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Understanding The Basics of Buying

"Oh, the times! Oh, the customs!" -- Cicero

Introduction To Buying

It is essential to bear in mind some key factors regarding the purchase of foreclosures.

First, all homeowners and lenders are different. No two are alike. All properties and their histories are different. Second, don't get carried away with your first prospective deal. There are thousands of "deals" on the market. There will be plenty of foreclosures available, you don't have to buy the first one you see. Third, don't bid on or pay anyone, any amount, until you are absolutely sure that the outcome will be in your favor, and that all possible difficulties have been removed. Fourth, make sure you have assembled your team of expert advisors to assist you in your ventures. Do not enter into any contract or arrangement until you have the endorsement of your advisors. Later, you will gain the ability to handle these transactions independently. Fifth, make sure you know the laws pertaining to foreclosures in your state. At the very least, make sure you have a competent attorney on your team. one that can fully explain the laws and advise you accordingly. Sixth, do your research properly, don't take short cuts. Mistakes in the recording or researching of documents, can result in a loss. Seventh, be professional. Never, ever misrepresent yourself to a homeowner or lender, and never take advantage of a homeowner in default. Eighth, become an expert in your area. It is too difficult and unproductive to try to cover the world. Ninth, determine what investing style best suits your needs or abilities. and practice, then perfect your style for maximum profits. Tenth, learn as much as you can about the real estate industry in your area. collect pertinent materials. read books. stay in touch.

Whether you buy and sell properties " for a living," or get involved on a casual basis. you can buy property at a discount. property that can be sold quickly for large profits. property that will appreciate well. or rent well. or possibly a combination or all of the above. Make no mistake about it, any of the aforementioned investments will increase your personal wealth.

As is with everything we buy. if the purchase price is discounted. there must be a reason why. This reason will help determine the price of the property, its condition, or both. If this property could have been sold at full market price. it probably would have. Discover the history of all properties you are interested in. Expect to hear and see unusual events or occurrences that led to the original default.

You will be dealing with lenders, lien holders and/or homeowners. You will be engaged in legal real estate transactions that require attention to detail. Pay attention to the details.

As each situation you encounter will be different, you should maintain enough flexibility of thought and dollars in your offers. I encourage you to be creative. but not too creative! Stick to the basics, especially at first. These are tried and true methods. Learn from the mistakes of others. who are now professionals. and who do this everyday.

Read these chapters over and over again, until you can see yourself getting involved. See yourself going to the courthouse or working with brokers and title companies. see yourself negotiating with homeowners and lenders. see yourself at the courthouse steps participating in an auction. see yourself negotiating with a broker or banker. see yourself doing this part time or full time. Start to get comfortable with the terminology and the concept of buying real estate at a discount.

The Three Basic Methods

The three "phases" of the foreclosure process produce three different sets of investing opportunities. The default or pre-foreclosure phase, provides you with an opportunity to buy the property from the homeowner before the property goes to auction.

The auction or sale phase allows you to bid at the time the property is auctioned off.

After the auction, or the REO phase, you can work with Realtors and sometimes directly with lender to get attractive properties at discounted prices.

All three investing opportunities present advantages, depending on who you talk to. These advantages depend heavily upon your capabilities, desires and willingness to take risks. By following the suggestions in this guidebook, you will minimize your risks.

The Judicial Foreclosure Explained

In the judicial foreclosure process, the lender must file a complaint, an intent to bring legal action against the delinquent borrower. The lender must provide evidence to the court, that the borrower is in default of his or her agreement to make regular payments on the loan. The mortgage stipulates, that if the conditions of the loan agreement aren't met, the lender shall have the right to begin the foreclosure process.

This is the common method in "Lien Theory" states. The lien theory dictates that the mortgage contract pledges the title of the property in question to the lender. While the lender does not actually hold title to the property. it is assumed to be the title holder by virtue of this mortgage contract. until the terms of the contract have been completed. The mortgage contract is recognized as a lien.

Because the judicial process is a legal process, the lender must petition the court to allow the lender to foreclose on the property.

Most states' courts have developed systems to deal with foreclosure complaints without resorting to jury trials. While it is possible, it rarely ever happens.

Several "judicial states" use a Summary Judgement Hearing. Here, the judge can decide in favor of the plaintiff (the lender) if there is no opposition from the defendant (the borrower). In other states, the lender pleads with the court to summons the borrower to appear. The defendant must show proof that the lender is incorrect and the foreclosure should not be granted.

If the borrower can not show "good cause," or fails to appear according to the summons, the judge can decide in favor of the lender and allow the foreclosure procedure to continue.

The time frames involved in the process vary greatly. The time a lender allows the borrower to be in default, the time within which a property owner may have a right to redeem the property. the time it takes the courts to process all of the necessary actions and hearings.

A typical judicial foreclosure proceeds in this manner:

When a loan is in default, the lender will send the borrower a "Notice of Intent to Foreclose."

This notice informs the homeowner that the loan is in default and the lender intends to take action if the problem is not cured. This notice will contain the amounts due. This notice is not a public notice.

If the process continues, the lender (who is also now the "plaintiff") files a "Complaint for Foreclosure and Other Relief" or a "Motion to Foreclose Mortgage," at the county courthouse.

Next is the Lis Pendens, which is the legal recording of the warning notices sent to any interested parties. Interested parties are those who may have some claim against the property or its ownership. The attorney for the plaintiff will order a title search to identify any interested parties.

When officially "served," the Lis Pendens informs the interested parties that there is "legal action pending" that might effect them. This notice is served as a summons, by the court, delivered by the sheriff. As you will see in the case study in section 2 of this publication, those served had 20 days to respond.

The Lis Pendens is of critical importance because it signals the beginning of the foreclosure process. It states that a suit was brought about by the plaintiff. against the defendant(s). regarding a particular contract (loan, deed or mortgage). and that relief is sought in a manner as to foreclose on the contract (mortgage). held by the plaintiff. against the property which is security for the debt. as entitled by law.

The Lis Pendens identifies the plaintiff. the defendant(s). and typically contains the following:

1. this is an action to foreclose on a mortgage

2. the date of the promissory note and mortgage

3. where this mortgage was recorded in the official public records

4. the plaintiff is the holder of the mortgage

5. a default has occurred

6. the plaintiff declares the full amount due and payable

7. the principle amount due and other expenses

8. any expenses paid by plaintiff to protect his interest

9. all conditions have been met to accelerate the note

10. identifies legal title of borrower(s)

11. for collection purposes, the plaintiff has hired an attorney and is obliged to pay for said services

12. other defendants may have some claim on the property (these claims identified by title search, are shown with the names of the defendants. date filed. amount of claim. case or file number. and location of recording in the public records)

13. the plaintiff seeks a judgment to foreclose the mortgage. and that if the proceeds of the sale do not cover the amount sought. a deficiency judgment be pursued.

A copy of the original mortgage and/or note are usually attached.

The Lis Pendens is an official court document and is matter of public record. This is the first opportunity for the general public, or foreclosure investor to become aware of this distressed property.

The lender petitions the court, as it is entitled to by law, to enter a Summary Judgment of Foreclosure and Attorney's Fees. A Notice of Hearing is sent to all interested parties for the Summary Judgment. This notice informs the parties that the plaintiff wants the court to decide in its favor. and to recoup the attorney's fees.

The actual "Motion for Summary Judgment and Request for Attorney's Fees" will be attached. The "Motion" states that the plaintiff can proceed in this manner as a matter of law. cites state laws supporting the action. the ability to foreclose to secure a debt. the lender's right of acceleration. status of the lien. and a statement showing that evidence is provided of the loan. the mortgage. "as well as the defaults thereon and the balance due."

A "Summary Judgment of Foreclosure" is ordered, adjudged and decreed. This "decree" indicates that the court acknowledges the plaintiff's rights under the law. terms of the documents and devices in question. the plaintiff has provided competent evidence of said allegations. the mortgage does indeed constitute a valid lien. the court recognizes and grants the requested attorney's fees.

a final judgment amount, the property's "legal description", notice that the court clerk shall sell the property at a specific date and time. and the address and location of sale. if the amounts as previously outlined are not paid. The balance of this sometimes lengthy document contains information and instructions for the distribution of the proceeds of the sale.

The Summary Judgment or "Final Judgment," is the green light that signals the beginning of the end. By order of the judge, the court will sell the property, typically via the Sheriff, if the debt is not satisfied. Since the court clerk has the duty of supervising the sale of the property, the court must send a "Notice of Sale" to all interested parties.

The Notice of Sale states that pursuant to the "Final Judgment of Foreclosure," the sheriff will sell the property at a specific time and place. The date and time of the sale is stipulated in the Final Judgment. Typically the place is the courthouse steps. A copy of the Summary or Final Judgment is usually attached.

If there is still no satisfaction, the property will be sold at the courthouse steps as outlined, to the highest bidder.

Except for states that allow the homeowner a "right of redemption," the homeowner will have just lost all control, ownership rights and interest in his property.

The Non-Judicial Foreclosure Explained

In the "Lien Theory" states, the judicial foreclosure process is applied as previously outlined. In "Title Theory" state however, the non-judicial foreclosure action is used.

The security instrument used is the Deed of Trust, not a mortgage. Deeds of Trust differ from mortgage contracts in that the borrower (Trustor) conveys his or her title to the property. to the Trustee (a neutral 3rd party). who becomes the legal title holder of the property. until the Trustor has completed the terms and obligations of the note.

The major difference between the judicial and non-judicial methods of foreclosure is obvious. The judicial method involves the courts, the judicial branch of government. The non-judicial method does not. Court approval to foreclosure on a property is not required because the method of foreclosure is stipulated and agreed upon when the original loan agreement is made. A Trust Deed pre-authorizes the sale of the borrower's property if a default in the original agreement should occur. The "Power of Sale" clause found in all Trust Deeds, authorizes the Trustee to sell the property upon notification from the Beneficiary, that the loan is in default.

The Trust Deed or Deed of Trust, employs a three party system. the Beneficiary (lender), the Trustor (borrower) and the Trustee (third party).

A typical non-judicial foreclosure proceeds in this manner:

In this system of foreclosure, the lender attempts to recover the debt through a "Trustee's Sale." This is authorized in the Trust Deed. Most, but not all states us the Deed of Trust in the non-judicial method.

The Trustee has the authority to sell the property, should the borrower go into default. The lender notifies the Trustee of the default and instructs him to start the process of foreclosure. (All lenders' policies differ, mortgages or deed of trust notwithstanding. The number of days late. number of payments behind. dollar amounts owed. will have different effects on different lenders. The length of time varies from lender to lender. as to when they issue the Notice of Default. and when the Trustee Sale is scheduled. Local and state laws also effect the time frames associated with this process).

The Trustee prepares a "Notice of Default," and files it with the County Clerk, Clerk of the Courts, or County Recorder. This notice is filed in the county where the property lies, by the Trustee. This notice signals the beginning of "public notice," that a loan is in default and that foreclosure action has begun. The notice may be posted in a public place and on the property itself.

The Trustee prepares the notice of Default. The notice will include the following information:

The date of the notice

The name of the Trustor (borrower)

The address of the Trustor

The name of the Beneficiary (lender)

The name of the Trustee

The original loan amount and date

The amount in default, including all other charges

The legal description of the property (optional)

Similar to the mortgage, the Deed of Trust accelerates the loan.

The homeowner in default is granted time to cure the problem. This is called the "reinstatement period" or "redemption period." The reinstatement period will vary from state to state. The reinstatement period is indicated in the Notice of Default. It is usually 60 90 days, but laws vary. It could be as little as 15 days and usually starts from the day the notice was recorded.

Notices of Default are worded very simply and very severely. A sample of the language used, is:

"IMPORTANT NOTICE IF YOUR PROPERTY IS IN FORECLOSURE BECAUSE YOU ARE BEHIND IN YOUR PAYMENTS, IT MAY BE SOLD WITHOUT ANY COURT ACTION."

If the default is not cured within the allotted reinstatement period, a "Notice of Sale" or "Notice of Trustee's Sale" is recorded like the Notice of Default. It is distributed and advertised according to the laws of the land, prior to the Trustee's sale.

The Notice of Sale states that the Trustor is in default and the property will be sold at a public sale. at a specific time and place. to the highest bidder. to satisfy an obligation by the Trustor. for the amount owed the Beneficiary. as stipulated in the power of sale clause in the Trust Deed. and that the Notice of Default (and "election to sell") was duly recorded in the proper county office. in said volumes. on said date.

If the problem still has not been resolved, the property is sold at auction. The time between the posting and recording of the Notice of Trustee's Sale. to the date of the actual sale. varies according to law.

In both the judicial and non-judicial foreclosure processes, the notices of sale, foreclosure complaints and foreclosure sales are advertised in newspapers. There are few if any states, that do not require the public advertising of these "notices."

In both of the foreclosure processes described, the emphasis was on showing the process in action and does not take into account the efforts made on behalf of the lender or borrower to resolve the matter. This is important to point out, because as you are now aware, foreclosing on a defaulting loan is absolutely the last thing the lender wants to do. Attempts will be made on both sides to avoid foreclosure.

Comparing The Processes

There are other significant differences between the two systems. The judicial system example above, is an extremely simplified example. Things can get a lot more complicated. The main reason is the involvement of the court system. You can see two examples, the judicial method is more complex and time consuming.

The non-judicial example is also simplified. Comparing apples to apples, you can see why lenders prefer the non-judicial system. Attorneys need not be involved, nor are there any lengthy court preparations and pleadings. The Trustee merely records the documents. prior approval from a judge is not necessary. This system is much more efficient from beginning to end. much faster and less expensive. especially for the lender.

Another major difference effects the rights of the homeowner in foreclosure. and the impact these rights have on the lender and the foreclosure investor.

The big difference is the right of redemption. In several states, the homeowner has the right to redeem his property after it has been sold at auction. This redemption period could be a few weeks. in some states a year or more.

The "right," is more or less a trade-off for the lender's right to bring a deficiency judgment suit. The mortgage contract (and state laws) allows the lender to sue the borrower for the balance of the amount owed. if the total amount owed was not collected at the auction. This stipulation is contained in most mortgages.

In the non-judicial system utilizing the Trust Deed as the security instrument for the loan. the property owner retains no redemption rights, after the property has been sold at the Trustee's Sale. Likewise, the Beneficiary no longer has the ability to pursue the property owner for a deficiency judgment.

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