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Secrets To PreForeclosure Profits – Copyright 2009

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Secrets To PreForeclosure Profits

Content About the Author ................................................................................................... 3 Introduction to Pre-Foreclosures ........................................................................... 5 The Basics of Foreclosure .................................................................................... 9 Step 1: Organizing Your Office ........................................................................... 16 Step 2: Researching the Market and Qualifying Homeowners ............................ 20 Step 3: Selling the Homeowner on You .............................................................. 30 Step 4: Performing Due Diligence ....................................................................... 35 Step 5: Inspecting the Property ........................................................................... 43 Step 6: Estimating Property Value ...................................................................... 61 Step 7: Negotiating with Homeowners and Others ............................................. 68 Step 8: Preparing and Presenting the Purchase Agreement .............................. 75 Step 9: Closing the Sale ..................................................................................... 81 Step 10: Maximizing Property Value and Appeal ................................................ 84 Step 11: Achieving Maximum Profit .................................................................... 90 A Word on Short Sales ....................................................................................... 95 Conclusion ........................................................................................................ 100 – Copyright 2009

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Secrets To PreForeclosure Profits

About the Author This book is dedicated to all those who’ve suffered hard times and want to make a success of themselves in the wonderful field of real estate. I know your story because I’ve been through some hard times myself. Let me explain… My brother and I escaped Vietnam on a fishing boat in 1986. I was 11 years old and my brother was 18 at the time. We spent seven days and six nights at sea and were mugged by pirate boats. They stripped us of all our valuables, but, luckily, didn’t kill us as happened with other unfortunate escapees. Eventually, a Malaysian boat picked us up, and we spent six months in a refugee camp before being transferred to a camp in the Philippines. After a short stay there, the United States accepted us, and we ended up in Houston. Neither my brother nor I had much money, so we lived in a two-bedroom apartment—with eight to 12 other single guys! Needless to say, it was crowded, and some of our roommates weren’t the best people. One day, I came home from school to find out the apartment had been raided by the FBI looking for drugs and illegal hand guns! Although my brother and I were poor and dressed in clothes bought from charity organizations, we worked hard. I graduated from high school, went to college, and worked in the IT field for two years. I had a good job, but, in 2002, the software company I worked for crashed and went out of business. There I was without a job! I’d always heard that real estate was the place to make good money, so I started studying by taking home study courses and attending seminars to gather the basic knowledge I needed. Then, I began knocking on the doors of homeowners for a few months and discovered very quickly that no one wanted to talk to me! Realizing that door-knocking was not an effective method of getting deals, I become a ―bird dog‖ for other real estate investors. A bird dog finds good leads for investors and then is paid for those leads that pan out. In the meantime, I worked at finding my own deals. After about four months, I found a good one. I bought a home for $55,000 and put $22,000 worth of repairs into it. I sold the home for $134,000 dollars at a five-day auction. I earned a $57,000 profit (minus 3% of the buyer’s closing costs)! This kind of profit doesn’t happen every time, of course. But through a combination of luck and hard work, I was on my way in a real estate career! As of this writing, I’ve bought over 340 properties, including single-family homes, condos, town homes, and vacant lots. I specialize in wholesaling but have also done many rehabs, subject-to’s, pre-foreclosures, and short sales. – Copyright 2009

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Secrets To PreForeclosure Profits I’ve had a lot of success, and I want to share it with you. I want you to make the money you deserve! This book is part of that sharing. It will provide you the fundamental and essential knowledge necessary to operate effectively in the preforeclosure market. Let me be clear. This book is designed to provide you with essential basic knowledge, but it’s only one part of my real estate ―curriculum.‖ You can gain advanced ―real world‖ knowledge by visiting You can also gain access to hot bargain-price property leads at You’ll receive the following benefits: Foreclosures / REOS PreForeclosure Leads - these are homeowners who just got kicked out of bankruptcy. Chances are they’re headed into foreclosure. Deep-discount Wholesale Deals Bankruptcy Leads - these are homeowners who’ve just filed bankruptcy and want to avoid foreclosure. Motivated Sellers – these are homeowners who have unwanted properties In this book, my seminars and on my websites, I provide you with everything you need to be a success in the pre-foreclosure market—and beyond! What you need to supply is hard work, persistence, and a positive attitude that you will succeed no matter what obstacle is placed in your path! I wish you the very best of luck in your real estate career! To Fun, Fortune and Freedom,

CEO Founder and President: Certified Real Estate Investors Association (CREIA) – Copyright 2009

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Secrets To PreForeclosure Profits

Introduction to Pre-Foreclosures In the real estate market, knowledge is definitely power—and the secret to profits! Since the subject of this book is pre-foreclosures, it’s important for you to understand exactly what pre-foreclosures are and what opportunities are available to you. This book is dedicated to helping you build and/or improve a career in real estate through my hard-earned experience and knowledge, so let’s get started!

What Are Foreclosures and Pre-Foreclosures? A foreclosure is a legal process. It’s initiated by lenders when home owners (and others) fail to meet their mortgage obligations. In other words, home owners fail to meet their payments and, as a result, lenders want the property back. The foreclosure process starts when a lender files a law suit or a notice of default (more on this topic later) in the official public records. We’ll cover this process in more detail in the next chapter. A pre-foreclosure sale takes place between the time when the lender files suit and when the property is scheduled to be sold at a public foreclosure action or a trustee’s sale. A pre-foreclosure is not a formal legal process; it’s an opportunity for you to assist stressed-out home owners and make a profit at the same time.

Why Do Foreclosures Occur? Often, people tend to think that foreclosures occur because of poor financial management by home owners and others. While this certainly can be true, there are really many different reasons why foreclosures take place. It’s important for you to understand these reasons so you can deal effectively with home owners facing foreclosure and help them to make the best of a bad situation. One reason can be a poor local or national economy. When jobs are lost due to cuts, outsourcing or other factors, homeowners lose their income and can no longer afford the mortgage payments. A second reason can be personal problems. Most commonly, foreclosure is caused by divorce, death of the sole provider, or, increasingly, overwhelming medical bills due to the high cost of health care in the United States. A third reason is the tendency of some first-time home buyers to over-extend themselves. They fall in love with the American dream of home ownership, but fail to have cash reserves to handle unexpected costs and emergency repairs that come with owning property. This means they fall behind and end up in a continual and losing game of ―catch up.‖ Eventually, they can’t meet their payments, and foreclosure is the result. – Copyright 2009

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Secrets To PreForeclosure Profits A fourth reason is the availability of loans with high loan-to-value ratios. These days, loans are offered at 90 to 100% of the value of the property securing the loan. This means buyers can purchase a home with little or no down payment. Since they have little invested in the home, they may walk away at the first sign of financial trouble. A fifth reason is the lenient terms offered by such governmental agencies as the Federal Housing Administration (FHA) or the Veteran’s Administration (VA). This means lenders can be tempted to offer loans to individuals with suspect credit and job histories. Unfortunately, the result can be foreclosure. A sixth reason is the existence of predatory lenders. These unscrupulous individuals and institutions target borrowers with low income, low credit scores, bankruptcies, and excessive debt. Since these borrowers can’t tap into the conventional loan market, predator lenders offer them ―subprime‖ loans with high interest rates and outrageously high late fees. Again, the result is often foreclosure. A seventh reason is, oddly enough, low interest rates. Low rates can tempt buyers into purchasing more house than they can afford. Most families these days have two income earners; however when one of the earners loses his or her job, the family can often no longer afford the payments on an expensive home. They fall behind in those payments, and the lender starts the legal process of getting the property back. As stated earlier, it’s important for you to understand all these reasons. It will help you empathize with your customers—the home owners—and, at the same time, avoid bad deals. Now, let’s look at the benefits of making a living in the pre-foreclosure market.

What Are the Benefits of Working in the Pre-Foreclosure Market? There’s no doubt about it—the pre-foreclosure market offers many advantages to the careful investor. First of all, you can buy properties at a deep discount. Discounts can range from 20% to over 40% of market value. This means you can buy a property, turn around and sell it at under-market value, and still make a great profit. Second, you can structure deals that will cost you very little money or, in some cases, no money at all. This doesn’t mean you’ll be able to operate in the market without cash reserves. That’s just plain foolish. However, it does mean you can get creative and legally use other people’s money to finance your deals. Third, you can buy properties quickly without all the rigamarole that goes on with conventional transactions. This not only means that you don’t get buried in – Copyright 2009

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Secrets To PreForeclosure Profits paperwork, but you’re also able to turn relatively quick profits while moving on to the next deal. Fourth, a great advantage of operating in the pre-foreclosure market is that you’re able to research and inspect properties. This isn’t possible during the later auction phase of foreclosure which means you could end up with a ―pig in a poke‖ if you’re not very careful. Buying a pre-foreclosure avoids this potentially disastrous possibility. Fifth, you’re able to structure sales agreements in a creative fashion. This means you can generate the best terms possible for you while, at the same time, helping a home owner out. Sixth, you have the opportunity for financial and personal freedom. In effect, you’re an entrepreneur, and you can set your own hours, rules, and profit goals. You’re no longer slave to a boss and a rigid office routine. Best of all, once you become proficient at buying and selling pre-foreclosure properties, you can ensure a secure future for you and your family since you’re not limited to the amount of money you can make. Also, your knowledge of the pre-foreclosure market will transfer to other aspects of real estate, allowing you to expand your efforts into different markets. Of course, every field has its disadvantages as well as advantages, and it pays to be aware of them so you’re prepared to deal with and overcome them. Let’s look at the disadvantages next.

What Are the Disadvantages of Working in the Pre-Foreclosure Market? Let’s face it—foreclosure is not an easy process for the homeowners. That means you’re going to deal with people who may be angry, frustrated, and looking for someone to blame. In some cases, they can be very difficult to deal with, and you have to be prepared for these situations. Working with home owners in foreclosure situations calls for tact, patience, and empathy. In effect, you have to be a ―people person.‖ We’ll discuss this at length later in the book, but the best attitude to take is that you are a problem-solver; that is, you’re there to help the property owner out of a bad situation in the best way possible. This attitude will help you maintain your sense of perspective and humor in all your dealings. Another ―disadvantage‖ is that you’ll have to do a considerable amount of courthouse research to make sure your deals are profitable. This is hard work, requiring extensive attention to detail to make sure the property isn’t loaded down with unexpected liens and other items that can entangle you in legal procedures over a long period of time and end up reducing your profit—or even resulting in a loss. When dealing with pre-foreclosure properties, the devil is indeed in the details! – Copyright 2009

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Finally, competition is tough in the pre-foreclosure market! After all, other buyers will be seeking the same profit opportunities that you’re looking for. This means you have to be up-to-date on local conditions and opportunities and stay on top of the market at all times!

What Does It Take to Become a Successful Player in the PreForeclosure Market? You don’t have to be a financial genius to operate successfully in the market, but there are definitely certain pre-requisites you must have. Most fundamentally, you need complete and detailed knowledge of not only the market, but the local, state, and national laws regarding foreclosures. This book will provide you with the basic information on that subject, but you’ll need to study real estate rules and regulations in detail so you can operate effectively and not inadvertently break one or more of those laws. This means you’ll need to do your research and do it well. If you’re a person of action and don’t enjoy reading all that much, think of it this way: You wouldn’t go hunting with an empty gun. You’d just be setting yourself up for failure and wouldn’t bag any game at all! So, consider research your ammunition. Once you have a full load, you’ll be able to hunt down and bag the best and most profitable bargains possible! No doubt you’ve heard the famous saying that there are only three things important in real estate—location, location, location. Well, in the pre-foreclosure market, there are three other things that are very important—persistence, persistence, persistence! Absolutely nothing beats persistence! You have to be willing to dig and dig (in terms of research) and to deal effectively with owners and your competitors. Remember, the race doesn’t always go to the smartest person around; it goes to the person who never, ever gives up! Pre-foreclosure investing is one of those investing strategies that you do not require any money or credit for. Sellers will often deed you their house for free. Okay, that’s the introduction to pre-foreclosures. Now, let’s get started on gaining the knowledge you need to become a successful investor in this lucrative niche of the real estate market! – Copyright 2009

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Secrets To PreForeclosure Profits

The Basics of Foreclosure In order to invest profitably in the pre-foreclosure market, it’s necessary to understand all aspects of the foreclosure process and how to operate in each of the stages within that process. It’s also necessary to understand what options are available to homeowners so you can see the process through their eyes and help them to make the best decision possible as well as the best one for yourself. Let’s start by looking at the three stages of foreclosure—pre-foreclosure, foreclosure and real estate owned (REO or OREO). As an investor, you can operate in any three of these stages, but, as you’ll see, the pre-foreclosure stage offers the greatest profit opportunities and the least amount of hassles.

The Pre-Foreclosure Stage As you learned in the introduction to this book, a pre-foreclosure sale takes place between the time when the lender files suit and when the property is scheduled to be sold at a public foreclosure action or a trustee’s sale. Here’s an overview of the benefits of buying pre-foreclosure properties so you can contrast them with the disadvantages of the foreclosure and REO stages. Benefits of Pre-Foreclosure Deep discounts Greater profits Ability to research inspect property/more accurate value estimates Ability to avoid the potentially expensive bidding process Ability to structure sales agreements in a creative fashion Less hassle from third parties (lenders, etc.) The potential for minimum cash outlay

The Foreclosure Stage When institutions (banks, lenders, etc.) lend money to individuals for the purchase of a home or other property, they naturally expect to be paid back. They’re in the business of lending money to make a profit. When borrowers (mortgagors) fail to meet their mortgage obligations, lenders want the property returned so they can re-sell it to others for a profit or at least reduce their losses. They regain the property through the foreclosure process. Of course, both mortgagors and lenders will do their utmost to work out an agreement that will allow people to keep their homes and the lender to keep receiving payments. In addition, neither the mortgagors nor the lenders want the legal complications of the foreclosure process. Unfortunately for them—but fortunately for you!—they can’t always work out an agreement, and the lenders have to initiate foreclosure proceedings. – Copyright 2009

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Secrets To PreForeclosure Profits

So, how is the foreclosure process begun and what’s involved in it? It’s important for you to be aware that every state and county has different rules and regulations that you’ll need to learn well. Otherwise, you may miss something or make a mistake than can cost you money. However, in general, every state within the U.S. uses one of two types of foreclosure—judicial and non-judicial.

Judicial Foreclosures In states with this system, foreclosure can only take place through court action. The process usually begins when the home owner falls behind on his or her mortgage payments due to one of the several reasons described in the Introduction (divorce, health issues, loss of job, etc.). Typically, the foreclosure process goes like this: 1. A lender files a lawsuit with the appropriate court to foreclose on the mortgage or deed of trust. 2. The borrower must respond to the lender’s ―complaint.‖ 3. A court hearing date is set. 4. During the hearing, the judge evaluates the complaint and either dismisses it or orders foreclosure of the loan. 5. If the decision is for foreclosure, the judge then orders that a public foreclosure auction sale be held on a specified date. 6. The public foreclosure auction date is then advertised to the public. 7. At the auction, the property is sold to the highest bidder. Or, if there’s no acceptable bid, the property reverts back to the lender. 8. A ―deficiency judgment‖ may be levied against the borrower. This is a personal judgment against the borrower for the remaining balance on the loan after a foreclosure sale. 9. After the sale, the borrower does have the opportunity to exercise ―statutory redemption rights.‖ That is, within a specified amount of time, he or she can regain the property by paying all costs and interest (in addition to the mortgage debt) to the lender. 10. If the borrower does not exercise statutory redemption rights within the specified amount of time, a sheriff’s deed or certificate of title is given to the highest bidder.

Non-Judicial Foreclosures In states with this process, the foreclosing lender makes use of the ―power of sale‖ covenant specified in the mortgage or trust deed. This is the right of the lender to force the sale of a property without judicial action. Typically, this is how the process works: 1. The lender files a default notice with the appropriate office (county recorder, public record, etc.). 2. A trustee’s sale date is set. 3. The sale is publicly advertised. – Copyright 2009

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Secrets To PreForeclosure Profits 4. At auction, the property is sold to the highest bidder. Or, it’s taken back by the lender if no bids are acceptable. 5. As with judicial foreclosures, the borrower may exercise statutory redemption rights after the sale. 6. After statutory redemption rights have expired, the deed is given to the highest bidder. At this point, you may be thinking to yourself, ―I could pick up some pretty good bargains at an auction sale.‖ And, it’s true—you can! However, an auction has several disadvantages that make it a poor choice compared to pre-foreclosure bargains. Here’s what they are: Greater competition—by definition, auctions are public which means everybody and his brother knows about the sale and can enter the bidding. This can drive the price up and have two potential negative results. One, it can put the property beyond your means. Or, two, if you do win the property, it may well reduce the profit you can earn. Fixed sales terms—at a public auction, there’s no opportunity to negotiate sales terms unlike in the pre-foreclosure stage. You have no flexibility and no opportunity to negotiate terms that could earn you more profit. No inspections—at a foreclosure auction, you buy the property ―as is.‖ You have no opportunity to inspect it in order to discover any defects (leaky roofs, etc.) that could end up costing you a lot of money. Proof of funds is required—if you’re a bidder at a public auction, you’ll be required to show proof that you have the money necessary to complete the purchase. For example, you may be required to have cash or a cashier’s check for X amount of your winning bid (5%, 10%, etc.). Then, it’s likely that you’ll be required to pay the rest of your bid amount within a short period of time as well as title transfer fees. (This requirement keeps non-qualified bidders from slowing down the process.) No leverage—since auctions are strictly ―cash and carry,‖ you’re not able to use the opportunity to line up a lender to finance the balance of the sale price. If you’re new to investment and have little free cash available, this means you’re effectively shut out of the auction process. You may not be able to insure the title—title insurers do not like risk, and most of them consider foreclosed properties to be an unacceptable risk. They’ll take a very close look at such property titles and, if they find any errors, they may well refuse to insure them. This, in turn, may leave you with unacceptable risk. – Copyright 2009

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Secrets To PreForeclosure Profits Potential for bidder collusion—there’s always the possibility that a group of bidders may meet before an auction sale and determine a maximum bidding amount on a desired property. This has the effect of restricting competition among other, less well-heeled, bidders. The result—you don’t get the property and end up wasting your time. Poor property condition—after you win a property, you may find it’s in such poor condition that no property or casualty firms want to insure it. The possibility of unfriendly occupants—if the property is occupied by unfriendly owners or tenants, you may be forced to evict them. This can be expensive and time-consuming. Basically, it means you can’t do anything with the property until the occupants are ousted—not a good scenario for making a profit! The “right of redemption” obstacle—from earlier in this chapter, you’ll remember that owners have the right to redeem their property after the sale within a specified amount of time. The redemption period varies with the state and can range from anywhere from 30 days to a year. So, this means you run the risk of losing the property after having bought it. Technical flaws in the foreclosure process—errors can abound in the foreclosure sales procedure—misspelled names, Wrong Street addresses, math errors, failure to adhere strictly to procedures, etc. This opens up the possibility for the previous owner to appeal for an overturn of the sale. Resolving these issues can take months and add up to a big headache for you in terms of time and money.

The REO Stage This stage takes place after the property has been foreclosed, and it’s been taken back by the lender. The term ―REO‖ stands for ―real estate owned.‖ It’s also commonly known as ―OREO‖ (other real estate owned). Typically, there are many of these properties available on the market, and, on the face of it, they might look like bargains. But a closer look reveals some real roadblocks to making a profit: Roadblock 1: Most are sold through real estate brokers. This means they’re sold at full market value, so there’s little incentive for you to purchase one because there’s no real profit in it. Roadblock 2: There are many rules you have to follow. Many lender-owned properties are HUD (Department of Housing and Urban Development) or DVA (Department of Veterans Affairs) homes. This means you’ll need to follow a strict set of rules, rules that are enforced by the federal government. Plus, on other non-HUD and non-VA properties, you’ll have to follow the rules set up by the – Copyright 2009

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Secrets To PreForeclosure Profits lender. In short, you could be facing a lot of hassles, hassles that you won’t face in the pre-foreclosure market. Roadblock 3: You’ll need verifiable proof of funds. As in the foreclosure stage, no one wants amateurs with no money slowing down the sale process, so you’ll need to have funds on hand to pay the down payment and closing costs. You’ll also need to prove that you’ve been pre-approved for a loan to finance the purchase. Roadblock 4: You don’t have the opportunity to do an inspection of important home systems. Many REO properties are vacant and all important systems—electrical, heating/cooling, plumbing, natural gas, water, etc.—are turned off. This means you can’t inspect these systems. Since they can be extremely expensive to repair, you definitely don’t want to invest in a property without knowing their condition. Roadblock 5: REO sales are final! All these sales are ―as-is,‖ so if there are problems with the property, you’re stuck with them. Problems can range from environmental concerns (mold, asbestos, lead-based paint, etc.) to hidden structural damage. They can all be expensive to correct, and, legally, you have no opportunity to seek compensation from the seller. From the above information, you can see why I feel the pre-foreclosure stage is the best area to target. It offers the greatest profit potential, the fewest hassles, and the least amount of risk. Now, let’s take a look at foreclosure through the eyes of the property owner so you can fully understand the options they have when facing foreclosure. This will help you to show them the benefits of working with you in the pre-foreclosure stage rather than undergoing the difficulties of foreclosure.

Owner Options In general, property owners have seven options available to them when they’re in danger of losing their home or other property to foreclosure. Loan forbearance/modification—This can be a strategy worth pursuing for property owners. In this situation, the loss mitigation department of the mortgage company may make arrangements with the owner to pay some of the back payments now and the balance within a certain time period. Here’s a typical example: John and Janet Smith owe $9,000 in back payments, attorneys’ fees, etc. Since the mortgage company doesn’t want the trouble and expense of foreclosure, it may accept $4,500 now and $750 per month for the next six months. Of course, the Smiths would have to resume making their normal monthly payments. – Copyright 2009

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Secrets To PreForeclosure Profits A loan modification is a permanent change to their mortgage that may lower their payments, and the delinquent payments may be added to the mortgage balance. A loan modification or forbearance is easier to arrange prior to the mortgage company filing a foreclosure lawsuit. Some lenders will not consider this after filing, but it’s worth trying. Loan modifications are more common in FHA loans. Reinstatement of the mortgage—As you learned earlier in this chapter, owners have up to and including the morning of the auction to catch up on their payments. So, if the Smiths have the cash, this is obviously a good solution. Refinancing of the mortgage—It’s usually very difficult to arrange new financing when owners are already in default on their existing mortgage. If you can find one, chances are it’s rare and they’ll only refinance up to 70% LTV*. That means the seller must have a lot of equity. *Note: “LTV” is an acronym for “loan to value” ratio. It’s the percentage of the property's value that’s mortgaged. To get the LTV, you divide the mortgage amount by the lesser of either the appraised value or the selling price. Different lenders use different standards to determine whether or not a loan will be granted with a certain LTV. Commonly, owner-occupied residences will get loans at an LTV of 80%. Investment properties are often required to have a higher LTV. Here’s an example of an LTV for a home: The home is appraised at $400,000, and there’s a $320,000 mortgage on the property. So, $320,000 / $400,000 = .80 or 80% LTV.

Chapter 13 bankruptcy—This can be a viable alternative for property owners if their financial situation has improved. Filing bankruptcy prior to the foreclosure auction will stop the sale. Unfortunately, for most people it only postpones the sale for one or two months. Let’s use the Smiths again to illustrate how the bankruptcy process works: Immediately after filing a Chapter 13 Bankruptcy, John and Janet will have to file a repayment plan with the courts. This plan has to show that they have sufficient monthly income to pay basic living expenses such as food and utilities and other monthly payments such as credit cards, car payments etc. In addition, their income must be sufficient to resume making their monthly mortgage payments. All past due amounts are usually spread out between 24 and 60 months. For example, we know they owe $9,000 in missed payments, attorneys’ fees, etc. Spread out over 48 months, this would result in an additional $187.50 due each month to the court appointed trustee. So, if they feel they have the income to immediately begin repayment of all their debts and the court agrees, this may be a good choice for them to save their home. Sell the home on the open market--This is probably the most underutilized option available to owners facing the possibility of foreclosure. – Copyright 2009

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Secrets To PreForeclosure Profits The fact is, selling their home will give them the most money in their pocket. Did you know that on FHA loans, the lender will postpone the sale and give them 90 days to sell their house? Sell the home to investors--If efforts to save their home have been unsuccessful and time doesn’t permit selling their home on the open market or they just don’t want to, but want a quick sale with no problems, they can sell it to an investor—you! Let the home be sold on the courthouse steps – Most of the time this is the worst option available to property owners. To be honest, I’ve experienced times when a house sold at auction for more than what I could have offered the owners. However, this is not all that common. And, as mentioned previously, owners can also face several expensive and embarrassing actions as a result of the foreclosure process— deficiency judgments, evictions, etc From the information in this chapter, I hope you can see how targeting the preforeclosure market is an excellent method of earning a profit and helping out home owners at the same time. With knowledge and professionalism, you can create a ―win-win‖ situation for everyone involved. Now that you have the required basic knowledge, it’s time to get started on learning the eleven steps to success in the foreclosure market. Here’s an overview of those steps: The next chapter will cover the organization of your office. It will show you how to set that office up in the most efficient and cost-effective manner possible. The Eleven Steps to Success in the Pre-Foreclosure Market Step 1: Organizing Your Office Step 2: Researching the Market and Qualifying Homeowners Step 3: Selling the Property Owner on You Step 4: Performing Due Diligence Step 5: Inspecting the Property Step 6: Estimating Property Value Step 7: Negotiating with Homeowners and Others Step 8: Preparing and Presenting the Purchase Agreement Step 9: Closing the Sale Step 10: Maximizing Property Value and Appeal Step 11: Achieving Maximum Profit – Copyright 2009

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Step 1: Organizing Your Office Setting up and organizing an office used to be an expensive affair. That’s no longer true thanks to today’s technology. For a minimum investment, you can now set up a highly efficient and effective work environment. Here’s a list of the basic equipment you need to get started: A computer—These days, computers are a bargain. You can buy one cheaply. However, it pays to get the latest model since the computer world is forever changing and improving itself. I’d recommend that you buy one that has a minimum of 1 megabyte of memory and will allow expansion for more memory. This is important because new software applications get larger all the time and become ―memory hogs,‖ which can slow down the computer While this may not be so important at the beginning of your career, it’ll become so as you become more successful and the complexity of your investments increases. A good “office” software suite—you’ll need software that includes word processing, accounting software, computer slide generation, etc. Microsoft Office is the most common suite, but there are other, cheaper applications available (WordPerfect Office, etc.). Often, the application comes with the computer you buy so make sure the office suite comes with the features you need. Eventually, if you move into other, more complex areas of real estate (multi-unit dwellings, commercial real estate, etc.), you’ll want to buy software that’s designed specifically for the real estate market. A high speed Internet connection—whether it’s a DSL (direct subscriber link) or cable connection, access to the Internet is absolutely vital these days. The Internet is a great source for research and information on all real estate topics. Definitely do not use a dial-up connection! Although such connections are cheap, they’re maddeningly slow and tie up your phone line. Both you and your clients will end up frustrated at the inability to communicate quickly and effectively. In short, a high-speed Internet connection can win you business; a dial-up connection can lose it. A good laser or inkjet computer. Printers are dirt-cheap these days. The manufacturers make a greater profit from supplying the ink cartridges, so it pays to get a printer that’s economical with the ink. It also pays to buy a printer that produces high-quality letters and images. This contributes to your image as a serious and professional investor. While image is not quite as important in the pre-foreclosure market, it will definitely be a vital factor once you move into other areas of real estate. – Copyright 2009

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Secrets To PreForeclosure Profits Banks, mortgage brokers, title companies, etc.—they all expect to see a polished and professional image in the people they deal with. A reliable cell phone—as you probably already know, this is one of the most important tools you can have as an investor. A cell phone allows you to be in contact with buyers and other individuals quickly and easily. Basically, it’s an information-gathering device that helps you identify deals and set them into motion. So, it’s important that your service be of high quality and not subject to a lot of dropped calls. Check out the service records of the cell phone providers in your area and go with the one that has the best record of reliability at a fair price. Those are the basics then, but we need to cover one more subject that’s vitally important to your success—accounting and record-keeping.

Accounting and Record-Keeping Real estate is governed by many local, state, and federal regulations. That means it’s vital for you to keep good records. As you start out, you may not need anything more than pad of paper and a pencil. However, once success arrives, you’ll definitely need computerized records and an accounting application. They not only help you keep your records straight, but make the whole process faster and easier. They’re well worth the investment! Below is a list of items you should definitely make use of in maintaining your records: Accounting software—If you decide to move beyond pre-foreclosures, you’ll definitely need to add a spreadsheet program (Excel, Quicken, QuickBooks, etc.) for all basic accounting requirements. And if you decide to eventually move into property management, then you’ll need to add software designed specifically for such properties as apartment buildings, commercial properties etc. This software should include the following:  A complete accounting package (general ledger, accounts receivable/accounts payable along with check writing, budgeting and financial reporting capabilities). Ability to track work orders and reminders, prints late notices, leases, checks, 1099s, etc.  Tenant and lease management capabilities (including rental management forms). Pop-up reminders to remind you of late rent, expiring leases, etc. categorized by building, unit, owner or tenant.  Capabilities to organize tenants, contractors, etc.  Templates for letters and forms, etc. – Copyright 2009

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Secrets To PreForeclosure Profits You can use the Google search engine on the Internet to study and evaluate property management software. To help you out, I’ve listed several software package names and their URLs in alphabetical order. I don’t recommend a particular package. I simply recommend that you try them out and see which one works best for you and is relatively easy to understand.     

MRI Residential ( RentRight ( Spectra ( Tenant File ( TenantPro (

You should be able to customize any of these programs to fit your specific needs. A separate checking account— Definitely keep your real estate financial transactions separate from your personal checking account! This is extremely important because you don’t want to invite a visit from the Internal Revenue Service (IRS). If you don’t keep a separate account, the IRS will be very suspicious of any claims for expenses, losses, and depreciation you put on your federal tax return. It may not consider you a legitimate business, and, if you’re audited, you may have a devil of a time proving expenses if your records are mixed in with your personal checking account. Also, it’s wise to have a credit card in the name of your business and charge all business expenses to this account. This also keeps business records separate from personal accounts. Expense records—Document every expense you have and keep organized records. Expenses can include bank statements, cancelled checks, tax returns, invoices, etc. In short, always have proof available in case the IRS challenges items on your tax return. Mileage records— It’s essential to keep business-related travel expenses well-documented. This is because the IRS has a requirement that tax payers maintain records of business-related mileage in order to claim that mileage as a business expense on tax returns. As of 2007, the standard mileage rate that can be deduced from federal taxes for the cost of operating a vehicle is 48.5 cents per mile for all business miles driven. Depreciation—Depreciation accounts for the fact that most assets lose their value over time and must eventually be replaced. You definitely want to take advantage of IRS rules to make sure you earn the highest profit possible. So, on your tax returns, claim the maximum depreciation allowed on such items as office equipment, software programs, cell phones, etc. – Copyright 2009

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Storage—Store all documents in an organized fashion so they’re easy to find and access. You don’t want to waste valuable time trying to locate items when you could be out finding more business. Use an organization method that works best for you (three-ring binders, tabbed folders, etc.). Photocopies of documents are fine for your office, but you may want to store originals in a safe deposit box at your local bank. However remote, there’s always the possibility of fire or water damage destroying originals, and, if that happens, you could spend a lot of time and trouble proving ownership of property and other items. Hire a professional for tax returns— Choose a board-certified tax attorney or CPA to prepare your taxes. This is a must. You may be tempted to use an off-the-shelf product (TurboTax, etc.), but I advise against it for the simple reason that these products can’t represent you before the IRS! Also, an experienced professional will have knowledge that a tax program couldn’t possibly possess. He or she will be well aware of all the intricacies of federal tax law and will be able to use them for your maximum benefit. Hire independent contractors—At the beginning of your career, you don’t need the hassle of maintaining employee records (wages, social security, etc.) and dealing with a myriad of state and federal government agencies (OSHA, the Department of Labor, etc.). As your business grows, you may find it necessary to hire part-time and/or full-time employees. However, in the beginning, it’s much less trouble to hire independent contractors. The suggestions mentioned in this chapter should get you off to a good, organized start in the pre-foreclosure market. Now, let’s move onto Step 2: Researching the Market and Qualifying Homeowners. – Copyright 2009

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Step 2: Researching the Market and Qualifying Homeowners In the pre-foreclosure market, there are two keys to your success—finding homeowners who’ve tried to solve their financial problem and failed to do so and qualifying those homeowners. This puts in you in the position of working with motivated sellers, and that’s half the battle! In order to find these motivated sellers, you have to do some hard work and research several sources of information.

Essential Sources of Information Below is a list of my favorite information sources. Keep in mind that you’ll be using a combination of these sources at all times. Don’t limit yourself to one or two. You want as many open highways to profits as possible. Courthouse offices—This is the first place to look so you can become familiar with your local and state government agencies handling foreclosures. The name of the agency varies with the state; it could be the county clerk, office of state register, registrar, etc. Find out if you can access foreclosure proceedings online. This is ideal since you’ll be able to download the list on to your computer quickly and easily. If the government office doesn’t have its records online, ask if there’s a foreclosure reporting service you can use. Keep in mind that, generally speaking, one of two foreclosure actions will be initiated by the lender’s attorney and will be available as a matter of public record—a Notice of Lis Pendens (judicial) or Notice of Default (non-judicial). A Notice of Lis Pendens means ―a pending lawsuit.‖ It describes the period between a filing of a lawsuit and when the case is heard in court. A Notice of Default is a legal notice filed in the public record to let the public know that the mortgage or deed of trust is in default and is scheduled to be foreclosed on at a specified time. Newspapers—State foreclosure laws require that foreclosure notices be published in newspapers established as ―newspapers of record‖ by the courts. Usually, this means the newspaper that has county-wide circulation and is read by the majority of residents within that county. Also, don’t forget to check the ads in the real estate section. Often, you can find owners advertising homes for sale in order to avoid foreclosure. Typical ads include phrases like ―Foreclosure soon. Must-sell bargain‖…‖Home priced to sell fast to avoid foreclosure‖…etc. – Copyright 2009

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Secrets To PreForeclosure Profits Foreclosure Reporting Services—There are many foreclosure reporting services on line. Do a Google search to find ones that target your area. One of these companies is ( Direct Mail—This can be an effective means of finding motivated sellers, but don’t use a ―shotgun‖ approach and mail to everyone within your areas. It’s a waste of time and money. Instead, target those who are in foreclosure or who have some sort of financial distress. (See ZIP code targeting later in this chapter.) Also, make sure you mail several letters to these individuals, as many as four, five or six. People receive a lot of junk mail these days, so, more likely than not, they’ll throw your first letter out. But, if you’re persistent and consistent, they’ll eventually open one up and discover that you can offer them relief from a bad situation. Of course, send the letters well ahead of the foreclosure auction and space them out. For example, mail the first letter approximately eight weeks before the auction, then one per week after that. Another tip is to make your letter look as personalized as possible so it stands out from junk mail. Avoid the ―bulk mail‖ look at all costs. Below is an example of a letter you can use as a template and modify to meet your own needs. Notice that it stresses benefits to the homeowner—avoid stress, creates a win-win situation, etc. (Date) Dear Mr. (Mrs., Ms., etc.) Smith, My name is Jonathan Jones, and I’m a private real estate investor who would like to help you out. I see that your property is scheduled to be sold at auction on May 16 on the steps of county courthouse. I’d sincerely like to help you avoid the stress of a public auction. I have many different options available, including a quick sale that can create a win-win situation for both of us. I’m available at any time to help you work through the available options. Feel free to call me at 1-800-XXX-XXX, and I’d be happy to discuss different solutions to your problem. If I’ve made a mistake and your property is not scheduled for foreclosure, my sincere apologies! I hope to hear from you soon! Sincerely, Jonathan Jones – Copyright 2009

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Secrets To PreForeclosure Profits One of my favorite variations on direct mail is to send homeowners a nonnegotiable check for anywhere from $5,000 to $15,000. I put the homeowner’s name on the check and, on the accompanying letter, say, ―Call this number to get this money.‖ It lets owners know upfront how much money they can receive by dealing with me and provides a great incentive to make the call. An example of this technique is shown at the end of the chapter. Signs/flyers—Posting signs and flyers is one of my favorite methods of finding motivated sellers. However, be aware that the posting of signs may be illegal in your county or state. Check with local government officials before using this method. Signs can be as simple as: HOUSES BOUGHT! Contact me today! 1-800-XXX-XXX Or FACING FORECLOSURE? We can stop it! Call for a free consultation! 1-800-xxx-xxxx Flyers can have similar language with more detail. For example:

SEEKING A QUICK SALE TO AVOID FORECLOSURE? I can help! I’m a private investor who can help you get out from under your debt. I look at all properties, no matter what their condition. Get rid of that stress by calling me at 1-800-XXX-XXXX

Or – Copyright 2009

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I WANT TO BUY YOUR HOME! Financial difficulties? Recently divorced? Facing a transfer? I can help you out! Let me talk to you about buying your home so you can rid of unwanted stress. I specialize in helping good people out of bad situations! Call 1-800-XXX-XXXX

Promotional devices—This includes business cards, refrigerator magnets, etc.—anything that puts your name and service in front of the public. People love useful items like magnets, and they can be placed in places (like refrigerators!) where your name will be constantly seen. Telemarketing—Phone calls can sometimes be effective. You’re able to call several people for a minimum of time and investment. However, be aware that homeowners facing foreclosure sometimes do not want to answer their phones for obvious reasons. Also, make sure you’re not violating any telemarketing laws within your state. Door knocking—This is also a possibility for finding motivated sellers. However, it has several negatives. Homeowners facing foreclosure don’t necessarily want strangers at their door! So, you’d better be prepared for some negativity or, in bad neighborhoods, even worse. Another negative is that door knocking takes a lot of time and effort, both of which could be spent using more targeted methods. So, I don’t recommend this tactic highly. Networking with wholesalers—Wholesalers get properties under contract to buy and then sell those properties ―as is‖ to others (like you) for a profit. You can network with them to find potentially profitable homes. Real estate agents/agencies—Agents handle homeowners who want to put their homes on the market at lower prices so they don’t have to face foreclosure. So, it pays to build good relationships with local agents and agencies. Experienced real estate agents know the market better than anyone and can be very valuable resources. Just make sure that any relationship you have with one creates a win for them as well as for you. Tax liens—A tax lien is a government-issued lien. It has priority over mortgage liens. Tax liens are placed on home owners who haven’t paid their property taxes. It’s likely that if they’re not paying their property – Copyright 2009

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Secrets To PreForeclosure Profits taxes, then they’re not paying their mortgage payments. This means they may be candidates for foreclosure and, thus, potential clients for you. Title companies—Whenever homeowners are issued Notices of Default on their properties, these notices are also sent to title companies. So, a little research on the title companies in the local area can get you on their mailing lists and give you a handy source of properties facing foreclosure. Although not all title companies will be willing to work with you, most will for the simple reason that they know you’ll be needing title insurance. The Yellow Pages is a good source to find these companies. Word-of-mouth—As has often been said before, word-of-mouth is the best advertising possible. Once you’ve established yourself as a fair and honest professional, your customers will spread the word to their friends, neighbors, co-workers, etc. So, in the long run, it pays great dividends to create and maintain a good reputation. ZIP code targeting—This is a great method of targeting motivated buyers in stable neighborhoods with middle-income residents. It eliminates poor risks from lower-income neighborhoods. There are convenient and free Internet sites where you can find ZIP codes listed by county for your state. One is Another is .

Qualifying Homeowners Here’s an ironclad rule you should never ever break: Always, always verify a homeowner’s loan information before proceeding with a deal! Never let the excitement at the prospect of making a profit overwhelm your common sense. You need to know if a pre-foreclosure has enough equity to make a deal a good one. There are several ways to qualify a homeowner. First, after a homeowner has expressed interest in working with you, get his or her written permission to contact the foreclosing lender. Then, contact that lender as soon as possible to find out the following information:  Type of loan (conventional, FHA, VA, private, etc.)  The unpaid principal loan balance, the interest rate, amoritization period and total monthly payment (including principal, interest, taxes and insurance)  Complete amount of loan payments, accrued interest, late payment charges, and legal fees that must be paid to end the default and reinstate the loan. – Copyright 2009

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Secrets To PreForeclosure Profits Ideally, the homeowner will have Internet access to his or her mortgage loan account. This speeds things up considerably. Otherwise, you’ll have to work with that homeowner to get the information by other means from the foreclosing lender. Upon your initial meeting with the homeowner, make it clear that you’re simply gathering information at this point and want to review the necessary legal documents (mortgage or deed of trust, promissory note, loan payment records latest escrow analysis, etc.). To keep track of all this information, use a worksheet or checklist. You can easily create one yourself on your computer. I’ve provided an example of an interview form at the end of this chapter for your use. Feel free to customize it to fit your own needs. It’s wise to create another form to track the owner’s loan information. This will help you keep the numbers straight to see if the deal does indeed have profit potential. An example of such a form is also provided at the end of the chapter. Another wise method of qualifying a homeowner is to have that homeowner request a Letter of Estoppel from the foreclosing lender. ―Estoppel‖ is a legal doctrine. It prevents parties from later denying factual information that they’ve certified as true. For example, if a lender sends you an estoppel letter stating that the mortgage or deed of trust has a principle loan balance of $120,000 on July 1, 2007, that lender can’t later claim that the balance was $130,000 on August 1, 2007. Normally, these letters are sent to a person in the lender’s loan loss mitigation department. To help the homeowner out, find out the name of that person for them so they’ll know who to contact if the lender is slow to respond. In addition to the estoppel letter, you can request that the homeowners send an authorization letter to the foreclosing lender. Such a letter allows you to discuss the homeowner’s loan information directly with the loan loss mitigation department of the lender. This letter should request that the appropriate information be sent directly to you via letter, fax, or email. In some cases, homeowners will have obtained their mortgage financing from private lenders. These lenders can be harder to deal with since they may prefer to go through foreclosure proceedings. However, it’s worth a try. Have the homeowner send an estoppel letter to the private lender requesting the pertinent loan information. In the next chapter, you’ll learn about Step 3—selling the homeowner on using you and your services. – Copyright 2009

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ABC Company 123 Main Anywhere, USA 77777 777-777-7777

DATE 8/20/2009

Eleven Thousand Dollars and No Cents


Owner Name 123 Elm Street Anywhere, USA 77777


AMOUNT $11,000.00

Call Me NOW To Get This Check Signed! __________________________________________ 777-777-7777 _________

00000000000000000000000000000000000000000 You’ve been through enough already. Let me save your credit: No Foreclosure. No Bankruptcy. Let me put CASH in your pocket in as little as seventy-two hours. It’s not too late, but on April 1, it will be. Dear Friend, If you want to STOP FORECLOSURE before the sale of your house in April, I can help you. I not only want to stop the foreclosure Of your house, but I also want to save your credit and put $11,000+ into your pocket. But you need to call TODAY! If you wish to stay in your house, please contact me soon. I can help you stay there. I’ve helped many people stay in their homes, Even when they thought it was impossible. Call me now for a FREE consultation. I want to help you. Your situation qualifies you to receive $11,000 or more if you choose to sell your house. If you are interested in selling, please Contact me immediately at 777-777-7777 or I buy houses. Time is running out, so call now. Are you considering bankruptcy? Often this is not the best option. Let me explain the hidden dangers of bankruptcy that lawyers Are keeping secret. Before I can help you, I need you to call 777-777-7777 or visit my company’s website at There, you will find More information about our company and what we do. Feel free to submit an email from the website. It will be answered within 24 hours. I want to show you:      

How to avoid a bank foreclosure How to find help to make up back mortgage payments How to sell your home quickly and profitably How to clean up a credit report How to file for Bankruptcy without paying outrageous legal fees How to get your finances back in order

To get your free consultation, call me now at 281-582-8080, and I will begin to assist you immediately. This is a FREE service. Sincerely,

Tim Mai Foreclosure Prevention Specialist – Copyright 2009


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Sample of an Interview Form Name of Owner(s): _____________________________________________ Owner(s) Mailing Address: _______________________________________ Address of property: ____________________________________________ Home number: ________________________ Work number: _________________________ Assessed tax value of property $___________________ Date of last assessment ________________ Type of loan (FHA, VA, conventional, private, etc.) ___________________ Months behind on mortgage payments? ______ Is the loan assumable? ( ) Yes ( ) No Monthly loan payment: Principal $_____________ Interest $___________ Taxes: $_________ Insurance $ __________ Total Payment: ___________ Principle loan balance that’s unpaid ________________________________ Liens or judgments against the property? ( ) Yes ( ) No If so, how much? __________________________ Recent property appraisal? ( ) Yes ( ) No If so, how much was it appraised for? ___________________________ Have you attempted to sell your property? ( ) Yes ( ) No How long has the property been for sale? ______________ Any written offers yet? ( ) Yes ( ) No If you’ve had offers, what amount was offered? ____________________ The property’s scheduled foreclosure date is _______________________. Other information: __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Example of a Loan Worksheet First Lender Firm Name: ______________________________________________________ Loan Officer Name & Number: _______________________________________ Loan Account #: __________________________________________________ Type of Loan (FHA, VA, conventional, private, etc.) ______________________ Original loan date: ______________ Original loan amount: ________________ Interest rate: __________ Is the loan assumable? ( ) Yes ( ) No Monthly loan payment amount $______________________ Total amount of payments in arrears $_______________________ Total amount of accrued interest, late charges, penalties, and legal fees owed $_____________ Total amount required to end default and reinstate the loan $______________ Second Lender Firm Name: ______________________________________________________ Loan Officer Name & Number: _______________________________________ Loan Account #: __________________________________________________ Type of Loan (FHA, VA, conventional, private, etc.) ______________________ Original loan date: ______________ Original loan amount: ________________ Interest rate: __________ Is the loan assumable? ( ) Yes ( ) No Monthly loan payment amount $______________________ Total amount of payments in arrears $_______________________ Total amount of accrued interest, late charges, penalties, and legal fees owed $_____________ Total amount required to end default and reinstate the loan $______________ Third Lender Firm Name: ______________________________________________________ Loan Officer Name & Number: _______________________________________ Loan Account #: __________________________________________________ Type of Loan (FHA, VA, conventional, private, etc.) ______________________ Original loan date: ______________ Original loan amount: ________________ – Copyright 2009

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Secrets To PreForeclosure Profits Interest rate: __________ is the loan assumable? ( ) Yes ( ) No Monthly loan payment amount $______________________ Total amount of payments in arrears $_______________________ Total amount of accrued interest, late charges, penalties, and legal fees owed $_____________ Total amount required to end default and reinstate the loan $______________ – Copyright 2009

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Step 3: Selling the Homeowner on You In many ways, this is the most important chapter in this book. That’s because although you’ll be buying and selling pre-foreclosure properties, the only way you can get those properties is through people. That means you need to know how to handle different personalities and their different needs. Some owners of preforeclosure properties will be pleasant; others will be very negative because they don’t enjoy being in the situation in which they’ve found themselves. This often means that you need to present yourself as a problem-solver. After all no homeowners enjoy facing foreclosure and will definitely be looking for solutions to their predicaments. Although they may not realize it at first, you’re the person who can provide the solution they need. So, it’s up to you to show them the benefits of using your services. This calls for a combination of techniques that are easy to learn and apply. This chapter will show you how to convince homeowners of the benefits of accepting the solutions you offer them. One of the key skills of every successful business person is the ability to create ―rapport‖ with others. Rapport means ―building a relationship of mutual understanding or trust and agreement between people.‖ In other words, it’s easier to convince homeowners to use your services when they like you. That’s no secret, of course, but it’s absolutely essential to build personal connections with homeowners whenever possible. And you can build these connections through the following effective techniques.

Be Yourself Be natural, easy-going and friendly. Remember, when homeowners first talk with you, they may be suspicious due to their dealings with lenders and others, so their first inclination may be to tell you to take a hike. However, if you’re friendly and natural from the start, it’s more likely that you’ll be able to overcome this barrier.

Dress to Fit the Homeowners’ Style Homeowners feel more comfortable when they’re dealing with someone who dresses in the same manner as they do. By the same token, they can feel very uncomfortable with a person who dresses unlike them. For example, if you show up in a fancy three-piece suit at a home where the homeowners are down-toearth people wearing jeans and work boots, you’ve already put yourself at a disadvantage. You may remind them of lenders or other creditors, and the last thing they’ll want to do is deal with you! So, always dress to the level of your customers. – Copyright 2009

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Be Polite and Respectful Always treat homeowners facing foreclosure with respect. After all, they may feel that they haven’t been treated well by the lender and others so a little heartfelt respect right from the start can go a long way toward creating a positive connection that may end up in a good deal for you.

Offer Benefits Benefits are items that tell homeowners what you’re going to do for them. In the case of foreclosures, benefits can be similar to the following:  Elimination of the stress of foreclosure  Relief of debt  Avoidance of the embarrassment of foreclosure  The opportunity to seek options other than foreclosure Here’s an example of how this might work either over the phone or in person. ―Mr. Thompson, my name is Ned Jones. I’m a private investor who specializes in properties like yours. I can offer you several options for avoiding foreclosure. They’ll help you out of a stressful situation and assist in getting rid of debt. I’d love to talk to you about these options. How would you feel about discussing them with me?‖ Notice that in a few short sentences you’ve introduced yourself, stated your purpose (help in avoiding foreclosure), offered benefits (reduce stress, get rid of debt), and asked for a commitment to discuss the options. This is a standard and very effective technique used by successful salespeople over the years. It gets the point quickly and efficiently. With a little practice of this technique, you can make it a natural part of your presentations to homeowners.

Look for Connections Once you’re in a home, look for honest connections between the homeowners’ lives and yours. For example, if the husband plays a sport (softball, golf, etc.) and you love the same sport, it can be a good icebreaker to talk about that sport. If he has sports trophies on a shelf, say something similar to, ―I see you’re into golf. What courses do you play? My favorite is Riverside.‖ This forms a connection between you and him and can build the necessary trust to do a deal, if it’s appropriate. One important point to keep in mind--never lie about being involved in a sport or hobby. If the homeowner is very knowledgeable about such activities, he or she will want to talk about them more, and if they discover you’re faking it, you’ll be out the door fast with no deal. – Copyright 2009

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Match the Personality of a Homeowner As you already know, different people have different personalities. The main point to remember about personalities is that people tend to prefer to deal with individuals who are like them. Extroverts are people who are friendly and outgoing and ―outward-directed:‖ i.e., they’re comfortable with people and enjoy talking with them. So, when you’re dealing with an extrovert, it pays to display the same kind of personality. On the other hand, some homeowners are introverts; they’re quiet and don’t open up easily. They tend to prefer a low-key approach and may want to discuss things in a calm, objective manner. So, that approach may work well for you in that situation. Just remember not to overdo the matching of personalities. Keep it subtle; otherwise, homeowners may feel that you’re being false simply in order to gain an advantage over them.

Create Empathy Simply put, ―empathy‖ means the ability to put yourself in the homeowner’s shoes and feel what they’re feeling. To create empathy with homeowners, you need to get them to open up. The best way to do this is to use the technique of asking open questions. Open questions are ones that encourage a person to open up and expand on a subject. Often, they begin with words like, ―What,‖ Why,‖ ―How,‖ ―In what way,‖ or ―Tell me more,‖ etc. Salespeople often use this technique because it’s so effective. Here are some examples:     

How do you feel about your present situation? In what ways can I help you? What kind of options to foreclosure are you interested in? Why are you interested in exploring alternatives to foreclosure? Tell more me about your situation so I can understand it better.

Once you’ve created empathy, you can then ask closed questions to gather the specific information necessary to determine if the deal is a good one or not. A closed question is one that asks for a ―Yes‖ or a ―No‖ answer as in, ―Does the home have any liens on it?‖…‖Are you ready to sign the agreement?‖…‖Do you understand how Chapter 11 works?‖…‖ etc. Use closed questions once you’ve gotten beyond the initial conversation and built trust. They’ll help you analyze the situation and decide if it’s a good deal or not.

Listen! This can be the most important skill of all, right from the first contact through to the closing of the deal. One reason for its importance is that homeowners don’t expect you to really listen to them. So, when you do actually listen to their needs and problems, they’re pleasantly surprised and more open to you. Listening builds rapport! – Copyright 2009

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A second reason for practicing good listening skills is that it allows you to pick up clues and information as to what homeowners are thinking and how they’re feeling. This permits you to offer them the best solutions to their foreclosure situation and enhances your chances for closing the deal. To become a great listener, follow these common-sense guidelines:  Focus on the person. Give your full attention to the homeowners and maintain eye contact with them (if appropriate for the culture). Don't let your eyes wander about. This can indicate boredom, impatience or lack of interest to homeowners, and turn them off to your deal.  Don’t interrupt. Homeowners facing foreclosure often want to talk once you’ve broken the ice with them. They want someone to understand what they’re going through—to simply listen. This can cause you to become impatient and want to interrupt. After all, time is money for you. However, unless the homeowner is a complete motormouth, it’s usually best not to interrupt. By interrupting, you’re letting them know that what they’re saying isn’t important, and that’s not the sort of impression you want to make with someone who may provide you with a good deal. Besides, by letting them talk, you may be able to gain valuable information that can help you construct a good deal for both you and the homeowners. So, in most cases, let the homeowner finish before you begin to talk. Everyone appreciates having the chance to speak without being interrupted.  Use prompts. If you want homeowners to keep talking, nod your head while they’re speaking or use verbal prompts like, ―I see…‖…Go on…‖…‖Tell me more,‖ etc. The use of prompts not only keeps them talking, but, at the same time, tells them that you’re listening closely and value what they’re saying.  Use summaries. I’m sure you’ve had the experience of talking several minutes with people only to discover that they haven’t really understood what you’ve said. This can happen with homeowners. One way to prevent this from happening is to use short summaries of what they’ve said at strategic intervals. This gives them the opportunity to either expand on what they’ve said or correct any misunderstandings on your part. A summary can be as simple as, ―So, what I hear you saying is that you’re not really sure how the process of selling your home to me really works. Is that a fair statement?‖ Summaries also have another great advantage; they can keep an overly talkative homeowner on track toward a deal! You’ll find that the basic skills discussed in this chapter will also come in handy during the negotiating phase (covered later in Step 7). As a matter of fact, they’ll – Copyright 2009

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Secrets To PreForeclosure Profits come in handy in all aspects of your business life. To increase your knowledge, I recommend that you get further education on selling skills and customer management. There are many good DVDs, CDs, audiotapes, and videotapes available for self-study. Or, if you prefer an instructor-led approach and have the time, there are also many good seminars, workshops and classes available. In short, my recommendation is—ALWAYS KEEP LEARNING! Go to for more information. Okay, let’s assume you’ve done a good job of working with the homeowners and discovered the information you need to formulate a deal. This means it’s time to take the next critical step—perform due diligence. That’s the subject of the next chapter. – Copyright 2009

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Step 4: Performing Due Diligence ―Due diligence‖ is a fancy way of saying ―find all possible risks before buying a property.‖ Here’s the central rule of this chapter: Always perform due diligence! It’s one of the most important actions you can perform to prevent yourself from buying a dog of a property that will come back to bite you right in the wallet. Remember, a majority of properties don’t come without some problems. Most have minor problems that are obvious at a glance. However, other properties can look great and still have hidden, major problems (plumbing, electrical, etc.) that can cost you major cash for repairs. So, once you’ve identified a pre-foreclosure property, your work is only beginning! You’ll need to use various tools to find out information about that property—the phone, letters, etc. One of the best tools is the Internet. It’s made the whole search process much easier and faster than in the past. It’s a wonderful real estate search tool, so if you don’t have an Internet connection now, definitely get one! It will dramatically reduce the legwork you have to do in terms of due diligence. As I stated earlier in the book, be sure to get a highspeed cable or DSL connection. Cheap dial-up connections are infuriatingly slow, tie up a phone line, and can cause you much frustration, particularly when trying to download large documents or materials. This chapter will show you how to find and examine public records to determine if a pre-foreclosure property is worth your time. In fact, all the information in this chapter is handy and essential for researching any type of property. So, if you decide to move from the pre-foreclosure market to, say, the multi-unit or commercial markets, you’ll be ready to do due diligence in those areas as well. In terms of public records, I want you to keep a central fact in mind—the records are not always accurate. That’s why you need to review them closely and verify the information contained in them. You want to make sure there are no unpleasant surprises that crop up after you take on a pre-foreclosure property. Now, let’s look take a specific look at methods of researching properties of interest.

The Internet The first step in using the Internet is to use the Google search engine. In many people’s opinion, it’s the best search engine available. To find out information on a property, it’s as simple as entering the property owner’s name into the Google window. If they’ve broken the law in some fashion, then their name may pop up in court records, and, thus, on your computer screen. – Copyright 2009

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However, most often, it’s a matter of accessing local records and digging into the information available there. So, once you’re on the Internet, where do you go to find information about a specific property?

County Property Appraiser/Assessor Sites Your first stop on the Internet should be local county property appraiser/assessor site and other appropriate sites. On these sites, look for the following information: Code violations—search for code violations cited for the pre-foreclosure property by your local code enforcement agency. Comparable sales—usually, the county property records will show sales of comparable properties during the past six months. This information gives you an idea of current worth of the property. Crime search— check with your local law enforcement agencies to determine the crime risk rating for the property’s address. Obviously, the worse the crime rating, the more risk you take by buying a property in the defined area. Demographic information—check all demographic data to see what the makeup of the neighborhood is, trends, etc. Flood zone map search—there should be federal flood maps available. If the property is in or near a flood-prone area, check the maps carefully. Hazardous waste search—avoid any property with hazardous waste issues! Clean-up of this waste can be extremely expensive, and you could end up with the bill. So, examine the records carefully for any evidence of environmental hazards. Any violations could be on local, state or federal agency sites. Property records—search and examine the county property assessor/appraiser’s property records to find out information on ownership, sale, tax assessment information, etc. Property tax records—search the country tax collector’s property tax records for information on tax payments. Don’t forget there are many other Internet sites you can visit to check for more specific information on topics. Here are several: Crime Statistics  The Disaster Center  NeighborhoodScout –subscription site These are just two examples. Many other sites on crime are available on the Internet. Use Google to find them for you. Demographic Information  ESRI—business information solutions – Copyright 2009

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Secrets To PreForeclosure Profits  Federal Financial Institutions Examination Council (FFIEC) Geocoding System  U. S. Census Bureau o o Environmental Hazardous Waste  Department of Housing and Urban Development (HUD)—HUD has environmental maps available  Environmental Protection Agency (EPA)  Enviromapper (EPA)—allows you to search by zip code —information on pollution and environmental hazards Property Records  Property Reports (Intelius)   Many more such sites are available online. Do a Google search to find them. As a precaution, I advise that you double-check information with your local government offices to ensure there are no code violations, tax liens, environmental hazards, etc. Sometimes, these agencies may have up-to-date information that hasn’t yet made it to their web sites. So, if you live in an area where the county property records aren’t available on the Internet, how do you find the necessary information? If this is the case, then you’ll need to call the customer service department at your property appraiser/assessor’s office and provide them the property’s street address. With that information, they should be able to tell you: parcel or folio number owner’s name and mailing address (if it’s different from the property address) when and how much the property last sold for current tax-assessed value Of course, if you’re a person who likes to deal directly and in person with your county offices, then visit them and tell them politely you want to do a title search to determine if there are liens, etc. They’ll direct you to the record books and/or microfiche files. Also, at some point in your career, you may want to locate owners of vacant properties, and, often, you can find this information in the records. However, if this information is missing or incorrect (as sometimes happens), then you can check the following governmental sources: – Copyright 2009

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County  Business license records  Jail inmate records  Public library patron records  Voter registration records State  Bar association records  Department of Motor Vehicles records  Fishing/hunting licenses  Professional license records  Prison inmate records  Vital statistic records Federal  Prison inmate records  Social Security Administration (death index)

Property Owner Names Check with your county property appraiser/assessor to find out the names of property owners. Tax rolls normally contain nearly all names and list every parcel of land within a given county. The tax identification numbers will vary according to the office’s regulations. In some cases, they can be an assessor’s parcel number (APN); in others, they have appraiser’s folio number. To find out if your county’s tax roll is online, use the Google search engine. Type ―tax rolls‖ and the county and state information into the search engine window. As part of your property records search, you’ll need to examine closely two areas to make sure there are no problems—liens and titles. Let’s look at these areas next.

Liens A lien has many different definitions, but it all boils down to this in terms of real estate: A lien is legal claim against an asset which is used to secure a loan and which must be paid when the property is sold. Why are liens important to you? For one very crucial reason--a lien affects the ability to transfer ownership! In other words, if there’s a lien on a pre-foreclosure property you want to buy, the ownership can’t be transferred until that lien is paid. So, if you buy a ―liened‖ property, you can’t do anything with it until that issue is resolved. You’re stuck not making any money and, possibly, losing it. Liens can be voluntary (mortgage or trust of deed lien) or involuntary (the result of legal action). If you need to find information on liens, here are common sources to check: – Copyright 2009

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Secrets To PreForeclosure Profits Circuit court office—check for tax liens on state income, state inheritance, state franchise taxes, etc. Also, check for liens against estates of deceased persons, guardianship of minors and incompetents, termination of joint tenancies, etc. County clerk’s office—same as above. Country recorder’s office—search for judgment liens (mechanic’s liens, etc.), property tax liens, federal tax liens, etc. Also, check for conditional sales contracts (contracts for deed, land sales contracts, etc.) In addition, look for notices of ―lis pendens.‖ As I stated earlier in the book, this Latin term means ―suit pending.‖ Notices of lis pendens should be red flags since they indicate that the title or right to the possession of the property is in litigation. Municipal clerk’s records—examine the records for any liens for failure to pay for municipal services like water, sewer and trash removal services. Also, determine if there are any code enforcement fines. United States Courts—search for any federal judgments against the title holder. These could include federal tax liens and liens resulting from defaults on FHA, Department of Veterans Affairs (DVA), Small Business Administration (SBA), and student loans. Common types of liens are shown at the end of the chapter. Study them so you can do a thorough search of records. A final note on liens: If there are several liens on a property, they are generally treated by the law according to chronological order. In other words, a lien recorded on February 1 would have priority over a lien recorded on March 1 of the same year. However, liens for unpaid government services may have priority over other liens in several states. It’s best to check with your local and state governments to determine what the rules and regulations are

Titles Obviously, you want clear and free titles to any pre-foreclosure properties you’re considering to avoid legal entanglements and expenses. So, a title search is extremely important. There are two common types: Current owner—this is a search of public records from the date the property’s title was transferred to the present owner to the current date. Full title search—this is a very thorough search of the property’s title from the date the current owner gained the title back into the past (up to a maximum search of 60 days). – Copyright 2009

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Secrets To PreForeclosure Profits You can do a title search yourself, but I don’t recommend it! It’s a tricky and very complicated area, so you’ll need to hire a professional title abstractor or title examiner to carry out the task. The cost of professional services is cheap compared to the cost of getting tangled up in the handling of a lien problem. To find title companies in your area, check the Yellow Pages. Or go online to The National Association of Land Title Examiners and Abstractors ( and use their directory.

Insurance Claims Always check the casualty and property insurance claims history of a preforeclosure property (or any other kind of property) before you buy it. It does you no good to buy a property only to find it’s uninsurable or insurance is only available at an exorbitant rate. There’s a good source on the Internet. It’s called CLUE (Comprehensive Loss Underwriting Exchange), and it’s a database of consumer claims created by ChoicePoint, ―a leading provider of decision-making information and technology that helps reduce fraud and mitigate risk.‖ ( CLUE’s database is used by insurance companies (and your insurance agent) to determine a basis for underwriting or rating an insurance policy. A CLUE report includes the following information: “…consumer claim information provided by the insurance companies. It includes policy information such as name, date of birth, and policy number, claim information such as date of loss, type of loss and amounts paid, and a description of the property covered. For homeowner coverage, the report includes the property address and for auto coverage, it includes specific vehicle information.” Ask your insurance agent to use CLUE to check this information to make sure the property is insurable and insurable at prevailing rates for similar area properties. – Copyright 2009

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Property Disclosure Agreements Make sure you’re doubly protected by having the property owner sign a property disclosure agreement (usually at the time of the signing of the purchase agreement). The agreement should be one approved for use by your state. Have the owner sign the statement in the presence of a notary public. Agreements vary by state, but, generally speaking, they ask questions in the following areas: Environmental hazards Legal problems (unpaid taxes, liens, etc.) Pest control problems (termites, etc.) Property defects (leaky roofs, etc.) Title Zoning problems If such questions aren’t asked on your state form, be sure to ask them! Of course, all of the above efforts need to be backed up with a physical inspection of the property. In general, you (or an inspector) should be looking at the following areas: Code enforcement (good enforcement) Condition of properties within the neighborhood Crime rates Good availability of municipal services. Public nuisances (sewer treatment smells, etc.) Public perception of the area Storm water drainage Traffic patterns (easy access to main roads) Physical inspection of the pre-foreclosure property is treated in detail in the next chapter. – Copyright 2009

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Common Liens Bail bond lien—a bail bond allows a person arrested on criminal charges to be released on bail pending his or her trial. One way to get a bond is to pledge capital in the form of real property (a home, etc.) Child support payment—when a property own fails to make court-ordered child support payments, the state government places a lien against the property’s title. Code enforcement lien—this type of lien occurs when a property owner has been fined for failing to correct code violations and has failed to pay the resulting fine. The local enforcement board then places a lien on the property’s title. Corporate franchise lien—this lien can occur within states that have a corporate franchise tax for the right to do business within those states. If a corporation fails to pay the tax, the state places a lien against any corporate real property within the state. Federal judgment lien—this lien concerns debtors who’ve defaulted on federally guaranteed loans (SBA loans, student-guaranteed loans, etc.). When default occurs, a lien is placed against the property title. Federal tax lien—when a person fails to pay federal income tax, the Internal Revenue Service has the statutory power to place a lien against the title of any real property belonging to that person. Homeowners’ association lien—this lien can occur when a member of a homeowners’ association fails to pay their dues as per the deed to the property. The lien is placed against the property title. Judgment lien—this type of lien occurs when lawsuits award monetary damages to the plaintiff. In this case, a lien is placed against both personal and real property of the defendant until the judgment is placed. Marital support lien—when a property owner doesn’t pay court-ordered marital support, a lien is placed against a property’s title. This can be done on the local, state and federal levels. Mechanic’s lien—this is a statutory lien which allows architects, contractors, engineers, mechanics, surveyors, etc. to take legal action against a debtor who’s failed to pay for furnished work or material for the improvement of real property. The lien is placed against the real property being worked on. Mortgage and deed of trust lien—this is a voluntary lien created when real property is pledged as security for the repayment of the debt. Municipal lien—when a property owner fails to pay for municipal services (water, sewage, trash removal, etc.), the local government places a lien against the property’s title. Public defender lien—when a property owner fails to pay for a court-appointed public defender, governments (local, state, federal) place a lien against the property title. Real property tax lien—when a property owner fails to pay his or her property taxes, liens are placed against the property by local authorities (usually city and county tax collectors). State inheritance tax lien—this is a tax levied against the estates of deceased individuals. If the tax isn’t paid, a lien is placed against the estate for the amount owed. Welfare lien—when a property owner fraudulently collects welfare payments, the local, state and federal governments can place a lien against the property’s title – Copyright 2009

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Step 5: Inspecting the Property You may be tempted to inspect a pre-foreclosure property by yourself and forego the expense of hiring a professional building inspector. I highly recommend that you resist this temptation unless you actually possess the knowledge and experience of a professional. You want a detailed, expert inspection to make sure the property is in fit condition for the investment of your hard-earned money. Of course, you should do your own inspection first to get a sense of the property as a potential investment. This is a good course to follow since some problems may be extremely obvious (sagging ceiling, water damage, etc.) so you’ll know right away that the property is not worth your time and money. In that case, you don’t need the expense of a professional inspector. So, why hire a professional at all? Because they’re experts at finding hidden defects that can cost a fortune to repair, defects like bad wiring, defective water pipes, dry rot, mold, rotting roofs, termites, etc! Unless you have experience at the inspection process, it’s likely that you’ll miss these defects, and devious owners can be quite good at covering them up. So, it’s always, always necessary to conduct a thorough physical inspection of any property you’re considering or to have an inspection done for you. If a property inspector does find problems, you can require that the seller correct those problems, reduce the price, or you can walk away from the deal before any damage is done to your finances. Many states protect your investment by requiring that a seller provide a disclosure statement. In general, sellers are responsible for disclosing only information within their personal knowledge. However, some states do define certain problems that the seller must take responsibility to search for, whether or not they see any indications of the problem. Be sure to check with your state government to find out if this is the case. If you do live in such a state and the seller willfully avoids mentioning the defect, you can take him or her to court for compensation. Finally, if an owner attempts to limit your access to or inspection of a property, walk away from the deal! He or she is likely trying to hide problems.

Choosing a Building Inspector Always use the services of a licensed building instructor. Non-licensed inspectors can be incompetent or outright fakes who take your money and do nothing. I’d recommend you interview a minimum of two or three inspectors before choosing one. Make sure they’re full-time professionals conducting a minimum of 50 to a 100 inspections a year (depending on the area). – Copyright 2009

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Secrets To PreForeclosure Profits Also, request copies of recent written inspection reports from inspectors. If they’re reluctant to provide them, cross them off your list immediately! Professionals always want to show you samples of their work. After all, it brings them more business. In addition, request a minimum of three references from inspectors. These references should be from customers who’ve used the inspector’s services within the last six months to a year. Once you have the references, contact the customers to get their opinions on the inspector’s work and behavior. Then, after you’ve made a selection, accompany the inspector on the first tour of the property you’ve targeted. This not only allows you to see how this individual works, but you’ll also have the opportunity to learn the specifics of inspection. I’d recommend that you select an inspector who’s a member of The American Society of Home Inspectors ( or the National Association of Home Inspectors Members of these associations adhere to a code of ethics, plus they’re prohibited from having a professional interest in the sale, repair or maintenance of a property they inspect. They’re also forbidden from using their inspection business as a way to find customers for a handyman service that they ―happen‖ to own. You may want to go on the Internet and use ASHI’s ―Find a Home Inspector‖ link to identify potential candidates in your locality. You’ll find that home inspection rates vary by inspector, region and size of house. According to, approximately 40% of buyers pay in the range of $200 to $250. However, as I said, rates vary, so it’s good idea to survey your local inspectors to find out what the costs are in your area.

What’s Checked in a Building Inspection? Obviously, you want a property that’s structurally sound, so you or the building inspector should do a physical inspection to found out if there are any problems in that area. Below, I’ve provided you with a general list of questions to get you started. As you gain experience, you’ll be able to add your own questions to the list. What property repairs are required? _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ Which areas are unsafe or causing rapid and expensive damage? – Copyright 2009

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Secrets To PreForeclosure Profits _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ Are there priorities for repairs? If so, what are those priorities? _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ Which repairs may cost a lot of money? _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ What are the biggest risks of hidden damage? _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ Are there inexpensive alternative repairs? ( ) Yes ( ) No If so, who’s available to make these repairs at a reasonable cost? _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ Are investigations into other repairs appropriate? ( ) Yes ( ) No _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Of course, it’ll be necessary for you or the professional inspector to get more specific and look closely at the following areas:                

Electrical System Wiring, Service Panel, Devices, and Service Capacity Energy Conservation/Safety Items Exterior Walls, Siding, Trim Floor, Wall, Ceiling, Roof Structures Foundation, Footings, Crawl Space, Basements, Sub-flooring, Decks Gutters, Downspouts Heating & Cooling Systems Insulation & Ventilation Interior Floors, Walls, Ceilings Moisture Intrusion/Mold Overall Structural Integrity Plumbing Systems, (fixtures, supply lines, drains, water heating devices, etc.) Property Drainage/Landscaping Roof, Roof Shingles, Chimneys, Attic Walks and Drives Windows, Doors, Cabinets, Counters, etc.

As you gain experience in inspecting properties, you may want to conduct inspections without the help of a professional inspector. I don’t recommend this. However, I’ve provided you with a list of clues to look for on the next page as well as several checklists following it to make sure you do a thorough and complete job. I highly recommend you use the clues list and the checklists on every inspection. After all, it’s your money you’re putting on the line, and you want to make a profit—not incur a loss! In the next chapter, we’ll look at the all-important step of estimating property value. – Copyright 2009

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List of Clues for Damage  Bad floors. Slanting or sloping floors can be a sign of serious problems with the foundation or the quality of construction. Also, check for soft spots on upper floors. This can indicate structural damage.  Cracks. Look around the foundation, walls, ceilings, windows and door frames, chimneys and retaining walls for cracks. If a seller tells you that these are ―subsidence‖ cracks, don’t accept this story at face value. It may or may not be true. The only way to find out is to let a professional do an inspection. Otherwise, use this rule-of-thumb: if a crack is big enough to stick the width of a pencil into it, then something more serious than subsidence is likely occurring.  Evidence of moisture damage and/or presence of mold. Mold can be particularly dangerous to the health of inhabitants. It can cause allergies, infections, irritations, and toxicities. It can also be very difficult and expensive to get rid of, so you definitely don’t want it present in any building you’re considering. Mold has a characteristic musty smell, so check for that odor. In terms of moisture intrusion (snow or rain), look for discoloration and stains on ceilings and walls and around windows and door frames. These clues may indicate serious structural damage. Also, look for sump pumps. They’re specifically designed to handle flooding in basements and lower levels. If you find them, have the inspectors check the property out in detail.  Grounds. Some soil problems can be very expensive to fix, so look for evidence of poor drainage, excess groundwater or cracks in the foundation. Don’t forget to check the drains. They should all be correctly installed and maintained.  Out-of-true structure. Modern technology is a wonderful aid in determining if a structure is outof-true. Laser levels are available at inexpensive prices and are definitely worth the cost. Using such a level, walk through a property looking for floors, walls, and ceilings that aren’t in plumb. Don’t forget to open and close doors and windows as well. If they stick, you know things are not in line.  Pest control inspection. Depending on the part of the country, pests can include termites, carpenter ants, powder post beetles, and any other bug that likes wood as a main course. These insects can cause very serious damage to a property. Don’t limit your to insects. Also, look for ―dry rot‖ and other similar fungi. It’s best to bring in a professional pest control operator to identify any of these problems.  Plumbing leaks. Internal leaks can do a considerable amount of damage, so check all potential leak sources--sinks, faucet lines, toilets, dishwashers, washing machines, sprinklers, etc.  Special note: Avoid any property with polybutylene domestic water supply systems. Due to its tendency to gradually deteriorate through interaction with chlorine and other chemicals in drinking water, it’s been the subject of class-action lawsuits over the years. The most widely known brand name was Qest (manufactured by Shell Oil Company, and it was a very popular type of pipe used in residential and commercial installations in the '70's and the '80's. Indoors, polybutylene pipe is gray colored and flexible. When used in a yard, it’s blue colored. In terms of overall plumbing, it was used for both hot and cold plumbing. – Copyright 2009

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Inspection Checklist for Exterior of Property

Area/Item Carport




Cost of Repair

Chimney Carport Doors Foundation Garage Paint Roof Screens Siding Soffit/Fascia Steps Windows Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Grounds

Area/Item Lawn




Cost of Repair

Drainage Driveway Outside Lighting Plants/Shrubs Sidewalks Sinkholes/ Depressions Streets Screens Siding Soffit/Fascia Steps Trees Windows

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Attic

Area/Item Air Ducts




Cost of Repair

Ceiling Joists Floor Lighting Insulation Mold Rafters Termite Damage Ventilation Wiring Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Basement

Area/Item Ceiling




Cost of Repair

Drainage Floor Lighting Insulation Mold Plumbing Termite Damage Ventilation Wiring Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Inspection Checklist for Carport/Garage

Area/Item Air




Cost of Repair

Conditioning Ceiling Doors Floors Heat Lighting Mold Paint Roof Soffit/Fascia Walls Windows Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Electrical Systems

Area/Item Capacity




Cost of Repair

Circuit Breakers Electrical Meter Electrical Outlets Lighting Riser Service Panel Wiring Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Inspection Checklist for HVAC

Area/Item Central Heat/Air




Cost of Repair

Condenser Unit Heat Pump Mold Natural Gas Oil Furnace Solar Panels Window/Wall Units Vents Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Kitchen

Area/Item Cabinets




Cost of Repair

Ceiling Ceramic Tile Countertops Dishwasher Doors Electrical Outlets Floor Lighting Mold Paint Plumbing Oven Refrigerator Sink Walls Windows Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Bathrooms

Area/Item Ceiling




Cost of Repair

Ceramic Tile Electrical Outlets Doors Floor Lighting Linen Closets Mirrors Mold Paint Shower Sinks/Vanities Toilets Tubs Ventilation Walls Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Dining Rooms

Area/Item Carpet




Cost of Repair

Ceiling Doors Electrical Outlets Lighting Mold Paint Walls Windows Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Living Rooms

Area/Item Carpet




Cost of Repair

Ceiling Doors Electrical Outlets Floor Lighting Mold Paint Walls Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Bedrooms

Area/Item Carpet




Cost of Repair

Ceiling Closets Doors Electrical Outlets Floor Lighting Mold Paint Walls Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Secrets To PreForeclosure Profits Inspection Checklist for Home Offices

Area/Item Carpet




Cost of Repair

Ceiling Closets (storage) Doors Electrical Outlets Floor Lighting Mold Paint Walls Other

Notes: ____________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ – Copyright 2009

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Step 6: Estimating Property Value This is a key step in my 11-step process! You have to be able to estimate property value accurately on a consistent basis in order to make a profit. The greatest danger lies in over-estimating value. Obviously, if you buy a foreclosure property for, say, $200,000, and it’s actually only worth $150,000, you don’t end up with a profit; you end up with a loss, and, to put it mildly, that’s not a recipe for success. So, my advice is to pay close attention to the information in this chapter and always, always keep a cool head regarding value no matter how hot the market is. Hot markets are often where amateur investors lose all perspective. They catch the ―buying fever,‖ abandon all common sense, and, in the process, lose their money or, at best, break even. Fortunately, the computer age has made estimating property value easier than in the past. In many counties, records of property ownership, sales and tax assessment records are readily accessible online. However, in order to make an informed decision, you still need to know the basics of appraisal, and this chapter will provide you with that vital information.

What Is Equity? Equity is defined as ―the difference between the market (or appraised) value of a property and the claims held against it.‖ Here’s an example: Assume an owner has a property that has a market value of $200,000 and an existing loan balance of $150,000. This owner has $50,000 worth of equity in the home (200,000 – 150,000 = 50,000).

How Do Appraisers Define Market Value? The Uniform Standards of Professional Appraisal Practice (USPAP) is recognized by The Financial Institutions Reform, Recovery and Enforcement Act of 1989 as the: ―generally accepted appraisal standards and requires USPAP compliance for appraisers in federally related transactions. State Appraiser Certification and Licensing Boards; federal, state, and local agencies, appraisal services; and appraisal trade associations require compliance with USPAP.‖

In plain English, USPAP sets standards for property appraisers nationwide. See the USPAP website for more information on this organization. . USPAP’s definition of market value is this: ―the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each – Copyright 2009

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Secrets To PreForeclosure Profits acting prudently and knowledgeably, and assuming the sale price isn’t affected by undue stimulus.‖

Also in plain English, this definition means that market value is the probable price that a property will sell for on the date of appraisal. It also assumes the following: The buyer and seller are motivated to do a transaction. They’re both well-informed and are acting in their own best interests. The property is on the open market for a reasonable amount of time. Payment is made by cash or a comparable financial deal. The price is a ―normal consideration‖ of the property sold; i.e., it’s unaffected by special financing or sales concessions by anyone involved with or associated the sale. No one is being forced into the sale.

What’s the Difference Between a Property’s Assessed Value and Its Appraised Value? Be sure not to get the terms ―assessed value‖ and ―appraised value‖ confused. They refer to two completely different things. The assessed value refers to tax valuation. In other words, it’s the value established by the local tax authority for a parcel of land and the improvements made on the land in order to collect property taxes. The appraised value refers to the estimated value of a property provided by a licensed property appraiser who must use accepted methods for the particular type of property being appraised. For example, property may be classified as residential homestead (owner-occupied), residential non-homestead, agricultural, commercial, etc. Each of these classifications is typically taxed at a different percentage of market value. Beyond the USAP website mentioned above, you can find information on property appraisers and the appraisal process at the following websites: Appraisal Institute American Society of Appraisers

What Are the Common Appraisal Methods? There are three methods commonly used. Often, professional appraisers will use a combination of all three, but, for your purposes, the easiest and best to use is the comparable (or comparison) sales method.

The Comparable Sales Method The comparable sales method is very simple. It establishes an approximate property value based upon sales of similar properties within a reasonable period – Copyright 2009

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Secrets To PreForeclosure Profits of time. Appraisers evaluate the properties in the neighborhood around the subject property and look for similarities, including type of property, age, location, size, etc. Normally, appraisers look for at least three similar properties in close proximity to the subject property. They also look for unique advantages and disadvantages so they can make positive or negative value adjustments based on those unique qualities relative to the subject property. As I said, this is the appraisal method you should use for pre-foreclosure properties. However, you should also be aware of the following two methods for possible future use. The Income Approach This method is used most often for larger income-producing properties. It’s not likely that you’ll use it for homeowner pre-foreclosure properties. However, as your real estate career expands, you’ll need to make use of this method. The income approach determines an estimate of total real estate value based upon the rate of return from potential net operating income from the property (assuming it was leased to a third party). In this method, the appraiser estimates an annual income rate for the property based upon similar rates for similar users. For example, the appraiser might determine that a retail space might rent for a rate of $10 per square foot per year. This rate should be comparable to other retail spaces in the vicinity. Once this lease rate is determined, the property’s value is estimated using a type of multiplier known as a capitalization rate, or cap rate. Historically, cap rates are subject to several factors including the strength of the type of tenant, the level of landlord involvement, economic conditions and type of industry. To use a basic example, a property with a good tenant in a good location might command a cap rate of 12 percent in a good market. The value of the real estate is determined by multiplying the net rental rate by the reciprocal of the cap rate. To continue the example, the value would be calculated by multiplying $10 per square foot by 8.3 (100 percent divided by a 12 percent cap rate). This would mean that the investment value of the real estate would be equal to $83 per square foot. Often, these figures are further adjusted to take into account other variables such as vacancy rates, property management costs and other investor related factors. The Cost Approach This is also called the ―replacement cost method.‖ Again, it’s not a method you’ll use for pre-foreclosure properties. However, it may be useful in your real estate future! It evaluates the replacement value of the property by analyzing the cost components of the specific land and building. It’s in common use for new properties, proposed construction or unique, or nonincome producing properties like schools, hospitals, churches, public buildings and the like. The variables involved in estimating value are dependent upon – Copyright 2009

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Secrets To PreForeclosure Profits location, geographic region of the country, labor and material costs. Factors considered are costs for land acquisitions, site preparation, utilities, types of building materials, tenant improvements and ―soft‖ costs (architectural and engineering costs, legal and brokerage fees and other similar related expenses). This method is often useful for estimating replacement cost. Remember, appraisals are not an exact science. You’ll find that they’re closer to an art form. However, as you gain experience, you’ll find it easier to accurately estimate value so you don’t end up overpaying for properties.

Where Can I Find Comparable Sales Data on Residential Properties? There are many convenient sites online that you can access. I recommend you do a search and try out a few to see which ones fit your needs best. To get you started, I provided a list below of a few sites concerned with foreclosures, residential properties, and other properties. RealtyTrac

What About Building Replacement Cost Estimates? In the event you need to consider building replacement costs, contact your local insurance broker—one who represents insurers specializing in providing property and casualty insurance for residential and commercial buildings. Simply ask him or her for a replacement cost quote. In general, such costs are calculated by using a replacement cost formula that’s based on several factors affecting the property; e.g., geographical location, street address, age, construction type, number of stories, roof type, current use, HVAC system, square footage, etc.

How Do I Calculate Costs for Construction Replacement? The easiest way is to use the Internet and the following sites: Building Cost Calculator Construction Cost Calculator Construction Material Calculators – Copyright 2009

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What Kind of Debt-To-Value Ratio Should I Look for in PreForeclosure Properties? The debt-to-value ratio refers to the total amount of debt owed on a property versus the property’s current market value. You want low debt to value. Generally speaking, you want the ratio to be below 75%. Here’s an example of how the ratio is figured: Assume a foreclosure property has a total debt of $100,000 (principle loan balance, loan payments in arrears, late payment charges, legal fees, subordinate liens, etc.) Now assume it has a current market value of $125,000. Now divide the debt by the market value; i.e. $100,000 ÷ $125,000 = 80% debt-to-value ratio

How Do I Estimate a Pre-Foreclosure Property’s Market Value? To estimate market value accurately, you need to know the following information:  The loan value of the property’s mortgage or deed of trust loans in default  The loan payments in arrears  Accrued interest, late payment charges, and legal costs owed by the owner  The total amount of money needed to cure the default and reinstate the loan  All judgment liens against the property’s title  The total repair costs necessary to put the property into re-sale condition  The property’s market value (as determined by the comparable sales method) Since you’ll be dealing with so many numbers, it’d be wise to draw up a worksheet to keep them straight, or you can use the one I’ve provided at the end of this chapter. Simply copy it for your own use. In order to obtain the necessary information to complete the market value form, log onto your county appraiser/assessor web site in order to get the tax-assessed value of the pre-foreclosure property you’re considering. Then do a comparable sales search by looking at your county’s online property tax rolls. Look for sales of three to six properties during the past six months. These properties should be comparable in terms of size, condition, amenities, etc. and located close to the pre-foreclosure property (e.g., a one-mile radius). Then, analyze those sales and adjust prices to account for differences among the properties. Finally, calculate the per square foot cost of replacing the improvements on the property. Be sure to use the same building materials and method of construction. – Copyright 2009

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How Do I Determine the Actual Amount of Equity an Owner Has in a Pre-Foreclosure Property? Discovering the actual amount of equity is vital for accurately estimating the current market value of a target property. You do this by deducting the total amount that it will cost you to reinstate the loan, pay off the liens, and repair the property so it’s in good marketable condition for resale. In general, I use 70% of After Repair Value (ARV) minus Repairs to arrive at a sale price Of course, getting the price you want is all a result of negotiation, and that’s the subject of the next chapter—how to negotiate effectively with owners of preforeclosure properties. – Copyright 2009

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Secrets To PreForeclosure Profits Current Market Value Worksheet Tax Assessment Value


Appraised Value


Balance of first mortgage or deed of trust


Balance of 2nd mortgage or deed of trust Amount of loan payments, accrued interest, late payment charges in arrears, etc


Legal fees owed Amount of money needed to end default and reinstate loan Amount of liens/judgments recorded against the property Property taxes owed



$_____________________ $_____________________ $_____________________

Outstanding fines (city, county, state) $_____________________

Total amount owed against the property $_____________________

Estimated property repair and clean-up costs $_____________________

Estimated current market value of property $_____________________

Cost to buy owner’s equity at discount (50% or more) $_____________________

Property search, acquisition and closing costs $_____________________

Estimated equity in property after purchase $_____________________ – Copyright 2009

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Step 7: Negotiating with Homeowners and Others Let’s face it—the prospect of foreclosure is not a happy one for property owners. They’ll be experiencing a range of emotions—anger, anxiety, denial, fear, panic, stress, etc. And that means you’ll be dealing with people who are not objective about their situation. Moreover, embarrassment may make them hesitant about discussing their financials with a stranger—you. In fact, they may be reluctant to talk about their financial situation because they don’t really understand it in the first place. In some cases, they may be looking for someone to blame. What I’m saying is that you have to be prepared to deal with emotional people. The best way to do this is to adopt the attitude of being a problem-solver as I mentioned earlier in the book. Also, adopt the attitude of empathy; i.e., put yourself in their shoes to understand what they’re going through so you can build a personal connection with them on some level. Keep in mind that many people in foreclosure are good people who’ve often suffered problems beyond their control—an unexpected illness and enormous medical bills, loss of a job, divorce, etc. Others have simply made bad decisions in the financial area and gotten themselves trapped in an ever downward spiral of debt. Some have gotten themselves addicted to alcohol, drugs, or gambling—or a combination of all three! Obviously, you don’t want to deal with them—or with people in the middle of nasty divorces where legal entanglements make sale of the property an iffy proposition at best. So, you want to do what all good salespeople do—―qualify‖ your prospects. That is, determine quickly if the homeowners are good prospects for your services or if they’re not worth your time and investment because of personal problems or addictions. However qualified homeowners got into their messes, it’s important for you—and them—to realize that you’re offering a way out. It’s also important to remember that most property owners facing foreclosure don’t really want to sell their properties! After all, people invest themselves and their emotions in their home. It’s the American dream, and no one likes their dreams shattered. So, they’re looking for any path out of the situation to prevent the foreclosure from occurring. Again, you can offer escape from a bad situation.

Options Available to Property Owners Facing Foreclosure Part of being a problem-solver is understanding the options available to homeowners during the pre-foreclosure period. I covered these in an earlier chapter but here’s a quick review: – Copyright 2009

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Secrets To PreForeclosure Profits Loan forbearance or modification Refinancing Chapter 13 bankruptcy Open market sale Sale of home to investors Public auction The reason I mention these options again is that they provide what I call secrets to ―CA$H‖ profits. That is, you can help out homeowners in two ways. First of all, let’s assume they want to save their home, not sell it. In that case, you can offer several services to help them.  You can charge to help them get forbearance on their mortgage ($300$1,000 range.)  You can charge to help them postpone the sale ($300-$1,000).  You can charge a referral fee if they qualify for a refinance with a private or hard money lender ($500-$1,000). Every lender is different so you might want to check with your local hard money lenders. Compared to losing a home, these fees are inexpensive, and you can relieve a lot of tension and stress for the homeowners in the process. Now, let’s assume you’re working with homeowners who want to sell their home. In this case, you can offer them the following options:  If the home owners don’t have enough equity, you can ―short-sale‖ the loan. In a short sale, a lender allows the property to be sold for less than the existing loan balance. (For more information on short sales, see the chapter “A Word on Short Sales” later in the book.)  You can put on option on the property and then do a 5-day auction on the house by using a ―round-robin‖ bidding technique. That is, you take the current high bid and then call interested parties in turn to see if they’re willing to beat that price. You don’t need an auctioneer’s license for this sale. Think of it as being similar to an eBay auction! For more information on this technique, check out Bill Effros’ How To Sell Your Home in 5 Days.  You can buy the home subject to existing financing, and then reinstate the loan.  You can pay off the loan completely, fix up the property and retail it. – Copyright 2009

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Secrets To PreForeclosure Profits Now let’s cover some common-sense guidelines that can help smooth negotiations with homeowners and allow you to make a good deal.

Guideline 1: Be Professional Be honest and straightforward in all your transactions. It’s not only the right thing to do, but it can help keep you out of lawsuits filed by dishonest and disgruntled homeowners who may claim they were fooled into selling their homes for less than they were worth. To protect yourself, document every step of the transaction so you have a ―paper trail‖ that’s transparent and proof that you acted ethically. Also, remember that honesty is an investment in your future as a real estate investor. It’s an investment for two reasons. One, when you treat people well, your reputation spreads by word-of-mouth—the best advertising possible. It brings in more business. Two, reputation is everything in the community of real estate investors. So, if you decide to expand your efforts beyond pre-foreclosures into other property investments (multi-unit dwellings, commercial, etc.), you’d better have a spotless reputation. Banks, lenders, and other investors—they’re not going to grant money to someone they view as an unacceptable risk. As I mentioned previously in the book, part of professionalism is your dress. That is, you should dress in a manner acceptable to home owners. If you show up at home in a modest neighborhood driving a Lexus and wearing an Armani suit, I guarantee you’ll have lost the deal before it even begins. People facing foreclosure are not happy to see investors showing up at their doors flaunting their wealth when they’re headed in the opposite direction! So, show up in appropriate clothes! If it’s a working class neighborhood, wear jeans and an open shirt (if you’re a man) or conservative, businesslike clothing and a minimum of makeup (if you’re a woman). If it’s middle-class neighborhood, you may want to wear a sport coat and casual slacks (if you’re a man) or appropriate business clothing (if you’re a woman. Use your judgment in this area.

Guideline 2: Build Rapport I covered this subject earlier in the book so I’d just like to reinforce one simple principle in this section: Remember, homeowners will deal with people they like. At some point in your life, I’m sure you’ve dealt with someone who turned you off immediately because you simply didn’t like their style. Perhaps, he or she was aggressive, brash and loud, and you’re a person who likes to conduct business in a calm, rational manner. Their ―pushiness‖ turned you off immediately to any further dealings. Naturally, you want to avoid this kind of negative situation. So, pay close attention to the homeowners’ personal style when you first meet them and adapt to that style in a subtle fashion.

Guideline 3: Keep It Simple Remember that homeowners are often ―illiterate‖ in terms of financial dealings, so don’t assume knowledge on their part. And because they know they’re not – Copyright 2009

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Secrets To PreForeclosure Profits financial ―experts,‖ they may be uneasy in dealing with you because they’ll be afraid they’ll be cheated somehow. The best way to handle this attitude is to keep everything clear and simple. This will build trust. So, explain the foreclosure process, the options available to them, and the services you can offer in simple straightforward manner.

Guideline 4: Always Be a Problem-Solver I’ve stressed this point several times, but want to re-emphasize it here. You’re not there to intimidate homeowners into selling their properties. That’s a good way to lose a deal and your reputation. You’re there to offer homeowners solutions to their problems. That means you should have the ability to quickly size up their financial condition and offer the appropriate solution.

Guideline 5: Listen I covered this skill earlier in the book, but it’s so important I’ll repeat it here. The investors who get the best deals are often the quiet listeners. They encourage homeowners to talk first and listen patiently to what they have to say. Good listening has two benefits. One, it builds rapport and trust with homeowners. Two, it gives you good information that can be very useful when it comes time to negotiate.

Guideline 6: Always Deal with the Person Who’s the DecisionMaker There’s always the possibility you could end up dealing with someone posing as the homeowner—an identify thief, for example. To prevent this situation from occurring, it’s wise to politely ask for a form of identification like a driver’s license with a photo ID. Of course, you’ll have to present your own ID first. Then, explain that identify theft is a big problem these days, and you’d simply like to make sure that everything is honest and above-board. Most people are aware of the identify theft problem due to wide news coverage so the majority of homeowners will be happy to comply. However, if a homeowner refuses to show you identification, then simply thank them for their time and leave. Okay, those are the general guidelines for negotiating. Below are some specific skills for selling homeowners on your deals. I recommend that you learn them as a starting point and then, as you gain experience, adapt them to your own style.

Skill #1: The Presentation After you’ve listened carefully to a homeowner, you’ll want to make a presentation to convince them that you’re the right person to help them out. A presentation has three parts: Summarize the homeowners’ needs Provide benefits Ask for commitment – Copyright 2009

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The second part is often the most important; homeowners have to know what you can do for them. A presentation doesn’t have to be anything fancy. It just has to be clear and emphasize benefits. A presentation might go something like this: “George, I want to create a win-win situation for us both. You’re facing foreclosure and want to avoid that unpleasant possibility. It’s created a lot of stress for you and your family, and I can help you get rid of it and make your life a lot easier. In order to do that, here’s what we need to do. First, we’ll inspect your property together. That will help me see its potential. Second, I’ll do a financial analysis with the loan information you provided me to see if the deal is a profitable one for me. Third, if I feel the potential is there, I’ll make you a written offer. Understand that the offer is contingent upon the status of the property title. Any undisclosed liens or judgments against the property will affect the deal negatively. But if the property is clear of liens or judgments and it’s in good shape and you agree to my offer, then we can close on the property within a week from today. This will lift the load of debt off your shoulders, and you’ll be free to move on with your life. If that all sounds good to you, shall we get on with the inspection?” Notice in the above opening statement that benefits are stressed throughout; i.e., avoid the possibility of foreclosure…get rid of stress…get rid of debt…the freedom to move on, etc. Also, in the final sentence, our investor asks for a commitment to do an inspection.

Skill #2: Offering a Deal The deal you offer will vary with the property’s physical condition and the homeowner’s situation. As such, you’ll have to be creative and use your judgment as to what to you offer. My rule is to use the following formula to determine the price I want to pay: Sales Price = ARV x Margin – Repairs Here’s an example: Assume a property has an ARV of $100,000. The margin is .70. The estimated repairs are $10,000. So, the calculation looks like this: ARV Margin = Minus Repairs Sale Price = – Copyright 2009

$100,000 x.70 $ 70, 000 $ 10,000 $ 60,000

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Skill #3: Closing the Deal There’s an old saying: If you don’t ask, you don’t get. So, if you’ve done a good job of offering benefits and know the deal meets the owner’s needs, you have a right to ask for commitment to that deal. In fact, here’s a simple, but effective way to ask for commitment: Summarize the homeowner’s needs Summarize the benefits that meet those needs. Ask for commitment Here’s an example: “George, you’ve said that you don’t your property to go on the foreclosure auction block and you definitely want to get all this stress out of your life. With the deal I’m offering you, you’ll get rid of that stress, have the possibility of foreclosure off your back, and be free to get on with your life. To my mind, this is a win-win situation for both us. Shall we close the deal?” In the above example, the investor summarized needs (need to get rid of stress and foreclosure possibility), then summarized the benefits that meet those needs (elimination of stress, avoidance of foreclosure, freedom to get on with life). Then, the speaker asked for a commitment to close the deal.

Skill #4: Handling Objections It’d be a great world if every homeowner immediately said ―Yes‖ and signed the deal. Of course, that’s not reality. You’ll run into resistance from some owners who may feel that what you offer them is not a good deal. This is a natural part of the selling process so it pays to be prepared to handle objections. An objection is something a homeowner doesn’t like about your offer; usually, it’s the amount of money being offered. The model for handling objections is this: Acknowledge the objection, but don’t agree with it. Offer counterbalancing benefits. Ask for acceptance Here’s an example of how to handle an objection. Assume a homeowner objects to your offer and says, ―That’s not enough. I need more money.‖ You might reply with a statement similar to the following: “I understand how you might feel that way. However, remember with my deal, you’ll not only be free of foreclosure headaches, but I’ll be paying your closing costs* and keeping foreclosure off your credit record as well as offering you debt relief. Plus, I’ll be giving you a relocation allowance.* – Copyright 2009

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Secrets To PreForeclosure Profits When you look at all those benefits, doesn’t my deal look pretty good to you now? *If appropriate to the deal

In the above statement, you acknowledged the objection without agreeing with it. Then, you offered counterbalancing benefits (payment of closing costs, debt relief, relocation allowance) and finally asked for acceptance of those benefits. Of course, people being people, you’ll find that this technique doesn’t work every time, but it does work on a consistent basis! It works especially well if you practice it on a regular basis and adapt it to your own unique style. All in all, negotiations are a combination of hard-headed financial sense and artful handling of people. As you gain experience, you’ll find it becomes easier. And once you’ve completed a successful negotiation, then it’s time to move onto to that all-important purchase agreement—the subject of the next chapter. – Copyright 2009

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Step 8: Preparing and Presenting the Purchase Agreement In real estate, a sales contract is called a ―purchase agreement.‖ It’s the legal document that outlines the specifics for the purchase of the pre-foreclosure property (or any other kind of property). Here are two central facts to keep in mind. First, all states have different terms for purchase agreements (sales contract, offer to purchase, a contract of purchase and sale, an earnest money agreement, deposit receipt, etc.) so be familiar with the term used in your state. Second, and even more important, all states have different rules and regulations regarding purchase agreements. This means you can’t use generic forms downloaded off the Internet. They simply won’t be specific enough for your needs and can cause you a lot of financial and other headaches if you use them. If sellers decide, for whatever reason, that they haven’t been treated fairly, they can launch lawsuits and possibly win if the purchase agreement isn’t considered legal in your state. So, study this subject closely and make sure any purchase agreement you draw up meets state legal requirements in terms of foreclosure and real estate laws. Also, it shouldn’t include any clauses that the courts can decide are unfair and unenforceable. Of course, make sure it fully protects your interests in the transaction. Make no mistake about it—the purchase agreement is the most important document in the purchase and sale of pre-foreclosures and other real estate properties. That’s because it specifies the following: How much you pay When you pay The terms and conditions for closing the transaction Cancellation terms I recommend that any purchase agreement be written in plain, clear English. Lawyers and others have a tendency to include a lot of gobbledy-gook language that ends up confusing people and can cost you money if you agree to something you don’t understand. So, if you plan on working with a lawyer, request that it be written in plain language. Then, once it’s drawn up, read it carefully with the attorney. If you don’t understand specific items, then ask for an explanation. Cross out any clauses that don’t apply or you don’t agree with. Initial any changes you make. Now let’s look at some of key stipulations you’ll find in purchase agreements so you’ll understand them fully. – Copyright 2009

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Key Stipulations I’ve listed key stipulations below in alphabetical order. All of these stipulations should be included in your purchase agreements in order to clearly define the rights and responsibilities of both the buyer and the seller. Assignment of the purchase agreement. Stipulate the right to assign or sell the purchase agreement to a third party. Default by buyer. Stipulate that the earnest money paid is the sole remedy in the event that the buyer or buyer’s assigns fail to close on the purchase of the property. Default by seller. Stipulate that the buyer or buyer’s assigns will have the right of specific performance in the event the seller defaults on the agreement by refusing to sell the property. Description of property. The agreement should include an exact legal description that’s written on the recorded deed of the property in the purchase agreement. Earnest money deposit. Stipulate that if the buyer doesn’t perform the agreement within the specified time, the buyer’s earnest money deposit will be forfeited, and this forfeiture will jeopardize the seller’s right to sue for specific performance. Eminent domain action. Stipulate that you will be entitled to a full refund of the earnest money deposit paid, plus any accrued interest, if the property is condemned by eminent domain prior to the closing date. Entry right. Stipulate that you have the right to enter the property and inspect, repair, market and show it to third parties prior to the closing date. 24 hours’ notice must be given to the owner. Examination of records. Stipulate that you have the right to examine all financial and tax records associated with the property prior to the closing date. Marketable title. Stipulate that you must be capable of obtaining an owner’s title insurance policy commitment letter from a title insurer in order to close on the purchase of the property. Parties to the agreement. Be specific and designate all parties to the purchase agreement as buyer and seller. This should include their legal status as to whether they are a single individual, husband and wife, or a business entity (corporation, limited liability company, etc.) Purchase price. State the purchase price of the property. Risk of loss. Stipulate that you’re entitled to a full refund of the earnest money paid (plus accrued interest) in the event the property is damaged or destroyed by fire, weather, or earthquake prior to the closing date. Subject to final inspection. This allows you to back out if the house needs more repair than you expected. Terms of purchase. Stipulate exactly how the property purchase will be financed. – Copyright 2009

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Secrets To PreForeclosure Profits Vacation of property. Stipulate that the seller must completely vacate the property and grounds prior to the closing date.

More on Real Estate Lawyers Real estate investment can be a tricky business due to the complexity of laws, statutes and regulations. That’s why it’s wise to have the services of a good attorney. Naturally, you want one who’s board-certified and specializes in real estate. You may not like paying the fees, but he or she can save you a lot of time, money and trouble in the long run. In your search for attorneys, look for ones who are very experienced in dealing with your state’s pre-foreclosure laws. Then, check qualifications and references. You can do this by first contacting your local or state bar association referral service for information. Then, search online for your state bar association membership to find out if the attorney is licensed to practice law in the state. Finally, check to see if there are any disciplinary actions or misconduct actions cited against the lawyer. If you need to look nationwide for attorneys, use one of the following sites to search for information on them. ( – click on the ―Research a Lawyer‖ link. ( ( – click on ―Real Estate and Housing‖ link. As I stated earlier, you want an attorney who can speak and write in plain English, so talk to several to find out which ones can explain foreclosure purchase agreements in language you can understand easily. This means they communicate well, and you’ll be able to work easily with them.

Presenting the Purchase Agreement A key in presenting a purchase agreement is to have witnesses on hand to attest to the signatures on the agreement. Every state has its own requirements as to how many witnesses are required so make sure you have the right number on hand. If you don’t, you run the risk of a court declaring the purchase agreement invalid should it come to a lawsuit. This can happen when you run into an unscrupulous seller who gets a perceived better offer after the signing and wants out of the deal. So, be sure to protect yourself in this regard. – Copyright 2009

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At the signing, also have the homeowner sign a state-approved property disclosure statement. This is absolutely necessary protection for you and your interests. The disclosure statement should require that the homeowner answer questions in the following areas: Are there any hazardous substances on the property? Are there any documents filed in the public records that negatively affect the property title? Are there any liens against the property for unpaid bills? Are there any actions (judgments, bankruptcies, liens, etc.) recorded in public records or pending in court that will negatively affect the property’s title? Any unpaid taxes, lien claims, etc. that would be an encumbrance against the property or property improvements? Are there violations of building codes and/or zoning regulations created by improvements? Are there any current or past legal disputes concerning the boundary lines of the property? Is there any person or entity, other than the owner, legally entitled to possession of the property or is in current possession of the property? Are there any legal disputes regarding the title or ownership of the property? Do any unrecorded mortgages, deed of trust loans or promissory notes exist that have been pledged as collateral? Your lawyer can help you draw up the specific language of these questions. To end this chapter, I’ve provided you with a sample purchase agreement to give you an idea of what one looks like. It’s shown on the next page. Once the purchase agreement is signed and witnessed, it’s time to enjoy the fruits of all your hard work by closing the sale. That’s the subject of the next chapter. – Copyright 2009

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STANDARD PURCHASE AND SALES AGREEMENT THE STATE OF _________________________ COUNTY OF ___________________________

1. BY THIS AGREEMENT AND CONTRACT _______________________________________________ hereinafter called SELLER hereby sells and agrees to convey unto _______________________________________________ hereinafter called Buyer, the following described property: Lying and situated in ____________________ County and Address: ___________________________________________________________ _____ 2. PURCHASE PRICE:Buyer agrees to pay Seller and Seller agrees to accept ________________________________________________________ ($____________________________) in cash at closing for the Property. Buyer has paid to Seller an earnest money deposit of $_______________, which shall be credited to Buyer at the closing of this Agreement. Property taxes shall be prorated as of the date of closing. 3. TITLE: Seller warrants that Seller has good, clear and marketable title to the Property, subject only to property taxes and any easements and restrictions of record. Seller will convey title to Buyer with a General Warranty Deed. Buyer will inspect title to the Property and Seller will satisfy any encumbrances other than those listed above. 4. CLOSING AND POSSESSION: This Agreement will be closed on or before ______________ and be extended as necessary to complete all paperwork required. Time is of the essence of this Agreement. 5. CLOSING COST: Buyer will have Buyer's attorney, at Buyer’s expense, prepare all required documents to complete this Agreement. 6. INSPECTION: This Agreement is subject to an inspection of the Property and approval by Buyer and/or his associates after acceptance of this Agreement by Seller. Buyer will buy the Property in its present "As-Is" condition. Special Provisions: – Copyright 2009

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Secrets To PreForeclosure Profits ________________________________________________________________ ________________________________________________________________ ____________________________

Executed in duplicate this ________________ day of ___________________20_______

SELLER ___________________________


________________________________ ___________________________________ ____________________________________ – Copyright 2009

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Step 9: Closing the Sale Closing the sale can be the most exciting part of the entire process of a preforeclosure sale. However, it can also be the most frustrating since unexpected obstacles can pop up (unrevealed law suits, etc.). Also, title and escrow agents are looking out for their interests, not yours, and may not be used to dealing with private investors. Since they normally work with banks and conventional lenders, they may regard you with some suspicion. In addition, they may simply not understand an ―unconventional‖ transaction outside their experience. So, to keep them under control, just remember their clearly defined role in the closing process; their only responsibilities are to make sure that all closing documents are properly signed and that the proceeds from the sale are distributed. Legally, they can’t provide advice in the accounting, financial, and legal areas. They also can’t act as negotiators or mediators between the transaction parties. In effect, during the closing process, treat them with courtesy but don’t let them treat you badly. Of course, a good way to make sure the closing process is handled smoothly and effectively is to have your board-certified attorney present. This is an absolute necessity. Unless you’re an attorney experienced in real estate law, never attempt to do a closing by yourself! As I stated earlier, the attorney should be experienced and knowledgeable about your state real estate laws and regulations. He or she should also understand specific foreclosure laws as well as the subject of liens, judgment liens, and other legal actions that can affect the closing process. Below are some other important tips on closing the sale.

The Real Estate Settlement Procedures Act (RESPA) RESPA is a 1974 federal law that was enacted to prevent con artists from preying upon the property-buying public, and you should know its provisions. It’s enforced by HUD (The Department of Housing and Urban Development). As HUD’s website states: “RESPA is about closing costs and settlement procedures. RESPA requires that consumers receive disclosures at various times in the transaction and outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD. “ – Copyright 2009

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Secrets To PreForeclosure Profits You can find out more about RESPA at In addition, RESPA allows buyers and sellers to review their HUD I Settlement Statement twenty-four hours in advance of the scheduled closing date. So, be sure to review the statement carefully to check for any errors or overcharges.

Check, Double-Check, and Then Check Again! One mistake made by novice investors is the failure to double-check all documents for mistakes and/or omissions. So, before you get to the scheduled closing date, sit down and review all forms carefully—loan documents, title transfer documents, closing documents, etc. Look for mathematical errors, transposed number and letters, and mistakes in spelling or typing. Of course, your lawyer should review these documents carefully as well.

Use the 365-Day Proration Method for Property Taxes The pro rata (in proportion) method simply means that the seller and the buyer pay property taxes in proportion to an assumed 365-day year. In other words, they pay in proportion to their possession of the property for that year. Here’s an example: Assume the seller of a pre-foreclosure property had a property tax bill of $2,775 and owned the property for 234 days. The seller’s prorated portion of the tax is calculated as follows: $2,775 ÷ 365 = $7.60 per day X 234 days = $1,778.40 If you were the buyer of this property, you would be responsible for the remaining amount of property taxes for that year or: $2,775 – 1, 778.40 = $996.60 Sometimes, however, the property taxes can’t be figured immediately. If that’s the case, be sure to put a stipulation in the contract that any proration will be adjusted when the property tax bill is finally received.

Have All Utility Meters Read The day before closing, have all utility meters read by the appropriate utility companies so the seller can pay his or her appropriate share. Also, remember to notify the utilities that the property is now under new ownership. That way, you won’t get billed for utility services provided to the previous owner.

Conduct a Final Inspection On closing day, walk around the property and inspect it to see if any changes have taken place that could negatively affect its value: e.g., standing water, condemnation/code violation notices, pest infestations, etc. This last-minute check can prevent any unpleasant surprises from popping up in the future. – Copyright 2009

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Record the Deed After the signing of all papers, go to the appropriate office (county clerk, etc.) for your state and have the deed recorded. If lenders and subordinate lien holders require payment, then send them cashier’s checks after recording of the deed so all transactions are complete, and you know you have the property fully in your hands. And now that you have possession of the pre-foreclosure property, it’s time for the next step—fixing it up so it has maximum appeal for potential buyers. That’s the subject of the next chapter. – Copyright 2009

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Step 10: Maximizing Property Value and Appeal Once you’ve closed the deal, your job isn’t done. It’s time for ―beautification‖ of the property so you can make it appealing to potential buyers. After all, you want to make a maximum profit, and an unappealing property definitely won’t do that for you! ―Curb appeal‖ is the term used in real estate for an attractive property. In other words, when potential buyers first see the property, you want them to think ―Wow! (or as close to ―Wow!‖ as possible). You want them to say to themselves, ―This is a property I could live in.‖ Another benefit of curb appeal is that, in the case of vacant properties, it lessens the chance that vandals will damage or, in the case of arsonists, destroy it completely. It’s a cheap deterrent! A third benefit is that good curb appeal increases the resale value of the property--and the return on your investment! So, maximizing curb appeal is a cost-effective means of turning a bigger profit. Be clear that maximizing appeal of a property isn’t a major rehabilitation on your part—or it shouldn’t be. After all, if you’ve done proper due diligence, you’ll have found a property that requires a minimum of repairs and beautification. So, all your efforts should be directed at clean-up and cosmetic improvements. This shouldn’t cost you much money. Depending on the size of the property, costs may range from $500 to $2,000. At the end of the chapter, I’ve provided you with a basic checklist of items to be accomplished in order to maximize a property’s appeal. Feel free to use it as-is or modify it meet your specific needs. In order to keep your costs to a minimum, I recommend that you budget right from the beginning. Also, keep a checklist of expenses so you have a clear and definite idea of the outlay of your money. You can make up your own form easily or use the example I’ve provided at the end of the chapter. If you’re a person who’d rather spend time acquiring properties than cleaning them up, I recommend you hire the services of a semi-professional to do the clean up. It’s often the case that you can find a local, retired person who’s looking for part-time work. Of course, ask around first to find out which individuals have great reputations for doing quality work at cost-effective prices. As you gain experience and knowledge, you’ll be able to select the best and use their services on a regular basis, creating a win-win situation for both of you. – Copyright 2009

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Secrets To PreForeclosure Profits Another option is to use professional contractors. But be careful in your selection. There are incompetents and scam artists in this field. So, to avoid them and make sure you get quality work, follow these guidelines:  Require a copy of the contractor’s general liability insurance certificate. Talk to the insurer to make sure the policy is valid and current.  Verify with the local Better Business Bureau that there is no history of complaints against the contractor.  Request a minimum of three verifiable customer references. Talk to each reference and ask how they were treated by the contractor and if they would hire him or her again. Remember, a reputable company will want you to check the references because they know it means more business and more word of mouth advertising.  Always get written estimates.  Make it a requirement that everyone involved in the clean up signs your state’s version of a release of lien upon final payment.* *In most states, any service provider who provides a service, labor or materials for the improvement of real property has a right to file a lien against the property’s title for non-payment. Moreover, you’re still financially responsible if even you do pay a contractor for a job and he or she fails to pay the subcontractors who supplied the labor and the materials. So, if you lack legal proof that everyone involved was paid in full, you could end up with the short end of the financial stick. Therefore, always, always have legal proof that everyone has been paid in full.

Of course, you should always do an inspection of the cleaned-up property before you make final payment to a contractor to make sure all work has been done to your satisfaction. If items haven’t been done, note them and require that they be corrected before payment is made.

More Tips Use the following tips to make sure your ―curb appeal‖ efforts are on time, on target, and within cost estimates. Establish a budget and stick to it. Before you begin any clean-up, repairs, etc., work up a budget to make sure you don’t spend too much and cut into your profit potential. Use the budget to figure your total cost and try to stay as close to that figure as possible. You can use the web sites I mentioned earlier in the book to estimate costs: o Building Cost Calculator o Construction Cost Calculator – Copyright 2009

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Secrets To PreForeclosure Profits o Construction Material Calculators Supervise the work. In the beginning, it’s cheaper and better for you to supervise the work done by contractors to make sure you get quality results. However, as you grow and gain multiple properties, then you’ll need to hire a trusted person to do the supervision for you. At that level, your goal should be to focus on the big picture of increasing overall income, not spending time and energy on supervision. Set a work schedule. You want your acquired pre-foreclosure property back on the market as soon as possible, so set a date for completion of all the work. Inform contractors of that date and hold them accountable for meeting it. Clean, clean, clean—as I mentioned earlier, you want potential customers to be attracted to the property as soon as they see it. That’s why you should always clean the exterior first. Depending on the part of the country in which you live and the condition of exterior, this can include a power wash of the siding, brick, stucco or other material. A good cleaning also lets you see if there’s any rotten wood or other damaged material that needs replacement. Use quality paint—avoid the temptation to go with cheaper brands of paint. A great exterior and interior paint job enhances the value of a property in a potential buyer’s eyes so it’s well worth a few more bucks per gallon. Hire a professional carpet cleaning service—particularly in the beginning of your career, you may be tempted to rent a carpet cleaning machine and do it yourself. While this may work for carpet that’s in good shape, it won’t work for carpet that’s really filthy and smelly. The rental machines are just not strong enough to do the job. Also, it may not be a wise investment of your time. Why should you be cleaning carpets when you could be out looking for more profitable properties? So, I recommend you hire a professional carpet cleaning service. However, make sure it’s a reputable one. As with other providers, ask for a written estimate before you hire a company. Get rid of any odors in the property—a bad smell in a home will turn potential buyers off fast so be sure to eliminate odors in any preforeclosure property you obtain. A simple way to eliminate mild odors is to open the house up (depending on the weather) and let nature do the work. With stronger smells, you’ll need to use an industrial-strength odor eliminator. There are many such products on the market. – Copyright 2009

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Secrets To PreForeclosure Profits Repair before buying—keep your costs low by repairing as many items as possible; e.g., sidewalks, driveways, mailboxes, doors, windows, lighting, kitchen cabinets, landscaping, etc. If an item isn’t fixable, then spend the money to replace it. As you can see from this chapter, maximizing the appeal of a property is mainly a matter of common sense—common sense that can often result in increased profit on a deal. So, my advice is to pay careful attention to this area and then enjoy the rewards! In the next chapter, we’ll look at another way of increasing the return on investment—how to market and re-sell pre-foreclosure properties in order to achieve maximum profits. – Copyright 2009

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Property Appeal Checklist ___ ___ ___ ___ ___ ___ ___ ___ ___

Carpet cleaning, if necessary. Mow grass. Paint exterior/interior, if necessary. Pressure wash exterior of house/building. Pressure wash sidewalks, drive ways, etc Remove brush, weeds, dead trees, etc. Remove trash from grounds and building. Thoroughly clean the house/building. Trim trees, hedges, etc.

Other: ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ ___ ________________________________________________ – Copyright 2009

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Property Cleanup—Cost Worksheet Date

Cost of Materials – Copyright 2009

Cost of Labor

Other Items

Total Cost

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Step 11: Achieving Maximum Profit In order to achieve maximum profit on a pre-foreclosure property, you have to market it well so you can sell it quickly, ideally within one to two months. This is a key step, and one you should pursue aggressively. Once you’ve cleaned up a property, you just can’t put a For Sale sign up in the yard and expect buyers to come flocking. They have to know what and where the property is before they can take a look at it. There are several guidelines you can follow to market your newly acquired property.

Marketing Guideline 1: Target Your Market The worst mistake you can make in marketing is to advertise willy-nilly, hoping this ―shotgun‖ method will bring buyers in. The best approach to take is to aim all your efforts at a market appropriate for the particular property. For example, if the property is close to a college or university, then you’d likely target professors, administrators or employees of that institution of higher learning. You could advertise in university publications, send direct mail to the target audience, post flyers, etc. Or, if the property is near a commercial/industrial park with many corporate employees, then you’d want to target that audience. Many corporations offer relocation services for their employees so you could contact them, advertise in local newspapers, etc. With this targeted marketing strategy, you automatically have an audience interested in your property.

Marketing Guideline 2: Determine the Property’s Resale Value Earlier in the book, I discussed the comparison method of determining value; that is, find the value of several homes in the neighborhood that are comparable in value to your property. You can do this by requesting listings from real estate agents or doing an online search for the neighborhood properties. Once you’ve done this, you’ll have a good idea of your property’s resale value and can set the price accordingly. Some investors price their foreclosure properties slightly below the market value to increase its appeal as a bargain; others price their properties at market value and throw in amenities to increase appeal. Whichever approach you use, be sure to include the cost of your time and efforts for the acquiring the property, increasing its curb appeal, and marketing it.

Marketing Guideline 3: Create a Property Information Sheet Your property information sheet should contain all the necessary contact information and details about the property such as the following: Your name, telephone number, e-mail address, web site address, etc. The address of the property A good photograph of the property, if possible. – Copyright 2009

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Secrets To PreForeclosure Profits A description of the property (i.e., the year it was built, architectural style, construction type, square footage, number of bedrooms and bathrooms, garage, basement, etc.) A description of the HVAC system A description of any of the ―amenities‖ (e.g., swimming pool, patios, decks, great landscaping, fences, etc.) Asking price, sales terms, loan information I recommend that you think of a property information sheet as more than a recitation of the property’s features. Think of it as a sales document that clearly describes the benefits of the property. For example, you can describe the living room as ―spacious with a great view of the park.‖ Or, you can describe the heating or AC system as ―fully modern and energy-saving.‖ Don’t forget to describe the neighborhood as well. For example, if the property is close to a college or university, add ―Located within easy walking distance of XYZ University on a lovely tree-shaded low-traffic street.‖ In short, your property information sheet should paint an inviting picture for any potential buyers.

Marketing Guideline 4: Use That Great Tool—the Internet Why restrict your marketing effort to local or regional markets? Now, you can go global by using the Internet! Many foreign investors seek out American real estate. Also, potential buyers like military personnel and corporate employees are often transferred from one location to another, and they use the Internet to find places to live. You can tap into global market in three ways: Create a web page—you can create your own ―properties for sale‖ web page if you have the knowledge. If you don’t, hire a professional to create one for you. Just make sure that it loads fast. Slow-loading web pages cause viewers to get impatient and move on quickly to other sites, and that could mean business lost. The pages should include photographs (interior and exterior) of the property, its location, directions to the property, the site plan, features (and benefits!), the sale price, terms, appointment information, etc. Maps for your web pages can be found at online mapping services like: o Google ( o MapQuest ( o Yahoo ( Use online ads—there are many web sites on which you can advertise your properties. Do a Google search to find out which ones fit your objectives and budget best. I recommend two sites: o o – Copyright 2009

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Secrets To PreForeclosure Profits Use URL forwarding---this is an inexpensive service you can include on your web page. It allows you to have your property for sale domain name forwarded to a specific web page on your web site. The benefit is that it eliminates the necessity of having to build an entirely new web site for your property sale domain name.

Marketing Guideline 5: Use Traditional Marketing/Advertising Methods Remember, good marketing doesn’t limit itself to just one method; instead, it uses a mix of methods. That’s because there’s so much marketing and advertising out there, it creates ―noise.‖ That is, today’s customers are bombarded with so much advertising, it can be difficult to make yourself visible if you simply limit yourself to one method. So, be sure to include traditional methods in your mix like the following:

For Sale Signs It definitely pays to have a For Sale sign placed in a highly visible spot on the property. For bargain properties, you may want to use handwritten signs to attract attention to the fact that they are bargains. In the sign’s message, be sure to include your telephone number. A typical sign might look like this:

Home for Sale $0 Down Call (123) 456-7890 Now!

Classified Ads You can place ads in your local daily and weekly newspapers to reach a larger local audience. Depending on the particular situation, you can include information beyond the phone number and email address; e.g., if you’re willing to finance, the amount of money required for a down payment, total down payment, etc. A reader will be able to quickly read the ad and know if they’re qualified or not qualified. So, in effect, your ad pre-qualifies buyers and reduces calls from non-qualified buyers. Finally, don’t forget to have your ad placed in the newspaper’s online classification section as well.

Telephone Answering System Why not use your answering system as a marketing device when you’re not available? Record a message describing the property, directions to find the location, the sale price and terms, and any other pertinent information. It could be something similar to this: – Copyright 2009

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Secrets To PreForeclosure Profits Hi, you’ve reached John Smith, Inc. Thanks for calling. We have a great home for sale at 12345 Maple Street in Jordan, (state). It’s a two-story Tudor-style home with durable, low-maintenance stucco construction. It has two bedrooms and two thorough modern bathrooms. The total living space is 1,800 square feet. All appliances and HVAC are modern as well, so utility costs are low. Fully carpeted. Two-car garage and big lot—90 ft. by 130 ft. with a fenced-in back yard and garden and tool shed…..This home is priced low for a quick sale at $150,000. If you have pre-approval for a mortgage loan by a state-approved lender in the $130,000 range, then call (xxx) xxx-xxxx and leave a message to arrange a viewing….

Marketing Guideline 6: Use Real Estate Brokers The key here is to a have a participating broker agreement that allows you to pay a sales commission only if that broker’s registered prospect buys the foreclosure property. Don’t sign an exclusive listing agreement; this will only tie the property up and limit your opportunities to sell. Work with an experienced full-time broker who’s handled foreclosures before. It’s a waste of time and effort to work with ―newbies‖ or part-time amateurs. Now that I’ve covered the basic guidelines for marketing, let’s turn to the subject of pre-qualifying buyers. This is an extremely important part of your sales effort because you don’t want to waste value time and money on people who can’t afford the property.

Pre-Qualify Your Buyers! Nothing is more annoying than working with prospects and then finding out they’re not qualified to purchase the property. But, if you do this, you have no one but yourself to blame because you haven’t put enough effort into prequalifying them! The best way to pre-qualify callers is to be direct: Ask them if they have enough cash on hand for the down payment. Ask them if they can afford the monthly down payment. Ask them for their credit rating. Ask them if they can close on the property within 30 days. If the answer is no to any one of these questions or their credit rating doesn’t meet your standards, then they’re not qualified. Inform them politely of this fact and move on to the next prospect. Another way to pre-qualify buyers is work with lenders. Build good relationships with several local lenders so you have a variety of loan programs to work with. That way, when you run into potential buyers who need financing, you can send them to one of the lenders. He or she will then let you know if these buyers are qualified or not.

Alternatives to Selling Directly to Buyers One alternative strategy is to sell your purchase agreements on pre-foreclosure properties to other investors. These are individuals who are looking for properties to rent to create ongoing income. Or they may be looking to resell – Copyright 2009

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Secrets To PreForeclosure Profits such properties for profit. Often, these are professionals (doctors, lawyers, etc.) who work with wholesalers to find investment properties. For you, this strategy can mean quick turnarounds and quick profits. It also means low startup capital as well as less risk since you’ll be limiting your investment to the earnest money deposit and the charge for a title report. Of course, work only with honest individuals who have the financial wherewithal and good credit ratings to ensure that the deal will go through. Another alternative is to assign or sell your purchase agreement to third parties. In effect, this transfers the ownership of the agreement through ―assignment.‖ What this means is that you’ve sold your exclusive right to purchase the contracted property for a specific price within a defined period of time. With this alternative, you can also turn a quick profit.

Additional Information I’ve saved the unpleasant fact of taxes for the last. Here’s what you need to know about taxes on the sale of pre-foreclosure properties: Follow the Internal Revenue Service (IRS) guidelines to minimize those taxes. It’s best to hire a tax professional to handle the IRS’ complicated rules and to avoid being labeled as a real estate dealer rather than an investor. In general, you should know that if you re-sell a pre-foreclosure property within one year (12 months) of the purchase date, your profit will be taxed as ordinary income. Of course, you can reduce that tax by deducting many costs—repair costs, cost of purchasing the property, insurance costs, real estate taxes paid, cost of reselling the property, mortgage interest paid, etc. To gain knowledge on IRS rules and regulations and download forms, go to their web site at On that site, the IRS lists all publications, and you can scroll through that list to find the ones you need. I recommend Publication 537: Installment Sales; Publication 550: Investment Income and Expenses; and Publication 946: How to Depreciate Property. To navigate through other tax information, go the IRS’ home page at – Copyright 2009

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A Word on Short Sales I like short sales and teach a course in it. You can go to to learn more about this subject. At this point, perhaps you’re wondering why I haven’t mentioned them previously in the book. The reason I left the subject of short sales until now is that while they can be profitable, they’re not as common as other techniques and more complicated to carry out. Below, I’ll describe what short sales are and provide the basics of such transactions. In order to get in-depth information, go to the link mentioned above.

What Is a Short Sale? Simply put, a short sale occurs in a situation when a home owner’s debt on the property is greater than the amount for which the property can be sold. This means the lenders are willing to accept less than the total amount due. Here’s an example: Assume a homeowner has an unpaid loan balance of $120,000, but the property will only sell for $100,000. The lender accepts that $100,000 as full payment, which is obviously ―short‖ of the full $120,000 payment. Since lenders aren’t in business to lose money, you can imagine that they’re reluctant to do short sales and will often only do them as a last resort. It can make more financial sense for them to go through with a foreclosure.

Why Is a Short Sale More Complicated? A short sale is a complicated process due to the fact that so many factors are involved: e.g., the loan mitigation policies of the lender and third-party investors; the financial condition of the same; financial condition of the borrower; the property’s as-is value; the cost to ―repair‖ the property to put it into saleable condition and market it, etc. In addition, approval for short sale must come from the investor who actually owns the loan. Moreover, if the lender is a governmentsponsored institution like Fannie Mae or Freddie Mac, approval can take a long time, given the nature of federal-type bureaucracies.

When Will Lenders Accept a Short Sale? Sometimes, homeowners experience a devastating illness like cancer that eats up all their financial resources. Other times, homeowners are military personnel who are called up to active duty for extended periods of time and lack the income to continue mortgage payments. There are many other instances all of which fall under the ―hardship‖ category—disabling, permanent injuries; financial insolvency; convictions; lack of employment due to economic conditions beyond the homeowner’s control, etc. In these instances, lenders are willing to consider a short sale. – Copyright 2009

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How Do I Know If A Property Qualifies for a Short Sale? In order to know if a property qualifies, you’ll need to gain knowledge. First, know the lender’s loss mitigation policy. What’s their record on dealing with short sales? If it’s seldom or never, a short sale is not worth your time. Second, know the number of liens recorded against the property title and the total amount of money in those liens. Third, know the borrower’s present financial condition. Fourth, know the type of loan that’s in default and its current status. Fifth, know both the property’s as-is market value and its as-repaired value. Sixth, and finally, be aware of the state of the local economy and the current real estate market conditions. Analyze all this information to determine if a short sale is worth pursuing.

How Do I Pursue a Short Sale? Let’s assume you’ve done your analysis and want to pursue a short sale. The first order of business is to have the homeowner sign an authorization to release the loan information. Next, you have to have cash on hand; that’s right, all short sales are cash transactions. So, you’d better have cash available and verifiable proof that you possess the money. Keep in mind that short sales cannot be made to relatives, family members, or close friends of the homeowner. In real estate terms, this is called an ―arm’s length transaction.‖ If a short sale transaction is completed and a lender later finds out that, say, the homeowner’s brother bought the property, then that lender can file a lawsuit to have the sale overturned. Another obstacle to a short sale is the property owners themselves. They can’t receive any of the money from a short payoff sale. After all, why should they be rewarded for financial irresponsibility? So, there’s little incentive for them to do a short sale. There’s also another negative; the debt that’s canceled by the short sale payoff of a mortgage or deed of trust is subject to federal income tax as ordinary earned income. This is not true of a bankruptcy or insolvency.

How Is a Short Sale Property Appraised to Determine Its Value? It’s done through the process of ―broker’s price opinion‖ (BPO). These are oral or written appraisals done by real estate licensees licensed to do such actions. Lenders use BPOs to determine two things: a property’s as-is value and its asrepaired value.

How Do I Start the Short Sale Process? Follow these steps: Contact the homeowner who’s in foreclosure. Determine the homeowner’s financial condition. – Copyright 2009

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Secrets To PreForeclosure Profits Determine the condition of the property. If both financial and property condition are suitable, ask the homeowner to give you written authorization to communicate with the loan loss mitigation department of the appropriate lender. Contact the decision-maker in the loan loss mitigation department of the lender and send him or her a copy of the written authorization. Call the decision-maker to discuss the short sale and ask the decisionmaker to send the appropriate short-sale documents to the homeowner. Have the homeowner gather all documentation to provide support for financial hardship case. Obtain repair cost estimates from a minimum of three licensed home improvement contractors. Do a comparable value study by assessing the value of three similar neighborhood properties sold in the last six months. Return the short sale proposal to the lender’s decision-maker. (See example of proposal letter at the end of the chapter.) It should include a signed purchase agreement for a percentage less than the amount owed to the lender; e.g., 20%, 30%, 40% less, etc. Include a HUD 1 Settlement Statement in your proposal. You can download the HUD forms at The lender’s decision-maker reviews your proposal and orders a BPO to determine the property’s as-is and as-repaired values. The decision-maker either accepts your proposal or rejects it. If the decision-maker thinks a short sale is appropriate, he or she will like make a counteroffer. You accept or reject the counteroffer. If you accept the counteroffer, you close on the transaction within 30 days.

Other Information on Short Sales Be aware that different federal agencies have different terminologies and regulations for short sales. – Copyright 2009

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HUD (Federal Housing Administration) To HUD, short sales are known as pre-foreclosure sales. Only loss mitigation lenders approved by HUD are authorized to approve such sales on FHA-insured loans. For a property to qualify for a pre-foreclosure sale, the following standards must be met: The property securing the default loan must be owner-occupied. The loan must be a minimum of 90 days in arrears. The borrower must have a bona fide financial hardship. The borrower has to receive counseling from a HUD-approved agency. You can get the latest information on HUD pre-foreclosure sales at the following website:

DVA (Department of Veterans’ Affairs) The DVA terminology for short sales is ―compromise sales.‖ According to the DVA website, the borrower must meet the following conditions: If your property cannot be sold for an amount which is equal to or greater than the amount owed, VA may pay a "compromise claim" for the difference in order to help you go through with the sale. Compromise sales are approved if the sales contract meets several criteria and results in a savings to the agency, over the costs of foreclosure. An additional advantage is that the property is not acquired by the VA and the owner avoids a foreclosure and resultant damage to their credit rating. If a compromise contract is accepted, you may be released from all further liability or you may, in some instances, be asked to repay the Government for the loss. In order to be considered for our compromise sale program you must submit a signed contract equal to fair market value. Any contract should state the words "pending VA approval of a compromise sale." All closing costs should be reasonable and customary. You should submit this contract along with the appropriate forms to VA, if your lender is not already pre-qualified to review these contracts on our behalf…. You may also contact your lenders Loss Mitigation Department or the VA, regarding this program

You can find out more information at the DVA’s web page at – Copyright 2009

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Secrets To PreForeclosure Profits Example of Short Sale Proposal Cover Letter Date Name of Lender Decision-Maker Loan Loss Mitigation Department Lender Name & Address (Reference Loan Number on property in default) Dear Mr. Smith, Enclosed please find my proposal for a short sale payoff for Loan Number (number, name of property owner, address of property). My proposal is as follows: The as-is sale price for the property is between $100,000 and $103,000. This price is based on the recent sale of comparable properties within the same area as the property in foreclosure. See attached listing of comparable properties. I estimate it will cost between $15,000 and $23,000 to restore the property to a marketable resale condition. This estimate is based on repair cost estimates from three licensed home repair contractors. The borrower is in insolvency. Within the past three years, property values in the neighborhood surrounding the foreclosure property have fallen by over 15%. I have the funds on hand to close on the property purchase within twenty-four hours’ notice. I would enjoy talking with you regarding this proposal. Please call me at (xxx) xxx-xxxx) or email me at I’d be happy to answer any questions you have. Sincerely, (Name) – Copyright 2009

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Conclusion The biggest difference between my successful students and 97% of other investors out there is that my students take the first step and ―just do it.‖ They then make necessary tweaks as they go along. Most investors never take their first step. So, my advice is to take all the information and tools I’ve provided you in this book and then just… GO OUT AND DO IT! There’s no substitute for getting out in the field and applying the techniques I’ve shown you. Action is the key! And action leads to great profits! So, don’t delay--take that first step and success will be yours. To enhance that success, I recommend you log on to the Internet and go to the following sites. To get your pre-preforeclosure leads today, go to To learn about Short Sales & other advanced investing strategies, go to – Copyright 2009

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