Let’s say that a bank or mortgage company has written a loan for
$100,000 on a house that now qualifies for foreclosure. The loan is
$100,000, but the financial institution does not want to take back the
property. Sometimes, especially with the high foreclosure rates occurring
in many parts of the country, the institutions will discount, or short,
the amount of the loan to get rid of it. If the house is in the process of
foreclosure or has been foreclosed on, the bank may be willing to take
only $70,000 to $90,000 on the $100,000 loan. Often, you must
present an appraisal on the house as well as a repair list so that the institution
can justify taking less money. Be persistent, especially in finding
the right department and decision maker at the bank.
Right now the foreclosures in some areas of the country are up 100 to
200 percent. When the economy slows down, people who overborrowed
and overspent during the good times have a financial hangover that
leads to foreclosures. And the banks that have lent too much money
have to take back property. It’s an ongoing cycle.
No matter where the economy is in the cycle, there’s opportunity to
make money. In the current climate, banks have foreclosed on so many
properties that if they are owed, say, $250,000 on a foreclosed property,
they’re tremendously eager to move that property off their books, and
they’ll short-sell the mortgage. That means you could offer less than the
mortgage amount and buy the property as a short sale.
First, you need to determine which bank owns the foreclosed property
and negotiate with the head of the real estate loan department or
someone who can make a decision. (The clerks who answer the phone can find out what the property is worth from the loan amount, how long
the bank has owned it, and so on. Then ask if the bank will sell the
house at a discount.
Many investors have been able to buy properties from 20 to 60 percent
below what they’re worth by doing short sales with the banks. Many are
wholesaling these great deals to other investors, or they may have partners
with good money or credit who help them buy and hold these great
deals. This is another way to make money in real estate without using
your own capital or credit.
Say you own a house that you purchased for $200,000 some years ago,
putting $20,000 down and borrowing $180,000. You have a first mortgage
of about $175,000, and the house is now worth $500,000.
This level of appreciation has taken place in many markets. Say you go
to your bank and get a second mortgage for $100,000. Now you have
a first mortgage of $180,000 and a second mortgage of $100,000.
Your bank calls and says, “We suggest you get one of these secured
credit card equity lines and pay off your car loan and your Visa bill,
which will make your debt tax deductible, because Visa payments and
your car lease or car payments are generally not tax deductible.” You
follow the bank’s suggestion and take out an equity line on your
house, secured by real estate, which now becomes deductible, and pay
off your other debts. You now have a third mortgage on the house for
Then you decide to go into real estate and want to borrow $50,000
from your mom to get started. She says, “I want a written loan contract
and security.” You go ahead and acquire a fourth mortgage for $50,000.
Unfortunately, you get divorced. The court decrees that you owe money
to your ex, which you can’t pay, so your ex gets a judgment against you
for $30,000 and files it against your house. You owe $8,000 in property
taxes, but you forgot to pay them last year and you can’t pay them this
year, so the city puts a $16,000 tax lien against your house. If you don’t
pay these taxes, the city will foreclose on it.
Now things are really getting bad and you can’t pay any of the debts.
Who is first in line for the debts owed? The city. Property taxes are
always paid first. Now the mortgage company could show up and pay
the $16,000 in taxes to protect their $180,000 or $100,000 mortgage.
But banks and finance companies sometimes don’t do the smartest
things. Often the properties go to tax sales and are foreclosed on. Call
your local tax collector’s office and get a list of properties with tax liens.
Then call the owners; they may be motivated. Also, go to tax sales and
start learning about them. The tax office may have property that no one
bought at the sale. See if you can get a good deal. Contact a local title
lawyer to learn the ins and outs of your local tax sale rules.