have very little to no equity or even negative equity built up in their property, and they have no hope of turning the financial tide, they may offer the lender a deed in lieu of foreclosure. The homeowners agree to sign their deed over to the lender and give them the keys to the property without having to go through a messy public foreclosure process.
Although this approach may give the homeowners a less-embarrassing escape route, it often leaves the lender with a property that it doesn’t want, along with the expense of repairing and rehabbing the property and then selling it. As an investor, you may be able to step in as the ultimate middleman, negotiate with the lender, getting it to accept less than the full loan amount due (what real estate insiders call a short sale), and still provide the homeowner a clear escape route.
Getting one last chance during the redemption period
Reasonable people would assume that when they buy a property at a foreclosure sale, it’s automatically their property, but that’s not always the case. Many areas of the country have a mandatory redemption period, which can last from a few months to an entire year. Check out the appendix at the back of this book to find out about the redemption period in your area.
During the redemption period, the person who purchased the property at the sale is responsible for insuring the property and paying the property taxes, but the foreclosed-upon homeowners have the right to redeem the property. To do so, the homeowners must come up with enough cash to pay off the mortgage in full, along with any interest and penalties and, in some cases, the investor’s expenses.
If you purchase a property at a foreclosure sale in an area that has a mandatory redemption period, you end up with the property about 50 percent of the time. The only sure way to end up with the property is to buy in markets that don’t have redemption periods. (Check out the appendix at the back of the book to determine whether your state has a mandatory redemption period.) To protect your investment in areas that have a redemption period, take the following precautions:
If possible, repair any defects in the house that may be considered to be unsafe or lead to further deterioration of the property. If the property is vacant and unsafe, and you don’t take care of the problem immediately, the property is likely to lose value. Avoid investing any more money in repairs than is absolutely necessary; if someone redeems the property, you stand to lose that money.
Insure the house and file an affidavit of payment so that if the homeowners redeem the property, you have a better chance of recouping your expenses. Consult your real estate attorney to determine your rights to recover expenses.
Pay the property taxes, and file an affidavit proving payment.
Don’t invest in any renovations. If the homeowners redeem the property, you could lose all the money you invested in the renovations. Generally, you perform repairs only to protect your investment if the house is vacant or if you’ve worked out an arrangement with the occupants to ensure that you won’t lose any money you invest in the property. Different states may have different abandonment laws that may restrict you from doing anything. Your real estate attorney can provide guidance here.
Keep an eye on the property to protect it from vandalism and theft. Some disgruntled homeowners may strip the property before vacating it.
For additional advice on surviving the redemption period, see Chapter 16.
LOSING OUT ON A JUNIOR LIEN
I bought a first mortgage (senior lien) at the first foreclosure sale on a property for $25,000. Another investor bought the second mortgage (junior lien) for $25,000. Thinking that he had the property in the bag, he spent another $25,000 during the redemption period renovating the house, so now he had $50,000 invested in a property that was worth about $100,000.
That sounds like a good deal, but the investor made a huge mistake: He failed to pay off the senior lien, which I held. He could have redeemed the $25,000 senior lien that I held, sold the property for $100,000, and made a $25,000 profit, but he forgot to redeem the senior lien.
I took possession of the house and put it up for sale. The other investor called, understandably upset because he was convinced that the house was his. I had to explain that due to his oversight, the house was not in fact his, but mine.
The moral of the story is that if you buy a junior lien attempting to control the senior lien, be sure that you redeem that senior lien.
Finalizing the Foreclosure: Ushering the Previous Owners Out the Door
Eviction is an unpleasant experience for both the evictor and the evictee, so you want to do everything you can, within reason, to encourage the previous homeowners to vacate voluntarily. Offer them an incentive package — a free dumpster, use of a moving van, relocation expenses, or whatever else they need — to put this problem behind them and move on to a potentially rosier future.
If that approach doesn’t work, you have no option but to file a request with the district court to have the homeowners evicted. After you file your request, assuming that it’s approved, the sheriff’s office delivers the homeowners an eviction notice stating the date on which the eviction will occur. On that date, if the homeowners haven’t vacated the premises, the sheriff shows up to forcibly remove them and their belongings, and you formally take possession of the property.
PUTTING SOME EMPATHY IN EVICTION
I knew an investor who reveled in evictions. He would drive to the eviction site, park his red Porsche in front of the house, and make fun of the people being evicted. He even went so far as to take photographs and hang them on his office wall. The company he worked for was doing a billion dollars' worth of business annually, so maybe that fact made this cold-hearted investor feel justified, but the only real justice was what finally happened to him and all the senior management at his company: The U.S. Securities and Exchange Commission investigated its business practices
