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By: Sani H. Panhwar
CO TE TS
Building a Foreclosure Portfolio Buying a Foreclosure Home With o Money Down Buying A Home With Bad Credit: How To Clean Up Your Credit Score Creative HUD Home Financing The Pros of 203k Loans The Cons of 203k Loans Adjustable Rate Mortgages (ARM) and Your Foreclosure Home Purchase FICO Scores, What Affects Them And How Mortgage Lenders Look At Them FICO Scores and Interest Rates First Time Homebuyer Advantages Lower Interest Rates For First Time Homebuyers Tax Exempt Status For Foreclosure Homes Exemption of Real Estate Appraisal Early Bidding Window For Foreclosure Homes o Current Home To Sell Termite Inspections and Foreclosure Home Repairs Familiarize Yourself With Your Real Estate Marketplace What does the average home sell for in your area? What is the average time a home is on the market in my "backyard"? How many foreclosure home deals come available on an annual basis? Rank The Areas Containing Foreclosure Homes in Your Marketplace Shop For Equity First. Then Marketability. Foreclosure Home Buying Advantages Foreclosure Home Bidding Rules How Much To Bid For the Foreclosure Home HUD Foreclosure Homes HUD/FHA Government Foreclosure Bidding Formula VA Foreclosure Bidding Formula Foreclosure Home Investing: Entry Level Homes Foreclosure Homes With Zero Down Foreclosure Real Estate and Home Ownership Foreclosures In 15 Minutes How to Determine Equity How much can I get the foreclosure home for? How much can I sell the foreclosure home for? How much will it cost to repair the foreclosure home? Foreclosure Tips How Much Home Do I Qualify For? How To Buy a Bank Foreclosure Home
Buying Foreclosures; by Sani Panhwar
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The Foreclosing Lender’s Profits Condition of Title Property Disposition Bank Foreclosure Investing Overview Disadvantages of Buying a Bank Foreclosure Home How To Buy a Fannie Mae Foreclosure Home How To Buy a Freddie Mac Foreclosure Home How to Buy A Hud Foreclosure Home Find a Good Real Estate Agent – It’s a ecessity Contact a Well-Informed Mortgage Lender The Bottom Line in HUD Foreclosure Homes How To Buy A VA Foreclosure Home Understanding VA Foreclosures Term Offer vs. Cash Offer Term Offer for a VA Foreclosure Home Cash Offer for a VA Foreclosure Home Investing in Foreclosure Homes: Risks and Rewards Buying Pre-Foreclosure Homes Buying a Foreclosure Home at Auction Buying REOs Investing In Real Estate: How To Sell Your Foreclosure Home Real Estate Investment Strategy 2 – Buy and Rent Option Real Estate Investment Strategy 3 - LIC to Sell LIC to LIC Quick Foreclosure Facts Why buy a foreclosure home? Real Estate Investment vs. The Stock Market Save $100,000 On Foreclosure Home Understanding Mortgage Interest Rates Frequency of Mortgage Payments Secrets of HUD Foreclosure Homes The Easy Way to Win the Mortgage Game The Importance of A Foreclosure Home Inspection What Are Bank REO (Real Estate Owned) Properties What Are Escrows? What Everyone Should Know About Equal Housing What Is a HUD Foreclosure Home? How Does a Home Become a HUD Foreclosure Home? The Importance of a HUD Foreclosure Home Inspection
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Buying Foreclosures; by Sani Panhwar
Building a Foreclosure Portfolio
If you are just beginning to build your real estate portfolio, it is important that you understand the choices you need to make now that will have an effect on your flexibility later. • • • • • • What is my short-term real estate investing goal (i.e., how many foreclosure homes the first year)? Am I trying to generate revenue from my foreclosure homes now or in the future? How much? Do I want to be a landlord or not? What is my credit like? (If you need to improve your credit, do it now.) How much cash am I working with? What are long-term real estate investing goals?
Be sure to ask yourself these questions before beginning your real estate investing and foreclosure portfolio. If you already have investment properties, you should still ask yourself these questions. Write your answers down and refer to this list before making any decisions with regard to purchasing your next foreclosure home. Do not be afraid to reassess your goals to be sure that you current actions are still in track with your longterm real estate investing goals. Buying a Foreclosure Home With o Money Down Federal Housing Administration (FHA) foreclosure homes are different from any other type of foreclosure home in that there are several methods of buying a property utilizing low money down or no money down techniques. It is essential to first understand the several different ways in which the FHA lists the foreclosure homes that they are selling. I = Insured IN indicates a foreclosure home that currently meets minimum property standards (MPS) and is currently in livable condition. These foreclosure homes are not currently available with no money down, but can be obtained with no money by applying these techniques. Simply bid on the foreclosure home using an FHA 203b mortgage (as seen on the HUD contract) and then have the foreclosure home inspected. Be certain that you are with the home inspector and that the home inspector understands that you are interested in finding the deficiencies of the foreclosure home. Be sure the foreclosure home deficiencies are included in the necessary MPS items, including structural, heating and plumbing—paint and carpet will not be enough. Send the foreclosure home inspection along with your request to include the necessary funds in the price you are paying for the foreclosure home. Repair funds requested must exactly meet the increase of the purchase price for the foreclosure home. Be sure that the amount requested is less than $5500 and that is approximately the three percent you were required to put down on the mortgage.
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You could increase the amount of money received for repairs by applying for a 203k mortgage after the foreclosure home has been inspected. This raises the amount of funds received to a possible limit of 110% of the value of the foreclosure home after repair. IE = Insured with Escrow IE indicates a foreclosure home that requires some degree of repair in order to meet MPS. Additionally, IE foreclosure homes are not currently in livable condition. These foreclosure homes are not currently available with no money down but can be had with no money by applying these techniques. Simply bid on the foreclosure home using an FHA 203b mortgage (as seen on the HUD contract) and then have the foreclosure home inspected. Be certain that you are with the home inspector and that the inspector understands that you are interested in finding the deficiencies of the foreclosure home. Be sure the foreclosure home deficiencies are included in the necessary MPS items, including structural, heating and plumbing—paint and carpet will not be enough. Send the foreclosure home inspection along with your request to include the necessary funds in the price you are paying for the foreclosure home. Repair funds requested must exactly meet the increase of the purchase price for the foreclosure home. Be sure that the amount requested is less than $5500 and that is approximately the three percent you were required to put down on the mortgage. You could increase the amount of money received for repairs to the foreclosure home by applying for a 203k mortgage after the foreclosure home has been inspected. This raises the amount of funds received to a possible limit of 110% of the value of the foreclosure home after repair. UI = Uninsured UI indicates a foreclosure home that requires repairs in order to meet FHA standards and that is currently not in livable condition. These foreclosure homes are available with low money down but can be obtained with no money down. It is even possible to buy these foreclosure homes and make a substantial profit if you apply the following techniques. Simply bid on the foreclosure home using an FHA 203k repair mortgage (as seen on the HUD contract) and then have the foreclosure home inspected. Be certain that you are with the home inspector and that the inspector understands that you are interested in finding all of the deficiencies of the foreclosure home. Be sure that the foreclosure home deficiencies are included in the FHA minimums, including structural, heating and plumbing—paint and carpet will not be enough. The home inspector will send the foreclosure home inspection to the mortgage lender along with the financial requirements to do all of the noted repairs. The inspector’s assessment of the repair cost can be adjusted up or down in order for you to get enough money to complete the repairs. Be sure to allocate enough so that you can break even on the purchase. If you have any need for additional cash, include a margin so that you can either add to your savings or pay some additional debt off. The maximum mortgage
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allowed is 110% of the value of the property after repairs. The bank generally frowns on this practice, but if you act as the general contractor and work on the foreclosure home yourself, you can pay yourself for the work performed. Buying A Home With Bad Credit: How To Clean Up Your Credit Score Repos, bankruptcies and even late payments on your phone bill can be the difference between being qualified to buy a home or not. Negative items on your credit can be removed quickly and easily if you know how. The only reason credit problems ever become an issue is when they are ignored. By hiding from the issue you allow the credit problems to gain momentum and the cycle of ignorance continues to grow. It is not difficult to understand that when a credit reporting agency annotates that you have paid late on your car payment that they do not actually gain financially by doing so. These credit agencies merely post information that was given to them by the creditor. This is important to understand in order to appreciate how and why the system discussed here has been so successful. By disputing the accuracy of the negative credit item through a series of challenges to the credit reporting agency you are challenging the reporting agency to defend their information. If the credit agency elects to meet the challenge and go to court they may be found to be accurate, but what have they gained? The credit reporting agency will have lost because the process of defending the credit report in question is costlier to them than any financial reward they could possibly receive. Remember that the credit reporting agency is not a creditor itself, therefore win or lose they lose because of the cost involved. This is why so few challenges are taken up by the credit reporting agencies. Fewer than one in one hundred challenges to a credit report are fought when the challenger has done the appropriate paperwork and done it correctly. In order to properly challenge each credit agency a professional service is recommended. You can challenge a credit agency on your own with some prepackaged programs, but the likelihood of success is magnified 100 times by using a credible firm that is well versed with this segment of the credit industry. Creative HUD Home Financing What’s the easiest way to make money on a foreclosure home? Purchase a foreclosure home that needs some repairs (over $5,000.00) and apply for a 203k loan. The FHA (Federal Housing Administration) insures 203k loans and allows you to borrow a predetermined amount of money to finance repairs to your foreclosure home. The Pros of 203k Loans • 203k loans are the most flexible way for you to customize your foreclosure home to meet your specific needs. Floor plans can be changed or updated, kitchens can be modernized and almost any other feature of your new foreclosure home can be improved using a 203k loan.
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By taking advantage of a 203k loan, you can skip up to eight months of mortgage payments on your foreclosure home. A 203k loan allows you to bill yourself for hours worked on your own home and MAKE MONEY!
The Cons of 203k Loans • • 203k loans are slightly more expensive than the usual FHA loan. 203k loans are slightly more complicated than the usual FHA loan.
The 203k loan program is an FHA insured loan that has similarities to construction loans with some added bonuses. A booklet explaining 203k loans in more detail can be downloaded from the link below or requested from your local real estate agent. This booklet can answer most questions with regard to a 203k loan and how it relates to your foreclosure home. Adjustable Rate Mortgages (ARM) and Your Foreclosure Home Purchase If you qualify for the particular home you wish to purchase with a fixed interest rate, then you should choose the fixed rate mortgage 99% of the time. In this article you will learn why the ARM can be such a bad idea and how you can overcome the anxiety of your decision based upon the facts. Because the current interest rate is so low—and has been that way for sometime now—making a choice with regard to an adjustable rate mortgage versus a fixed rate mortgage is not difficult. You may be apprehensive of mortgage payments now, but within a very short period of time you will become comfortable. Generally, the first monthly mortgage payment is the most intimidating. After the first payment, the mortgage payment becomes just another monthly payment. The bank would not have qualified you for the foreclosure home you are interested in if they had not already determined you were capable of sustaining the payment. Don't forget that banks are pretty clever about what they do and don't often lose money. Because the bank is safe, you are safe.
Only use an ARM for qualifying reasons. The current rate rotates between seven to eight percent. If you absolutely must go with an adjustable rate mortgage then there is no better time than when buying a government foreclosure home, as you may be able to include all points and closing costs into the loan. Do not be misled by the erroneous loan programs that abound in the market today. CDA loans and Farmers home loans are among the many other loan programs that simply will not work when purchasing a foreclosure home. In general terms, these loans are not good for much and in with specific regard to foreclosure homes they are actually bad. The
Buying Foreclosures; by Sani Panhwar
single reason that these loans are such a bad idea is that they are not compatible with the type of properties, specifically foreclosure homes, that you are interested in buying. It is true that CDA promises a lower interest rate, as does the Farmers home loan program. However, because the wait for the funds can be 90 to 120 days, no government agency is willing to wait that long to remove the foreclosure home from their foreclosure home inventory. Additionally, the money is not guaranteed to be there when you are finally ready to purchase your foreclosure home. FICO Scores, What Affects Them And How Mortgage Lenders Look At Them FICO stands for Fair Isaac & Company. Credit scores are reported by each of the three major credit bureaus: TRW (Experian), Equifax, and Trans-Union. The credit score does not come up exactly the same with each credit bureau because the bureaus each place a slightly different emphasis on different items. The credit score itself can range from 300 to 900. The formula for exactly how the credit score is calculated is proprietary information and owned by Fair Isaac. Here, however, is an approximate breakdown of how it is determined: • 35% of the credit score is based on your payment history. This makes sense since one of the primary reasons a mortgage lender wants to see the score is to find out if (and how timely) you pay your bills. The credit score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall credit score. 30% of the credit score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more credit cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 30% or less of their limits. 15% of the credit score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions. 10% of the credit score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your credit score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are, the worse for your credit score. FICO scores only count inquiries from the past year. 10% of the credit score is based on the types of credit you currently have. The number of loans and available credit from credit cards you have make a difference. There is no magic number or combination of types of accounts that
Buying Foreclosures; by Sani Panhwar
you shouldn't have. These actually come into play more if there isn't as much other information on your credit report on which to base the score. The credit score is actually calculated using a "scorecard" where you receive points for certain things. Creditors and lenders who view your credit report do not get to see the scorecard, so they do not know exactly how your score was calculated. All that the creditors and lenders see are the final scores. Basic guidelines on how to view the FICO scores vary a little from lender to lender. Usually, a score above 680 will require a very basic review of the entire loan package. Scores between 640 and 680 require more thorough underwriting. Once a score gets below 640, an underwriter will look at a loan application with a more cautious approach. Many lenders will not even consider a loan with a FICO score below 600, some as high as 620. FICO Scores and Interest Rates Credit scores can affect more than whether your loan gets approved or not. They can also affect how much you pay for your loan, too. Some lenders establish a "base price" and will reduce the points on a loan if the credit score is above a certain level. For example, one major national lender reduces the cost of a loan by a quarter point if the FICO score is greater than 725. If it is between 700 and 724, they will reduce the cost by one-eighth of a point. A point is equal to one percent of the loan amount. There are other lenders who do it in reverse. They establish their base price, but instead of reducing the cost for good FICO scores, they "add on" costs for lower FICO scores. The results from either method would work out to be approximately the same interest rate. It is just that the second way "looks" better when you are quoting interest rates on a rate sheet or in an advertisement. First Time Homebuyer Advantages The advantages of being a first time homebuyer are plentiful and can be utilized if you know and understand your options and the ways in which you can save money. Lower Interest Rates For First Time Homebuyers As a first time homebuyer, you are offered far lower interest rates than an investor. If the standard interest rate you are being quoted is 7.5%, then you can be sure that the real estate investor who is interested in your hopeful new foreclosure home is going to be faced with an interest rate of at least 9.5%. When the real estate investor is planning to rent the home after purchase, this increase of 2% interest plays into the financial viability of the purchase for the investor. Knowing this should help you understand the benefits of getting out to the foreclosure home you are interested in sooner and moving on it faster. Tax Exempt Status For Foreclosure Homes Most states recognize the need for government-owned homes to be removed from the ledgers of the taxpayer. In order to make these foreclosure homes more attractive to a potential homebuyer, many standard items are not required.
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For example, most counties in the United States have special tax exemptions for buyers of foreclosure homes. This reduces and, in some cases, removes entirely the requirement to pay county transfer taxes when the home is purchased directly from the federal government. In Maryland, for instance, a first time homebuyer is allowed an exemption from paying the Maryland state transfer tax. That equates to a 0.25% savings on the purchase price of the foreclosure home at the settlement table. Exemption of Real Estate Appraisal Another example of savings for a first time homebuyer is the exemption of a real estate appraisal when buying a foreclosure home from the Veterans Administration (VA) or Housing and Urban Development (HUD). As long as you are asking the government agency selling the foreclosure home to help finance the same house, you are not required to have the home appraised. These agencies allow this because they have already appraised the foreclosure home and therefore do not require you to do the same. You can, in fact, use their appraisal to determine value when the need arises. Early Bidding Window For Foreclosure Homes Because HUD strives to make more Americans homeowners, an owner occupant you wishing to bid on a foreclosure home is offered a five-day window of opportunity to bid on a given home during its first five days on the market. During this time, a real estate investor that wishes to bid on the same foreclosure home is not legally able to offer a bid at all. After the five-day window has closed investors are permitted to come out of the woodwork with a vengeance. Use this window to your advantage by getting out to a foreclosure home that you might be interested in quickly and either moving on it or moving away from it. o Current Home To Sell First time homebuyers are not hindered in bidding no a foreclosure home by needing to unload another home before buying the property they are bidding on. This keeps many thousands of would-be homebuyers out of the foreclosure home arena. Use this to your advantage. Additionally, there is no such thing as a contingent contract when making an offer on a foreclosure home. The word “contingent” refers to the situation that homebuyers find themselves in when they currently own a home and must sell that real estate it before buying a new home. When the seller accepts a contingency, the homebuyer has no obligation to purchase if their house does not sell. Use the lack of contingent offers in the government foreclosure arena to your advantage. If you do happen to be an owner of a home and are looking into the purchase of a government foreclosure home, be content with the knowledge that every contract has a financial contingency and, therefore, you are indirectly not obligated to make the
Buying Foreclosures; by Sani Panhwar
purchase unless you qualify to carry two mortgages at the same time, which is highly irregular. Termite Inspections and Foreclosure Home Repairs Whereas most homes require a complete termite inspection and repairs paid for by the homebuyer, the VA and HUD have both found it beneficial to cover these costs with regard to foreclosure homes so long as the homebuyer is financing the home with their respective help. If you are buying an Insured Property, FHA/HUD will pay for all necessary repairs required in order for the foreclosure home to meet minimum property standards (MPS). MPS is not the same as traditional FHA standards. MPS is quite a bit less rigorous. Do not let this scare you off, as termite testing and treatment are fairly standard and MPS should have no effect on the quality of termite treatment. Familiarize Yourself With Your Real Estate Marketplace First, become familiar with your real estate marketplace. Real estate markets sometimes differ from town to town and sometimes from zip code to zip code or even block to block. It is important that you know how your real estate market differs from that of the markets around you. Determine your perimeters geographically. As your experience grows, your perimeters can and should expand so that with enough experience and a sizable financial cushion the idea of buying foreclosure homes in different states will become a reality. First, however, you must get comfortable with the foreclosure home market in your own "backyard". What does the average home sell for in your area? The answer to this question will enable you to determine the spread between the future target purchase price of your foreclosure home and the average sales price (your equity). To use the top-end selling price for that area will not give you an accurate picture. Hope for the best but prepare for the worst. What is the average time a home is on the market in my "backyard"? The answer to this question will help you calculate the carrying costs of your future purchase as well as determine if one neighborhood is more desirable than another. If your future purchase has a days-on-the-market time which, when calculated, consumes all of the possible profits then you need to know this in advance. Do not assume that because you are more aggressive or intelligent than the average homebuyer you will be able to reduce the time the home is on the market. Often, time on the market has nothing to do with your ability to advertise your home or negotiate. Sometimes interest rates increase quickly (spike), contractors that you hired are late or events that are out of your control will affect the selling date of the home. How many foreclosure home deals come available on an annual basis? The answer to this question will help you recognize an opportunity from an option. If such deals are rare, then you may have to reduce your expected returns in the short term for a great upside in the future. If a neighborhood has few (if any) home buying
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opportunities that indicates a strong market. If you have a personal guideline of 15% equity before purchasing a home, you may decide that a particular neighborhood is still desirable even though you can only find a 10% equity position. The appreciation of the foreclosure home in one year will make up the difference. Rank The Areas Containing Foreclosure Homes in Your Marketplace What are the most desirable medium to low cost housing areas in your "backyard"? Break down the neighborhoods on your list of foreclosure homes. Assign each neighborhood a number from one to five. One is terrible and five is the best neighborhood for foreclosure home investing purposes. Medium to low cost housing is specified for several reasons: After you have assigned each neighborhood a value it will be far easier to recognize good opportunities. Foreclosure homes in neighborhood A might be a possible option, in neighborhood B there may be great foreclosure home opportunities and neighborhood C a terrible idea. Many skilled investors do not know how to make a determination between neighborhoods and may make expensive mistakes that can be easily avoided with this simple system. Shop For Equity First. Then Marketability. Many would-be investors make the simple mistake of repeating what they have heard regarding what makes a good real estate investment. They believe that a 3-bedroom/2bath free standing home is the only investment worth making. This is absolutely not true. What you want is equity. You do not want to end up with an oddball property. If onebedroom condominiums are commonplace in your real estate market then they are every bit as valuable as a single family/free standing home. Shop for equity first and then for marketability. Leave all the foolish notions for those who know less than you. Your potential market has just increased because your knowledge with regard to buying a foreclosure home has increased. Foreclosure Home Buying Advantages There are numerous advantages to buying a foreclosure home, including the incredible savings that can be enjoyed financially, as well as the possibility of buying a larger and more valuable home via foreclosure than you could ordinarily afford. Divorce, loss of employment and loss of life are the most common reasons for a foreclosure to occur. A foreclosure occurs when the mortgage lender of the home loan money to buy the home is not paid back in a timely way. When one of the three situations listed above transpires and the homeowner is not adequately prepared, a foreclosure is most likely to be the end result. Soon after one of the “big three” occurs, the homeowner is several months behind in payments and the mortgage holder will not negotiate with the homeowner as special exemptions cannot be made for every homeowner going through difficult times. It seems oppressive, but very often a foreclosure can be the best thing for
Buying Foreclosures; by Sani Panhwar
the homeowner because it removes the pressure and allows the foreclosure party to potentially live in the foreclosure home for several months free of charge. After the foreclosure party has vacated the foreclosure, the foreclosure home is given to the foreclosure agency that insured (FHA) or guaranteed (VA) the mortgage. This government agency will begin the process of cleaning and appraising the foreclosure home. The fact that these foreclosure homes are so plentiful keeps the federal government from determining the debt of each home independently. The foreclosure homes are sold for the appraised value at the time of foreclosure. When a foreclosure home is underappraised, it is given a list price below the market value. These under-appraised foreclosure homes are not a rarity. In truth, the sheer number of these foreclosure homes results in countless under-valued foreclosure homes. Appraisers are asked to perform ten to twenty appraisals on foreclosure homes in a single week, far more appraisals than can be performed with the degree of accuracy normally associated with a “normal” appraisal. These appraisers bid on the job of appraising thousands of home foreclosures at once and rely on volume in order to make a profit. With volume come mistakes. These mistakes can and do go both ways. When you see a foreclosure home that has obviously been over appraised, find solace in the knowledge that right around the corner there is bound to be a foreclosure home that is under appraised. Take advantage of the volume of foreclosure homes that these government agencies are dealing with and profit from it. As a first-time homebuyer, you hold all of the cards. Foreclosure Home Bidding Rules If you are looking at a bank foreclosure, then the rules of bidding are fairly simple. Contact your real estate agent or the listing agent and express your interest in the foreclosure home. Then: Have your mortgage loan officer draw up a preapproval letter for no more than the price you plan to offer on the subject foreclosure home. Have your real estate agent send the listing agent a letter of intent for the foreclosure home. The letter of intent differs from a full-blown contract in that it covers only the generalities of the transfer of the foreclosure home (i.e., price, financing, proposed closing date, etc.). Once the listing agent receives the letter of intent for the foreclosure home from your real estate agent, the listing agent will send the letter of intent to the bank holding the foreclosure property. Be prepared to wait at least a week from this point, as banks work slowly and cautiously. How Much To Bid For the Foreclosure Home Obviously, one of the main considerations when thinking about placing a bid on a foreclosure home is how much to bid and, moreover, how to bid just enough to win the bid for the foreclosure property without overpaying. This is where the trouble potentially
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begins. Unlike HUD or the Veterans Administration (VA), which are both government agencies, banks determine the price they are willing to accept for a foreclosure home on a per property basis. Ask your real estate agent to pull the tax records in order to determine the amount mortgaged prior to the foreclosure. Do not try to bid less than the bank owes on a foreclosure home until it has been on the market for three to six months. Do not be afraid of bidding below the mortgaged amount for the foreclosure home. A discount of 10-15% is the most you can expect, and the bank may still not be able to be this flexible regarding sales price. If you do not offer full price for the foreclosure home, be prepared to lose the foreclosure property to another homebuyer. HUD Foreclosure Homes Housing and Urban Development (HUD) is the largest single resource for real estate foreclosures in the country due to the fact that everyone qualifies for an FHA loan. (In contrast, the VA requires that you be a true veteran in order to initiate a veteran loan, thereby limiting the number of qualified loan applicants.) FHA loans also provide a lower down payment than conventional loan programs, as most first-time homebuyers opt for reduced down payments. Whereas the first-time homebuyer would be responsible for five percent down with a conventional loan program, an FHA loan requires only three percent down. HUD/FHA Government Foreclosure Bidding Formula Per the HUD/FHA government foreclosure bidding formula, you can bid five percent below the asking price at a maximum. If you bid less than five percent, the bid will not be accepted and your bid for the foreclosure home will be thrown out. If you require closing cost assistance, you must ask for it during the bidding process and this figure must be allowed in your final tabulation. HUD allows for a maximum of five percent for closing cost help, and in some states that amount is far less. Ask your real estate agent or mortgage lender for guidance. VA Foreclosure Bidding Formula A similar formula exists for VA foreclosure homes. The Veterans Association has the ability to be a little more flexible regarding sales price as the amount owed on the foreclosure home can play a larger role with regard to repairs. Whereas HUD allows no more than a five percent price reduction, the VA will sometimes take as much as ten percent off the price of the foreclosure home. The VA will also allow for six percent closing cost help. While one percent may not sound like a lot, it becomes fairly impressive when one percent of the price of the foreclosure home equals several thousand dollars. Get educated, get a good real estate agent and get into a low-priced foreclosure home. Foreclosure Home Investing: Entry Level Homes Four percent of all homes mortgaged are foreclosed upon. This percentage is stacked more heavily toward the segment of the real estate market referred to as "entry level homes". This does not mean that higher-priced homes do not also become foreclosure
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homes, however the higher priced the home, the greater the financial resources the homeowner normally has at their disposal. This financial generality works well to your needs as a real estate investor as the market for entry-level homes is by far the strongest, most active segment of the real estate market and will be for the foreseeable future. The first-time and second-time homebuyer encompasses a wide variety of homes from one-bedroom condominiums to two-bedroom townhouses or even three and four bedroom single-family homes. The type and style of foreclosure homes available to you are more heavily weighted to your geographic areas of interest (where you live) rather than toward what is generally perceived as wise investment choices. The real estate investing community has been focused on types of homes more than on the true value to a wise investor. Profits should be the single guiding light in your search for real estate investment success and financial freedom. Profits are driven by equity balanced with repair and carrying costs. Understanding how to balance these three variables is paramount. Foreclosure Homes With Zero Down There is an old saying in real estate that goes: “If you want to play in the game, you fist must show up.” In other words, you must first build a relationship with a particular lending institution in order for the lender/mortgage holder to have a lower perceived risk. By allowing a homebuyer—you—to purchase a home without risking any of your own money, the mortgage lender assumes all the risk. If, for any reason, you were to be foreclosed on, the mortgage lender will, of course, lose additional funds on the home. This risk brings responsibility on the part of the mortgage lender. The downside for the loan officer that approves your no-money-down scenario is that the mortgage lender’s board could fire him or her for losing additional money on a home that has already lost money. It is a popular misconception that lending institutions make money foreclosing on homes. The foreclosure process is a negative cash experience for the mortgage lender. The lending institution is not in the business of real estate management. They are in the business of making money just as it was lent to the initial homebuyer. The interest and time frame are precisely how the mortgage lender wants to be paid. Prove your value to the mortgage company by presenting a good credit score and your current real estate portfolio. If your credit is not as good as it could be, make it better. If you do not have a current real estate portfolio, start building one now. Do not make the mistake of asking for no-money-down scenarios from the lender without at least one of aforementioned qualifiers. The worst that can happen is that you are turned down. The idea of a real estate portfolio and good credit is to increase the number of times you hear “Yes.” Once you have proven your ability to help the lending institutions out of their predicament, they will begin coming to you when they need your special kind of help.
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Finally, always remember that the relationship with the mortgage lender is more important than any single deal. When you put people first, you will win. Put money first, and you are bound to lose. Foreclosure Real Estate and Home Ownership There is a system to purchasing foreclosure real estate that can be broken down into six basic steps. Following these steps will simplify a foreclosure real estate transaction while avoiding common mistakes made by the typical consumer. Step 1 – The pre-approval process. The most common mistake made by the typical homebuyer is shopping for a home without having financing pre-arranged. A qualified mortgage lender will help the homebuyer figure out the amount that the homebuyer is qualified to borrow and determine any options available to the homebuyer to increase borrowing power. Homebuyers need to explore alternative lending programs, such as those backed by the Federal Housing Administration (FHA), the Veterans Administration (VA), The Federal National Mortgage Association (Fannie Mae) and private sources of funds. The preapproval process is much more involved than a simple pre-qualification process. Preapproval converts a homebuyer from “contingent” to “all cash,” improving one’s negotiation position. Step 2 – The interviewing process in selecting a real estate agent. Homebuyers need to select the real estate agent that will best serve his or her needs with regard to finding and purchasing a foreclosure home. Step 3 – The actual hunt for a foreclosure home. A common mistake made by many homebuyers is that they select a foreclosure home too rapidly. In a hot market, however, a quick decision may be necessary. Buyers should view at least five or ten homes within their price range. The importance of step one, prequalification, is that homebuyers are only looking at homes they can afford, thus expediting the shopping process. Step 4 – The negotiating process. Once a homebuyer finds the right home, it is time for negotiations. If you have followed this outline in its proper sequence you are ahead of the game. In an active real estate market, being pre-approved prior to finding your home will improve your chances of getting the home desired should there be competition for the home with multiple offers. Home sellers are more likely to accept an offer from a prospective homebuyer if they have the assurance that they homebuyer can complete the transaction for the home rapidly. Step 5 – Loan Processing and Approval. Once the home is selected and the terms have been negotiated, your mortgage lender will take the homebuyer from the loan application to the final approval of the home loan.
Buying Foreclosures; by Sani Panhwar
There are many steps along the way that will need constant supervision and involvement from all parties. Step 6 – The Closing Process. A homebuyer that does not come to the closing fully prepared may run into unpleasant surprises that could not only delay closing on the foreclosure home, but could very well dissolve it altogether. The homebuyer’s team—their real estate agent, mortgage lender and closing representative—will coach the homebuyer on what happens at the closing, who needs to be present, and what documents to bring. The loan professional that has made this information available to you specializes in assisting those individuals with obtaining a home loan whether for purchase or refinance. Your loan professional in most cases can advise you on the best approach and help you with the specific loan requirements necessary for purchasing the foreclosure home you desire. Foreclosures In 15 Minutes Investing in foreclosure homes for resale is not that different from investing in foreclosure homes for rental income. Many of the same rules apply and many guidelines remain constant. As with any type of investing, the point at which you enter will determine how profitably you exit. The single largest distinction between real estate investing and stocks, bonds, mutual funds or precious metal is that real estate allows the investor the opportunity to have a more direct and immediate impact on the investment vehicle—the foreclosure home—through rehab, paint, carpet, etc. This article demonstrates how to quickly make an assessment of a potential real estate investment. This guide should allow the average investor to make a rapid and well-thought-out decision. An informed real estate investor will not "lose out" because of third-party factors such as obtaining appraisals or contractors and repair people. An aggressive, proactive approach by the real estate investor can reduce the time it takes to obtain foreclosure homes. A passive approach or an offhand attitude does not promote good opportunities. Remember, work WITH your real estate agent and get proactive! How to Determine Equity The old adage about the only the three words in business being "Location, Location, Location" is as true as ever. In real estate, however, those three words are "Equity, Equity, Equity." The difference between what is owed on a property and its market value is called equity. As a real estate investor, the goal is to buy the foreclosure home for less than the full value and sell for market value in order to make a profit in the process. The question is, at what point does caution balance against risk to make a profit on a foreclosure home? A strong equity position is generally targeted at 25% after repairs. An equity position less than 25% can work for rental investments, but for resale purposes 25% is a safe figure. In order to determine if 25% after repairs can be achieved there are only three variables that need to be weighed in the mind of an investor:
Buying Foreclosures; by Sani Panhwar
• • •
How much can I get the foreclosure home for? How much can I sell the foreclosure home for? How much will it cost to repair the foreclosure home?
It is not difficult to obtain answers to these questions as long as the readily available data can be obtained quickly and accurately distilled into usable information. By using the following guide and examining each foreclosure home in terms of these three variables it should not take more than fifteen minutes to determine if a particular foreclosure home is a wise investment. How much can I get the foreclosure home for? First, ask what your real estate agent knows about the particular foreclosure home: 1. How long has the home been on the market? (Not vacant, but available for sale.) 2. Can investors bid on the home? (Some properties are for owner/occupants only.) 3. What does your real estate agent think about the home? (A good real estate agent is worth his/her weight in gold.)
Second, look at the foreclosure home yourself. Is it a "fixer upper" or is it "market ready?" The cost to make a foreclosure home ready to sell has to be considered as part of the cost of buying a property. Usually a good look will tell you how much of a commitment in funds will be required. Third, be sure that you are willing to own the foreclosure home for the duration. While it is certainly possible to get in and get out without a serious commitment of finances, be ready to own the foreclosure home until it is sold. Some banks have regulations stating you must take possession of a property before you can sell it again. If, for whatever reason, your buyer is unable to complete his end of the transaction, you need to be prepared to be the owner of the investment property until it eventually sells. Fourth, bid quickly and often. Nothing is more frustrating than investing a lot of effort into a project for nothing. When considering investments, do not hesitate and risk missing an opportunity. If a deal looks only “so-so” (only a 10% equity position, for instance) BID LOW to achieve that 25% potentiality. It could be a good rental, or even a modest resale. And there is always the chance you might win the bid. In investing, as in life, "he who hesitates is lost." After submitting a bid, start looking for the next investment. Don't delay a possible "big dessert" while waiting on the first course. How much can I sell the foreclosure home for? As a general rule of thumb, most investors are motivated to purchase with a minimum 25% equity position (after repairs). This requires two separate deductions in order to be
Buying Foreclosures; by Sani Panhwar
sure of a 25% equity position: the true market value of the subject property (after repairs) and the actual repairs. In order to determine the true market value without ordering a full-blown appraisal (both time and financially prohibitive), an investor must look at comparable sales. "Comps" are available from your real estate agent or online from services like HomePriceCheck. While the online services may serve as a general guide, the comparables your real estate agent can obtain will take into consideration many more factors. Look at the entire neighborhood in print format. Then consider the most recent sales that reflect the style and neighborhood of the subject property and compare them to your investment home. How much will it cost to repair the foreclosure home? After looking at the comparable sales, the investor need only reduce the repairs to understandable figures in order to calculate if the foreclosure home can be purchased and repaired for 75% of its market value (the 25% equity magic number). To estimate repairs one could have any number of contractors offer bids and submit proposals, however the time required for meeting with three contractors and getting proposals may not be available. A quick-thinking, fast-acting investor can estimate work required by walking through the subject foreclosure home and tallying the figures without a second appointment. These figures are not concrete numbers, but should allow a quick and easy comparison of value allowing a decision to be made after the estimates of repair have been performed. The following should offer some averages for the more common repairs to a 1200 square foot rancher without a basement. Paint w/minor drywall repairs: $800.00-$1000.00 per house Carpet (one grade above builders): $1000.00-$1200.00 per 1,000 sq. feet Kitchen and Bath flooring: $300.00-$500.00 per room New Roof (try to repair first): $2,0000.00-$3,000.00 per house New Heating and Air: $1,000.00-$2,500.00 Appliances (Save Money-buy used): $250.00 per appliance Miscellaneous Expenses: add 10% to total Foreclosure Tips Tip #1 - The rewards are greatest when the real estate investor is a knowledgeable, proactive force in the process. Take an active roll in your foreclosure home investment. Tip #2 - The figure for how many days on market (DOM) a property was available before its eventual sale will be found on the MLS listing. Be sure to ask your real estate agent for these figures specifically so that a determination can be made regarding the desirability of a particular neighborhood, style of home, and other factors. Tip #3 - Along with "sold" properties, take a look (in print) at other homes that are still "available" or "withdrawn" from the market to determine the health of the market.
Buying Foreclosures; by Sani Panhwar
Tip #4 – Be sure that you are true to your investigation and do not allow passion or trepidation to sway your decision-making either way. It is more important that you swing than it is that you hit a home run. Bid often! Tip #5 – Once the subject property is under contract, be sure to get a foreclosure home inspection and estimates from more than one contractor. How Much Home Do I Qualify For? Determining how much home you can afford will greatly affect your home buying decision. Even if you have been pre-qualified for your home purchase, you may want to have your information reviewed by your mortgage lender to determine if there are ways you can be qualified for a higher amount or a lower interest rate. The major factors that determine your home mortgage qualifying amount are: • • • Your Income Your Monthly Expenses Your Credit Score
In order to give yourself a snapshot of what you qualify for, multiply your annual household income by a factor of three and add $10,000.00. For example, if your annual household income is $50,000.00 multiply that by three giving you $150,000.00. Add $10,000.00. You qualify for a $160,000.00 mortgage. This home mortgage amount is not representative of any debt that you may have such as car payments and credit card debt. Remember, only recurring debt counts against your qualifying amount. By pre-qualifying online, your mortgage lender will review your credit reports free of charge and ask you a few questions about your monthly expenses and income. In some cases you may need to provide information about a co-signer or clean up your credit to increase the amount of home for which you qualify. You will be required to gather past tax information, pay stubs, receipts, or other documentation. Talk with your mortgage lender about what information he will need to get the ball rolling on the purchase of your home How To Buy a Bank Foreclosure Home Many new real estate investors want to buy foreclosure homes directly from the bank. The attraction to bank-owned properties is understandable, as you borrow money from the bank to purchase a home. It is natural to assume that the bank owns the home; however, whether through a Deed of Trust or Mortgage, the title to your home is either held by a third party or pledged as security for the loan. So, in fact, the bank does not actually own the foreclosure home at all. You borrow money from and give mortgage to the bank. The mortgage is the security instrument utilized to protect the bank from loss should you default on the home loan.
Buying Foreclosures; by Sani Panhwar
Unless you bought a bank foreclosure home directly from the bank, the bank has never owned the foreclosure home at all. The Foreclosing Lender’s Profits The goal of the foreclosing lender is to gain possession of the foreclosure home. The financial goal of the lender is the recovery of the principle loan balance, accrued interest, late fees, penalties, taxes paid on behalf of the home owner, court costs and attorneys’ fees. In most states, the laws are written so that the mortgage lender can only attempt to recover these widely accepted standard losses. The mortgage lender will add in every legitimate expense when foreclosing on a home. This is what is sued for: the total the mortgage lender claims is owed by the owner of the foreclosure home. In most states, this is the maximum amount the mortgage lender can collect. The laws are written this way to protect homeowners from unfair practices. The commonly held notion is that a bank (or any other lender) must sell a foreclosure home for the same amount it cost in order to gain possession of the home and, therefore, cannot make a profit. This is false. If the foreclosing lender is the successful bidder on the foreclosure home at auction, it will take possession of the foreclosure home for the very first time. When this happens, all the rules change. The lender, now the legal owner of the foreclosure home, can do anything it wants with the home, including sell the foreclosure home for any amount it desires. Condition of Title When purchasing foreclosure homes, homebuyers are often concerned about the quality issued by the mortgage lender. A common belief is that there may be liens or judgments clouding the title of the foreclosure home. This is a myth. The mortgage lender will bid on a foreclosure home at auction only if it wants the home. The mortgage lender, typically the senior lien holder, wipes out all junior lien holders or judgments against the foreclosure home in the process. If the foreclosing mortgage lender does not bid at the sheriff’s sale or auction, it probably doesn’t want the foreclosure home. This may be due to excessive superior liens, such as IRS or tax liens. (Tip: If the mortgage lender doesn’t bid for the foreclosure home at auction, you probably shouldn’t bid on the home either.) The mortgage lender, in an effort to recoup its losses, will bid on the foreclosure home, wipe out lien holders, and then pay the balance of outstanding taxes on the foreclosure home to secure the home’s clear title. No mortgage lender will go through the time, effort and expense of foreclosing on a home only to lost the foreclosure home for a few thousand dollars in back taxes. Having absorbed these costs, the mortgage lender generally adds them to the asking price of the foreclosure home and will sell the home with a clear title. The lender does not have to sell the foreclosure home for what was paid at auction.
Buying Foreclosures; by Sani Panhwar
Another myth is that all banks are bending over backwards to give away foreclosure homes. Lenders want to sell their foreclosures. Lenders—banks in particular—are corporations. These corporations are driven to make money, not to lose it. A bank has to answer to its shareholders just like other corporations do and thus will not “give away” a foreclosure home. The business of repossessing homes is not new. Over the years, many mortgage lenders have developed effective methods of selling their foreclosure homes quickly with minimal loss. Property Disposition Lender practices and procedures with regard to foreclosure homes vary greatly. Some lenders widely market their inventory of foreclosure homes, while others practically hide them. Some banks advertise foreclosure homes in daily newspapers, while others demand that you maintain an account with them—or better yet, become a stockholder—just to get their list of foreclosure homes. Lenders are in the money business, not the real estate business. Thus, most foreclosure homes are marketed through recognized real estate brokers or real estate agencies. Some real estate agencies specialize in foreclosure homes and may represent several lenders’ homes. Real estate brokers may have several real estate investors line up just waiting for a good foreclosure home to turn up. Real estate brokers can also assist the mortgage lender in determining market prices of foreclosure homes, suggesting marketing strategies, recommending appraisers or contractors with expertise in foreclosure homes, etc. Some mortgage lenders establish a set price for a foreclosure home and will only allow the sales agent to consider offers for less. Many mortgage lenders dispose of their own foreclosure homes. Depending on the size and complexity of its foreclosure home inventory, the mortgage lender may have one part-time clerk working on foreclosure homes sales or an entire staff of special asset managers handling the sale of foreclosures. Bank Foreclosure Investing Overview Purchasing foreclosure homes directly from the bank is the most popular way to buy foreclosures. It’s fairly easy and less of a headache than other real estate investing methods because it involves less complications and risks. Locate bank or government foreclosure homes in the newspapers or by researching them at the county courthouse. You can also contact a real estate agent or use a good listing service. Locate foreclosure homes that meet your investing criteria, those that are in your area, price range, size and style. Determine whether you are buying a foreclosure home to resell or to secure a home for yourself. Decide if the foreclosure home is a bargain by deducting the lender’s asking price for the home from the average market price of very similar homes in the immediate area. Your goal as a real estate investor is to realize a tidy profit. You can buy a foreclosure home at a 15-20% discount and earn a 35-40% return. As a homebuyer, you should buy a
Buying Foreclosures; by Sani Panhwar 22
foreclosure home below market value with a low down payment, low interest rate and reduced closing costs. Contact the mortgage lender or the real estate broker and meet him at the foreclosure home so you can inspect it. Record any damages to the foreclosure home and deduct the home repair estimates from your price. Use a good home inspection checklist. Real estate investors must deduct all expenses associated with buying, repairing, borrowing, holding and closing on the foreclosure home again from the price they think they can get. Homebuyers should negotiate around the four discount factors: price, down payment, interest rate and closing costs. The bank, being a lender, can negotiate all these items. If you still like the numbers and the foreclosure home, proceed with a written offer for the home containing the following: • • • • • • • • • • A statement indicating your intent to purchase the foreclosure home The physical address of the foreclosure home The legal description of the foreclosure home The price you are willing to pay for the foreclosure home Your down payment terms Your financing terms The date you desire to close on the home Any contingencies Your deposit information Your name, address and phone number
Depending on the foreclosure home and several other variables, you may want to buy a property at 15-25% below market value. Start your offers accordingly. Unrealistic offers on foreclosure homes will be rejected quickly. Learn to work with the banks. You can negotiate around interest rates, price and down payment, just stay within reasonable boundaries if you want to succeed in purchasing a home. Some mortgage lenders sell thousands of foreclosure homes every year. Many sell their foreclosure homes at or near market price. We know one lender who has sold almost 10,000 properties in the last three years, with average sales of 99% of market value. Not all lenders behave the same way. Try to locate those that are more flexible in their property disposition policies. When the bank accepts your offer, close on the foreclosure home as quickly as possible. Avoid delays and complications from competitive offers.
Buying Foreclosures; by Sani Panhwar
Disadvantages of Buying a Bank Foreclosure Home In the real estate industry, the rewards follow the risks. Therefore the payoff from this investing method is typically lower than that of buying pre-foreclosures or buying a foreclosure home at auction. An REO investor should have no problems achieving a 10-20% discount from the market value of comparable homes. Savings of 25-35% are harder to find. Savings of 40-60% are possible, but are getting more rare. Other disadvantages to buying a bank foreclosure include: a lender that moves at a slow pace; a lender selling the property “as is” with no cooperation in making repairs to the home or allowances; and the rare but possible problem of evicting a tenant or homeowner from the foreclosure home. How To Buy a Fannie Mae Foreclosure Home Fannie Mae foreclosure homes are owned by the Federal National Mortgage Association. These foreclosure homes are homes that were previously purchased using a conventional loan (as opposed to a VA loan or FHA loan). Fannie Mae “guaranteed” the loan to the mortgage lender by providing “mortgage insurance,” which is paid by everyone who seeks a Fannie Mae insured loan. A Private Mortgage Insurance premium (PMI) is paid to Fannie Mae by each borrower. There is an upfront cost that is included in your home closing costs, as well as a monthly premium paid with each monthly mortgage payment you make. The funds collected from your closing costs and monthly premium are used to reimburse a mortgage lender for any losses incurred by the default of a borrower. For example, if a borrower does not pay their mortgage and the mortgage lender decides it must foreclose in order to be repaid, the lender will serve notice and eventually auction the foreclosure home. If the auction of the foreclosure home does not generate enough money to repay the loan in full, the mortgage lender can apply to Fannie Mae for payment in full. Fannie Mae repays the mortgage lender and obtains the deed to the foreclosure home. Once Fannie Mae obtains the deed to the foreclosure home, it will evaluate the home and put it up for sale. All PMI premiums collected and all proceeds from foreclosure home sales enable Fannie Mae to continue insuring loans and actually “buy” mortgages from banks and other lending institutions. This process allows mortgage lenders to keep lending, thereby “recycling” the banks’ cash on hand (so they do not have to wait 30 years to be repaid.) How To Buy a Freddie Mac Foreclosure Home Freddie Mac is chartered by Congress and does not actually lend money. Instead, Freddie Mac buys mortgages from various mortgage lenders, sets lending criteria and puts loan programs for mortgage lenders to use when evaluating your creditworthiness for a mortgage. This process, in turn, makes money available to banks to lend and encourages mortgage lenders to take a risk with certain borrowers.
Buying Foreclosures; by Sani Panhwar
Freddie Mac is actually a competitor to Fannie Mae (although Fannie Mae has been around since 1938, while Freddie Mac was established in the 1970’s). This competition enables consumers to get the lowest mortgage rates possible. Freddie Mac also offers special loan programs to homebuyers from time to time. Freddie Mac has properties to sell as a result of the loan guarantees it issued to various mortgage lenders. Once Freddie Mac goes through the process of reimbursing the mortgage lender for any foreclosure losses, it will take the deed to the foreclosure home and put the home up for sale. Since Freddie Mac’s revenue comes from a combination of Private Mortgage Insurance (PMI) premiums and the actual sales proceeds, you can often find some real bargains. How to Buy A Hud Foreclosure Home Before you begin the process of buying a HUD foreclosure home, you need to know what obstacles you must overcome to make your purchase and how to manage the "risks" of buying real estate foreclosures. (For basic background on how a home becomes a HUD foreclosure home in the first place, check out the article “What is a Foreclosure?”) Anytime you sign on the dotted line to purchase a foreclosure home "as is" without even a financing contingency, you had better know what you are doing. This sounds scary, and it should, but there are clear steps you can take that will help make buying a foreclosure home a better experience for you and make it the best single real estate investing opportunity of your life! Find a Good Real Estate Agent – It’s a ecessity First of all, find a good real estate agent. Yes, there are thousands of real estate agents and there are many very good ones. The bottom line is that you need a good real estate agent who has experience dealing with HUD foreclosure homes. There are web sites that can assist you in your real estate agent search. (A good one to reference is www.USHUD.com, which not only contains educational information, but also includes Real Estate Agent and Mortgage Lender Experts knowledgeable in real estate foreclosures whose references have been checked.) There some clear differences you and your real estate agent must understand when dealing with HUD Foreclosure Homes. The contract is very different and you must use the HUD foreclosure sales contract and HUD Addendum. This is critical because you cannot just buy the HUD foreclosure home without these forms and your real estate agent should be sure to explain both sides of the HUD foreclosure contract. The back side of a HUD foreclosure contract contains all the fine print. (Note: Teachers and police officers are eligible for special programs—the Officer/Teacher Next Door Programs. Although guidelines for teachers and police officers are different from other prospective foreclosure homebuyers, it is still recommended that the services of a knowledgeable HUD real estate agent be retained.)
Buying Foreclosures; by Sani Panhwar
HUD also has an online bidding system and you want a real estate agent familiar with this system. Even if you do not use your real estate agent to find a foreclosure home for you, and instead use other tools available to locate a foreclosure home on your own, you still need a real estate agent registered with HUD to bid on these foreclosure properties. The real estate agent’s broker must be registered with HUD before their real estate agent can even submit bids. You should discuss this with your real estate agent during your very first conversation and know in advance that there are bidding deadlines to be concerned about. All bids on foreclosure homes are due at midnight on the bid deadline published on the HUD listings. Bids for foreclosure homes can be submitted until midnight each day Monday through Friday (you can submit bids on the weekend, but they count as if done on Monday). In most states, New HUD Listings are posted each Friday, usually by midday, with bids due the following Tuesday for full price Owner-Occupants only. An experienced real estate agent will know this and explain this to you, but remember the exact days are different in many areas. Also, be sure to ask your agent to PRINT the Bid Confirmation that HUD presents on the computer screen after a foreclosure home bid is submitted. This is the only way to “find” your bid if it gets lost. The new HUD foreclosure home listings are made available to Owner-Occupant bidders who are prepared to pay full price for a HUD foreclosure home during the initial bid period. HUD tries to give new homeowners a short period of time to bid against other new homeowners (as opposed to experienced real estate investors.). If the foreclosure home is not sold during this initial bid period, it will be made available to OwnerOccupants who want to make an offer less than full price (of course you could always offer full price at any time if you really want the foreclosure property). If the foreclosure home is not sold during the next seven days, it will be made available to All Purchasers (including real estate investors). Anyone can bid on these foreclosure homes and you can bid any price; it does not mean that HUD will take the offer. After all, this is not a HUD auction but is rather a sealed bid process. The exact number of days between each category change listed above can differ from state to state, which is yet another reason to be sure to deal with a real estate agent who has experience with HUD foreclosure homes. HUD has also been known to change the rules often as they have different M&M Contractors handling HUD property sales in various states. Contact a Well-Informed Mortgage Lender In addition to a good real estate agent it, is a good idea to speak to a mortgage lender familiar with HUD foreclosure homes and, in particular, find a mortgage lender who is knowledgeable about FHA 203k HUD Loan Program. These HUD loans will help you get the money to make the foreclosure home purchase AND get the funds you will need to fix up the foreclosure property. It is this FHA 203k HUD Loan Program which helps you get the maximum benefit and the maximum "sweat equity" when buying a HUD foreclosure or any foreclosure home. Part of the American Dream is to buy a home and
Buying Foreclosures; by Sani Panhwar
fix it up so that it is worth more than you paid for it - the FHA 203k HUD loan is one of the best ways to achieve this. The FHA 203k HUD loan helps to protect you from yourself. It requires a HUDapproved inspector to thoroughly review the foreclosure home, point out the required repairs and discuss with you the repairs you would like to have completed. This is sort of a "wish list" because they will lend you all the money as long as you qualify for the HUD loan amount. The minimum is $5,000.00, but these HUD loans include paint, carpeting, kitchens, baths, windows and more. The best part of FHA 203k HUD loans is that the person who inspects the foreclosure home for you in the beginning is the same person who inspects the foreclosure home as the work is completed in order to approve draw requests. You have to complete some work before the repair money is released to you, therefore you have to be prepared to lay out the money or get a contractor willing to wait for the draw inspection. While you are not required to get a FHA 203k HUD loan and there are many foreclosure properties that do not need extensive repairs, the HUD program is very helpful in making you think about what you are getting into and providing independent inspectors to make sure the work is done properly and that the foreclosure home is in overall good condition. If you are purchasing an Insured property (IN), no repairs or appraisal are required, but you should absolutely get a foreclosure home inspection from a certified home inspection company. Your real estate agent should be able to tell you the procedure for turning utilities on before the inspection (HUD doesn't always get the condition of major systems right). Your real estate agent must make the request to turn on the utilities after HUD accepts your contract. You will then have 21 days in which to conduct the inspection of the foreclosure home. There is a separate HUD Addendum Form that covers many specifics regarding this process and explains why you should get a foreclosure home inspection. A good real estate agent will know this and be very helpful in explaining and coordinating the process. The Bottom Line in HUD Foreclosure Homes The real point is to do your homework. Before you even begin your HUD foreclosure home search, you should determine how much house you can afford to buy. This is absolutely critical to do BEFORE you start looking. It’s easy to fall in love with a home you cannot afford to buy. Find the home you think you like and (with the help of your real estate agent) determine what the homes sell for in that immediate area. You will find that HUD foreclosure homes can be great values, sometimes even great bargains, but they can also sell for market value if they are in good shape and in a desirable area. Once you determine that the foreclosure home will work for your family and is a good value for you, figure out how much you want to pay for the foreclosure home. Anytime you bid very low you risk losing the bid to someone else who really wants the foreclosure property. Pay what you can afford to pay for the house you will call home. If you only want the foreclosure home if it is a "super bargain," then take your chances and bid whatever you want. However, a word of caution: good HUD foreclosure homes in
Buying Foreclosures; by Sani Panhwar
desirable areas come and go very fast. Be prepared to be decisive, but do not rush into anything. If you do your homework up front you will be better prepared to take advantage of that "great deal" that comes your way and requires you to move quickly in order to get it. There is no substitute for being well informed, especially when it comes to preparing for one of the largest, more important investments you can make. How To Buy A VA Foreclosure Home Few people know the number one best-kept secret of buying foreclosure homes: it is possible to purchase a foreclosure home with no money down. Even real estate agents often don’t understand how to get their homebuyers into a foreclosure home with zero money down. These easy tactics will show you how. #1 Little Known Fact About VA Foreclosure Homes - You do not have to be a veteran to buy a VA foreclosure home or to have the VA guarantee the financing on the foreclosure home. #2 Little Known Fact About VA Foreclosure Homes - You can buy a foreclosure home from the VA and receive a free charitable contribution from the Ameridream Foundation for your payment regardless of your financial status. Understanding VA Foreclosures Homes designated as VA foreclosures—also known as Veteran’s Administration foreclosures—were last purchased with a Veteran’s home loan. This means that the past purchaser was a Veteran of one of the branches of the United States Military and that the previous mortgage was made possible by the Federal Government which guaranteed the home loan. By guaranteeing the home loan, the Department of Veterans Affairs agreed to repay the mortgage lender for all money lost by the lender in the event the home was foreclosed on. This situation benefits the mortgage lender greatly, as their investment in the home is 100% guaranteed. The Federal Government protects itself by charging each buyer of a VA mortgage a funding fee. The funding fee is a percentage of the mortgage amount and is helpful in several ways. The funding fee enables the Veterans Administration to allow the Veteran to purchase a home with no money down. By purchasing a VA foreclosure home from the list of Veterans Administration foreclosures you can proceed with the loan as though you are a Veteran and purchase many of these foreclosure homes for sale with no money down and without mortgage insurance. Term Offer vs. Cash Offer A VA foreclosure home provides for two separate ways to write an offer: Term Offer for a VA Foreclosure Home When writing a term offer for a VA foreclosure home, the homebuyer is asking the VA to hold financing on the foreclosure home. This provides an opportunity to buy the
Buying Foreclosures; by Sani Panhwar 28
foreclosure home with no money down; however, there are still closing costs to contend with. Closing costs can run anywhere from one to six percent of the purchase price of the home. Ask your local real estate agent or loan officer for more information. Cash Offer for a VA Foreclosure Home When writing a cash offer for a VA foreclosure home, the homebuyer is not actually offering to pay cash, but is rather not requesting that the VA hold the financing on the foreclosure home. The VA is even more flexible with pricing and closing costs with a cash offer, as they will not be responsible for the mortgage. Write the cash offer for the foreclosure home and ask for the maximum contribution required towards closing costs (consult with your local real estate agent). As soon as the contract is accepted, contact the Ameridream Foundation. The Ameridream Foundation will give you the closing costs as a free contribution. Learn more about the Ameridream Foundation (www.ameridream.org) and buy your foreclosure home from the VA with no money down.
Investing in Foreclosure Homes: Risks and Rewards The mortgage foreclosure process creates three sets of real estate investment opportunities: the "Default/Pre-Foreclosure" phase, the "Auction/Sale" phase and the "REO" phase. This article discusses the risks and the rewards of each opportunity. Buying Pre-Foreclosure Homes Buying pre-foreclosure homes involves working directly with the homeowner and sometimes the mortgage lender. Your goal is to create a win-win scenario. One “win” is for the homeowners (they make a sale) and the other “win” is yours (you buy the foreclosure home at a substantial discount). To accomplish a successful foreclosure home purchase, most experts recommend the following: • • • • • • • locate loans in default evaluate and narrow foreclosure homes to pursue inspect the foreclosure property evaluate the property owner's needs determine the market value of the foreclosure home, fix-up costs, potential sales price and profits arrange default work out by negotiating with the owner and the mortgage lender close on the foreclosure home, repair and resell it quickly
Pros of buying pre-foreclosure homes: Pre-foreclosure homes are a great investing opportunity if done correctly. Discounts off market value can range from 20% to 35% on average. A low cash down payment is possible if structured properly. Also, you have ample time to research homes and unique and flexible sales agreements are possible.
Buying Foreclosures; by Sani Panhwar
Cons of buying pre-foreclosure homes: Sometimes it is difficult to contact the property owner. Also, you will usually have a lot of competition for pre-foreclosure homes. The courthouse research involved with pre-foreclosure homes can be cumbersome. And you may need to negotiate with the lien holders.
Buying a Foreclosure Home at Auction Buying a foreclosure home on the courthouse steps at the auction can be the most rewarding way to buy properties as well as the most dangerous. The foreclosure home is publicly auctioned off to the highest bidder, and the process moves very quickly. When bidding at the auction, you compete against the lender and other investors. Auction buyers research foreclosure homes prior to the sale date, pursue realistic opportunities, calculate values and potential profits, determine bid price and follow the home to the auction and participate. Pros of buying a foreclosure home at auction: Very good to excellent discounts. Investors can achieve 35% to 45% savings off market values and earn an excellent return on investment. This is the only investment method where you can really hit the jackpot.
Cons of buying a foreclosure home at auction: Auctions are frequently postponed, which can result in a waste of your time and effort. It is rarely possible to inspect the foreclosure home in question. To be safe, you should have a title search performed, which can be costly. Unusually large cash outlays deter most investors (note that this can also be seen as a benefit). Certified checks for 10% of the purchase amount may be required with the balance due in weeks, days or even hours. Improper research can lead to devastating results. Buying REOs Perhaps the easiest way to buy foreclosure property is to buy REOs ("real estate owned"). An REO occurs when the mortgage lender takes back the home to gain possession and cut its losses. The lender, however, does not want the home because it is not in the real estate business and is therefore usually motivated to move the property quickly. Pros of buying an REO: The lender is almost always the senior lien holder, thereby wiping out all other liens at the auction. This means an REO will always have clear title, which saves a lot of time, expense and worry when buying a foreclosure home. Most likely, the mortgage lender will also have paid any property taxes in arrears. The lender may either repair the property to acceptable standards or allow a discount to the buyer to accomplish the repairs. Cons of buying an REO: Rewards follow risk: this is a low risk investing method and the rewards can be on the low side as well. Average savings may range from only 5% to 15% off market value, although discounts of 25% or more are possible if you know how.
Buying Foreclosures; by Sani Panhwar
Investing in foreclosure homes can provide excellent profits. Each of the three foreclosure opportunities presented here offer both rewards and certain risks. Be sure to do your homework before you buy. Investing In Real Estate: How To Sell Your Foreclosure Home When investing in real estate, there are numerous strategies available to help maximize your equity depending on your short and long-term investing goals. Designing your exit strategy is as important as the home purchase itself. This article outlines some strategies that can potentially increase your return when investing in real estate. Real Estate Investment Strategy 1 – Buy and Cash Out Buying to cash out is the most easily understood form of real estate investment. Despite its simplicity, there are some useful strategies for increasing your return: 1. Begin advertising and showing the foreclosure home the day the contract is ratified. 2. Strategize the way in which you want to present your offer to the buyer regarding closing costs and mortgage amount on the foreclosure home. 3. Understand Hart, Ameridream and other no-money-down foundations and how they relate to your foreclosure home. 4. Determine your break-even point and build it into your profit. Real Estate Investment Strategy 2 – Buy and Rent Option The difference between rent options and conventional rentals is that with rent options the contract is contingent upon a sales contract which is conversely contingent upon the rental contract. The sales contract has the purchase price and closing date preset to allow the tenant enough time to repair credit if necessary and save enough money. The attributes that distinguish a rent option from a non-rent option are: 1. A predetermined price with a built-in appreciation of four percent per year. 2. A non-refundable deposit in an amount that you feel secures your real estate investment. Five percent of the sales price is a starting figure. 3. A rental contract and sales contract are endorsed simultaneously. The transfer of real estate can be accomplished in several different ways. Renting out the home with the option to purchase is a strategy that allows the owner to maintain ownership of the foreclosure home while simultaneously creating a cash flow. The average property owner that rents the home out with the option to purchase realizes a 20% higher return over a conventional rental situation. In addition to the reasons already listed, rent options can also be advantageous because: 1. The tenant’s perception is one of ownership, which could translate into the home being better cared for. 2. The tenant is willing to pay more for the feeling that they have a greater sense of ownership over the home.
Buying Foreclosures; by Sani Panhwar 31
3. The tenant is willing to put an above-average deposit down on the home, which is generally five percent or greater depending on tenant’s credit. 4. The tenant is more likely to stay in the home for over three years because there is perceived ownership. 5. If the tenant reneges on the contract there is no need for you to absorb the expense of foreclosing on your tenant. Despite the advantages listed above, the maintenance of the foreclosure home remains solely the responsibility of the homeowner until the foreclosure home is purchased, which can be a disadvantage. Further, tenants can be over-extended when attempting to pay both rental and option payments. Real Estate Investment Strategy 3 - LIC to Sell A Land Installment Contract (LIC), also known as a Land Trust, is a method for transferring a home from one party to another without creating a new mortgage. This tool allows a real estate investor to transfer the ownership of a foreclosure home to a buyer without that buyer having credit worthy of a mortgage. This opens the same doors as a Rent Option with one small difference—it requires the seller to perform a foreclosure in place of an eviction. The foreclosure process can cost between $5,000 and $100,000, while an eviction should cost little more than $500. An LIC can be favorable because it makes it more difficult for the buyer to be evicted and in some circumstances the buyer is willing to pay a greater amount in order to initiate the transaction over a rent option. Real Estate Investment Strategy 4 - LIC to Rent An LIC to Rent is also possible and has been done for many years by land installing the property from the seller and rent optioning the property to the buyer. This option requires that you read all “For Sale By Owner” periodical and call the seller directly. Once contact it made by the seller, ask the following questions: • Do you need to cash out? • Are you willing to hold a mortgage? • How much are you willing to hold? If the answer to first question is not “yes,” skip the remaining steps and move on to the next seller. LIC to LIC The mistake that many investors make is not fully understanding the options that they have available. A great way to make a profit in real estate is to buy and retain the property. Rent optioning the property is far more advantageous than Land Installment Contracts for the seller. Land installments offer the buyer more control over the property than is required, giving them a sense of ownership and responsibility.
Buying Foreclosures; by Sani Panhwar
Are you ready to purchase a home? Ask yourself these three questions: 1. Does this foreclosure home meet my minimum requirements? 2. How much does it cost to buy this foreclosure home initially? 3. How much will this foreclosure home cost per month? If you have already answered these three questions, then you have a plan for purchasing a foreclosure home. If you allow the situation to become any more complex that the three questions above, you have overcomplicated the process of buying a home. Don’t listen to that little voice in your head telling you that you will miss the perfect home. There is no such thing as the “perfect” home. There are homes— lots of homes—that you can make perfect. But first, you have to buy one. The search for the “perfect” home has kept more than a few people in the trap of home rental years longer than they would have been if they had not built their expectations to an unrealistic level. The process of buying a home can be much less intimidating and frustrating if you just focus on the three questions above and keep them in mind when looking at a potential first home. From there, contact an experienced real estate agent familiar with foreclosure homes to help you navigate the particulars and you are on your way. Be sure to also look for a mortgage lender who specializes in foreclosure homes. Quick Foreclosure Facts Why buy a foreclosure home? Foreclosure homes are less expensive to buy and less expensive to own on average than any other type of home purchase. For instance, if you purchase and finance a foreclosure home through the VA (Veteran’s Administration), there is no charge for mortgage insurance. [Note: you do not need to be a veteran to purchase a foreclosure home through the VA.] The savings on mortgage insurance alone will save you $45.00 per month every month as long as own that mortgage. (Based on $100,000.) HUD foreclosure homes do not require that the homebuyer pay for an appraisal if the foreclosure home is financed with an FHA mortgage. Remember that FHA (Federal Housing Administration) is part of HUD (Housing and Urban Development). Is it always better to finance a foreclosure home through the bank or branch of government selling the home? Most of the time this is the best option. For example, the bank that foreclosed on the home has lost money 99% of the time. The bank can regain some of their losses by financing the foreclosure home again. It is strongly advised, however, to contact the real estate agent or mortgage lender in your area familiar with foreclosure homes. Real Estate Foreclosures
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REO is an acronym for “Real Estate Owned,” which indicates that the home has been foreclosed upon and is currently on the market or soon will be. The foreclosure homes have been collected and assimilated from literally hundreds of REO warehouses from every state in the United States, Puerto Rico, US Virgin Islands and Guam For years, banks were not willing to allow their REO inventory be published for fear that their shareholders would look upon their foreclosure home inventory as a failure to secure mortgage money wisely. The outlook on foreclosure homes (REOs) that banks have does not take into consideration the 4-5% foreclosure rate that has remained consistent for the past 20 years. Many stockholders do not understand this simple constant. Fortunately, banks and lending institutions have become wiser and have educated their stockholders about the basic facts of foreclosure homes. Pre-foreclosure homes and REOs are different. Pre-foreclosure homes have not gone through the foreclosure process and therefore cannot be purchased from anyone other than the current mortgage holder (homeowner). This method of buying homes for real estate investing purposes has been well documented on television commercials and video series available for purchase. This type of investing is not the best use of a real estate investor’s time as the homeowner, more often than not, is able to avoid or delay the foreclosure process. The reason this type of foreclosure opportunity is so popular is because of the illusive nature of the deals. This logic is lost on most would-be investors. In short, if the deals are hard to locate then why focus on them? Buy a home that has already gone to foreclosure (REO) then sell or rent it. Buy another foreclosure home and sell or rent it and by the end of the year you will have completed twice as many transactions and made more money in the process. Real Estate Investment vs. The Stock Market There are investing opportunities, but none are as lucrative as real estate investment. Unlike the stock market, investing in real estate offers real profit. Investing in real estate offers you direct control over the value of your investment. Paint the home and it is worth more. Add a deck and the value goes up again. This simple truth escapes most investors and opens the door for you to make a far greater rate of return in real estate than a similar investment of capital would make in the stock market. An investment of $100,000 in the stock market would allow you to control 2000 shares of a stock with a price of $50.00 a share. You control $100,000 of assets. The same $100,000 investment in real estate would allow you to buy 10 houses, at 10% down on each home, with a value of $100,000 per home. You control $1 million dollars of assets, ten times the amount of assets controlled with an identical initial investment in the stock market.
Buying Foreclosures; by Sani Panhwar
In short, buy real estate as part of your investment portfolio. Foreclosure homes are the best bet for an equity position. When buying foreclosure homes for accumulation or for resale, the same math used above can be put into practice. Use the calculator provided in order to determine the investment value of the subject property. Save $100,000 On Foreclosure Home All homeowners are interested in paying less for their potential new home. You can save $100,000 or more on the total cost of your new foreclosure home without refinancing or strapping yourself into an uncomfortable mortgage payment. The system is easy, takes no work or fancy calculations, and can be used in purchasing your first foreclosure home or your tenth foreclosure home. In order to use this system you need only understand a little about mortgages and how they work. By the time you finish this article, you will have the tools and knowledge necessary to save $100,000 on your new or existing foreclosure home. Understanding Mortgage Interest Rates First, you should realize that mortgages are fairly new in the world of finance. For centuries, if you wanted to buy real estate your only option was cash. In the 1800’s banks began to offer the middle classes the opportunity to finance a home. In short, banks and lending institutions have been at this a lot longer than you or I, so they keep the rules somewhat quiet in order to maximize their profits. In order to grasp the rules of the mortgage game, you must first know and understand how interest works, as well as comprehend some easy terms and their meanings. Interest is the percentage you are paying the bank for the ability to borrow a very large sum of money (your mortgage). Using simple math, if you are purchasing a $100,000 home, at 8% interest you would be paying the bank $800.00 each month until the loan is virtually paid off. That equates to $288,000.00 in interest paid over a 30-year term, resulting in the $100,000 foreclosure home costing $388,000. In order to reduce this amount by roughly $100,000, you need only make one additional payment per year. By making this additional annual payment towards principal, you reduce the amount of the total loan, thereby reducing the amount that you are being charged in interest. Frequency of Mortgage Payments Other options are available, such as getting a 15-year mortgage rather than a 30-year mortgage. Keep in mind, though, that the 15-year mortgage forces you to pay a higher monthly payment and locks you into that payment in good and bad times. Another option is to get a biweekly mortgage. This requires you to pay the same amount each month, but you pay it in 50% portions every other week. A biweekly mortgage results in one extra payment each year. Although it can be a bit of a hassle to become so regimented, a biweekly mortgage is a great way of saving some money. But use caution. Call your mortgage holder and tell them you want to switch to a biweekly schedule and would like them to send you a payment book. There is no need to refinance or go through
Buying Foreclosures; by Sani Panhwar 35
any hoops, just follow up with the mortgage holder as soon as you get the book and make certain that they are fully aware of what you wish to do. The best option that we know of for saving money on your mortgage is simply to make one extra payment per year. Many people save a small amount each month and make two mortgage payments in December. Others use their income tax returns to make the additional payment. Although discipline is required, the return on the investment is very much worth the effort. One final caution: a problem can occur if you do not make a clear notation on the check that the additional payment is being made toward “principal”. Make this notation large and clear on the check and follow up on the payment with a telephone call to your mortgage holder. These basic tips should help you in saving money on your foreclosure home purchase. For more information, contact your local loan officer and make an appointment to ask a few questions. Secrets of HUD Foreclosure Homes If the home you are interested in buying is a HUD (Housing and Urban Development) foreclosure home, then the home was last purchased was an FHA (Federal Housing Administration) mortgage. The federal government nsured the home loan, making the previous FHA loan possible. By insuring the loan, the federal government agrees to epay the mortgage lender for all money lost by the lender in case the home is foreclosed on. This is a good deal for the mortgage lender as their investment in the home is 100% insured. The Federal government protects itself by collecting a Mortgage Insurance Premium (MIP) on each transaction of a federally financed property at the time the home is purchased. The MIP is 2.25% of the mortgage amount and is helpful in several ways. Because the MIP is charged, the FHA can allow a homebuyer to reduce their initial outof-pocket cash expenditure from 5% to 3% of the purchase price of the home, thereby making it possible for many more Americans to purchase homes. HUD reports in their mission statement that homeownership is the goal of the majority of Americans. This goal of homeownership has been the driving force behind HUD and their decisions and directives since HUD’s inception. The MIP is pooled with all the other premiums and allows the federal government to continue helping homebuyers save money on their foreclosure home purchases by keeping the costs associated with the home down. Most importantly to you, the MIP paid by all the former homeowners allows HUD to sell the foreclosure homes in their home inventory at a substantial discount. Each foreclosure home has its own financing options. For the best information on a purchase strategy for the particular foreclosure home that you’re interested in, contact a real estate agent in your area familiar with HUD foreclosure homes.
Buying Foreclosures; by Sani Panhwar 36
The Easy Way to Win the Mortgage Game When applying for a mortgage, be sure of your credit. If your credit is not above a certain beacon score (525 +/-) be prepared to pay a high interest rate on your mortgage. Or, if you don't understand the difference between points and interest rate, you may find yourself paying tens of thousands more for the same foreclosure home than you would if your credit score were higher. This difference can literally cost you as much as new car. Don't let this happen to you! Here a few tips that should allow you to understand more completely how to win the game of getting a mortgage. Never pay points. Points are also referred to as "discount points." This refers to the discount you receive on your mortgage interest rate for paying points upfront on your mortgage. One point equals 1% of your mortgage amount. Compare points and interest rates between two or more mortgage lenders. Allow for slightly higher interest in place of paying more than one to two points. Get your mortgage from some one "in the know" rather than some one "that you know." If you are buying a second home or investment property, be prepared to pay a higher interest rate due to the higher rate of foreclosures on mortgages in the real estate investing arena. The Importance of A Foreclosure Home Inspection Regardless of which type of foreclosure home you are interested in buying—VA or HUD—the foreclosure home inspection can help make your home buying experience easier. The sequence of buying a foreclosure home is generally helpful in determining the viability of the home you are buying. Apply what you read here and you could gain several thousand dollars in repair or associated cost by using the foreclosure home inspection correctly. The information that can be gleaned from a quality foreclosure home inspection can also save you from making a mistake that could cost you tens of thousands of dollars. Find out how this small step can get you into or keep you out of a financial jam. Always keep in mind that no matter where you are in the foreclosure home buying process you can always get out of the contract using the home inspection results. Because every foreclosure home has some problematic issues, you can escape the confines of the contract by submitting the problems to the mortgage lending company and instantly having your approved loan promptly disapproved. Since every contract has a financing contingency, like magic you are free of the contract. Do not use this escape clause just because you get nervous. Getting nervous is standard.
Buying Foreclosures; by Sani Panhwar
Beyond the ability to nullify an undesirable contract, you can use the foreclosure home inspection to gain some needed repairs and create a little additional cash depending on the entity that you are buying the foreclosure home from. If the property is a HUD foreclosure home, get an FHA loan. Remember that there are three different types of FHA mortgages depending on how the property is offered: • 203b identified as "IN". The foreclosure home is offered insured, meets minimum property standard (MPS) and is not offered with any additional funds depending on what you might find out during the home inspection. This does not mean that you won’t receive additional repair funds towards your foreclosure home; it just means the option is not offered that way. Armed with the written foreclosure home inspection, your real estate agent or you can appeal to HUD for a repair escrow in order to bring the house up to MPS. The requested repair escrow cannot be more than $5000.00 or HUD will determine that you must get a full 203k mortgage. 203b Repair Escrow identified as "IE". The foreclosure home is offered "insured with a repair escrow" and has already been assigned an amount to bring the home to minimum property standards MPS. If you find that the repair escrow is not enough to get the foreclosure home in livable condition, you or your real estate agent can increase the amount of the repair escrow with the use of the home inspection. Just like with a 203b, you cannot request more than $5000.00 or HUD will determine that you must apply for a 203k mortgage. 203k mortgage. The foreclosure home requires $5000.00 or more worth of repairs to bring the home to MPS. This situation is not a negative. In fact, the 203k loan has the greatest possibility of make positive cash on an initial foreclosure home purchase.
Remember that you can always take a 203b with or without an escrow and convert it to a 203k, but you can never take a foreclosure home offered with a 203k and try to go 203b. If this is attempted, HUD will not be permitted to allow you to close escrow of the property and take possession of the foreclosure home. All repairs to the foreclosure home must be performed after settlement when buying a HUD. If the foreclosure home is a VA (Veterans Administration) home, the home inspection can be used in order to make repairs performed by the VA prior to settlement. The VA will not give you an escrow for repairs as HUD will. The VA will, however, have many repairs made prior to settlement on your foreclosure home so long as the repairs are required to pass the FHA inspection. This is only possible when financing the property through an FHA insured mortgage (203b).
Buying Foreclosures; by Sani Panhwar
What Are Bank REO (Real Estate Owned) Properties Bank REO (real estate owned) properties are the most time consuming and most complicated foreclosure homes to become involved in. Information on bank REOs is rarely easy to obtain. A great deal of research is required and the only way to conduct bank REO research is to spend countless hours in the county courthouse. There is financial risk involved with bank REO properties as well because after the research is done and the potential purchaser is prepared to go to the auction, a nonrefundable cashiers check is required for ten to fifty thousand dollars. It is possible to find higher price range homes in this arena, but the home in question may not be vacant and gaining access is sometimes difficult. Most Bank REOs have a third-party manager who is responsible for the upkeep of the foreclosure home while the bank owns it, and they are your liaison with the bank. Offers must be made through the third-party manager and they will relay counter-offers from the bank. In general, banks do not negotiate much on prices, so if you offer less than asking price be prepared to go through the negotiation process several times for a minimal discount. What Are Escrows? Mortgage lenders generally take over responsibility for the payment of taxes and insurance so that they can be sure that the payments are made. They require that an escrow account be established with the borrower's funds, from which the mortgage lender makes the payments as they come due. The escrow account is established with a deposit that the borrower provides at closing. Mortgage lenders ask for more than they actually need as a "cushion" in order to assure themselves that there will always be enough money in the account. Since mortgage lenders usually get to keep the interest on escrow accounts, in years past many of them maintained unreasonably large cushions. To deal with that, the Department of Housing and Urban Development (HUD) issued a ruling that placed a ceiling on the size of escrow accounts, which in turn limited the amount the lender could ask the borrower to deposit at closing. The rule is that the deposit cannot exceed the amount needed to prevent the balance from falling below an amount equal to two months worth of tax and insurance payments at its lowest point during the year. Although HUD does not do a lot of enforcement, all but a handful of mortgage lenders follow the HUD rules. How do I calculate the maximum initial deposit? Add the annual taxes and insurance premiums and divide by 12. This is the amount that will be added to your mortgage payment every month. List 12 months running down the page beginning with the month in which your first mortgage payment is due.
Buying Foreclosures; by Sani Panhwar
In the second column, enter the tax and insurance payments next to the month in which they are due. In the third column, show the amount in the escrow account assuming there is no initial deposit. The monthly payments made by you add to the account while the tax and insurance payments made by the lender reduce it. Scroll down to the month that has the largest shortfall. To the shortfall add two months of payments (the allowable cushion). The total is the maximum deposit under HUD's rules. Here is an example: Assuming no upfront deposit, the low point of the escrow account is reached in August when school taxes are due. Through August, total payments from the escrow account are $3468 whereas only 10 payments have been made into the account totaling $2890. The account would therefore be short by two monthly payments, or by $578. The lender is also allowed a cushion of two months, which is $578. Hence, the total required deposit to the escrow account would be $1156. Borrowers who don't want to be bothered checking the mortgage lender's calculation of the required escrow deposit are unlikely to be taken advantage of because lenders can't do it without violating the law. Focus your attention on the many legal ways that mortgage lenders and mortgage brokers can pick your pocket. At the same time, unintentional mistakes do occur at the closing table that can affect the allocation of costs between sellers and buyers. A recent letter described a $500 mistake of this sort, which the letter-writer discovered by accident. It is a good idea, therefore, to check out every number. What Are Escrows? Mortgage lenders generally take over responsibility for the payment of taxes and insurance so that they can be sure that the payments are made. They require that an escrow account be established with the borrower's funds, from which the mortgage lender makes the payments as they come due. The escrow account is established with a deposit that the borrower provides at closing. Mortgage lenders ask for more than they actually need as a "cushion" in order to assure themselves that there will always be enough money in the account. Since mortgage lenders usually get to keep the interest on escrow accounts, in years past many of them maintained unreasonably large cushions. To deal with that, the Department of Housing and Urban Development (HUD) issued a ruling that placed a ceiling on the size of escrow accounts, which in turn limited the amount the lender could ask the borrower to deposit at closing. The rule is that the deposit cannot exceed the amount needed to prevent the balance from falling below an amount equal to two months worth of tax and insurance payments at its lowest point during the year. Although HUD does not do a lot of enforcement, all but a handful of mortgage lenders follow the HUD rules.
Buying Foreclosures; by Sani Panhwar
How do I calculate the maximum initial deposit? Add the annual taxes and insurance premiums and divide by 12. This is the amount that will be added to your mortgage payment every month. List 12 months running down the page beginning with the month in which your first mortgage payment is due. In the second column, enter the tax and insurance payments next to the month in which they are due. In the third column, show the amount in the escrow account assuming there is no initial deposit. The monthly payments made by you add to the account while the tax and insurance payments made by the lender reduce it. Scroll down to the month that has the largest shortfall. To the shortfall add two months of payments (the allowable cushion). The total is the maximum deposit under HUD's rules. Here is an example: Assuming no upfront deposit, the low point of the escrow account is reached in August when school taxes are due. Through August, total payments from the escrow account are $3468 whereas only 10 payments have been made into the account totaling $2890. The account would therefore be short by two monthly payments, or by $578. The lender is also allowed a cushion of two months, which is $578. Hence, the total required deposit to the escrow account would be $1156. Borrowers who don't want to be bothered checking the mortgage lender's calculation of the required escrow deposit are unlikely to be taken advantage of because lenders can't do it without violating the law. Focus your attention on the many legal ways that mortgage lenders and mortgage brokers can pick your pocket. At the same time, unintentional mistakes do occur at the closing table that can affect the allocation of costs between sellers and buyers. A recent letter described a $500 mistake of this sort, which the letter-writer discovered by accident. It is a good idea, therefore, to check out every number. What Everyone Should Know About Equal Housing The sale and purchase of a home is one of the most significant events that an individual will experience in their lifetime. It is more than the simple purchase of housing, for it directly impacts the hopes, dreams, aspirations, and economic destiny of those involved. For this reason, the Fair Housing Act and other federal and state laws were enacted to guarantee a right to a national housing market free from discrimination based on race, color, religion, sex, handicap, familial status, and national origin. THE LAW Civil Rights Act of 1866 The Civil Rights Act of 1866 prohibits all racial discrimination in the sale or rental of property.
Buying Foreclosures; by Sani Panhwar
Fair Housing Act The Fair Housing Act declares a national policy of fair housing throughout the United States. The law makes any discrimination in the sale, lease or rental of housing, or making housing otherwise unavailable, because of race, color, religion, sex, handicap, familial status, or national origin illegal. Americans with Disabilities Act Title III of the Americans with Disabilities Act prohibits discrimination against persons with disabilities in places of public accommodations and commercial facilities. Equal Credit Opportunity Act The Equal Credit Opportunity Act makes discrimination unlawful with respect to any aspect of a credit application on the basis of race, color, religion, national origin, sex, marital status, age or because all or part of the applicant's income derives from any public assistance program. State and Local Laws State and local laws often provide broader coverage and prohibit discrimination based on additional classes not covered by federal law. THE RESPO SIBILITIES The home seller, the home seeker, and the real estate professional all have rights and responsibilities under the law. For the Home Seller As a home seller or landlord you have a responsibility and a requirement under the law not to discriminate in the sale, rental and financing of property on the basis of race, color, religion, sex, handicap, familial status, or national origin. You cannot instruct the licensed broker or salesperson acting as your agent to convey for you any limitations in the sale or rental because the real estate professional is also bound by law not to discriminate. Under the law, a home seller or landlord cannot establish discriminatory terms or conditions in the purchase or rental, deny that housing is available, or advertise that the property is available only to persons of a certain race, color, religion, sex, handicap, familial status, or national origin. For the Home Seeker You have the right to expect that housing will be available to you without discrimination or other limitations based on race, color, religion, sex handicap, familial status, or national origin. This includes the right to expect: • • • • Housing in your price range made available to you without discrimination; Equal professional service; The opportunity to consider a broad range of housing choices; No discriminatory limitations on communities or locations of housing;
Buying Foreclosures; by Sani Panhwar 42
• • • •
No discrimination in the financing, appraising, or insuring of housing; Reasonable accommodations in rules, practices and procedures for persons with disabilities; Non-discriminatory terms and conditions for the sale, rental, financing, or insuring of a dwelling; Freedom from harassment or intimidation for exercising your fair housing rights.
For the Real Estate Professional Agents in a real estate transaction are prohibited by law from discriminating on the basis of race, color, religion, sex, handicap, familial status, or national origin. A request from the home seller or landlord to act in a discriminatory manner in the sale, lease or rental cannot legally be fulfilled by the real estate professional. Filing Discrimination Complaints Complaints alleging discrimination in housing may be filed with the nearest office of the United States Department of Housing and Urban Development (HUD) or by calling HUD directly. What Is a HUD Foreclosure Home? In 1999, many things changed with regard to the way HUD sold homes as HUD moved toward the privatization of its effort to sell its inventory of foreclosure homes. As a result, you can now find a list of HUD foreclosure homes on the internet, pick one out that you like and buy it - right? Well, not exactly, but we will offer you some specific pointers for navigating the maze and the myths of HUD foreclosure homes. How Does a Home Become a HUD Foreclosure Home? First of all, you should know that a home becomes a HUD foreclosure home because someone who had an FHA Insured loan defaulted on that loan and was foreclosed on by their mortgage lender. The mortgage lender, in turn, collects any losses they incurred from foreclosing from FHA (Federal Housing Administration). FHA is part of HUD (Housing and Urban Development). HUD, in turn, eventually gets the deed to the foreclosure home and offers the home for sale to the general public. The reason mortgage lenders can recover their losses is that everyone—yes, everyone— who gets an FHA Insured loan pays what is called "mortgage insurance." These insurance premiums show up on your settlement sheet as an initial premium, which is usually added to your loan amount. An additional monthly premium is then added as part of your mortgage payment. These premiums go into a fund to payoff mortgage lenders. It takes 6-12 months for HUD to get the deed to a home so it can try to evaluate and sell the foreclosure home. It takes the mortgage lender 3-6 months to complete the foreclosure buying process and another 3-6 months to get reimbursed by HUD in order for HUD to obtain and inspect the foreclosure home, appraise the foreclosure property and put it on the market. All the while the foreclosure home is usually vacant. The total timeframe could easily be 12-18 months from the date of foreclosure, but 8-12 months is
Buying Foreclosures; by Sani Panhwar
probably the norm. These factors contribute to the reasons that HUD sells foreclosures homes strictly on an "as is" basis. The Importance of a HUD Foreclosure Home Inspection HUD foreclosure homes have typically been vacant for an extended period of time, often without any utilities turned on. HUD is working with its private Marketing and Management contractors (M&Ms) to come up with an efficient way of getting utilities turned on in a foreclosure home before the appraisal is completed and keeping things like sump pumps running through the process. Until recently, appraisers did not necessarily have the benefit of having gas and electric service. How could they give a reasonable determination of foreclosure home value without knowing if the plumbing, electric, heating and air conditioning are in working order? These procedures have been changing and resulting in better appraisals of foreclosure homes. However, foreclosure home inspections should be conducted to see for yourself exactly what the condition of a foreclosure home is so that you go to the settlement knowing what to expect from the foreclosure home and what repairs will be needed. Remember, HUD foreclosure homes are sold in "as is" condition. If the repairs needed exceed $5,000, HUD has a program to lend you the money called the FHA 203k Rehab HUD Loan Program. This program is covered in further detail in “How Do I Buy a Foreclosure?” HUD wants you to use a real estate agent to assist you with submitting the appropriate contracts and forms if your foreclosure home bid is accepted. You can find the HUD property list online at www.hud.gov . Take your time reading the screens and you will be able to select your state and view your particular listings. Many subscription sites offers this same list of foreclosure homes and provides some easy-to-use bells and whistles, as well as some other real estate content you will find very helpful in your search for a real estate agent or a mortgage lender who has experience working with HUD foreclosure homes and FHA loan programs. HUD Foreclosure Homes and Minimum Property Standards It is also important to understand the difference between Insured (IN), Uninsured (UI) and Insured with an escrow (IE) foreclosures. Briefly: Insured means that the foreclosure home meets HUD's minimum property standards and has been appraised for the stated value and your mortgage lender will not need a new appraisal (which saves you $400.00 on a new FHA appraisal!). Insured with an escrow means that HUD's inspections and appraisals indicate that there is less than $5,000 in repairs needed for the foreclosure home to meet HUD's minimum foreclosure property standards. This is important because you need to know that the minimum foreclosure property standards are, in fact, very minimum. Do not give up on your right to a home inspection just yet. First, take a look at the HUD minimum foreclosure property standards. You need to know that HUD expects you to complete the repairs to the foreclosure home and then get your mortgage lender to inspect and approve
Buying Foreclosures; by Sani Panhwar 44
the repairs before you can get the funds from the repair escrow. This means that you need to get someone to do the repairs that will wait to get paid when you do or you must lay out the money and get reimbursed by your mortgage lender. Uninsured properties require you to pay cash or get some kind of rehab loan. These foreclosure homes need more than $5,000 in repairs (often $10,000 to $20,000 or more). HUD offers the FHA 203k Rehab HUD Loan, which works very well if the "team" helping you knows what they are doing. An experienced real estate agent, as well as a mortgage lender experienced in the processing of FHA 203k HUD loans, will help save you time and money. The interest rates and the amount of HUD loan discount points is usually a little higher than a standard FHA loan, but you can often buy these foreclosure homes significantly below market prices if you are willing to put up with the higher fees and the hassle of fixing them up. This article addresses the basics of how a home becomes a HUD foreclosure home. Now that you have an understanding of the foreclosure home buying process, you need to know what obstacles you must overcome to purchase a HUD foreclosure home. For detailed information
Buying Foreclosures; by Sani Panhwar