Buying Foreclosures e-course Home


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Step-by-step instruction on
buying property before, during and after foreclosure
the good, the bad & the ugly

What you pay for an income property is important, but what you finally earn on your money and effort is even more important.

A Certificate of Course Completion is now available for this Course.

This e-course provides lessons and discussions regarding the real estate foreclosure process and then buying those properties. We will take you step-by-step through understanding the subject of buying foreclosures before, during and after the sale. However, the course will assume that students have some prior knowledge of basic real estate concepts and terminology.

The pre-course quiz will test your existing knowledge of the subject and a final quiz will help you to see how much you learned. You may repeat all or parts of the course as many times as desired. Some of the issues covered in this course are covered from different perspectives in various other of our pages throughout the CSES family of Webs.

This course is useful for Buying & Selling Income Property.

After you have completed this, or other csu e-courses, it may be worth your while to review them periodically for new resources, support documents and updates in the law.

Please Take the Quick & Simple
Pre-Course Quiz

Introduction & Overview

Cutting through the hype and BS

      Every other day you hear, read or see a new a way to get rich quick in the real estate investing business with no money down, bad credit and little or no work. One of the most over hyped and misrepresented real estate investing come-ons is buying properties in foreclosure.
      The Internet is polluted with web sites wanting to sell you access to their lists of property you can "steal" for 50% of value; coupled with books, tapes or other packaged BS on how to do it. Some are legitimate and valuable, most are not.
      It is easy to find the lists; we link to some at the end of this course and you can find many more on your own. Do a search using "foreclosure" and you will find a whole list of lists. After you pay for access you will also find that you probably just missed the really good deals. "We're sorry".

Now here's the truth

If RHOL had a list of real estate investments that can be bought for 50% of value, we are not going to share it with anyone but our children, our very best friends, and perhaps my wife's deadbeat brother. We don't have such a list and neither does anyone else.
Now, that is not to say that great foreclosure property deals do not exist. They do. But whoever finds them first buys them and only tells you about it after closing. You will learn how to find those that actually do exist here, but you will also learn that it will take some effort and follow-through to find them and actually buy them. It is one thing to have the knowledge, we will help with that, it is quite another to get you to use it before your competitor does.

Information is everything

      You will obviously need to know what properties are or will be for sale in order to buy foreclosures. You will need to learn how much the loan amounts are and what timeframes you are dealing with. Local newspapers will publish the properties scheduled for sale. That will provide some information and all you have to pay for is the newspaper subscription. You can go to the county recorder and research documents yourself. You can also subscribe to a legitimate service that obtains records and sells the information. The best services give complete, accurate information and others provide the basic minimum, but it saves time spent looking them up for yourself.
      Another option is to go to the auctions in your area and ask the bidders who show up for the sale what local information providers are available. If they don't want to tell you, start smiling and ask someone else until you get the information you need.
      Once you know which properties are in default, you can approach owners directly to buy their equity, arrange favorable financing with the existing lender, or whatever seems appropriate to benefit all the parties involved.
      Whatever you decide to do after completing this course will be based on knowing which properties that are for sale fit your criteria.

Pretty and profitable are not synonymous

The real money to be made in any real estate investment is finding something ugly that no one else wants; but with the right things wrong with it. A sagging porch, pealing paint, broken windows and other things that can be repaired inexpensively with not much more than a facelift will make a huge improvement in the curb appeal and therefore the market value of a property.

Property owners facing foreclosure usually have financial problems which may prevent them from doing even basic maintenance on their property. Additionally, they are probably in a state of depression with no incentive to keep the property looking good. Those unhappy facts are often good news for an educated investor who has learned how to look past the skin-deep ugly to find the valuable investment opportunity underneath that others can't readily see.

Thou shalt not steal

The days of stealing a really good repossessed property from a lender for a song are, for the most part, long gone. Now-a-days banks, and even government agencies, know the value of painting and fixing before they offer their foreclosed property for sale. In fact, the first obligation of a broker representing lenders and government agencies is doing whatever can reasonably be done in the way of repairs or decorating to maximize the sales price.

Need we remind you here that wherever there is a profit to be made in real estate, a line has already formed? The line got so long at CitiBank that they now charge investors $50.00 just to see a list of their foreclosures.

Professionals are in the picture

      Most lenders now hire professionals to handle the entire foreclosure and resale process for them in order to maximize their profit or minimize their loss. As a result, REO (Real Estate Owned) properties are almost always fixed, painted and sold for something near their true market value.
      Don't be discouraged yet. If opportunities did not still exist we wouldn't be writing this course. Your mother was right; where there is a will there is a way.
      There are many opportunities to see and do what someone less informed and motivated misses during every step of the foreclosure process; before - during - and after the foreclosure auction.
     After you have completed this course you will know as much or more than most property owners, lenders and their agents about what is happening, and what is likely to happen next in the foreclosure. That will do a lot to at least level the playing field for you and give you at a better chance at what deals are out there..

Understanding the foreclosure process

Many new investors believe that the only way to buy foreclosure properties is directly from the bank. You will learn here how wrong that assumption is. Most home loans today are made through a mortgage company, credit union or savings and loans; while banks specialize in business and commercial loans. Additionally, most home loans are sold to the mortgage securities market, so the originating lending institution may have no ongoing interest in the mortgage other than a contract to service the loan; which may include handling any foreclosure.

It is natural to assume that the bank owns the property because that's where the money came from to purchase it However, whether a Deed of Trust or a Mortgage, the title to your property is either held by the property owner, a third party, or is pledged as security for the loan. Therefore, a bank does not own the property unless and until they successfully complete the legal process of foreclosing a loan and buying the property by out-bidding any other interested parties at a Sheriff's sale or auction.

When you borrow money you give a mortgage to the lender or a trust-deed to a trustee as the security instrument utilized to protect the lender from loss should you default on the loan.

Types of foreclosure

Judicial, Non judicial, Strict Foreclosure

A foreclosure is the legal process of a lender taking ownership of the collateral for a mortgage or promissory note that is in default. The process of foreclosing is a little different from state to state, but there are basically two types of foreclosure: judicial and non-judicial. States, like California, may permit both types of proceedings, but it is common practice to use one method or the other almost exclusively within a state.

Review your State Foreclosure Law Summary from the dropdown menu under Course Resources

The goal of the foreclosing institution is to recover the balance of the loan and costs by gaining possession and ownership of the property.

What do they want, blood?

      Banks are mostly about money, not real estate or blood. The goal of a lender pursuing foreclosure is the recovery of the principle loan balance, accrued interest, late fees, penalties, taxes paid on behalf of the property owner, court costs and attorneys' fees.
      In most states, the laws are written so that the lender can only attempt to recover these widely accepted standard losses. A pound of flesh or a little blood is now illegal and debtor's prison was outlawed in America under Andrew Jackson.
      However, the lender will add in every legitimate expense they can when foreclosing, and that will include the total the lender claims is owed by the property owner. In most states, that is the maximum amount the lender can collect.
      Laws have also been written to protect property owners from unfair practices during foreclosure. Some of them will be covered in this course.

Myth

The belief that a lender must sell a repossessed property for the loan balance and the amount it cost them to gain possession is untrue. Once the lender owns the property they can keep it, sell it, or even rent it for all they can get, and keep the profits.

Accelerating the debt

Most mortgages or land contracts contain an acceleration clause which states that in the event of default the lender may declare the entire balance due and payable. However, states have laws requiring a reasonable notice to the defaulting borrower before the lender can accelerate the debt.
Remember, a lender will also have to comply with any relevant provisions of the Federal Fair Debt Collection Practices Act. If the borrower does not cure the default after being served legal notice, the lender may then elect to foreclose their loan.

Reinstating the Loan

A borrower may be able to "cure" the loan before the date of sale. This may simply require paying the amount in arrears, plus interest and attorney's fees. This may have some value to an investor if the mortgage is assumable; as is the case with VA and some other government guaranteed loans.

Judicial Foreclosure

More than half the states allow judicial proceedings for a foreclosure. A lawsuit is brought by the lender ("mortgagee") against the borrower ("mortgagor") to acquire possession of the property (security). Like all lawsuits, it must start with a summons and complaint served on the borrower and any other parties with rights in the property. That is because all junior liens (second mortgage), including lease-hold tenancies, are wiped out if the foreclosure is successful. Superior liens include the IRS and property taxes. Those liens will survive a foreclosure sale.

You better answer

All lawsuits require the defendant (borrower) to answer the lawsuit, or the plaintiff (lender) will get a default judgment. After judgment a referee will be appointed by the court to ascertain the total amount of money, including interest and attorney's fees, that is due the plaintiff. The lender must then publish a legal notice of sale for several weeks, according to the state law. If the total amount due is not paid by the date ordered by the court, a public sale is conducted by the referee or sheriff on the courthouse steps.
The sheriff's sale is conducted like an auction with the property going to the highest bidder. However, the only bidder at the sale may be a representative of the lender because if there had been a significant amount of equity in the property the borrower would likely have been able to sell and prevent the foreclosure. We will get to that in lesson one.

If the lender does not bid at that sheriff's sale or auction, it probably doesn't want the property. This may be due to excessive superior liens, such as IRS or other tax liens. It might also mean that there are contamination or other environmental problems.

Sheriff or trustee's deed

The deed commonly received when purchasing a property at a foreclosure sale is called a Sheriff or Trustee's Deed and does not contain the warranties embodied in the Warranty Deed usually used to transfer real property ownership. Consequently, it is often necessary to pay any outstanding taxes and tax liens, then file a legal action to quiet title and perfect the deed.

Deficiency judgment

If the loan was full recourse, and the proceeds from the sale are insufficient to satisfy the amount owed to the lender, the lender may be entitled to a deficiency judgment against the borrower and any guarantor on the loan.
Some states prohibit deficiency judgments. (See, Alaska Statutes §34.20.100, California Code of Civil Procedure §580b and Washington Revised Code §61.24.010 ).

The legal process can take from three months to twelve months, depending on state law and the volume of court cases in the county where the property is located.

Non-Judicial Foreclosure

Many states permit a lender to foreclose without a lawsuit using what are commonly called forfeiture or a "power of sale." When the parties use a land contract or the borrower ("grantor") gives a "deed of trust" to a trustee to hold for the lender ("beneficiary"), the lender simply files a notice of default and publishes a legal notice of sale. The entire forfeiture or power of sale process usually takes less than 90 days.
There is another however, however. Judges sometimes do strange stuff. If the borrower has a significant amount of equity, or a sufficiently sad story, judges have been known to grant extended periods of redemption. Conversely, bankers often have friends in high places and a wink or nod could expedite the process. (Sorry about the real world stuff in an academic setting.)

Strict Foreclosure

Connecticut is one of the few states that still uses strict foreclosure. There is not foreclosure sale at all, not even at the courthouse steps. The lender must go to court and obtain a court order showing the borrower to be in default under the terms of the mortgage. At that point, title shifts to the lender. However, the borrower has a length of time set by the court to redeem the property. If the borrower fails to come up with the money during that time, then the borrower is forever barred from asserting a claim to the property and title becomes absolute in the lender.

Redemption

Some states give a borrower the right to "redeem" the amount owed and get title to their property back after the sale. The length of the redemption period varies from state to state; usually from six months to a year. The first right of redemption is from the owner, borrower or guarantor on loan. Then would come the junior lien holders who are in danger of having their interest wiped out by the foreclosing senior lien holder.

Buy before the sale

      The best time to buy a foreclosure property is usually just before foreclosure. If the property is worth enough in excess of the mortgage balance to make it interesting, an investor can often make the best deal with the owner before the auction. As you will learn, that will not normally be quick and easy, but the most challenging will usually produce the highest rewards.
     Even when the equity spread is not large there are still possibilities. Remember your leverage lessons. If you can buy for little or no money down, your rate of return on investment could be as large as Bill O'Riley's ego. Consider too that there are times when an investor is paid something by the borrower to buy their property because it will help solve their problems and protect their credit.
      Now that we have your interest, let's get right to it. We have made buying before foreclosure the first lesson.

Are you ready to learn and grow rich?

Pre-course quiz

Lesson 1 - Buying Pre-Foreclosure