Raging Profits with REOs

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1 Raging Profits with REOs Published by Introduction If your goal is to gain financial independence through real estate investing you have many choices: Real Estate Investment Trust (REITs) provides you with a professional fund manager seeking the highest return possible. Fix and Flip - Buy a house fix it up and sell for a profit. Buy and Flip - A strategy used by investors who purchase homes in new housing tracts. Buy and Hold - Buy rental property for income and long term appreciation. Lend Money - Find rehabbers or investors and lend them the cash to purchase properties at much higher than bank interest rates. Buy Trust Deeds - Buy existing mortgages directly from private holders. Raging Profits with REOs 1 CashFlowInstitute.com

2 Anyone of those tactics can be very profitable, but every so often the real estate cycle offers truly extraordinary opportunities with bank owned property - REOs. I believe we are heading towards one of those periods now. It will be a time when there will be so many foreclosures that bank owned property will skyrocket. The deals will be amazing and you will learn how to take advantage of them here. Table of Contents Topic Page What is Foreclosure? 4 Why REOs Are Wealth Source 5 Missed Mortgage Payments 6 Advantages of REO vs. Foreclosed Property 6 Real Estate Owned 8 Bank Owned Properties 8 Understanding REO Opportunities 9 Why No Foreclosure Auction Bidders? 9 A Property Does Not Sell At Auction Because 10 Why Banks Sell REOs at Discounts 12 Fix'em and Profit 17 Timing and Good Deals 19 What About Cash Needed For Purchase? 19 Four Ways to Find REOs 20 Contacting the REO Manager 22 Finding REOs On The MLS 25 Hot Prospects 27 Higher Deposits 28 Double Loan Applications 28 Bank Chooses Service Providers 29 Raging Profits with REOs 2 CashFlowInstitute.com

3 Not the Usual Contract 29 Double Check Everything 30 Choosing A Real Estate Agent 30 Some REOs Are Time Wasters 32 Ask the Bank To Pay For Repairs 33 More on Purchase Offers 33 Signals 35 Stay Away From These REOs 35 Three Steps To An Offer 37 Inspect The Property 38 Do You Need A Real Estate Agent? 38 When Should You List With A Real Estate Agent 40 Profit Formula 40 Always Buy Hazard Insurance 42 REO Negotiating Tactics 47 Understanding The Banker's Problem 47 Price and Terms 49 Intimidation Proof Yourself 50 The Price 51 Discussing Instead of Negotiating 52 Honesty First 54 Flipping REOs 55 Assigning The Contract 56 Cash Is King 58 Flipping Step by Step 59 Qualifying Money Partners/Buyers 60 The Benefit Of Buying at 65% Of Value 61 Advantages of Buying Bank REO Properties 63 REOs Overview 64 Contacting The Lender 64 Make Your Offer 65 How to Contact Lender 65 Finally 66 Raging Profits with REOs 3 CashFlowInstitute.com

4 BUYING BANK OWNED HOMES - REOs What is Foreclosure? Let's begin by getting a clear idea of what happens during a foreclosure action. Foreclosure is a legal process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. Depending upon the state where the real estate is located, mortgage loans may be secured by a recorded mortgage or a trust deed. The only difference is how a lender is required to foreclosure upon a delinquent loan. We need not concern ourselves here, because by the time a property becomes an REO the lender/bank has already followed all rules to control the property. The foreclosure process can end one of four ways: 1. The borrower/owner reinstates the loan by paying the amount due before the foreclosure auction is scheduled. This period is known as preforeclosure. 2. The borrower/owner sells the property to a third party during the preforeclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history. 3. A third party buys the property at a public auction at the end of the preforeclosure period. 4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through Raging Profits with REOs 4 CashFlowInstitute.com

5 an agreement with the borrower/owner during pre-foreclosure (a deed in lieu of foreclosure) or by buying back the property at the public auction. When ownership vest in the lender it becomes know as an REO property. This process allows for three opportunities for finding bargains on foreclosure homes: a.) Pre-foreclosure, b.) Foreclosure auction, c.) When it becomes an REO. Once the lender has an REO they usually sell the property to recover the unpaid loan amount. The lender typically clears the title for any buyer. The price of an REO is often less than what you would pay during the preforeclosure period or at the foreclosure auction sale often times much less! Why REOs Are Wealth Source Many investors consider an REO property to be an untapped source of wealth. An REO is different from a foreclosure property in that the bank has already tried to sell it at a foreclosure auction and has had no luck getting bids. Because the property was not bid on, the bank then became the owner of the property. Banks are not in the real estate business and so don't want to keep the REO any longer than necessary. You might say they are a special category of "don't wanter". This makes it a great opportunity for an investor. Not every REO is a good deal, but when you look at many REOs you ll commonly find that there is a lot of money to be made. Missed Mortgage Payments Technically speaking, the home was foreclosed on because the owner of Raging Profits with REOs 5 CashFlowInstitute.com

6 the home failed to make their scheduled payments. That allowed the bank to take possession of the home. The first thing that a bank or mortgage lender will have to do is handle any eviction. The eviction removes any tenants that are squatting on the property that they once owned and therefore frees the prospective buyer of the obligation to remove the tenants themselves. This action usually makes the property more attractive, as the stress and cost of removing the tenants will not be the concern of the buyer. The banks next step was to offer it for sale through a public auction. The bad news for the banks was that there were no bids placed on the home. That meant that the bank was stuck owning the property. Now the bank will be anxious to get rid of the property. Advantages of REO vs. Foreclosed Property When you are thinking of buying an REO you have distinct advantages that a buyer does not have with a foreclosure auction. The first is that you are able to buy on your schedule. You do not have an auction deadline to meet. Theoretically you can make an offer for an REO property any time; you don t have to wait for bidding to begin. Another big advantage of an REO compared to a foreclosed property is that you can inspect it before you buy. You cannot do this with the majority of foreclosed homes that you might buy at the auction sale. Being able to inspect the property before you buy can save you from a financial disaster with properties that might cost thousands to return to saleable condition. Raging Profits with REOs 6 CashFlowInstitute.com

7 With this guide you will avoid wasting hundreds of hours on unprofitable investments. My job with this ebook is to show you how to make the most amount of money in the least amount of time... and with a minimum of risk. Here is an example why buying REOs is worth the effort: PURCHASE AT MARKET PURCHASE AS REO Purchase Price $135,000 Purchase Price $110,000 Repairs Needed 2,500 Repairs Needed 6,000 Down Payment 4,050 Down Payment 3,480 Mortgage w/ 3% Down Mortgage w/3% Down Repair Paid by You $130,950 w/ Finance of Repair $112,520 Prin/Int Payment at Prin/Int Payment at 6.5% for 30 years $ % for 30 years $ Total Interest Total Interest Paid in 5 years $41,295 Paid in 5 years $37,605 Principal Paid 8,366 Principal Paid 6,746 Estimated Value in Estimated Value in 5 years at 4% Apprec $159,950 5 years at 4% Apprec $159,950 Mortgage Balance $122,583 Mortgage Balance $105,774 EQUITY POSITION 37,367 EQUITY POSITION $ 54,176 There is a $16,809 profit in the REO property. Raging Profits with REOs 7 CashFlowInstitute.com

8 Real Estate Owned In banking they call the homes they acquire through foreclosure REOs. That stands for "real estate owned". Investors are interested in REOs because they often can be purchased for a fraction of their market value. But to get the deals you must understand exactly how to zero in on the best opportunities. To make the killer profits you must know how to identify profitable properties, how to negotiate with banks and how to protect your interest. Get ready for the insider story on how to make money with bank owned properties. Bank Owned Properties In the world of real estate there are many, many types of properties that you can buy. The majority of the time people hire a real estate agent to help them buy a property that is listed on the MLS (multiple listing service). More astute bargain hunters look at houses that are either in foreclosure or are owned by a bank or loan company. A common misconception of people outside of the real estate industry is that foreclosure and an REO purchase is the same thing. Although they are similar, they are in fact different. They are corollaries of each other, with an REO being a direct result of a failed foreclosure sale. To understand the difference between the two and how they vary from each other it is best to define what each is, and their respective merits. The term Real Estate Owned property has a specific meaning in the real estate industry. It identifies a property that has been foreclosed upon by a Raging Profits with REOs 8 CashFlowInstitute.com

9 bank or loan company and has reverted back to the ownership of the lender. So as already explained, an REO is the result of property that has been foreclosed on, but failed to sell at the auction sale. To be successful in any endeavor you must have a plan that allows you to use your time wisely. Your plan should allow you to evaluate the REOs in your area quickly and easily. You are looking for the best deals. Understanding REO Opportunities When a bank takes a home through foreclose it is required to sell it by means of a public foreclosure auction. A foreclosure auction is a quick way for the bank to get the home off of its books and recoup at least a portion of its mortgage loan. If the property does not sell at the auction it becomes an REO. Banks hate REOs. That's why it is often possible for an investor to buy an REO at below market value. Sometimes way below value. Under certain conditions many banks will take large losses just to get rid of their REOs. Why No Foreclosure Auction Bidders? When a bank makes a mortgage loan it is legally able to foreclose on the property if the borrower/owner stops making payments on the loan. Foreclosure law allows the bank to recover the amount still owing on the loan, plus the expenses of the foreclosure. That amount is called the bank's "credit bid" at the foreclosure auction. For example: The bank made a mortgage loan of $200,000, the borrower owned the home for 2-years before defaulting. During those two years they paid down the principal of the loan by $20,000. That means the bank is still owed $180,000 on the loan. Add $4,500 in legal costs and expenses and the bank would have a foreclosure credit bid of Raging Profits with REOs 9 CashFlowInstitute.com

10 $184,500. On the day of the sale if no one was willing to bid more than that amount the property title would transfer to the bank and become part of the bank's REO inventory. Just because the bank owns a property does not make it a good deal. In fact, when you see that a home or property is an REO you have to wonder exactly what IS wrong with it. There are several reasons why a property does not sell at a foreclosure auction: A Property Does Not Sell At Auction Because 1. The property had little or no equity. When there is little equity in a property, bidders will not attend the foreclosure auction. If a property has less than 15% equity there is no chance for a bid from a knowledgeable investor. There would be no room for profit. 2. The property needs extensive repair and no one would take the risk of buying it at the auction. These properties can be very profitable, because you can often get the bank to allow you to inspect the property before making your offer. The bank will be willing to sell the property at a deep discount, because they know that the property needs work. It is not unheard of for investors to get REOs that are in poor condition for less than 50% of their market value. For the investor who understands rehabbing very large profits are possible. 3. There is an IRS lien attached to the property, because the homeowner Raging Profits with REOs 10 CashFlowInstitute.com

11 owed back taxes to the federal government. Many bidders at foreclosure auctions will not take the risk of buying a property that has an IRS lien. After a foreclosure auction the IRS has 120 days in which it can take the property from the successful bidder. The IRS must reimburse the bidder for the amount of his bid. Many investors who buy properties at foreclosure auctions do not want to wait 120 days only to find out that the IRS has decided to take the property and refund their money. These properties can, therefore, be better than average opportunities. You can get the bank to accept a low offer while you both wait for the IRS 120 day "right of redemption period" to end. In the meantime, you can flip the property to another investor contingent upon the IRS not exercising its right to take the property. The bank can negotiate with the Internal Revenue Service for the removal of tax liens and pay off any homeowner s association dues. This again makes the property more attractive, and will most likely result in a quick sale. 4. There is a coming change in the neighborhood that will drive down the value of all property. You must be sure that if you are purchasing an REO to fix up and sell that the property is located in a desirable part of town. If the home is not located in an attractive area, you should be sure you have a plan for getting to your profit. There are investors who specialize in such properties and you may be able to flip it to them for a small, but quick profit. It's an old rule, but a good one: In any real estate investment the three big things to consider are location, location, location. Never let a seemingly good deal let you lose sight of how important location is for any piece of real estate that you intend to buy and then sell. Raging Profits with REOs 11 CashFlowInstitute.com

12 Why Banks Sell REOs at Discounts (In the pages of this ebook we will use the word "bank" to represent any institution that makes and forecloses upon real estate loans.) An REO on a bank's balance sheet is a liability rather than an asset. Every month that the REO remains unsold, the bank loses money. Here are seven reasons that a bank would sell an REO to you at a deep discount: 1. The bank has received a large cash settlement from their Private Mortgage Insurance Company. Private Mortgage Insurance is also known as PMI. PMI is insurance that covers the bank for losses when it must foreclose upon a homeowner and it not able to sell the property for the amount still owing on the mortgage loan. PMI does not cover the full exposure of the lender. PMI covers the top slice of the loan, maybe 20% plus some fees. In the case of a 90% loan, then PMI usually covers 10% of the loan amount. In order for the bank to receive the PMI coverage it must manage the default to its completion - the foreclosure sale. Just know that unless you are paying 100% of what is owed the bank, they will need to get the PMI company to concur with a decision to sell. Otherwise the bank could lose their opportunity to file the insurance claim. In the rarest of instances a lender may decide to forego the PMI claim. So, depending upon what is bid at the auction, PMI will make the bank a full or partial settlement. This settlement helps offset any loss of money the bank may have when it sells the REO at a discount. Raging Profits with REOs 12 CashFlowInstitute.com

13 With most REOs, the banks are willing to take a loss even if the PMI settlement does not cover them fully. This loss is viewed by banks as the cost of doing business and is factored into their operating expenses. For example, the bank is foreclosing on a property and has given their attorney instructions to start the bidding at $140,000 (their credit bid). No one shows up to bid on the property and the bank ends up with it. Since the bank has followed the bidding instructions of the PMI company, it will receive a cash settlement of about $14,000 and possibly more, depending upon the terms of the original mortgage insurance premium. This means that the moment the auction is over it can now sell the property to you for $126,000, because it will get $14,000 from the PMI company. Since many banks are willing to take a loss on REOs, there is a good chance that you can get the property at an even deeper discount. 2. Banks are regulated by the federal government. The Feds penalize banks for having too many REOs. A bank with a lot of REOs may not be able to borrow money from the Federal Reserve or may have to pay a higher interest rate on the money that the Federal Reserve loans it. Banks need to borrow money from the Federal Reserve in order to operate. An above average number of REOs are a sign that the bank has been making bad loans. If a bank makes enough bad loans it could be forced out of business. The U.S government insures these banks through the FDIC and keeps a close eye on their operations. This means that every bank has a strong incentive to minimize the number of REOs in its inventory. 3. Banks are not organized to manage real estate. In good economic times many banks don't even have an REO department. When a small lender gets an REO, it assigns the task of disposing of the property to a high ranking manager, such as a department manager or a regional manager. Raging Profits with REOs 13 CashFlowInstitute.com

14 The REOs are dropped into this manager's lap on top of all other normal duties. He or she does not get paid more money to deal with REOs. This manager wants to get rid of the property as fast as possible. This makes it feasible for an investor who understands the process to make the bank a low offer and have it accepted. All banks differ from one another; however the large banks and loan companies will have an entire department that is solely for REO sales. Depending on whether the bank that you are purchasing the property from has its own REO department will largely affect the time it takes for them to look through the offer. A large bank will have a number of people who are involved in the decision making process, of whether or not to accept an offer. It is not unusual for 3 or 4 people to look through your offer and give their opinion. Generally you may expect the bank to take a week to consider your offer. 4. Banks sometimes own mortgages on out of state properties. When a property is foreclosed upon and a bank ends up with an REO that is located in another state, it makes it doubly difficult for the bank to make decisions about the sale of the property. In most cases it doesn't make financial sense to have a bank representative travel to an out of state property, assess its condition, then hire contractors, oversee fix-up and then list the property for sale with a real estate broker. As you might guess some of your best REO opportunities will be with local properties that are owned by banks located in other states. Raging Profits with REOs 14 CashFlowInstitute.com

15 5. The REO will have carrying costs associated with the property. These include property taxes, water and sewer bills, insurance bills and electricity bills. If the property is a condominium, there will be condominium fees. If it is a townhouse, there will be homeowner's association fees. In addition to carrying costs, there are seasonal maintenance costs. The property must be winterized in the colder months. In the milder months, the lawn has to be cut and the shrubs trimmed. Banks want to avoid these responsibilities whenever possible and so have incentive for a quick sale. 6. The REO must be put into marketable condition. Banks are not set up to deal with the renovation of a property. They run the risk of paying too much for repairs and end up over-improving the property, or worse, underimproving the property. Because banks always want to sell a property in its as-is condition means that the most you can expect from a bank, or loan company, in terms of certification regarding the house is what is called a section 1 pest certification, which says that the property is fit for human habitation, i.e. there are no pests in the property. Even obtaining the above section 1 pest certificate can be hard work on your part, as bank will only provide it if you specifically ask for it in your offer to them; again it costs them money to obtain the certificate, something which they want to minimize. The bank may wait until there is a contract and then negotiate with a buyer before they have needed repairs done. This often results in the property sitting unsold for months, because 90% of those buying as owneroccupants want a property that is in move-in condition. 7. Carrying costs mount up, making the bank more and more anxious to sell. The bank must hire a real estate agent to market the property. This will Raging Profits with REOs 15 CashFlowInstitute.com

16 cost the bank around 6% of the total sales price. In cases where the bank is willing to sell directly to an investor, it can save the six percent commission that a real estate agent will charge. As an investor your must remember these seven reasons and use them to your advantage when negotiating an REO purchase. It is plain to see why banks do not want their REOs and will often sell them at deep discounts. Advantages of Buying Bank REO Properties All liens against the property are removed once it becomes an REO, and taxes are paid. Unlike properties at foreclosure auction, REOs can be inspected prior to contract, and are listed with real estate agents. While many foreclosures are often in deplorable condition, REOs are sometimes restored to at least a readily salable condition by the lending bank. The bank or lending institution that owns the property will often offer you better financing on an REO purchase than they would on an ordinary mortgage loan. The bank or lender that owns the property will often provide an allowance for certain repairs. You can save money in your title search if you use the same title company that the lender used during foreclosure. They will often discount the cost up to as much as 100%! REO properties are usually listed on your local MLS (multiple listing service), or can be located by going directly to your local REO bank s website. Raging Profits with REOs 16 CashFlowInstitute.com

17 REOs will often include appliances While in hot markets, you may not see a difference in price between an REO and a typical property, during slower markets, you can buy REOs at deep discounts to the property s actual value. All back taxes and liens are removed. Allows negotiation on rehab costs, interest, closing points, loan amount, etc. In a REO sale the bank will evict the tenants/occupants (or you could leave them there and let them pay rent), remove any liens etc and do the basics. It varies from lender to lender, but often the bank will not make any repairs to the house and want to sell it to you in what is called as-is condition. In this situation you should seek the services of a home inspector to find out the state of the property and to help you decide whether you wish to continue the transaction. Although a bank owned property might look like a good deal on the outside, it is necessary that you do your background research on the property before you commit to any contracts. Your first priority should be to find out what the house is worth in today s current market; having a comparative market analysis carried out will help you with this aspect of the purchase. If you are working with a real estate agent he or she will do this for you. Fix'em and Profit The biggest discounts on REOs are attached to those that need repairs. REOs that are in poor condition can often be purchased for a fraction of their value and quickly resold for huge profits. By targeting these properties you will get tremendous discounts and be able to make good money with them. Raging Profits with REOs 17 CashFlowInstitute.com

18 People who receive notice of foreclosure from a bank or loan company normally will have no time to clean the house, nor will they want to, as this will take time and money. The reasons that they are in foreclosure will probably be because they can t afford the mortgage payments, therefore it is highly unlikely that they will have the time, money or motivation necessary to either clean the house or make the necessary repairs that are usually needed. In general around 4% of the value of a property is required each year in maintenance alone. For example a $250,000 property will require $10,000 in repairs and maintenance each year. A person in foreclosure, who could not afford mortgage payments, is unlikely to be able to afford such costs. Do not buy an REO if the property has major structural problems unless you have the knowledge and cash required to supervise repairs. Houses with foundation or structural defects are risky investments and should be avoided by most investors. If you have any doubts about the structural condition of an REO, then get a professional home inspector to perform an inspection on the entire house. If it needs more work done than you are willing to deal with, do not buy it. Stick to houses that look bad, but can be quickly made presentable with affordable fix-up. Many REO houses that need fix-up work are listed for sale at reduced prices. Don't let the asking price fool you into thinking that the bank won't take an even lower offer. Each bank works differently, but one thing they all have in common is that they want to get rid of their REOs. This represents a tremendous opportunity for you to cash in on REOs. Raging Profits with REOs 18 CashFlowInstitute.com

19 Your offer may be they only one they've had and they may jump at the chance to get rid of that liability. Timing and Good Deals Some banks are motivated to sell many of their REOs at the end of their fiscal year or each quarter. They do this because they want to clear their books. Some banks decide to sell their REOs at discounts when they accumulate too large an inventory. When a bank has too many properties in their REO account they want to sell any way that they can and will often accept low offers for them. Here's the catch. You probably will never be able to pinpoint when the timing is exactly right, but that is why you should make offers and counter offers. Remember that you can always raise your offer if your first one is not accepted. Timing is a factor that many banks use when they adjust the price of an REO. To be successful with REOs, you must continuously make offers! If you make one offer each month, it will take you a long time to get a good deal. If you make several offers each week, you will strike gold sooner. Don't worry about rejection. There are plenty of deals coming down the pipeline. What About Cash Needed For Purchase? What about the money needed to buy REOs? If you build a reputation as someone who can consistently find bargain property, you will attract people with cash to invest. In the beginning they can become partners and share in the profit. Later they can become a source of short term loans. You can pay a generous rate of interest on loan money you only need for two or three months. That's the time you need for fix-up and a quick sale. Will a bank give you a mortgage loan to purchase their REO? Rarely, but Raging Profits with REOs 19 CashFlowInstitute.com

20 you can always ask. The best deals are made when you have ready cash from some other source. Once you have located an REO at a deeply discounted price, you'll find it easy to sell, because you can offer it for sale at a below market price and still make a nice profit. Four Ways to Find REOs Here is a look at four ways to find REO deals: 1. Subscribe to an online foreclosure listing service. They list REOs and usually include bank contact information: Click Here for List One Click Here for List Two 2. Call the foreclosing attorney right after the auction and see if the property was taken back by the bank. 3. Create a list of banks, lending institutions and finance companies. Contact them on a regular basis. 4. Have your real estate agent find REOs on the MLS. Raging Profits with REOs 20 CashFlowInstitute.com

21 Here are details of the four methods: Number One -- Subscribe to an online foreclosure listing service. Without question, joining an online foreclosure listing service is the fastest and easiest way to find REOs. These listing services specialize in finding REOs all across the U.S. Their databases hold literally thousands of REOs. They group the REOs by city, state and zip code so you can search for them at the click of the mouse. Some online foreclosure listing services offer a one week free trial. Join one and perform a search for REOs in your area. You'll be surprised at how easy to use and affordable these services are. Do not limit yourself to your immediate area, especially if you live in a small town. Search for all REOs within a reasonable driving distance of you home. Number Two -- Call the foreclosing attorney. An attorney or company specializing in foreclosure sales is usually engaged to handle a bank's auction sales. The name of that attorney or legal firm is usually listed in the notice of foreclosure. Call that office late on the day of the auction and see if the property was sold. If not it has become an REO and you may have a purchase opportunity. Ask the attorney if the bank was foreclosing on a conventional mortgage loan. You can explain that if it was a conventional loan you would like to talk to the bank about purchasing the property. (NOTE: A conventional loan is one that is not insured by an agency of the U.S. government - like the FHA. The FHA handles its own foreclosures through HUD. Conventional loans may be partially insured with Private Mortgage Insurance (PMI). More about that later.) Raging Profits with REOs 21 CashFlowInstitute.com

22 If the attorney is cooperative and tells you the loan was conventional you can next ask if he could give you the name and number of the manager who handles REOs at that bank. Sometimes they will and sometimes they won't. If you don't get a bank contact from the attorney you must call the bank and find the person that is responsible for that property. Chances are you will be passed from person to person until you find the right manager or department - don't give up! It's a good idea to always give the property's address as you move from one person to the next. The bank may have various people handling various properties. Contacting the REO Manager Keep track of everyone's name and phone number. That will save you time in the future. Your telephoning might go something like this: Question One: "Who should I talk to about making an offer on the bank owned property at (property address) that was not sold at yesterday's foreclosure auction?" Question Two: "Can you please give me that person's direct telephone number?" Question Three: "Do you know what might be the best time to reach that person?" You will often be talking to secretaries or clerks who don't really know Raging Profits with REOs 22 CashFlowInstitute.com

23 much about REOs, so always be very patient and polite. Once you have reached the person responsible for the REO, you can explain that you would like to make a purchase offer on the property in question. If the manager is receptive make your first offer right there over the telephone. Even if your offer is very appealing, the banker will probably tell you that he has to clear it with a supervisor. Be prepared for the bank to counter your offer. Later we will discuss how to negotiate with banks and get their REOs at tremendous discounts. TIP: When you finally find an REO manager always ask them if their bank has any other REOs in inventory. You may find that the bank has several REOs that it would like to get rid of. At this point, get the addresses of the properties and go take a look. If they have potential you might be able to get a package deal. Imagine the amount of money you will make if you can get several properties at the same time and flip all of them to one or more investors! You can sometimes get exceptional cooperation from an REO manager if you agree to take a junk property as part of your deal. The few thousand dollars you allocate for the purchase of that junk property can cement a relationship that can be like gold to both of you. Raging Profits with REOs 23 CashFlowInstitute.com

24 If necessary flip the junker at cost to an investor who specializes in fixers. Number Three -- Create a list of lending institutions. Create a list of banks and lending institutions. Usually, the larger the lending institution, the more REOs it will have. Since banks are not the only institutions that make loans to homebuyers and owners, make sure your list includes all of the lending institutions in your area. This method takes some time because you must put a list together, but it will pay off big if you use it regularly. Look in your Yellow Pages lenders/mortgage loans. Here is a list of headings to look under: Banks Financing (especially "Finance Companies") Mortgages Loans Many lenders sell their mortgage loans to large financial institutions that package the loans and sell them to retirement funds and other such buyers. But you will find other lenders who keep the loans in their own portfolio. Call each lender and ask if they have an REO manager. You will quickly target the ones who, at least occasionally, have real estate they want to sell. With this method, it is important that you are persistent. Spend a couple of hours each week making phone calls to locate REO managers. Then remind them that you are an investor who is interested in buying their REOs. After you have called them several times, they will remember you and some may begin calling you when they have something to sell. If you have trouble contacting the bank by phone, another option is to overnight or fax a letter to the bank stating your interest in the property. Some buyers and investors include a check made out to a local escrow Raging Profits with REOs 24 CashFlowInstitute.com

25 company to get the bank's attention. This check is usually a small percentage of the total purchase price and should be refunded if no transaction takes place, but it shows you're a serious buyer. An important part of your REO investing business will be building and maintain a relationship with these people. Number Four -- Build a relationship with a real estate agent or broker. Most banks list their REOs with a real estate agent, so that the listing will appear on the MLS. That's where all other agents in the area look to find homes for their prospective buyers. Once your real estate agent knows what to look for he or she can alert you to the best opportunities. It will not take your agent much time to find REOs if she/he knows what to look for on the MLS online database. The Multiple Listing Service, also known as the MLS, is a computerized service that provides real estate agents with a detailed and comprehensive list of all the properties for sale that are represented by other brokers in the market. A "listing" is a term real estate agents use to describe a property that they currently have for sale. Finding REOs On The MLS In the MLS, REOs will usually not be called REOs. They will be listed as "foreclosures" or "bank-owned" properties. Your agent will have to enter the word "foreclosure" or "bank-owned" as a key search word in the computer. When your agent pulls up all of the foreclosures in the MLS, the property owner will be listed as a bank. Many agents do not know this. Make your real estate agent aware of what you are looking for. Now your agent can provide you with a listing summary for each foreclosure listing. A listing summary is a one-page fact sheet for any Raging Profits with REOs 25 CashFlowInstitute.com

26 selected property. It gives detailed information about each property something like this: The property's address The asking price The type of property - single family home, townhouse or condominium The number of bedrooms and bathrooms The number of days that the property has been on the market. A brief description of the property, including its current condition and other important facts. The description will be brief, but it can reveal clues that the bank is motivated to sell at a steep discount. The "number of days" is a strong signal. The longer the property has been sitting unsold, the more anxious the bank will be to get it off the books. Make offers on properties that have been on the market the longest period of time. Give priority to properties that are in poor condition. Hard to sell properties that sit on the market for long periods of time and properties in poor condition are hot potatoes that lenders want to unload as quickly as possible. In the "description" look for phrases like "Bring all offers!", or "Foreclosure property -- bank says to sell!" or "Property in need of repairs, great deal for investor or handyman" all are signals that the bank is ready to sell for the best deal they can get. Hot Prospects Raging Profits with REOs 26 CashFlowInstitute.com

27 Now that you have targeted some properties that appear to hold profit potential, have your real estate agent call the listing agent. The listing agent was hired by the bank to sell the REO. From that agent find out if there have been any offers. Often you will learn that there have been two or three offers on the property that have been turned down by the bank. What do you think that means? You may have found an unmotivated bank. Have your agent ask the amount of the purchase offers. A few listing agents will furnish this information, but most will not. The listing agent has a fiduciary obligation to the bank and is not obligated to give you this information. What if the listing agent does share that information? If the rejected offers were higher than what you would offer you should move on to another REO. If the real estate business is slow you might consider checking into this property later. The bank may have decided they are ready to sell. As with all real estate investing, you want to spend a limited amount of time and effort on each prospect. Do not waste a lot of time on any one property. Now you have four methods for finding REOs. Use them all or use a combination of them until you find the method that works best for you. TIP: It's always best to make a purchase offer before the REO manager lists the property with a real estate agent. Over time you will build relationships that will allow you to do this on a regular basis. Always try to contact the bank's REO manager as quickly as possible after a property has not been sold at the foreclosure sale. You might be able to buy the property before it is listed with an agent. Raging Profits with REOs 27 CashFlowInstitute.com

28 Often, after the initial offer is made in writing, counter offers are made verbally until agreement is reached. This is a slow process because the bank REO manager may be in a different time zone, or the responsible people who must approve the deal are tied up in meetings. It may take many days of verbal countering before a final agreement is signed by all parties. During that time, there is a danger that another offer will come in and the bank may accept it. This is especially likely to happen if negotiations go over a weekend. Try to reach agreement with the minimum amount of counter offers. Higher Deposits A bank will require a higher good faith deposit than a private party would. Expect to write a check for 3% to 5% of the purchase price when making an offer on an REO. Double Loan Applications If the bank is willing to finance your purchase they will probably require that you get prequalified with their institution within a few days of accepting your offer. Unless you are paying cash you may have to go through the loan application process with them, even if you get the loan somewhere else. While they can ask you to apply with them, you are under no obligation to accept their financing, unless, of course, not to do so would kill the deal. Bank Chooses Service Providers The bank will insist that an escrow and title company of their choosing be Raging Profits with REOs 28 CashFlowInstitute.com

29 used to close the transaction. They have previously negotiated fees with these companies, so they know what their expenses will be. Since these companies are favored by the banks you'd expect them to be very efficient, right? In fact, everyone in these companies seems to be overworked and service can be slow and careless. Many times it will be your real estate agent (or you) who will do much of their work to push the deal through to the close. You may go through a few agents before you find one who is consistently willing to work harder than normal to make sure you get the house you want. Not The Usual Contract The bank may insist that you use their contracts, not the standard one used by real estate brokers in your area. It's critical that you or your agent read every word of this contract to make sure your interests are protected. Remember the bank's attorneys who wrote the contract are protecting the bank. You must be careful to protect yourself. Just because something is printed in a contract does not mean that it can't be negotiated out or changed to suit your needs. Double Check Everything As mentioned above, you will find that the bank's listing agents and Raging Profits with REOs 29 CashFlowInstitute.com

30 escrows officers are often overloaded with work. Repairs may get ordered, but there is seldom a follow-up to see that the work was done. Your must take it upon yourself to double check everything and assume nothing. If you are buying REOs off of the MLS try and find an agent that has experience working with banks and is not afraid of some extra work to protect your interests. You may find that your local board of realtors has a publication that will allow you to place an ad for an agent with REO experience. Interview a few see if you can find one that seems to understand what will be expected of them. Do not work with an agent who will not give you priority. You will buy several REOs each year, and you will end up listing some of those properties for sale with the agent. As a repeat customer, you deserve to be at the top of his or her list of clients. Choosing A Real Estate Agent A word of caution here You will find that just about any agent you speak with will want an opportunity to do business with you. Finding an agent to work with is easy. Finding a good agent requires a little more effort. That is why it is important that you interview at least three experienced agents before making a decision. Questions You Should Ask an Agent Before Choosing One 1. Have you worked with investors before? If you end up working with an agent who has never worked with an investor, then you'll need to make sure he or she understand that you are in this business to make a profit. In REO investing, this means buying properties that will sell quickly. Make it clear that you only buy properties in neighborhoods where properties are selling quickly and that will be part of the agent's job to warn you about neighborhoods where properties sell slowly. Raging Profits with REOs 30 CashFlowInstitute.com

31 Let the agent know that you want only conservative, fair market values when choosing deals. You must not overpay for a property. Explain that since you are buying these properties at a discount, you will be able to offer them to buyers at below market value. The agent should understand that the low price will making earning her commission much easier when she begins marketing the property for sale. Remember, if you have the lowest priced property in the neighborhood, your agent should have a buyer for you very quickly. 2. How long have you been a real estate agent? The number of years an agent has been selling real estate gives you an idea of their experience. However, you may find a less experienced agent who is share enough, and hungry enough to understand exactly how to work with your. I feel it is better to have a less experienced agent who will be there when you need him or her, than a more experienced agent who is always busy with other clients. 3. Are you willing to spend the time necessary to help me do this? Explain to the agent that they will need to search the MILS and find the fair market values of several properties each week. Stress that the payoff for them is that you will end up purchasing several properties a year, totaling a number of nice commissions. Those are some of basic questions you should ask real estate agents when interviewing them. Remember, you are not necessarily looking for the smartest, the most experienced, the wealthiest or the most personable agent - just one who will be eager to give you prompt service. Some REOs Are Time Wasters Raging Profits with REOs 31 CashFlowInstitute.com

32 Bankers are not stupid! They will only discount the price of a home if it suits their needs or they have no other choice. Any REO in reasonable condition will be listed for sale at prices close to its market value. Remember... that is the ASKING PRICE! You don't know if the bank will accept a lower offer until you make it. Don't talk yourself out of any profitable offer. If your offer is refused you can always counter... or move on to another property. Each bank works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in "dumping" real estate cheaply if they don't have to. Generally, larger banks have an entire department set up to manage their REO inventory. Once you make an offer to purchase, banks usually present a "counter-offer." It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. You should plan to counter the counter-offer. Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like..subject to corporate approval with 5 days." Banks always want to sell a property in "as is" condition. Most will provide a Section 1 pest certification, but not unless you include it in your offer and negotiate the point. They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs. That doesn't mean you shouldn't ask for repairs! You must A-S-K to G-E-T! Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct. Raging Profits with REOs 32 CashFlowInstitute.com

33 Ask The Bank To Pay For Repairs Even though you agreed to as is," always give the bank another opportunity to make repairs or give you a credit after you ve completed your inspections. Sometimes they ll re-negotiate to save the transaction instead of putting the property back on the market, but don t take it for granted. Banks do not want to see a lot of proprietary disclosures. In many states the banks are exempt from presenting a Seller s Transfer Disclosure Statement. If there are real estate agents involved, either representing you or the bank, state regulations often require those agents to provide you their disclosure statements. That means they must report any defects they have noticed in the property. That is only a help if the agents have actually looked at the property. Often they have not. Most banks will not provide financing on their REOs, but it doesn t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is." More on Purchase Offers Before making an offer, have your agent contact the listing agent and ask the following: Are there any inspection reports? What work has the bank agreed to? Is there a special "as is" form? How long does it take the bank to accept an offer? Raging Profits with REOs 33 CashFlowInstitute.com

34 How does your agent deliver the offer? Offers are usually FAXED to the bank. The listing agent needs to FAX your original documents. There often is no formal presentation. Nothing happens evenings and weekends, because banks are closed... and they probably leave early on Friday. Since there is usually no face-to-face presentation to the bank, provide the listing agent with a loan pre-qualification letter or better yet, a pre-approval letter if you plan buying with a mortgage loan. The bank wants to be sure you have the financial ability to close the deal. If you are an experienced investor providing a buyer biography may also a good idea. Make your offer easy to accept. After a year or two of doing deals you may have accumulated enough ready cash to finance your own deals. When you are flipping properties your own money will only be tied up in a deal for a matter of days. That means it doesn't take a fortune to keep buying with your own cash. When you reach that point you can get the manager of the bank where your money is on deposit to write a letter to the REO manager confirming that you have enough cash on deposit to do the deal. Signals Raging Profits with REOs 34 CashFlowInstitute.com

35 It's not always easy to identify signals that indicate what a bank expects out of a property. Here are some examples that will save you time when looking for bargains. Move on if you find the following: The bank has rejected offers that were higher than you are willing to pay. For example, an REO with a fair market value of $250,000. You know that you would pay no more than 65% of its value, which equals $165,500. You find out through your real estate agent that the bank has recently rejected two offers. One offer was for $196,000 and one offer was for $179,000. Both of these offers were higher than the $165,500 you would be willing to pay. In a case like this, wait one or two months before submitting an offer. The bank may become motivated and sell it for a deeper discount. Make notes on this property so you will have the information ready when you make your offer. The bank has had the property fixed up. The bank has invested a good deal of money into getting the property into marketable condition and it will not be willing to quickly sell it at a deep discount. If the bank has made just a few minor cosmetic repairs and you see that the property still needs a plenty of work - make an offer. If the property is in move-in condition, you are probably wasting your time... but it never hurts to make an offer. Stay Away From These REOs As with any investment you must use common sense when considering an REO purchase. Avoid REOs that are in bad locations. Bad location makes it hard to sell any type of real estate. REOs in rundown sections of town where there is obviously no pride of ownership may be difficult to sell at a Raging Profits with REOs 35 CashFlowInstitute.com

36 profit... unless you find a rehabber that is experienced in deal with property in those areas. Rural property is only for specialists. Very few buyers want to live a thirty minute drive from the nearest school or grocery store. Watch out for junk property. Unless you are skilled at rehabbing always get a professional home inspection performed to assess the amount of fixup work a property will require. Better yet... get a contractor to give you an estimate of repair costs. Always be on the lookout for investors and rehabbers that have the skill to handle what would be problem properties for others. They want deals and will pay your for them... if they are priced right. Generally you want normal homes in pleasant neighborhoods. These are the best homes to buy and they sell to an owner-occupant. Those are the homes that have the largest pool of potential buyers and where you can make the most profit if you are will to do minor fix up and then have your agent place them on the MLS at a share below market price. High end homes in very expensive neighborhoods are tempting targets, but like rural property they are for specialist only. You can lose you shirt in the blink of an eye if you don't know what you are doing with big money deals. Start off with deals that are sure things. When you have experience and some financial strength you might try some luxury home deals. A good rule is to always make sure you are buying a property that is affordable to most people. Three Steps To An Offer Raging Profits with REOs 36 CashFlowInstitute.com

37 Here are three steps that you must take before making your offer on an REO: Find the fair market value of the property. If you are working with a real estate agent they can help you with that. If you are an experienced investor you might be able to trust you own judgment as to the value of the property. You can get a free ballpark estimate online at Zillow.com, HomeGain.com or HouseValues.com TIP: To get a free home value estimate as offered by a number of popular websites like the three above, you must enter personal contact information and agree to have that information disclosed to others. What they don't tell you is that your personal information is sent to as many as 5 Real Estate Agents, numerous mortgage bankers, insurance companies, home inspection companies, etc. These "free home value" websites are supported by these companies in order to generate sales leads! Some claim these sites do not provide you with the best data available on a property. They typically utilize only one or two smaller and lesser known valuation models. On the other hand, Nationalpropertyvaluation.com claims to guarantee that your information remains absolutely confidential. That they do not share or sell your contact and personal information with anyone, so no salespeople will contact you. There business is to provide you with the most reliable and up-to-date data available. Banks and mortgage companies use this same data to validate the value of a property prior to approving the mortgage loan. Raging Profits with REOs 37 CashFlowInstitute.com

38 Take your choice! If you are still unsure of fair market value, you can hire a certified real estate appraiser to give you an "opinion of value" or "drive by appraisal". These will be far less expensive than a full appraisal and should give you an accurate idea of the property's value. Use them only when you have a bank that is ready to sell you an REO at a low price, and for some reason you are not sure what the fair market value is. When formulating your offer always be conservative in your estimate of the fair market value. Inspect The Property I feel that it is important that you personally inspect every property. It's your neck that will be at risk, so it's important that you know exactly the condition of the property. Just ask the REO manager to arrange for your visit. During your inspection make a detailed list of all the needed repairs. Your list will be invaluable when making your offer to the bank. You will be able to enumerate to the banker all of the various repairs that are needed. Do You Need A Real Estate Agent? Real estate agents are professional salespeople who are responsible for selling most of the real estate that is marketed in the United States. When homeowners and bankers want to sell a property, they usually hire a real estate agent. Real estate agents greatly increase the odds that a property will sell quickly, and for a fair price. Real estate agents work on a commission basis. Commissions usually range from 3 to 6%. The majority of agents want a commission of 6% of the Raging Profits with REOs 38 CashFlowInstitute.com

39 total sales price. The reason real estate agents want 6% is that much of the time you will list your REO property with an agent, and an agent from another real estate agency actually finds the buyer. When this happens, the agents from the two different realty companies will split the commission 50/50. The agent who had originally listed the property ends up getting only 3%, rather than the whole 6%. It's very common that a property is listed with one agent, and a different agent brings in a buyer. When an agent from another company brings in a buyer, it does not mean that the agent you hired to sell your property has not earned her money. Your agent has put a lot of time and effort into marketing your property up to the point that a buyer is found. She/he will work with the other agent and make sure that the sale of the property goes smoothly. Real estate agents don't get a commission until the property is sold. You don't have to pay them anything unless they sell the property. Your agent will pay all the costs of marketing your property. She/he will protect your best interest in the property at all times. Overall, you will find that an agent's 6% for marketing your property and finding a qualified buyer is well worth the money. One of the best things about using real estate agents to sell property is that they don't get a commission until the property is sold. You don't have to pay them anything unless they sell the property. Once they find a qualified buyer, their commission comes out of the proceeds from the sale of the property. So you never have to pay them out of your pocket up front. They get their money at the closing of the deal. When Should You List With A Real Estate Agent Raging Profits with REOs 39 CashFlowInstitute.com

40 You will only need to list with an agent when you want to sell a home at its retail value to an owner-occupant who qualifies for a mortgage loan. That's where you find the most profit, but it usually takes longer than selling to an investor. If you reach a point where you are consistently buying and selling 3 to 5 properties per month you may consider putting your agent on a yearly retainer. For that guaranteed money they would do the MLS search, determine a market value for the properties, push your purchases through closing and handle of sale of your listed properties. Many REO buyers build a list of investors and flip (make a quick sale) the properties they buy to a names on that list. The profit is less, but you get immediate income and you don't have to pay a real estate agent's sales commission. Profit Formula Once you have found a desirable REO it is critical that you understand how to calculate the potential profit of the deal before you buy. Use this easy formula... Before I explain the formula you must pledge to never pay more that 65% of an REO's fair market value. This gives you a minimum of a 35% discount. If the property needs more than cosmetic repairs deduct the cost of those repairs from your offer. You need a 35% margin because of the many costs involved with each deal. To figure the potential profit there are five different costs that must be factored into the deal: 1. You will have the total amount of money you are offering the bank for the REO. Raging Profits with REOs 40 CashFlowInstitute.com

41 2. Settlement or closing costs. These are all the costs associated with the buying and selling of a property. When a property settlement occurs, both the buyer and the seller of the property have costs that must be paid in order for the ownership of the property to transfer. These include attorney's fees, transfer taxes, fees charged to record the new deed, etc. TIP: Here's a rule-of-thumb figure that can be used to estimate the purchaser's closing costs. Use 2% of the purchase price as a general estimate of the amount you will pay for the purchaser's side of the settlement costs. In most areas of the U.S. that will be close to your actual cost. If you are using a real estate agent ask if their experience shows that 2% is a fairly accurate figure. Another idea is to ask an escrow agent or attorney. You may want to adjust this percentage up or down depending upon the various closing costs in your area. 3. Fix-up cost. All the costs associated with getting the REO into top marketing condition. You want it to show well and sell quickly. Examples of fix-up costs are painting and carpeting; plumbing and electrical repairs; renovation or updating of kitchens and bathrooms, if needed; and any other repairs you must to do to get the property into salable condition. If you will be flipping to a rehabber you will not have fix up expenses. 4. Carrying cost. These are your monthly expenses during the period you will own the property before selling. They include monthly loan payments, Raging Profits with REOs 41 CashFlowInstitute.com

42 property taxes, monthly utility bills, and monthly hazard insurance premiums. You should factor in at least four months of carrying costs. If the real estate market is slow in your area ask your agent for the average time it takes to sell a house and base your figure on the information. She can find that number through the MLS. Here's another rule for your thumb. Calculate monthly loan payments and taxes to be about 1% of the loan amount. Utilities and insurance will be about another two hundred dollars a month. The two hundred dollars per month includes one hundred dollars a month for all utility bills, such as electricity, gas and water. No one is living in the home, so utility bills should be near the minimum. Another one hundred dollars or more per month is for hazard insurance. Insuring a vacant property is costly. Always Buy Hazard Insurance Listen! Never try to save a few dollars by ignoring hazard insurance on your properties! Without fail you must always have your properties covered by insurance... and it must be a policy that covers an UNOCCUPIED home. If you have normal homeowner's insurance and the house burns down Raging Profits with REOs 42 CashFlowInstitute.com

43 before being sold the insurance company with provide you with nothing but sympathy. Establish a relationship with an insurance agent and explain that you are an investor and need each of your unoccupied houses covered for a few weeks or months before they are sold. The agent will understand and write the correct policy. When you buy a new property you can just telephone the agent and they will arrange immediate coverage. Here's a question! Does responsibility for damage to a property transfer the moment the deed IS signed, or not until that deed transferring title is recorded? I choose to notify my insurance agent of the date on which the deed will be signed and ask that the property be covered by insurance from that day forward. 5. Marketing costs. These are the costs of selling the property. Use 10% of the selling price as a rule of thumb. That will include: a.) 6% for your real estate agent's commission. b.) 2% for the seller's settlement fees. Remember to check with your real estate agent to see whether you should adjust this figure up a little or down a little, depending on the area you live in. c.) 2% for helping your buyers pay their side of the settlement fees. Many buyers have barely enough money for their down payment and cannot afford to buy the home from you unless you help them with their settlement fees. In a buyer's market you will often be asked to help pay for some of the buyer's settlement costs. Factor this cost into the formula. (You can ignore these if you are flipping the contract.) There you have the primary costs. You must add them together in order to find the amount of potential profit you will make. Raging Profits with REOs 43 CashFlowInstitute.com

44 Because fix-up costs vary with each property, there is no percentage that can be used for that in the formula. You will need to get a contractor to give you estimates on your first few deals. Once you have completed a few deals, you will be able to start estimating fix-up costs on your own. Never overlook any of the five costs: 1. Purchase price 2. Purchaser's settlement cost (2% settlement cost when you purchase the property) 3. Fix-up cost 4. Carrying cost 5. Marketing cost (2% real estate agent commission, 2% seller's settlement costs, and 2% for helping the buyer pay his settlement fees, totaling 10% of the price you sell the property for) Examples of Calculating the Five Costs: Example 1. Let's say you have found a bank willing to sell an REO. The property is in a clean, well located neighborhood. Your agent informs you that houses sell quickly in this neighborhood when they are in good condition and priced fairly. This property has a fair market value of $200,000. After negotiating with the bank, you agree to pay $130,000. The property is in good shape and needs only painting inside and out, new carpeting and a few minor general repairs that cost about $200. Your contractor estimates the total fix-up cost will be $3,500. Let's calculate your potential profit. $130, Purchase price. $ 2, % of the purchase price for your settlement costs. $ 4, Estimated fix-up costs. $ 3, months of carrying costs. $200 a month for Raging Profits with REOs 44 CashFlowInstitute.com

45 insurance and utilities, and $1300 a month on your first trust loan of $130,000 (1% of the $65,000 = $1300). This adds up to $1500 a month X 4 months = $6000. $10, % of the fair market value of $200,000 = $20,000. (6% real estate agent commission, 2% percent seller's settlement fees, and 2% for helping the buyer pay his settlement fees). $159,100 Total for all five of your major costs. Take a look at you potential profit: $200,000 Sales price based on the fair market value -159,100 Total for all five of your major costs $ 40,900 Potential amount of profit you could make on this deal Your potential profit for this deal is $40,900. Not bad when you consider that this can all be done in your spare time! Example #2: You have found an REO in a good neighborhood where houses sell well. The property's fair market value is $150,000. The bank is willing to sell at a discount. Your standard offer is up to 65% of the fair market value. With this property that comes to $97,500 ($150,000 fair market value X.65% = $97,500). After carefully inspection you find a need for painting, carpeting, and a new roof. It also needs new kitchen appliances. All of this will cost about $8,500. Since the property needs so much work, you decide to offer the bank just 60% of the fair market value ($150,000 fair market value X.60% = $90,000). The bank accepts your offer. Now it's time to add up the five costs to be sure there will be enough profit in the deal. Raging Profits with REOs 45 CashFlowInstitute.com

46 $90, Purchase price $ 1, % of the purchase price for your settlement costs $ 8, Estimated fix-up costs $ 4, months of carrying costs. $200 a month for insurance and utilities, $900 a month on your first trust loan of $90,000 (1% of $90,000 = $900), totaling $1100 a month X 4 months = $4,400 $15, % of the fair market value of $150,000 = $15,000 (includes a 6% real estate agent commission, 2% seller's settlement fees, and 2% for helping the buyer pay his settlement fees) $119,700 Total for all five of your major costs Now how much potential profit is there in the deal for you? $150,000 Sales price based on the fair market value - 119,700 Total for all five major of your major costs $ 30,300 Potential profit you could make on this deal $150,000 sales price minus $119,700 total costs, gives you a potential profit of $30,300. A nice profit, wouldn't you say? Now think about doing three or four such deals in a year! That should put a smile on your kisser. Sure, the formula seems just a bit complicated at first. After using it a few times, you will see that it's a nifty way to project your profit on any REO deal that you plan on buying and selling at retail. Keep in mind that this formula is meant to be an estimating tool. A property could take four months to sell, or only two months. The actual fixup costs of a property could be a little less, or a little more. And you must accept that you could make more or less profit depending on the situation. Use the formula whenever you have a bank ready to sell an REO. Let the formula tell you if you have a winner. It's more efficient to just flip a contract, but the profit will be less. When Raging Profits with REOs 46 CashFlowInstitute.com

47 flipping you can use the formula to run the numbers and show your investor-buyer what his or her potential profit will be on the deal. REO Negotiating Tactics Your key to success with REOs is knowing how to deal with a bank when you make your offer. Remember, the property did not sell at auction and you are doing the bank something of a favor by taking an REO off its hands. You are therefore dealing from a position of strength. There is a chance that you are the only person who has shown any interest in the REO. This means that the bank will have a genuine interest in helping you buy. Understanding The Banker's Problem Here are five factors that are most important to bankers: 1.) Type of property - Some properties are harder to sell than others. Usually a condominium is harder to sell than a single family home. A four unit apartment building may be harder to sell than a well located townhouse. 2.) The bank's inventory - A bank with 50 REOs is more motivated to sell properties at a discount than a bank that has only one or two. If you ask the banker may tell you how many REOs are in inventory. More than one? Ask for a package price if you buy them all. The banker will understand that you expect a LARGE discount. Raging Profits with REOs 47 CashFlowInstitute.com

48 3.) How long in inventory - The longer property has been in the bank's inventory the better your chance of getting a serious discount. Occasionally REOs can stay on the market for a year or more. The bank should be ready to listen to your offer no matter how low it is. 4.) Timing - Is it getting near the end of the bank's fiscal quarter or year. A bank's fiscal year may start in March and end the next February. Banks like to dispose of non-performing assets before the start of the next fiscal year. This can be a major factor in a bank's motivation to sell at a discount 5.) Condition - A property's condition is the biggest factor in the kind of a deal you can expect. If an REO is in poor condition, the bank will be much more willing to sell at a deep discount. The ideal situation would be one where you could negotiate a deep discount and get the bank to loan you the money to buy the property. Seldom will you find a bank that will give you both a good price and good terms unless the country is in the middle of a severe recession. Those are the periods when nobody is buying home and the bank is desperate to get rid of the property. If a bank is willing to make the loan you may be able to get either price or terms, but probably not both. If you manage to get both price and terms, it will usually be a compromise of the two. In other words, you may get some terms, but the discount you get on the property will not be as deep as it could have been. There are periods when the economy and real estate market plunge. That is when you can forget the rules and try for anything you can get. Many banks will be hanging on by their financial fingernails... and they will deal! That's one of the reasons we urged you to add this ebook to your library. Many knowledgeable observers believe we seeing the beginning of serious economic. Raging Profits with REOs 48 CashFlowInstitute.com

49 Price and Terms Now let's have a little more talk about price and terms: Price: When you want to buy at the lowest possible price, you will make the bank an all cash offer. An all cash offer means that you will get financing from another source and pay the bank cash for the property. You do not ask the bank to pay any of your closing costs or to finance the REO. This makes a low offer more attractive to a bank. They know they will take a loss on the property, but it is worth it to them to get a nonperforming asset off of their books without anymore costs. Terms: When you ask the bank for terms, you are asking it to finance your purchase of the property and pay as many of the costs as they will accept. Sometimes this can be the smart why to buy, but understand that a rock bottom price usually come with an all cash offer. Terms can be anything you are willing to ask for. For example: a.) The bank finances the property for you. Since you are dealing with a bank, why not have them lend you the money for the REO? A bank would rather have a paying loan on its books than an REO which costs it money each month. b.) Ask the bank to give you an interest rate at least 1% below the going rate. Even if you negotiate an interest rate that is one-half of a percent below the going rate, you are saving money. If you are planning on living in the property or finding a renter, then this will lower you monthly payment and give you a shot at positive cash flow. c.) The bank agrees to charge you no points for the financing. Points are another way of saying "percent." One point equals 1%. Points are what banks charge you for the privilege of loaning you money. It is just another Raging Profits with REOs 49 CashFlowInstitute.com

50 expense you must negotiate with the bank. Always ask the bank to waive the points if they are going to finance your purchase. One point on a $100,000 loan equals $1,000. Two points on the same $100,000 loan equals $2,000! Negotiate a "no-points" loan with the banker and you are paying yourself hundreds of dollars for a few minutes of your time. d.) Bank to pay all closing costs. Closing/settlement costs can easily add up to 2-3% of the purchase price. Avoid paying those costs whenever possible. When you begin negotiating with a bank that is willing to finance the REO, decide which of these is the most important to you and the deal: Price (a deep discount) Terms (low cost bank financing) Both price and terms (a slight discount and low cost bank financing) If you are going to flip the property, then you must buy at a deep discount that a cash offer will provide. If you are planning to purchase the property for use as a personal residence or as a rental, financing and terms will come out on top. Terms would include the lowest possible monthly payment. Intimidation Proof Yourself Remember, bankers are just people doing a job. If they do a poor job they get fired. If you don't make good buys you soon go broke. If you have had limited opportunity to negotiate deals it is only natural that you will feel unsure of yourself in the beginner. Just don't let yourself get intimidated by bankers. You both have the same objective... make a deal! Your attitude must be that this is only one of many deals that are available Raging Profits with REOs 50 CashFlowInstitute.com

51 now and tomorrow. If you can't reach a profitable agreement you are ready to go to work on the next one. Be polite and business like. Expect the same in return. Just get in the habit pleasant, but serious look on your face as you ask the banker for more than you are willing to settle for. Don't be crazy, but ask for anything the makes the deal better. Let the banker say no to some of your requests and feel like he has done a good job negotiating for the bank. You know that the banker wants to get rid of the REO! He knows that you can go on to another deal and he will still be holding a property the bank does not want. The Price There is an old saying you hear from negotiators, "The first person to mention a price loses!" With that in mind ask the banker for his asking price. Do not start off by stating your offer. If you are contacting the banker directly, right after the foreclosure auction, he may not have a set an asking price. Even then, don't make an offer until you hear a price from the banker. He may want less than you're ready to offer! When you finally make your offer it's a good idea to talk price first. After the selling price has been agreed upon negotiate for financing and terms if the bank is willing. Terms mean nothing if you have not agreed upon a price. When dealing with small lenders the REO manager may or may not have experience negotiating the sale of the bank's property. Just remember that Raging Profits with REOs 51 CashFlowInstitute.com

52 they have no personal attachment to the property. The banker understands that you are an investor and expect to make a profit on any REO deal. Some investor's begin the negotiation by asking "What's the least amount you will take for the property if I pay all cash within 30 days?" They ask that even if they know they are going to ask the banker to finance the purchase. The objective is to get an idea of the banker's rock bottom selling price. Suppose the banker replies, "Our price for that property is $195,000." No matter what the asking price you could counter with, "Based on my evaluation of the property that figure is high. When I visited the property yesterday it was easy to see that it needs a good bit of work to get it into marketable condition. Take a look at my list of needed repairs. Here are some photos I took to show why the repairs are needed." Discussing Instead of Negotiating Your approach should be that you and the banker are really just DISCUSSING, not NEGOTIATING. That makes it easier to ask for everything you want and hear what the banker offers. If properties are selling slowly in that neighborhood be sure you mention that. "Slowly" can mean different things. If every property offered for sale fails to sell within the first month, you could feel reasonable in saying that properties are not selling quickly. If your agent reports that the MLS show it is taking six months to sell a home, be sure to pass that fact onto the REO manager. He probably already is aware of that, but let him know YOU are aware of it. Point out the major repairs that are needed and then add that there are many other smaller things that need fixing. Raging Profits with REOs 52 CashFlowInstitute.com

53 If at some point during the "discussion" the banker asks (after he has already stated an asking price) what you are willing to offer, be ready to give him a figure and support it with what you've learned about the property. It is not a good tactic to offer a rounded-off price, such as $130,000, $240,000, etc. Convince the banker that you have carefully calculated the amount you can pay for the property. Check your notes as you tell him/her that you can pay $229,795 or $231,250. Let it appear that you have carefully calculated all of your potential costs. And you have, haven't you? Offering an even amount such as $230,000 makes it too easy for the banker to automatically counter your offer. You can continue by saying something like, "$228,295 is a fair price for this property, because of all the work that's needed. I can offer that if the bank will finance the property with no points and pay all closing costs." At this point the negotiation could go in any direction. If the banker counters your offer with, "I would consider $230,200, but I would need all cash for the property, because we are not providing financing for REOs." Now you have the chance to say that you can pay all cash, but would need to buy the property for $220,500. Whenever you give the banker something make sure you ask for something in return. That is just good negotiating. If course, the banker may do the same to you. During the discussion you are probing to see of the banker is tired of dealing with this particular REO and is ready to sell at a deep discount. When you are near a deal the banker may say that he needs to speak with a real estate agent and/or a contractor about the REO before making a Raging Profits with REOs 53 CashFlowInstitute.com

54 decision. Don't worry, that's just the way they do things. If you've been honest in presenting your offer there should be no major problem. Honesty First Look, as with anything, honesty is always the best policy. It's OK to exaggerate the problems with the property somewhat, but keep it reasonable. Your goal should be to do many deals with this banker and you want trust on both sides. If the banker contacts a real estate to get a second opinion on the price you are offering for the REO. Most real estate agents will take look at the property and make a guess about the cost of needed repairs. They aren't contractors and often the agent may overestimate the cost. That could make it easier for the agent to report to the banker that your offer is reasonable. What if the banker gets a contractor to estimate the cost of need repair work. Good. Contractors often give banks high estimates. Sometimes these negotiations lead to a purchase and sometimes they don't. If the banker can't agree to a price that fits your needs, then thank him or her for their efforts and ask the banker to call you if he/she later finds the price can be adjusted. We are moving into a period where it is predicted that there will be a growing number of REOs. Opportunities will be plentiful. On the deals that don't workout, just put that REO on a list along with you notes. Call the banker back in two or three weeks. You never know when it will suit the bank to sell. This happens often, so always follow-up. Just like all of us you will develop you own style of dealing with bankers and REOs. Just jump in and let yourself grow into this incredible Raging Profits with REOs 54 CashFlowInstitute.com

55 opportunity. Flipping REOs You can generate cash flow in real estate by flipping houses. That means when you buy a home you only hold it long enough to find a buyer. Once you have a signed contract that allows you to purchase an REO at a big discount, you can sell that contract to an investor for a quick profit. This is called "flipping a contract" or "flipping a house", or just plain flipping. It usually only takes a small deposit when you sign a contract with a bank. That means you don't need a lot of cash if you are going to immediately flip that contract to an investor for cash. That investor's cash reimburses you for your deposit, plus gives you your profit in quick cash. Does this sound easy? Well, it is! In most cases real estate investing means buying and renting property for long term appreciation. Many investors begin with very little cash and they need at least semi regular income to live. They generate cash flow by flipping some of their deals. The problem is that many just keep flipping and don't hold on to some of the best properties for the big money in long term increases in real estate values. There should be a place in you business plan for doing both. If you are new to the game, and have little or no money, then flipping contracts is good way to get up and running. You can put thousands of dollars in your pocket in a matter of a few months using just enough cash for a deposit on a contract. When you flip a contract to another investor that person then has the right Raging Profits with REOs 55 CashFlowInstitute.com

56 to purchase the REO at the price that has been agreed upon in the contract. How much cash will be needed for your original deposit? It will probably be anything from $1000 to $5000. You can only flip a contract if the contract allows you to assign the deal to a third party. I am not an attorney and do not intend to give legal advice in this or any other publication. Let me just say that it is my understanding that any contract can be assigned, unless there is wording in the contract that specifically forbids assignment. Assigning The Contract One tactic is to include the phrase "and/or assigns" directly after your name on the contract. That may or may not be necessary if all contracts are assignable, but it removes all doubt if the question of assignability should ever come into question. Here's something you must prepare for. When writing a contract the banker may not agree to include a clause in the contract allowing you to assign it to someone else. You may persuade the banker to allow the assignment clause by explaining that after consulting with your tax advisor you may decide to take title to the property in your company name or in the name of your business partner. When possible specify in the contract that you have ten business days to decide on title. This will give you two weeks to flip the property to an investor. Some bankers will accept the local Board of Realtors standard purchase contract for your offer. Other banks will require you to use the bank's contract form. They may even write the deal up on their contract according to your verbal negotiation with the REO manager. The bank's contract may have a clause that specifically forbids assignment. Read that contract to be sure there are no surprises. Raging Profits with REOs 56 CashFlowInstitute.com

57 If the bank is financing the deal there may be no way they will agree to an assignment of the contract. After all, the bank wants to know who is going to end up owning the property and making payments on the loan. You could be trying to sell your contract to someone who is unemployed and has no money and bad credit. If there is any question about contract assignment you can state that you've been negotiating the deal on behalf of yourself and a business partner and his name will go title. You investor-buyer is something like a partner in the deal, so you are only slightly stretching the truth. Another tactic might be to take title to the property in an LLC and then sell the LLC to an investor. Yes, it adds another layer of paper work, but LLCs are easy and inexpensive to form. You can buy a kit for a few dollars and do it yourself. Just make copies of the kit's form every time you buy another property to flip. If the bank is financing the deal they would have to accept the LLC as the payor on the loan. This is just thinking from a person who is not qualified to give legal advice. Since contract law varies from state to state the sensible thing is to find a real estate attorney and ask for his suggestions. That should cost you about one hour of the attorney's time. A good investment if you ask me. And it's tax deductible against your real estate profits. Plus, you can use the attorney's advice on all future deals. Raging Profits with REOs 57 CashFlowInstitute.com

58 Cash Is King The most efficient way to buy REOs is for all cash. There are plenty of hard money lenders that will make short term loans on properties that have the kind of protective equity found in good REO deals. Find their ads in the financial section of your newspaper or in the classified section. TIP: A hard money loan is a species of real estate loan collateralized against the quick-sale value of the property for which the loan is made. Most lenders fund in the 1st-lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Hard money lenders structure loans based on a percentage of the quicksale value of the subject property. This is called the Loan-to-Value or LTV ratio and typically hovers between 60-70% of the value of the property. The lender charges "points" (one point is one percent of the loan amount, usually financed into the deal), which can range from 1 to 5. For the purposes of determining an LTV, the word "value" is defined as "today's purchase price". This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a 1-4 months' time. This 'value' differs from an appraised value. If you can't find a local hard money lender you might try one of these: Lender One Lender Two Lender Three Lender Four (We list these for informational purposes with no recommendation.) Yes, the interest rates are high, but you just figure those into the cost of Raging Profits with REOs 58 CashFlowInstitute.com

59 the deal. When you are flipping you will need the hard money loan for a very short period of time. Cash deals go together quickly and leave the banker with a smile on his face. Flipping Step by Step Flipping simply means buying or contracting to buy a property and reselling the property or the contract quickly, as opposed to holding on to a property long term as a rental. Flipping comes in several varieties, most of which are legal and profitable, some of which are not. Recent regulations have been put into place to block the flipping of certain types of financed property. That is why you will seldom have the opportunity to flip an REO that is being financed by the bank. Flipping a purchase contract is another story and should not be a problem with REOs. Let's keep it simple: STEP 1: Find a few investors who are ready and able to close quickly on any good deal you get under contract. A good way to find investors is to advertise for them in the largest newspaper in your town. Run your classified ads in the "Investment Property" or "Money Wanted" section. Or... You may find investors by calling any phone number you see on "We Buy Houses" ads. Or... Another good source is a local real estate club. You can find a list of real estate clubs at LegalWhiz.com Get each interested investor's name, street address, address and Raging Profits with REOs 59 CashFlowInstitute.com

60 telephone number. Your job is to convince each investor that you regularly will be providing them with properties at a cost well below fair market value. Screen your investors and make sure that they understand that they must have their money ready when you bring them a good deal. If they can't show that they have needed cash readily available, demand that each be prequalified for a fast loan from his bank or lender. To prequalify for a loan means that the investor has had his bank declare him qualified for a loan before he actually needs the money. It's even better to get a pre-approval letter from a lender. Qualifying Money Partners/Buyers Require each investor to illustrate sincerity by providing you with a detailed letter that includes the following: A prequalification/approval letter from a lender. How many days will he need to produce the needed cash? Will he buy properties other than single family homes? Which areas of town are acceptable? What is his price limit per property? Does he plan on buying more than one property? Start a file card or database entry on each investor you talk to. When you find a deal check your file for an interested investor. Then you can contact that investor and set the wheels in motion. STEP 2: You and the banker sign a purchase contract allowing you to buy an REO at a deep discount. The better the deal the more money you can ask from your investor. Now you can call the investor you have lined up and tell him/her that you Raging Profits with REOs 60 CashFlowInstitute.com

61 are ready to assign the purchase contract to them. To assign the contract create a document that states: "I, YOUR NAME, hereby assign all of my rights and privileges under this contract to Ivan Investor for $ to be paid at closing." In the blank, fill in the amount of money the investor has agreed to pay you, including your contract deposit. The Benefit Of Buying at 65% Of Value You will find that many investors will jump at the chance to buy property for 70 or 75 percent of market value. Your newly acquired REO knowledge will allow you to buy properties for 65% of their fair market value, or less. That means you can pocket at least 5% of a property's fair market value when flipping a contract. Over time you may run across some investors who will be happy buying properties for 80% of their fair market value. You will make a delicious 15% profit from those flips if you have a contract to buy it at 65% of value and there will still be room for the investor to make a profit. As we explained earlier, your signed contract with the bank should have the words, "and/or assigns" right after your name in the purchaser's section of the contract. This gives you the right to assign the contract to your investor. You did check the contract to be sure that was nothing in it that forbids an assignment, didn't you? Here's how the figures in a deal might add up. You found an REO with a fair market value of $200,000. You have negotiated with the bank to purchase it for a total of $130,000. That's 65% of fair market value. Your purchase price is $130,000. Your investor will buy from you at 70% of fair market value. That means the investor will pay you $140,000 for the property. Raging Profits with REOs 61 CashFlowInstitute.com

62 Your contract with the bank is for $130,000 and the investor is paying you $140,000 - you pocket the difference of $10,000 at closing. That's when the investor will pay you the $10,000 and then he will pay the bank $130,000 for a total purchase price of $140,000. You have no other costs and no other money in the deal besides the money you gave as a contract deposit. You have previously explained all of this to the investor, plus the fact that he/she must reimburse you for the deposit you submitted with the purchase contract. Since the investor is actually the one taking title he or she pays all the normal closing/settlement costs. STEP 4: The last step is the settlement/close. If it is customary in your area for the principals to attend the settlement, you must be there with the investor. This is important because you don't want any last minute complications to kill the deal. The banker doesn't know the investor, and might get confused. At the same time, the investor doesn't know the banker, and might get confused. At this point, the banker should have no problems with you flipping the property as long as the bank gets the total amount of money that it is due at settlement according to the contract. Often, at the closing, the bank is represented by an attorney you have never met. He just wants to get the deal done and should present no problem. There should be absolutely no reason for any complications to arise. If there is something you now have an understanding of how the system works and can easily handle problems. Bank, investor, escrow personnel and you all want to get the deal done. Every involved wants to more on to other business. If you used a real estate agent to find the property he or she is entitled to compensation. I suggest paying the agent at least one percent of the Raging Profits with REOs 62 CashFlowInstitute.com

63 property's sale price. If there was extra work or service provided you can bump that figure up some. You want a full-out effort from the agent on your next deal. You will only get that if you pay for the service rendered. Advantages of Buying Bank REO Properties All liens against the property are removed once it becomes an REO, and taxes are paid. Unlike properties at foreclosure auction, REOs can be inspected prior to contract, and are listed with real estate agents. While many foreclosures are often in deplorable condition, REOs are typically restored to at least a readily salable condition by the lending bank. The bank or lending institution that owns the property will often offer financing with better deals then they would offer on traditional properties. The bank or lender that owns the property will often provide an allowance for certain repairs. You can save money in your title search if you use the same title company that the lender used during foreclosure. They will often discount the cost up to as much as 100%! REO properties are usually listed on your local MLS (multiple listing service), or can be located by going directly to your local REO bank s website. REOs will often times include appliances. While in hot markets, you may not see a difference in price between an REO and a typical property, during slower markets, you can pick up REOs Raging Profits with REOs 63 CashFlowInstitute.com

64 at large discounts to the property s actual value. REOs Overview The lender/bank has taken ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction. The lender usually sells the property to recover the unpaid loan amount. The lender typically clears the title for any buyer, but the potential bargain is often less than a pre-foreclosure or auction property. Contacting The Lender You should contact the lender directly and ask for the REO or asset management department to find out how you can view and make an offer on the property. REO means "Real Estate Owned" by the lender. It's another way to say the property has already gone through the foreclosure process and has now been repossessed by the foreclosing lender. If you have trouble contacting the bank by phone, another option is to overnight or fax a letter to the bank stating your interest in the property. Some buyers and investors include a check made out to a local escrow company to get the bank's attention. This check is usually a small percentage of the total purchase price and should be refunded if no transaction takes place, but it shows you're a serious buyer. Make Your Offer Raging Profits with REOs 64 CashFlowInstitute.com

65 Although the lender usually clears out any liens on the title, you should still make any purchase offer contingent on a title search. Also, find out if the lender has made any repairs to the property or if it is being sold "as is." The lender wants to recover any money they've put into the property, but you can often make a successful offer that's still substantially under the market value. There is no set timeframe within which the banks must sell their REOs; however, banks often want to get REOs off their books rapidly. As a result, many REOs sell quickly. The only exception is if there is a "redemption period" for the owner to buy back the property after it is repossessed by the bank. State law dictates if there is any redemption period. The bank will typically wait until the end of any redemption period to sell the property. Keep in mind that sometimes contacting the lender can be frustrating, as the main purpose of a lender is to loan money, not to sell property. So even though the bank may have a department that handles bank-owned property for sale, that department may be hard to track down. How to Contact Lender Your first step is to contact the lender who now holds the property to find out more details and possibly set up a viewing of the property. You or your agent should submit your purchase and sale offer to the lender directly or the listing agent who will forward it to the lender for consideration. Once it is received, they will accept it, reject it, or make a counter offer. Once your have offer accepted, the bank or loan company will prepare a contract for you to sign. It is vital that you take a good look at the contract and have your legal representative go over it with you. The purchase and sale agreement (or contract) will serve as the letter of closing. All terms and conditions in the purchase and sale agreement will be adhered to. Raging Profits with REOs 65 CashFlowInstitute.com

66 Finally Real Estate Bubble and REOs You've read a lot about whether areas of the US are experiencing a real estate bubble. What is a real estate bubble? Is the current housing market in a real estate bubble? A real estate bubble occurs when housing prices take an unhealthy climb instead of rising gradually with the rate of inflation or the rise in median incomes. When the bubble bursts, housing prices tumble, which causes the real estate market to collapse, often followed by a recession in that area. In a real estate boom, the cycle runs its course and a market correction takes place more gradually, with prices settling down to more realistic levels. What Causes a Real Estate Bubble? There's heated argument among experts about whether we're in a real estate bubble or a real estate boom. Either way, the rising cost of housing encourages people to take on risky debt. The bubble (or boom) has been fueled by falling interest rates, which makes higher priced houses more affordable, and the willingness of homebuyers to take out second and third mortgages, variable rate loans, terms longer than 30 years (unwise), mortgages that exceed the value of the home (if you can believe it), and interest-only loans (buyer beware!). Most of these place homebuyers at extreme financial risk. Raging Profits with REOs 66 CashFlowInstitute.com

67 Guidelines Ignored The rule of thumb that your total housing expenses, including principal, interest, property taxes, and homeowners' insurance, should not exceed 25% of your gross monthly income has been tossed aside in recent years. The Center for Housing Policy reports that in the last five years the number of working families paying more than 50% of their gross income for housing has jumped by 76%. When people spend so much on housing, they are often forced to use credit card debt to pay other expenses. They may feel confident that they're okay financially because their home is appreciating in value, but in reality, they're paying often outrageous interest rates on credit card debt and stretching the payments out over many years by making minimum payments. The people most at risk are those with adjustable rate mortgages. As interest rates rise, many people with adjustable-rate mortgages and low monthly payments that allowed them to buy a home they couldn't really afford will not be able to make the rising payments. According to Foreclosures.com, four out of five U.S. subprime loan recipients can no longer afford their mortgages. That means they are heading for foreclosure. As home prices fall, these people may owe more than their house is worth. They may be forced to sell, perhaps at a loss. Where will they get the money to pay off their mortgage if the balance is more than they'll get for the house? Some will be forced to default and walk Raging Profits with REOs 67 CashFlowInstitute.com

68 away from their home, ruining their credit for many years. At this point if the bubble is not bursting it certainly has a dangerous leak. Foreclosure rates have spiked and that means banks will end up with more REO properties in inventory. Because of recent mortgage fraud (over 50 subprime lenders have filed for bankruptcy as these words are written) qualifying for real estate loans is become much stricter. That means few people can buy homes and bank will have a hard time trying to sell REOs. More REOs - Fewer people able to by! A wave of opportunity is developing for those who understand how to buy "bank owned property". That's YOU! Photos illustrating this guide are actual bank owned properties. There are many opportunities for profit in a distressed real estate market. Don't limit yourself to just one money-maker: Screaming Foreclosure Profits - The explosion in home foreclosures throws down the greatest wealth building opportunity in the last 20 YEARS! Click Here The Million Dollar Foreclosure System - Foreclosures are at all time highs. Learn here how to find motivated sellers & buy their homes at big discounts. Click Here Short Sales - A Guide for Foreclosure Investors - With foreclosures banks are willing to discount the loan amount Raging Profits with REOs 68 CashFlowInstitute.com