on the market for sale. Since the second property was already occupied by a tenant he decided to keep it. His mortgage is roughly $400 per month (interest only loan/taxes paid at year end) he makes $700 in monthly positive cash flow. Not bad for a beginner (wink).

This would have never happened if Thomas accepted NO from the bank. If he would have not known what pressure points to touch and how to counter without increasing the offer amount we would not be talking about these deals.

This type of outcome is customary when you are equipped with the necessary tools and know how to turn a “No” into a “Yes” just by slightly adjusting your approach. Thomas got two great properties with lots of equity and a constant cash flow, the homeowner avoided two foreclosures, and the bank was satisfied.

Remember, the next time you are putting together a short sale offer, be prepared and take control of the deal. Never take NO for an answer. Be proactive not reactive. Don’t just submit offers without having a game plan. Do yourself a favor and take advantage of the opportunity to make lots of money in an industry where great deals are hard to come by. We hope that you have learned something and are on your way to much success.

Ok, so you’ve received the short sale requirements from the lender and you’ve made friends with the loss mitigation’s rep that’s assigned to your potential deal. Next, you are now ready for the lender to order a BPO on the property. Notice that I emphasize “you”, this is because I don’t want you to miss out on a key opportunity to influence the overall outcome of your short sale.

Although many investors are aware of the benefits of influencing the BPO, few know exactly how it’s done. The BPO is the single most influential component that the lender considers when deciding how much they are willing to accept as a reasonable short sale offer. If your offer is not in the ballpark of the BPO it will most likely be rejected. Many investors give up at this point and assume that the lender is not willing to accept a short sale. It’s not that the lender is not willing to accept a short sale, it’s that the short sale offer does not come close to the amount of the BPO. It’s just that simple. There is a big difference between a lender not accepting a short sale and a lender not accepting the offer.

What Exactly Is a BPO?

BPO stands for Broker’s Price Opinion. All this means is that a real estate agent or broker will assess the property and give their professional opinion of it’s value to the lender. The closer that number is to your offer the better. You want the BPO to be as low as possible. Listed below is a snap shot of a BPO requirement.

1.) Run comps and take pictures of the surrounding neighborhood, subdivision, or area.
2.) Inspect the overall condition of the home and estimate the cost of repair. Take pictures.
3.) Formulate their “opinion” of the property’s value based on the information that was gathered.
4.) Submit a detailed report of their research to the lender.

Here Are 5 Necessary Steps to Influence the Broker’s Price Opinion (BPO)

Step 1:
Before your package is submitted ask your loss mitigation’s rep to order the BPO. Let them know that there is not a lockbox on the door and you have the only key. Give them the best number to reach you and have the agent doing the BPO call to set up an appointment. You must be present for the BPO.

Note: There are two types of BPO’s:

1.) Full BPO – The agent does a full inspection of the home.

2.) Drive-By BPO – The agent only takes pictures of the outside and other homes in area.

Always request a full BPO. If a drive-by BPO is done, you will not have any one-on-one time with the agent, therefore eliminating any possibility of influencing the outcome.

Step 2:
Compile comps, estimated costs of repair, and any other relevant information that will justify a discount. If possible, visit the property prior to the BPO or at the least a half hour before the agent arrives. Make two lists for repair costs. One with all of the obvious repairs such as wall damage, carpet, paint, etc. The first list will be mostly cosmetic repairs. Make a second list of all repairs that the agent will not see with their naked eye (i.e.: roof and water damage, faulty plumbing or electrical fixtures, pests, mold, etc. This list will contain more serious problems. Be sure to have an itemized breakdown of the costs involved. Bring this information with you to the BPO appointment. Be prepared to explain in detail how you came up with your estimates.

Step 3:
Make sure if the house is occupied that the homeowner is not present during the BPO. You do not want the agent asking the homeowner any questions about the property or offering any unwanted information. All communication must be between you and the agent. Follow this rule each time and you will maintain leverage during your negotiation.

Step 4:
On the day of the appointment shadow the agent as he/she does their assessment. Bring a camera and take pictures of every room in the house. The agent will only take a limited amount of pictures and may miss something important. As you are walking throughout the house, point out the most important repairs only. Take notes and make them aware of other homes in the area that are comparable to your offer. Share with the agent the information about the house that you’ve compiled. Doing these things will help establish you as a well-prepared professional and help you earn respect with the agent.

Step 5:
Before the BPO is complete, ask the agent if they have a ballpark estimate in their head. They will most likely tell you that the numbers will be determined once they complete their report. At this time, ask when they will be finished and if you can give them a call at a specific time to get their final numbers. Note: The agent works for the lender and more than likely they will inform you that their report is proprietary to the lender. You have to feel that person out and see if they may be willing to share that information with you. It doesn’t hurt to ask more than once if necessary.

Let the agent know that you are very familiar with the neighborhood and tell them what you think the property is worth. The agent doing the BPO knows only what they have researched and what they discover once they actually see the property. You will be surprised as to how much your opinion matters. I like to call it YPO (Your Price Opinion). If the agent views you as someone who is educated about the property and the activity in the neighborhood, your opinion will be valued and taken into consideration when they make their report to the lender. Hopefully, I’ve helped shed some light on this most important area of short sale negotiations and that you are able to apply what you’ve read to your next deal.

When investors find out I specialize in short sales, they always have so many questions. Here are the answers to some of the most common. Hopefully, these answers will give you a better understanding of a short sale and how to do one.

Why Do The Banks Short Sale?

* The mortgage is in arrears or foreclosure.

* The property is in poor condition.

* The homeowner has hardships and cannot afford the payments.

* New homes in the area are being chosen over existing homes.

* The area or neighborhood has depreciated in value.

* The bank’s shareholders are concerned when there are too many defaulting
loans on the books.

* Some banks are required to prove a loss each month… let’s help them out.

* Some banks are required to have an amount equal to or up to six times the
retail value of each REO “on hand” – ouch, that hurts.

* An REO is a liability, not asset. Too many liabilities will cause any
business to go under if not dealt with quickly.

Can I Short Sale A Nice Property?

Absolutely! As you can see, banks short sale for many reasons other than the poor condition of the property.

What Steps Do I Take To Complete A Successful Short Sale?

A. Find a property owner in distress.
B. Put a deal together with the homeowner.
C. Have the homeowner sign an authorization to release form.
D. Fill out a sales contract for the amount you want to offer the bank and have the homeowner sign it.
E. Call the Loss Mitigation department at the bank.
F. Fax them your offer along with the following:

1. Your cover letter explaining why you can’t offer full price.

2. The sales contract.

3. Justifying comps of the area.

4. Pictures, if you have them.

5. A net sheet or closing statement (a sheet that shows the bank exactly
how much they will net after closing costs, taxes, etc. are paid).

6. A hardship letter from the homeowner that mentions the dreaded word….
bankruptcy.

7. Estimated list and cost of repairs, using retail repair prices that the
normal homeowner would pay for these items.

What Happens To The Homeowner’s Credit?

When you negotiate a successful short sale, keep in mind that the agreed upon price is payment in full. However, the homeowners may still owe the difference between the mortgage balance and the discounted amount via a “deficiency judgment.” If granted, this judgment will affect the homeowners and their credit report just as any other judgment. You must get the bank to agree to accept “payment in full without pursuit of any deficiency judgment.”

In addition, you need to explain to the homeowners that the discounted amount (the difference between the mortgage balance and the short sale) may be declared as income on their income tax return by means of a “1099.” The homeowners can speak with their accountant for advice. Since the homeowners have been in such duress and probably haven’t made much income, a 1099 may not adversely affect them.

I hope this sheds some light on short sales. As you know, nine out of ten deals have no equity. To be successful in this business, trends call for you to be a short sale expert.

With the press full of more bad news about defaulting homeowners and a rise in foreclosures, the question most people ask me is: “Jeff, how do people get into that state in the first place?”

Being a real estate expert who has seen foreclosures close up I can tell you that a foreclosure is never the result of a single incident. It’s never, for instance, a case of a little bad luck, the loss of a job, a car accident or some ill health. These are deplorable situations to occur, to be sure, but on their own they are never enough to take a homeowner who has purchased his dream property, down.

What usually happens is that homeowners who end up facing the dreaded prospect of a foreclosure have consistently boxed themselves in, closing their prospects and notching up debt through the consistent use of credit to finance debts. This is a case of “robbing Peter to pay Paul” and the scenario, all too familiar goes a little like this:

The homeowner boxed into a financial corner, rather than thinking of how he can reduce outgoings and perhaps downsize his lifestyle until his financial condition improves, he chooses to take out a second and maybe even a third mortgage and release equity stored up in the house.

Now there’s nothing wrong in doing anything like this. Equity stored up in a property could be released which means that it can, if used properly, save a house owner in trouble. The problem is that house owners forced to release the equity in their homes very rarely manage to use this facility properly. Feeling a certain sense of desperation, they leave it too late to shop around for credit, fail to look at the fine print and feel incapable of negotiating with the lender. As a result they get locked down into second mortgages which hit them with hefty interest rates after a brief honeymoon period which usually lasts between six months and a year.

The increased payments the homeowner then has to make put him back into the same situation he was in before he took out the loan. He then gets into a greater panic and is forced to take out another loan from an ever shrinking number of choices which leaves him in the worst possible financial bargaining state. Next is a story that’s pretty much foreclosed and inevitable.

The tragedy is that a little careful planning here could possibly have averted the worst as the fine print would have revealed it early enough for the homeowner to either avoid getting the loan or making an adjustment in order to meet the higher cost. So, the lesson is when it comes to credit, the fine print is all important.

They say there’s never a cloud without a silver lining and it certainly would seem so where foreclosures are concerned. The fact that so many foreclosures are now hitting the market is a clear indication that a market correction mechanism is in operation in the world of property speculation and real estate and it is part of the market’s self-correcting ability to stabilise every time it overheats.

Let’s look at this process a little more closely so we understand it: Left unchecked here’s what can happen to the real estate market. Properties begin to increase in price and value. The growing value of those who have already bought a property allows them to sell on so they can then invest in a bigger, more expensive one.

Those who are already in expensive properties take out second and third mortgages, releasing the equity in their property and enjoying some of the finer things in life. So far, so good. But, left unchecked the increase in house prices begins to force a lock out and a lock down. Those looking to get their foot on the first rung of the property ladder are beginning to get locked out as house prices on starter homes also experience an increase.

With no new buyers coming into the market those who are in the middle ground and need to sell on so they can move up begin to experience a lock down as sales begin to drop and buyers become sparse in a market that has suddenly got not just too expensive for them but also one lacking in movement.

This, in turn affects the entire real estate economy which relies on new home buyers for its buoyancy. You begin now to see why foreclosures can be considered a good thing. By ‘hitting’ those who have bad credit foreclosures break the impasse of the lock down and the barrier of the lock out and release, in the real estate market, a fresh spate of properties which are affordable and can enable buyers to come in at a level they could not before.

This also mobilises the market as new buyers, generally, spend more than those upgrading or staying put, and it stimulates the economy which stimulates growth and jobs and begins to finance credit and homes and the whole cycle starts again.

Am I oversimplifying a little? Definitely yes and I am not for a moment making light of the personal tragedy for the aspiring home owner which is a foreclosure, but you can see how from a market mechanics point of view foreclosures are a necessary self-correcting mechanism which allows the real estate market to be truly self-sustaining.

Understanding the different options a seller may be considering is important when negotiating with sellers. Below are the most common options that sellers may address with you if the sellers are either in default or anticipating being in default.

1. Reinstatement of Loan (Cure): This option is paying the lender everything that is owed in one lump sum to include missed payments, any late fees associated with these payments, foreclosure fees, legal fees and the principal owed during the delinquency. A cure may involve the seller curing or deeding it to the investor “subject to” the exisiting loans, who will cure. There is a risk to the homeowner that the lender may accelerate the loan because of the due-on-sale, and the homeowner no longer owns the property and has no recourse of the investor doesn’t pay the loans.

2. Repayment Plan: This is a written agreement between the lender and the seller. These plans require higher payments than the regular monthly mortgage amount for a period of time until the loan is brought up-to-date.

3. Loan Modification: A loan modification involves changing one or more terms of a mortgage. Modifications can be considered to reduce the interest rate of the mortgage, change the mortgage product (from an adjustable rate to a fixed rate, for example), extend the term of the mortgage or capitalize delinquent payments (add delinquent payments to the mortgage balance-only available in extreme hardship situations). Modifications are NOT easily granted and there must be strong, justifiable reasons for the request.

4. Forbearance Agreement: The lender will allow you a period of time (3-6 months typically) of either low payments or no payments at all. Unless the loan term is extended (which happens rarely), the later payments generally will have to be higher than the original monthly mortgage payments until the loan is up-to-date.

5. Special Forbearance (FHA Loans only): Allows eligible borrowers to postpone monthly mortgage payments for a minimum of four months. While there is no limit on the maximum number of months, at no time may the agreement allow the delinquency to exceed the equivalent of 12 monthly PITI installments.

6. Deed-in-Lieu: A Deed in Lieu is an option in which a borrower voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL may not be accepted from borrowers who can financially make their payments. If a borrower qualifies for a DIL program they may be eligible for cash back from the lender as in the “Cash for Keys” program.

7. Cash Sale: The borrower sells the property, pays off his loan, and, depending on the equity, may net some cash out of the deal. The challenge, of course, is being able to sell it quickly enough, which most often requires a substantial drop in the price.

8. Short Sale: The borrower makes an agreement with the investor to sell it for less than is actually owed, subject to approval of the lien holders. This generally results in no cash to the homeowner, but will be better for the better for his credit than a completed foreclosure.

9. Refinance: The borrower may be able to refinance and get a new loan, but generally this is difficult because the borrower has little equity and poor credit. The new loan likely will have higher payments than the old loan.

10. Do Nothing: The worst choice for the seller, whose credit will be ruined, but he can stay in the house for several months for nothing, save up some cash, and move when the lender or the high bidder from the auction eventually evicts the homeowner.

Explain each of these choices, and be honest with the homeowner. In many cases, he will trust you for your candid explanations. You may lose a deal or two by offering the homeowner choices that are actually BETTER than your offer, but that’s ok – always take the high road and you will have a long and properous business in real estate investing.

The good old days of doing business on a handshake have gone so far away that the Hubble telescope couldn’t find them. Even at my tender age, I have witnessed enough legal action resulting from deals gone awry, sellers-turned-psycho, and downright skullduggery to make even the most hardened investor’s blood curdle. And the heat of the battle takes place, unfortunately, in one of the best arenas to make an honest living in: real estate—pre-foreclosure investing.

Who is to blame? Sometimes the seller, sometimes the investor. If I had to make a guess as to who causes the most problems, it would be sellers. Over the years, I have only heard of a handful of unscrupulous investors who tricked homeowners who thought they were getting a loan into signing a deed, forged documents, took over a loan and pocketed the rent payments, or something equally evil. Of course, these are the only incidents you hear about on the news. My guess is because “Fair and Honest Investor Buys House, Makes Profit” isn’t a very sexy headline.

The real concern, and the focus of this article, is sellers in default who either:
A) Lie about their property, its condition, their hardship story, etc, in a deliberate attempt to defraud an investor, or
B) Experience seller’s remorse after their problem is solved, and use false accusations that they actually believe in an attempt to undo what they agreed to.

Which do you think is the more common scenario? I don’t believe it’s A. Although the old expression “buyers are liars and sellers are worse” has some truth to it, I think that most sellers in default are honestly seeking a way to solve their problem through ethical means. And any untruths they do tell can be uncovered with the proper due diligence prior to purchase.

Therefore, I think that B is the more common scenario in which fraud is committed. And by “committed,” I mean “frantically slung as a weapon by the seller in a misguided attempt to undo a transaction that is perfectly legal by making you the scapegoat for their own selfishness, irrationality, and/or situational ethics.” This doesn’t make headlines, but it does make a frequent topic of conversation at local REIA meetings, where I have heard similar stories told ad nauseum.

Scenario B is far too common, but even more so when a pre-foreclosure investor does things that make them more likely to be accused of fraud. I have listed three unsafe scenarios below. I will preface them with a golden nugget of wisdom that I have gleaned from years of networking, news-watching, and personal experience, and then voice my opinion on the subject with more passion than Basic Instinct, Don Juan Demarco, and The Notebook combined.

“No matter how many times you explain how the deal will take place, how slowly you go over it, how many times they tell you they understand, or sign and initial a document that spells everything out in excruciating detail in 4th-grade English using size 16 font, sellers in pre-foreclosure will immediately create and believe their own memories of what they agreed to the very second that their payments are caught up.”

If you are not familiar with the concept of implanted memories, just remember the movie Total Recall and you’ll know exactly what I’m talking about (but with a little less violence). The unavoidable fact above must always be remembered, dealt with head-on, and used to guide your decisions when working with sellers who are behind in payments. And now for those three unsafe pre-foreclosure scenarios:

1) Asking them to sign blank documents – I think the wild, wild, western days of showing up at the seller’s house with a mobile notary and getting them to sign a deed and blank documents for any and every conceivable type of transaction (short sale,cash offer,subject-to, note, deed of trust, etc.) on their kitchen table are over. This shoot-first-ask-questions-later style of getting a deal done has “Six o’clock evening news scandal” written all over it.

While it may certainly be more convenient for the investor to get everything signed in advance and then figure out what kind of deal is possible later, and though the investor may truly have the seller’s best interests at heart, think of how it will appear to a judge when the seller says later in court, “He had me sign all these blank documents, and told me he’d take care of everything, and I didn’t know what I was doing…”

I don’t think we can afford to be so cavalier in our dealings — at least until pre-foreclosure investors cease to be perceived as vultures, guilty until proven innocent, which I calculate will happen approximately three times the length of time from now that hell will take to freeze over.

2) Letting the seller stay in the house – I cannot think of any kind of transaction so generous, so humane, so… hazardous. For starters, leasing the house back to the seller is a risky gamble (since, in my experience, 9 out of 10 of them will miss at least 2-3 rent payments per year, which, unless you have a money bin as bounteous and deep as Scrooge McDuck, will cause considerable damage to your cash flow).

If you give them an option to buy it back, you’re walking on thin ice. Because, if for some reason they are not able to buy it back again (missed payments, worsened credit, stricter lending environment, decreased property values, etc.), you will become the bad guy for daring to ask them to move out so you can finally recoup your investment, free up your funds, and thus avoid becoming broke, busted, and disgusted.

And if you lease back to a seller whose house you bought subject-to, put on your headgear and get ready to rumble. You might as well drive to the nearest courtroom and have a seat, because you’re going to go there soon anyway — ask me how I know this. It’s just too easy for a seller to wish they hadn’t sold their house so badly that they actually believe they still own it, or should own it. And, because so few attorneys know anything about subject-to deals, it won’t be hard for them to find one to put you in the hot seat.

3) Advancing funds prior to closing – Imagine meeting the kindest, sweetest, most innocent seller you’ve ever met. They’re in foreclosure through no fault of their own (illness, tragic accident, etc.) and have tried everything to fix their situation, with no success. You finally get in touch with them a day or two before the auction, and agree to save them from their pending disaster. But there is one problem — you won’t be able to close on time.

Maybe the title company can’t get the title search done fast enough, schedule you soon enough, your private lender is on vacation, or something. If you could just delay the auction one more day, you could conduct the closing and be the hero. But, of course, the only thing that will buy you the time to close is to reinstate the loan now, before the closing. The helpless seller’s credit, dignity, and financial future is in your hands. Do you do it?

Although it goes against every altruistic bone in my body, I would not advance any funds before closing even if it means they lose their house and I lose a deal. I promise you that if you do, you will, in all likelihood, witness a formerly sweet, rational, and grateful seller transform before your eyes faster than you can say Bilbo Baggins. Your funds will be tied up with no legal recourse other than to enforce your contract to buy, which will take more money and several months, in which time they may fall behind again and lose the house (and your money) to foreclosure.

Or, you could be sued after all you’ve done and be accused of taking advantage of the seller, even though your funds are being held hostage at their mercy. And even if you have them sign a note and deed of trust as security before reinstating their loan, you may be going into dangerous territory by breaking lending, licensing, and possibly usury laws. The potential downside makes it not worth the risk.

So the moral of the story is this — given the current legal climate, the fallen nature of sellers once their problems are solved, and the inherent financial risks, it is wise to avoid the three types of pre-foreclosure investment methods mentioned above. It’s not enough to be honest and do what you promise. It’s also not enough to have excellent documentation and CYA agreements. They can certainly help your case in a lawsuit, but don’t think for a minute they will actually prevent suits from arising to begin with. Instead, you have to avoid the very appearance of fraud, even if it means losing a few deals (which is infinitesimally better than losing a few lawsuits — or even winning them, for that matter).

Nothing is worse than a lawsuit, even when you win. It will cost you a teacher’s salary in legal fees (not to mention the legal fees of your private lender, if you used one and they are named in the suit) as well as tying up your invested funds and hostage profit for 1-2 years. That’s a 1-2-3 combination of knockout blows to your cash flow, and could put you out of business. And in bad economic times, litigation only increases because everybody needs money. Therefore, when it comes to protecting yourself from false accusation while investing in pre-foreclosures, an ounce of prevention is worth 60 megatons of cure.

Perhaps the most well-known method of obtaining foreclosure properties is buying them at the auction. The foreclosure auction is a live bidding process, just as you may have imagined. The auction is typically conducted at a public place, such as a courthouse. In some states, the county Sheriff or his deputy will conduct the sale. In other states, a referee appointed by the court will conduct the sale. Although the process is slightly different from state to state, the basic idea is the same – the property goes to the high bidder. The first bid will usually be made by a representative of the foreclosing lender. The lender can bid up the amount that is owed to him, without actually tendering money. If nobody else bids, the lender gets the property. In a majority of cases, nobody will show up but the auctioneer and the lender’s representative. Thus, in most cases, the lender gets the property; the less equity in the property, the less people show up at the auction.

Buying at the auction is not for everyone, especially beginners with limited funds. You need cash, and lots of it, to buy properties at auction. If you have access to a large credit line or have a money partner, you can sometimes find real bargains at foreclosure auctions. Do not get too excited, though, because most properties either have too little equity for people to bother with, or have so much equity that a large crowd will show up to compete. Despite popular beliefs, a real steal at the auction is very unlikely.

Finding Out Where the Auction Is Held

The auctions for your city or county are usually published in a legal newspaper or the legal section of your local paper. You can also subscribe to information service providers that will fax, mail and/or email you this information on a regular basis. If you are following a particular property, contact the lender’s attorney or the trustee for information about the sale date. Call the day before to make sure the auction has not been postponed or delayed by the lender or by the borrower filing for bankruptcy.

Before Going to the Auction

Before you even consider bidding at the auction, you need to do some homework. Remember that your bid at the auction is absolute; there is no backing out. Your due diligence in researching the property can be quite time-consuming, and chances are you will not get a huge bargain. Sounds discouraging? It is, but you should try it a few time to get a feel for the process. Choose a few neighborhoods that can familiarize yourself with and bid only on those properties.

Check the Condition of the Property

You need to drive by the property to find out what condition it is in. Good luck in trying to get inside, since the homeowner isn’t likely to let you in. If people are living in the property, you can make the assumption (most of the time) that there is running water and electricity in the house. However, you must assume the house needs at least the basic cosmetic upgrades: carpet, paint, new appliances, new kitchen cabinets, new vanity in the bathrooms. If the house looks vacant, take a peek inside the windows. The less information you have about the inside, the more conservative you need to be with your fix-up estimates.

What to Bid?

Before you bid on the property, the most important factor you need to think about is what you intend to do with the property if you win the bid. Are you going to live in it? Fix and sell it for cash? Flip it “as is” to another investor? Finance it and rent it out? Each one of these strategies will change your maximum bid price. I would suggest that you take the most conservative approach, that is, ask yourself what price you would need to pay if you had to resell the property quickly. In other words, don’t bid what you think will be the high bid, rather bid what you want to pay!

What You Need to Bring to the Auction

Contact the attorney, referee, sheriff, trustee or other official to determine how much money you need to bring to the auction. In most cases, you must bring a percentage of the winning bid price (usually 10%) in the form of certified funds, the balance being due in 30 days. In some states, the entire balance is due the day of the sale. Rather than bringing one certified check or money order, bring several smaller denominations, since it makes giving the deposit easier.

Tips for Buying at the Auction

You must arrive on time. Most auctions begin and end in a matter of minutes. If the auction is set for 10:00 am and you arrive at 10:05 am, you may be too late! If you are going to a county building, it will likely be in a part of the city which parking is a problem, so arrive extra early. Get a feel for the other bidders at the auction. It won’t take you long to figure out who is a pro and who is a “looker”. Even if you don’t buy the property, make friends with the pros so you have someone to sell other properties to at a later time. Don’t get in a bidding war! Many beginners get caught up in “bidding fever.” Don’t be one of them. Determine what you want to pay before you come to the auction, and don’t bid any higher!

Over the past two years, a dozen states have passed foreclosure “protection” laws, and many states are following suit. Even in states where there are no specific foreclosure protection laws in place, there’s plenty of power within the state Attorney General or County District Attorney’s office to prosecute a real estate investor.

Here’s some of the things you need to do to stay out of trouble:

GET ALL AGREEMENTS IN WRITING

Oral agreements are not good anymore, and they often lead to a dangerous “he said, she said”. If you get a deed from an owner across a kitchen table, it is a legal transfer, but you should document everything first with a contract and/or set of good, clear disclosures. These disclosures include the fact that the owner is losing his property, his equity, and his right to any proceeds from the home. Although giving a deed should make this obvious, some people truly think that they are entitled to something more because they are still living in the house. Also, some investors do offer vague promises to sellers for a right to re-purchase the house at a later time, which can be misconstrued. Always document every agreement you have with the seller in writing.

EXPLAIN THINGS IN PLAIN ENGLISH

Even though you have a good written disclosure, it’s no excuse for pushing papers under the seller’s nose to sign without reading. Explain everything clearly to the seller so he understands the implications of the deal. If you are afraid of telling the truth, don’t do the deal. The seller must go into the transaction with his eyes wide open. Imagine that the local news station was filming your deal and act accordingly.

DON’T OFFER THE SELLER A RIGHT TO REPURCHASE

Although you can offer the seller a lease-back with an option to re-purchase at a later time, this kind of arrangment rarely works out. Some state laws restrict this kind of agreement with a cap on the profit you can make on such a deal, which all but makes it impractical. Vis-a-vis these laws, a homeowner can claim such an arrangment was a “disguised” loan and get the property back by filign a lawsuit. Either way, it’s generally a bad idea to leave the seller in the property. Make a fair deal, give him some cash, and get him to move on with his life.

COMPLY WITH FORECLOSURE PROTECTION LAWS

Know your state foreclosure protection laws, known as “foreclosure consultant” laws. Generally speaking, these laws requires a written contract with state-required disclosures and a rescission period, anywhere from three to ten days. The rescission gives the seller the right to cancel the agreement. It is recommended you give a seller a 3 day rescission even if the law does not require it. If the deal ever blows up and you are in court, it will go a long way for your credibility.