There is a reason real estate investors can make money by picking up cheap defaulted property from the banks.  Banks need to get rid of those foreclosure properties.

You may think that negotiating with banks in order to get them to give you a discount on their property is practically impossible!  It is possible and real estate investment deals go through with the bank every day.  Here’s why.

Why You can Get Discounts on Default Properties
Banks are rated in their ability to work out deals with homeowner in default.  That means they are rated for how much cash they hold in reserve to cover each mortgage should it default and how well they work with the homeowner in order to keep a property from foreclosing.  Some banks may hold as much as 8 times the default mortgage in cash reserve, which for a standard $100,000 mortgage is as much as $800,000.  They are required by law to cover that mortgage in case it goes sour. The banks can’t use this money, invest this money and they certainly can’t use the property.  It just sits there tied up for as long as that mortgage is in their books.

So a bank will accept a short sale on a property or a mortgage note purchase primarily because of the reserves they are required to set aside.  They want that money freed up so they can invest that reserve money and make profits. 

Your best deals come from the bank right before the end of their fiscal year or right before their auditing. 

How eager the Banks are to get rid of Default Properties!
A particular real estate investor was interested in a small home in default.  The investor began discussions with the bank that held the homeowner’s mortgage to see if they could negotiate a deal.  He was holding out for a sale price of $37,500 on this property and he wanted to make the sale as a note purchase.  The bank was being difficult.  They didn’t want to sell the property that low and they wanted a short sale deal on this property.  The deal didn’t work out all three parties went their separate ways.

About 6 months later the bank calls the real estate investor back up to see if he is still interested in buying the property.  They were willing to let him have his previous price of $37,500 and let him have the property mortgage through a note purchase.  In fact the bank needed to do a note purchase. 

They had foreclosed on the homeowner during those 6 months, but neglected to show up at the sheriff’s sale.  This naturally messed up their foreclosure. 

The only way they could sell the property was by a note purchase.  There may have been a lot of investors interested in this property, but because the investor had been holding out for a note purchase six months prior the bank remembered him and called him up to see if he was still interested in investing that property.  Even better the investor saw what a pinch the bank was in and managed to negotiate an even lower sale price on the note purchase of $30,000.

Banks are not in the real estate business, they are in the money lending business.  The only use foreclosure as a last resort to recover some of their money.  This process takes a long time though and it’s messy.  Banks are much more willing to sell the property, work with the homeowner or take discounted short sales and note purchase deals to recover their loan.

There are all kinds of deals to be made in the real estate business.  Three deals in particular on the least desirable properties can bring you profits.

We love the ugly and awful.
~Andy Heller

There are all kinds in real estate investment.  All kinds of real estate investors, all kinds of deals and all kinds of property to make a deal on.  You’ll definitely find that having all kinds in this business makes for a great amount of variety and plenty of opportunity for earning profits.

There are three basic ways to make a profitable deal in the real estate investment industry.

1. Pick up a Pre-Foreclosure
2. Pick up a Property at the Foreclosure Sale
3. Pick up a Post-Foreclosure

These are the three states of the defaulted property before it usually ends up back on the market as a classic home for sale with a real estate agent.  A pre-foreclosure involves finding homeowners who haven’t been keeping up with their payments and working with them to buy their home, while also getting them out of their defaulted mortgage.

The foreclosure sale is where you can go to pick up mortgages and properties that have already been foreclosed on by the bank.  A post-foreclosure is a property that didn’t sell at the foreclosure sale for whatever reason and has gone back to the bank.

These last properties are usually undesirable for many reasons.  They may look bad, need a lot of repairs, may have a very high mortgage to cover or even have an IRS lien placed on them.  The real estate investor must realize that banks are not in the business of real estate.  They are in the money business.  In fact those post-foreclosure properties in a bank’s portfolio are listed as non-performing assets.  The banks don’t want them!

Give Us your Poor, Your Tired, Your Huddled Masses…
In real estate investment you’ll come to love those properties that are in disrepair.  These properties are not attractive to the general public, or those people looking to buy a home to live in.  Once a home becomes ugly and awful, you’ll find that it’s pretty much only attractive to the post-foreclosure property investors. 

As a property grows more and more neglected, fewer and fewer investors will be interested in that property.  However, this ugly and awful property is also an excellent way to get a major discount from the bank or the homeowner.  You can ask for multiple discounts on the sale price of a property because of shabby appearance, neglected maintenance, problem placement of the home on a lot and more. 

Don’t turn down a property deal just because that home looks ugly and awful.  In a business with all kinds, the leftovers can really turn out to be diamonds in the rough.  If the safety inspection shows the home to be sound and termite free, then you can bet that a property that just looks bad is a great property investment.

You’ve got your list of defaulted homeowners and defaulted mortgages, but don’t feel comfortable ringing them up.  Well, you can initiate contact with the homeowner through direct mail letters.

In the old days it used to take a lot of time to find and contact all of the default mortgages out there.  Now, it is way easier these days to find the names of homeowners in pre-foreclosure than it used to be and as a result contacting them is easier too. 

Looking for the Foreclosures
In the old days you used to have to go down to the courthouse and scroll through the lists of homes in foreclosure on microfiche in order to find pre-foreclosure deals that fit your needs and get the names of potential sellers that you could send letters to.  In fact, if you wanted you could still do this.

If you want to save yourself some time and stress on your neck, try buying into a mortgaging list that sends you all of the default mortgages.  There are all kinds of list providers out there today.  They’ll send you lists filled with pre-foreclosures and foreclosures in areas across the country.

How to Start Direct Mailing
You can now contact all of these wonderful foreclosures and pre-foreclosures available on the market by making use of direct mailing practices.  Direct mail involves sending a form letter to the homeowners you’ve selected as potential clients.

Once you get your list of homeowners in default or even a list of homeowners with their own mortgages you can start sending out direct mailing letters.

If you are uncomfortable with your own letter drafting skills, you can look up some pre-formatted sales letters that are available online, or just use a letter template from your word processing program (such as Microsoft Word) to create your own simple and direct letter to the homeowner. 

In your letters be sure to state your reasons for contacting the homeowner about his or her pre-foreclosure and provide your business information.

That includes:

• Your name and company name (if any)
• Telephone number
• Mailing address or office address (if any)
• Email
• Business card

Including a business card in each letter you send out may be a little costly at first, but in the long run those homeowners you contact about picking up their homeowner mortgages or pre-foreclosures are more likely to keep a business card than the letter.

Some suggest being prepared to send out your direct mailing letters to defaulted homeowners up to seven times before you’ll get a response.  That’s the average number of times someone needs to see a piece of information before they’ll act on it. 

There are lots of ways to invest your money.  Investing in the real estate market can be a great way to invest your money and even make money if you don’t have any capital!
You’ve probably heard a lot of people saying that the real estate market is a great way to make money and a great way to increase your returns.  Well, they are right. 

There are lots of opportunities in real estate for making profits, everything from flipping homes to buying defaulted mortgage notes and it’s all a consistent step-by-step process that’s simple to work once you know how. 

The average bank savings account makes you up to 6% interest if you are in one of the very high paying accounts.  The stock market deals in constantly fluctuating shares.  IRAs can’t be cashed in for years and they’re meant for your retirement anyway.  Real estate on the other hand, deals in property which is always there and mortgages which last for years.  Plus, you can work deals with average returns of 14-25% in profits. 

Cashing in on the pre-foreclosure market is an amazing way to make profits on your money, earn an income, or provide for your own retirement. 

One Woman’s Gain in Real Estate
Donna Bauer was a stay at home mom.  She made some money babysitting at a $1/hr per kid, but was really scrapping around for enough money to keep the family going about 20 years ago.  She could have gone out and gotten a job, but was determined to remain a stay at home mom.  So, she got into buying and selling real estate.

Three months later, she closed her first deal and earned over $5,000 and this was about twenty years ago.  So you can imagine how much more $5,000 was worth back then.  It was an amazing transition in her lifestyle.

To this day she’s making money in real estate and even teaching others how to do it for themselves.

You may feel that there are so many programs and real estate investors and real estate agents buying up the market that there isn’t any room left for you to get started.  However, foreclosures and pre-foreclosures come up in the market every single day.  This is a rotating market so there are always real estate deals for you to find and make a profit on!

You could approach the bank about a Short Sale on a defaulted property you’re interested in, but it does involve a lot of physical effort.  Another easier method is simply to buy the mortgage note from the bank on that same defaulted property.

You’ve been buying mortgage notes for a little while and are comfortable with the practice.  However, you’ve noticed that there are a lot of pre-foreclosure homes out there with mortgages on them too.  This is a large section of the mortgage note industry that remains untapped, but how can you get in on the profits with a defaulted property in the mix? 

It is possible to buy the mortgage note on a defaulted property.  When you use this method of real estate investment you still begin with the normal means of contacting the homeowner in pre-foreclosure through direct mail.

After you’ve spoken with the homeowner and they’ve agreed to sell to you, you’ll have the homeowner under contract to sell their home to you.  This is even though you are going to buy the note on their mortgage.  You’ll just have them sign the contract so they are locked in with you, and the homeowner doesn’t turn around to try and sell the house to someone else while you are working with the bank.  Once, you buy the note the contract becomes irrelevant.

How to Approach the Bank
Go into the bank and ask them if they would consider a Short Sale to you.  A short sale involves buying the actual real estate property at a reduced price and the bank writes off the remainder of the mortgage.  Usually they’ll say yes and begin to give you all kinds of information to turn in for final approval on a short sale.  Then, you can come up with, ‘Hey, wouldn’t it just be easier if I bought the note from you?”
 
If the bank knows how to do a note sale on a defaulted mortgage, then they’ll usually jump on your suggestion because it is so much easier to sell the note than get the process of a short sale through their system.

Once You Buy the Mortgage Note
After some negotiation the bank agrees to give you a note purchase on this property and they accept your offer of say, $70,000 for their mortgage of $115,000. 

By purchasing the note to the property you basically become the bank.  You buy the right to collect the remaining $115,000 left on the defaulted mortgage.  That’s crazy, right?  Nope.

Once you have the mortgage note you have a few options to move forward.  You as the mortgage note owner could continue on with the foreclosure and kick the homeowners out of their home, not very nice since you did approach them first.   Or you could get a “Deed in Lieu of Forclosure”. 

The Deed in Lieu of Foreclosure basically means that the property owner gives you the deed to the property when they can’t make payments on the mortgage.  When you first approach the homeowners about helping them out of their property, you’ll want to let them know that you aren’t going to save their mortgage you’re just trying to give them a clean escape from having that defaulted mortgage on their credit. 

This means that you aren’t going through with the foreclosure and the homeowner gets out without having a foreclosure mark on their record because they are just giving you the deed to the property.

The process of buying the mortgage note on a defaulted mortgage adds one more step to the basic process involved in a short sale.  However, it’s usually quicker, easier and lets you get your piece of real estate investment property

You may come across properties with multiple mortgages in your real estate investing.  These property deals can be a real hassle, but it is possible to negotiate with the multiple mortgage holders.

Sometimes you’ll come across properties in your real estate investing that have multiple mortgages.  In order to get your discounted sale on this property you’ll often need to negotiate with each mortgage holder separately.  This can get difficult.

Negotiating with the First Mortgage Holder
Usually it becomes a real hassle when you negotiate a short sale deal with the first mortgage holder, which is often the bank.  The bank may say, okay we’ll let you purchase this property for $60,000 and we’ll take a $45,000 write off on the mortgage.  However, since we’re taking such a big write off, we’ll only let the second mortgage holder take a $1,000 for their claim to the property. 

Remember, when it comes to property sales, its first come, and first serve.  The first mortgage or lien holder on that property gets control of that property, that mortgage and gets to say what everyone else behind him gets for their claim.  This may be all of the cash or it may be none. 

As you can imagine the second mortgage holder won’t take too kindly to this deal.  They’ll probably hold up the short sale by telling you that they won’t sell unless they get $5,000 for their claim, instead of the $1,000 that the bank wants them to take.  Many real estate investors stay well clear of properties with multiple mortgages, but it’s possible to make the deal work.

How to Get around this Conflict
You could spend your time as a go between for the different mortgage holders, trying to get everyone to get along.  Or you can just make a note purchase! 

Rather than making a note purchase for the first mortgage you buy the note on the second mortgage!  That’s right, go ahead and pay the second mortgage holder the desired $5,000 for their position as second mortgage holder.  You become the bank again and willingly accept $1,000 for the short sale.  Thus, the deal can close and you don’t have to waste valuable time being the bank’s gopher.

Any time you run into an obstacle in a deal, you should ask yourself, ‘what would happen if I bought the note?’   Can’t get the second mortgage holder to accept the bank’s offer?  Buy their note!  The bank won’t let you give the default property holder a little cash for their trouble?  Buy the note!  It’s an amazingly easy way to think outside the box and still make your money.

You can’t just approach the bank with your best offer and expect to close the deal.  You need to persuade them to accept the short sale first with a little negotiation.

You’ve found a great real estate investment to purchase, signed on with the homeowners and gotten all of your information in order.  All that’s needed is to approach the bank with a short sale offer and close the deal right?  Maybe not.

There is an art to negotiation in the real estate investment industry.  Negotiating a short sale isn’t simply approaching the bank with your packet of paperwork and your best offer to close the deal. 

You’ll need to endure at least two rounds of negotiation with the banks most of the time.  So, don’t approach them with your final offer right off.  It’s probably best if your first offer to the bank is a price that’s lower than what you are willing to pay.

Send a Cover Letter
Submit to the bank an offer cover letter filled will all of your points to justify the discounted offer you are making on the bank.  The banks you usually end up negotiating with get tons of offers for their properties.   This submitted cover letter helps you stand out and makes you look a little more professional as a real estate investor. 

The cover letter can outline your interest in the property, certain negative aspects you’ve noticed to the default property and your first offer on the property.  Don’t be afraid to make a low offer on the property when negotiating short sales.  You can always up your offers, but you can never lower them.  So, if you start out by giving them the most you are willing to pay for the foreclosure property you are interested in the bidding could quickly enter a price range you aren’t able to afford.

Make it Personal
Making more personal offers, such as using the cover letter submission, will get you into more negotiations with banks and help you close more deals.  You’ll waste a lot of time if you go out make a 100 low ball offers in a very impersonal manner.  It just won’t make real estate investment worth the time. 

Instead, go out and find ten default properties that you are interested in and make more personalized offers on them.  Put together a nice cover letter for each that outlines the points above and you’ll find that you enter more deal in less time.  Less time spent means you are making more money for your effort and you are more likely to make that real estate deal. 

The homeowner can’t have a clean get away after a short sale on their defaulted property sale.  They’ll have to face the possibility of a judgment for the remainder of the mortgage or having to deal with the IRS!

When you are negotiating a short sale or note purchase through the bank on a defaulted property it’s easy to overlook the possibility of a mortgage judgment being filed against the homeowner after the sale.  It can be common practice for a bank to file a judgment against homeowners fro the remainder of a mortgage after a property has been sold for less than its mortgage.

A typical short sale involves negotiating with the bank to let you buy a property at a lower price than what is left owed on the mortgage to the homeowners.  This allows you to pick up a property cheap, the bank to unload a mortgage that the homeowners just can’t make payments on and the homeowners to get out from under a mortgage that’s downing downhill fast.

What Happens after the Short Sale?
Sometimes you’ll find that the homeowners don’t get away from this deal as Scott-free, as they were led to believe.  The bank may say okay, we’ll let you buy this mortgage or this property for say $60,000 when the homeowners still owe $100,000, but we’re also going to court later on to get a judgment against the homeowner. 

This judgment against the homeowner basically says that the now former homeowner still owes the bank $40,000, which was the amount of the write-off the bank took on the sale of that property to you.  That judgment will remain attached to the homeowner for 2 years and can really mess up their ability to get into a new home.  It can also attach to another house that the homeowner buys after selling you the property.  So the homeowner automatically gets a $40,000 debt tacked onto their other mortgage.

The bank can also decide not get a deficiency judgment against the homeowner for the write-off on that defaulted property.  While you are negotiating with the bank for that property you can also negotiate with them to not get that mortgage judgment against the homeowner.  When the bank doesn’t get a judgment, it is required to send out a 1099 form to the homeowner.  This 1099 form shows the $40,000 write-off by the bank as income for the homeowner for that year. 

What to Do about the 1099 Form?
As you can imagine, most homeowners will be terrified by this possibility.  Either they get a deficiency judgment against them for the remainder of the mortgage or the IRS views that $40,000 write-off as income.  Be sure to tell the homeowner, that when they get this 1099 Form they need to see their CPA or someone who is certified to do their taxes. 

The CPA will be able to tell them how to work with the IRS, so that this 1099 isn’t shown as income.  The homeowner may qualify for an ‘exclusion’ from the 1099 for selling their own home if they have lived in that home for the past 2 out of 5 years. 

In addition, there is a Form 982 that the homeowners may be able to fill out that shows they are ‘insolvent’ and have no funds from this sale. If they qualify through this form the IRS may not require them to pay taxes on that $40,000 write-off. 

Don’t blame the banks for this little predicament that can pop up and ruin the homeowner’s deal.  They are required by law to get a judgment against the homeowner or to send out a 1099 form to the homeowner.  Just make sure that you lee the homeowner know in advance that if they take the short sale or note purchase deal they will face one of these two possibilities.