If you live in a state that has
redemption, then there is a completely different set of rules to follow.
Most of the guru’s stop just short of how to handle foreclosure in a
redemption state. Redemption in the different states can run anywhere from a
few weeks to several months.
If you are in the foreclosure
market, there are 3 ways to buy investment properties:
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Pre-Foreclosure. You can buy
the house before the foreclosure sale directly from the homeowner. You
can either pay the mortgage off in full with investment money, or a new
loan, or you can take the property “Subject-To” and re-instate the first
mortgage and any other junior mortgage and liens. There are a whole host
of guru’s out there to teach you how to buy a house “Subject-To” and
re-instate the mortgages and even discount mortgages and liens. (Contact
me for more information on buying houses in pre-foreclosure and/or
subject-to)
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Redemption (Applicable only
if you live in a Redemption State). You can buy the house during the
redemption period. However, depending on the length of your states
redemption period, it could be a benefit or a disadvantage to buy during
this time frame. (Continued below)
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Directly from the bank. This
is the most common way to buy foreclosure properties in the United
States. You simple wait for the bank to take possession of the property
and make it available for sale. The advantages of buying the property
directly from the bank are numerous. First of all, there are no junior
liens or mortgages to deal with, because the foreclosure process
eliminates them, if they have not acted in the time allowed for by the
particular states statutes. You are buying the property directly from
the bank for whatever price you negotiate with the bank. The biggest
disadvantage is the competition. Because this is the simplest and
cleanest way to buy foreclosure properties at wholesale prices, this is
how the majority of investors buy their rehab properties.
Redemption (Applicable only if
you live in a Redemption State). You can buy the house during the redemption
period. However, depending on the length of your states redemption period,
it could be a benefit or a disadvantage to buy during this time frame. Let
me start off buy giving you 2 real life examples.
Example 1)
$110,000 After Repaired value
$96,000 First Mortgage
$8,000 Rehab Costs
I bought the house about 1 week
before the foreclosure sale. There was not enough time to deal with the bank
before the sale. They were not willing to negotiate at this time, and there
was nothing I could do to stop, or postpone the sheriff’s sale. I thought I
lost the deal because I was not willing to get a new loan to pay off the
$96,000 first mortgage plus all the closing cost and $5,000 - $10,000 in
rehab to try and sell the property for $110,000. But I decided to contact
the foreclosing Mortgage Company again and see were their motivation was.
Funny thing how motivation at the Mortgage Company changes from one
department to the next. They were not willing to negotiate when the
pre-foreclosure department was in control of the property. But, after the
sheriff’s sale the property was transferred to the department that was to
manage the property during the redemption period and once they got physical
possession of the property. They had a totally different viewpoint of the
situation. They didn’t want the house; all they wanted was to satisfy the
loan. They were more than willing to deal with me, because I owned the
Redemption Rights to the property (more on that later). I was able to
discount the property about 72.5% ($69,710). I bought the Sheriff’s
Certificate (more on that later) from the bank for $69,710 plus accrued
interest and sold the house for $114,900 on a contract for deed, the house
only needed about $8,000 in rehab costs.
$114,900 Sales Price
$80,000 New First mortgage including all closing costs and accrued interest
$8,000 Rehab Costs
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$26,900 Profit
Not to bad for a house that most
people would have past up on given the initial information and the Mortgage
Companies unwillingness to negotiate before the Sheriff’s Sale.
Example 2)
$125,000 After Repaired value
$80,000 First Mortgage
$10,000 Second Mortgage
$13,000 Third Mortgage
$10,000 Rehab Costs
This is a deal I was working
with someone else on. He brought it to me about 1 week after the Sheriff’s
Sale. We got the Redemption Rights from the previous homeowners. They just
wanted out, they could not sell it and the house had already gone into
Foreclosure at the Sheriff’s Sale. The Mortgage Company new there was enough
equity in this property that they were not willing to negotiate the sale of
the mortgage. We ended up paying full price for the first mortgage of around
$80,000. We bought the Sheriff’s Certificate from the First Mortgage
Company. We let the redemption period run out and we owned the property for
the $80,000 we paid for the Sheriff’s Certificate. You see, the foreclosure
process virtually wipes all junior mortgages and liens out if they do not
act before or during the redemption period. We have not sold this property
yet, but now we can sell it for anything we want above the $80,000 we paid
for it, plus any minor rehabs we have done to the property. Isn’t that
better than having to also pay for the second and third mortgages as well?
There might not have been enough equity to do anything with this one if we
also had to pay the second and third mortgages.
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On the second example we might
have been able to discount the second and third mortgages, but would we have
wanted to? Lets say we were good negotiators and were able to get a 50%
discount on both the second and third mortgages, how much would that have
been? ($10,000 + $13,000 = $23,000) $23,000 * 50% = $11,500. I don’t know
about you, but I would much rather do it the way we did, than pay an
additional $11,500. Look at it this way; just by knowing how the redemption
works, we were able to make another $11,500 on an already good deal. And we
got the property before the bank had the opportunity to put it back on the
market were all the other investors would have bid the property up to a
point that was more that we would have been willing to pay.
Also, we were not able to redeem
the property in the second example. If we redeemed the property, then that
would be subject to the rights and interests of all junior mortgages and
liens. The legal term is Unjust Enrichment, which basically means you cannot
let the property go into foreclosure, then redeem the first mortgage to get
rid of the other junior mortgages and liens. If the homeowner redeems the
first mortgage after the Sheriff’s Sale, then all junior mortgages and liens
are back in their original places and still in full force. So we had to buy
the Sheriff’s Certificate, take the banks place in the foreclosure and wait
out the redemption period before we could sell the property.
Why wouldn’t the second or third
mortgages just redeem the property their selves? They could have, but lets
look and see if it makes any cense for them to do this. If the second
Mortgage Company was to redeem the first they would have to pay the whole
$80,000 to the first Mortgage Company to protect their $10,000 second
mortgage. And what if they couldn’t sell the property for enough to cover
the $80,000 they paid the first, the $10,000 they were owed, plus all their
legal expenses in this whole process. I might be cheaper for them to just
let the property go and cut their losses. And what about the third mortgage?
They would have to pay $80,000 to the first and $10,000 to the second, plus
all their legal expenses in this whole process. Second and third Mortgage
Companies take a big risk in these situations and they know it. But they
also know what percentage of their loans will go bad, and they usually
charge a much higher interest rate that first mortgages for their risk.
Redemption Rights:
When you convey title (fee simple ownership) to someone, one of the rights
conveyed is the Right of Redemption, if your state has redemption rights. If
the Mortgage Company has to foreclose for whatever reason and your state has
redemption rights, then the only thing you retain is the Right of Redemption
until the State Statutes run out. That can be anywhere from a few weeks to,
in my State of Minnesota 6 months.
Sheriff’s Certificate:
When the bank forecloses and there is a Sheriff’s Sale, the bank gets a
Sheriff’s Certificate from the Sheriff. The Sheriff’s Certificate conveys
all rights back to the bank except the Right of Redemption, which the
homeowner retains until the State Statutes run out. At which time the bank
now owns the property, and now has the right to sell the property to get
their money back from the loan they had to foreclose on.
Mike Jacka is the President
and Founder of
The Minnesota Real Estate Investors Association
www.MnREIA.com, a Real
Estate Broker, an active Investor and a published author of “Real Estate
Promo eNewsletter”.
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