Step by step Guide to Do it Yourself Foreclosure Solutions

A Step by Step, Do It Yourself Guide to Surviving Foreclosure, Without Filing Bankruptcy or Spending a Fortune in Fees, etc…

Thank you for taking for requesting this e-book. Never before has so much information about how to survive foreclosure been put into a single document and written for the homeowner’s benefit. Until now, all of the other books on the market were written to teach people how to buy properties from homeowners like you. Instead of another foreclosure investment guide, This e-book Is to help you, the homeowner, fend off vultures like those and hopefully keep your home (we can help you along the way if you request it) or at least sell it with options. If you want to list your property on a non-exclusive basis, we can also do so. For refinance and/or access to a loan. we will try to get the best lenders for you The control will always be on you. CALL US at (951)278-2207 24/7

WHAT IS FORECLOSURE? What is foreclosure, anyway? Let’s begin by taking a step back and describing what foreclosure is and what it’s all about. The mortgage or deed of trust document signed by a borrower during a purchase or refinance of a home gives the lender the right to sell the property if the

borrower fails to live up to the terms of the agreement. Basically, foreclosure is the legal process a lender can use to enforce the provisions of that mortgage. As you may have noticed above, the terms mortgage and deed of trust appear here. Some states use a deed of trust instead of a mortgage. Though they are both legal instruments that spell out the rights and obligations of both lender and borrower, their terms of enforcement are handled differently. This book uses the term mortgage even when deed of trust would be more accurate. For the purposes of the discussions here, the two terms are interchangeable. TWO TYPES OF FORECLOSURE There are two common types of foreclosures: Judicial and Non-judicial. For all practical purposes, they amount to the same thing. The differences primarily concern with how the lender ultimately gets to the foreclosure auction. JUDICIAL FORECLOSURE In a judicial foreclosure, the lender must actually sue the borrower and get permission from the courts to foreclose. As you might imagine, this process is slow and expensive. In some states a judicial foreclosure can take a year or more. To begin the process, most lenders will wait until the loan is two or three months behind. Then, because the process is so lengthy and expensive, they will usually attempt to contact the borrower and offer an alternative to foreclosure. This is typically a payment plan of some kind, also known as a forbearance plan, which will be discussed later. If the lender is unable to work out something with the borrower, they will then file what’s called a lis pendens, a fancy legal term meaning that they are starting a lawsuit. Usually within 30 days of this filing, all parties with an interest in the property (owners, other lenders, lien holders, etc.) receive notice of the foreclosure action from the court. This gives anyone with a potential financial interest in the property a chance to respond or object to the foreclosure. The notice will contain a deadline, after which no answer or objection will be permitted. Anyone who does not answer is assumed to accept the foreclosure. The actual process is different in all states, but generally the lawsuit

proceeds and the lender usually (but not always) prevails. The court grants permission to the lender to sell the property. Realize that the timeline of the process differs from state to state. This section exists simply to offer an overview and general understanding of the process, and not to completely describe a complicated legal procedure. The remainder of the process is very similar between judicial and nonjudicial foreclosures. NON JUDICIAL FORECLOSURE Non-judicial foreclosure gives the lender the right to foreclose without using the court system. That means it’s a much quicker and less expensive process than a judicial procedure, so lenders don’t typically wait as long before starting. Some lenders start to foreclose when a loan is only two months behind! In states that practice Non-Judicial Foreclosure, the process often begins with a 30-day demand for payment letter to the borrower. The lender is required to give the borrower this chance to bring their loan current before the foreclosure action can officially begin. The next step is for the lender to record a Notice of Default in the County Land Records Office (this may also be known as the County Recorder’s Office or the County Registry of Deeds in some states). This provides notice to the public and any potential lenders or buyers that a foreclosure action is about to take place. As a Notice of Default would cloud the title, it would be very difficult to refinance or sell the property. Not all non-judicial states require a Notice of Default. Some of them skip this step and go straight into the Public Notice of Sale. As was mentioned earlier, a non-judicial process is much swifter than a judicial process, owing to the fact that there won’t be a trial. In fact, some of them can be completed in less than four weeks! STAGES OF FORECLOSURE PUBLIC NOTICE OF SALE The next step is the Public Notice of Sale. Most states require that an official Public Notice be published once a week for three or four consecutive weeks in a newspaper of general circulation in the county where the property is located. The Notice of Sale specifies the name of the lender, borrower, address of the property, usually its legal description, the location and time of the

sale, terms of the sale, and any required legal language explaining the rights of the borrowers and bidders. It’s at this point when most of the vultures get involved. You can sometimes spot them sitting in the corner of a local fast food joint, scanning the public notices section of the newspaper, writing furiously on a legal pad. AUCTION If the borrower fails to cancel the foreclosure, the attorney or auctioneer handling the file will conduct the auction. In almost every state, the auction is held at the county courthouse, though some states allow the auction to be held at the attorney’s office or other publicly-accessible place. At the appointed place and time, the attorney or auctioneer handling the sale will request that all interested bidders register and show proof of funds. Each bidder is required to bring a deposit to the auction, usually in certified funds (cash, bank check, money order, etc.). The amount of the deposit will vary from location to location, and sometimes even from auction to auction, but is often a few thousand dollars. Once all bidders have registered, the auction begins. The auctioneer reads the legal notice and announces the terms of the sale. Then the bidding begins. Usually the bidding will start ridiculously low, but then quickly build to a more reasonable number. It’s very rare, however, that a property is bid up to its real market value. In most auctions, the lender will have set a reserve price, below which they can refuse to sell the property. If the high bid doesn’t exceed this reserve price, the lender can reject the bids, and then the lender becomes the new owner. Assuming the bidding goes higher than the lender’s reserve price, the property will be sold to the highest bidder. This bidder will then be required to surrender his deposit and sign a sales contract. The unsuccessful bidders get their deposits back. At this point, the auction is over and the successful bidder will have some period of time (anywhere from 1 – 60 days) to complete the sale. Foreclosure sales have no financing or inspection contingencies, and all sales are as-is, where-is. Should the high bidder fail to complete the purchase, he usually loses his deposit. The lender will then either offer the property to the backup bidders, or hold the auction again.

SPECIAL FORECLOSURE SITUATIONS REDEMPTION Some states have a redemption period, either immediately before or immediately after the foreclosure auction. This is a period of time during which the borrower can bring the loan current, paying all outstanding balances and legal fees, and thus nullifying the foreclosure. The length of the redemption period depends on the state. In some states, such as Minnesota, the redemption period begins immediately after the foreclosure auction. During this time, the borrower or any junior lien holder may redeem the foreclosure by paying all costs associated with the foreclosure and by bringing the foreclosing loan current. In states like Maine, the redemption period is the 90-days prior to the auction. The borrower can simply reinstate the loan during this time and stop the foreclosure entirely. Many states are non-redemption, meaning that the sale cannot be overturned after it has been held. In fact, in most non-redemption states, a bankruptcy filed just 60 seconds after the high bid has been recorded is too late to stop the foreclosure.

JUNIOR LIENS What happens if the high bid is high enough to cover the foreclosing mortgage, but not high enough to cover any other outstanding loans and liens? In that situation, the junior lien holders take what’s left, in order of their priority. All of the junior liens then simply cease to exist. Which liens are senior and which are junior? That’s depends on their respective priorities. The liens’ priorities are determined by both statute and recording order. Usually the first document recorded has priority over the second document recorded. But there are some notable examples, such as property tax and condo liens. An example will make it clearer. Imagine a house with two mortgages and a property tax lien, as shown below. 1. Mortgage, Recorded on November 1, 2001, for

$100,000 2. Mortgage, Recorded on June 5, 2003, for $25,000 3. Property Tax Lien, Recorded on September 30, 2004, for $3000 Going strictly by recorded order, the $100,000 mortgage is the 1st Mortgage, and the $25,000 mortgage is the 2nd mortgage. So far, so good. The problem is the property tax lien. In all states that this author is aware of, property tax liens are always in first position. This is why most lenders require you to escrow your property taxes with them, to ensure that your taxes are paid on time. So in this example, the property tax lien is the first priority lien, followed by the 1st mortgage, and then the 2nd mortgage. So assume the 1st mortgage is foreclosing, the property goes to auction, and the high bid is $100,000. The foreclosing attorney would pay this money to his client, the 1st mortgage lender. The 2nd mortgage lender will get nothing and its lien will legally vanish. The property tax lien will 15 remain in force, with the high bidder required to pay it in full. Had the high bid been more than $100,000, the 2nd mortgage company would be entitled to the extra money, up to the total amount due on its loan. DEFICIENCY JUDGMENTS Continuing the example above, what happens when the 2nd mortgage lender doesn’t get all the money owed to it? If the amount of money is substantial, the lender can sue the borrower for a deficiency judgment. If granted by the court, the borrower will still owe the lender the amount the lender was entitled to under the original loan agreement. This means that even after the foreclosure sale, the lender can still come after the borrower for its money. This often results in the borrower being forced into bankruptcy, adding insult to the injury of losing their home through foreclosure. OVERAGES But what if the opposite happens? What if the high bid is more than what’s owed on all of the liens combined? That’s called an overage, and technically, the money belongs to the borrower. That’s the theory, anyway. The reality isn’t quite that simple.

First of all, there is no guarantee that the bidders will bid up the property to its true value. In fact, it almost never happens, because many of the people who attend foreclosure auctions are professional buyers. Most of them know each other and some even travel together. They know what the foreclosing lender is owed on the property, and aren’t likely to bid any more than that. Don’t expect an unsophisticated buyer to bid the property up to its full market value. It happens, but only rarely. The second problem is that some attorneys don’t automatically send the overage to the borrower. Instead they deposit any excess proceeds with the state through a legal procedure known as an Interpleader Action. In the state of Washington, this is actually required by law. At that point, borrowers must hire a lawyer to go after the money that is legally theirs. These lawyers aren’t cheap, either. Most will charge thousands of dollars, whether or not they get the money back! At this point you now have a grasp of the basics. You should understand what foreclosure is and generally how it works. It’s now time to explore what you can do about it. Fortunately, there are more options available than simply selling the house or watching it go to the auction. Exactly which options are available to you will depend on your unique circumstances. This section briefly describes the options available, each beginning with a short example of a real situation and how it was resolved. REINSTATE THE LOAN Obviously, if you can come up with the cash, it always makes sense to bring the loan current. If it was that easy, you probably wouldn’t be reading this book. But just in case you may have overlooked something, here are a few ideas on ways to raise the money. LINDA AND TOM OVERCOME ADVERSITY Linda and her husband Tom lived in a modest ranch-style home in a small town in New England. Tom had been injured in a car accident and the other driver had no insurance. He was unable to work for about three months while he recovered. Linda’s salary and Tom’s disability insurance wasn’t enough to cover all their bills. Soon they were three months behind on their mortgage payment. Their lender began to foreclose.

Not long after they received the foreclosure notice, Tom was cleared to return to work at full salary. They now had the income, but were still about five thousand dollars behind, including back payments, penalties, and legal fees. They decided that they would do whatever it took to raise the money to bring their loan current. Tom didn’t really want to involve anyone else. Perhaps it was pride, but he had always been able to provide for his family. The foreclosure made him feel like a failure, even though it wasn’t his fault. Linda convinced him to swallow his pride and reach out to his parents and friends. After a week of phone calls and emails, they were able to sell a few unused items from their garage, get a gift from Mom and Dad, and borrow the rest from Tom’s 401k plan at work. They reinstated the loan, and never had another problem with their lender. BORROW FROM FAMILY/FRIENDS You should never overlook the generosity of family and friends. Many people try to keep their problems, especially financial ones, hidden from those closest to them. Maybe it’s pride or a sense of failure. If you need to be humble to keep your home, consider humility. BORROW FROM 401K Don’t forget about retirement funds, either, whether yours or a friend’s. If you have a 401(k) plan, you can usually borrow up to half of its vested balance at very favorable rates. And the interest you pay on the loan actually goes back into your account, which helps to increase the account’s value.

BORROW FROM A FRIEND’S IRA You can’t borrow from your own IRA or Roth IRA, but here is a littleknown secret. If you have a friend who is tired of lousy returns in the stock market, you can offer her an above-market return on a mortgage against your house. All your friend needs to do is transfer all or part of her retirement account to a self-directed IRA custodian (check the Resources section for a few of them) and then lend you the money. The custodian will want a signed promissory note and mortgage document, but those are easy to find and complete. Assume your mortgage is $10,000 in arrears. You have a friend who has that much in her IRA. You sign a promissory note and mortgage

document, and give them to her custodian. Your loan payments go directly to the custodian and into your friend’s IRA. When you ultimately refinance or sell the house, the custodian will be contacted for a payoff and your friend will be paid in full. Note that you normally cannot borrow from a direct relative’s IRA. An exception is made for sisters and brothers, for some reason. Don’t worry too much about it, though. The custodian will know the rules and should help keep you out of trouble with the IRS. WITHDRAW FROM RETIREMENT ACCOUNT You can also withdraw money directly from your retirement account, but that should be your last resort. The penalties and excess taxes make it very expensive. SELL OTHER ASSETS TO RAISE THE MONEY This is another often-overlooked source of funds. If you have an extra car, snowmobile, motorcycle, jewelry, etc., consider selling them to bring your loan current. GET A NEW 2ND MORTGAGE WITH A SUB-PRIME LENDER If you have a lot of equity in the property, some sub-prime lenders (Countrywide, Household Finance, Option One, and Beneficial, to name a few) will allow a homeowner to get a home equity loan, and use that to bring the 1st mortgage current. Be careful, though. These loans are usually very high-interest, and often carry large payments and huge prepayment penalties. GET A “HARD MONEY” LOAN In every city and town in America there are private investors who want to invest in real estate, but don’t have the desire to own houses themselves. Often, they will be able to make short-term loans to homeowners in distress. Usually the interest rate will be high and the loan term will be short, but if it’s your only choice, you may consider them to be an option. While not tightly regulated, these private loans are still governed by state and federal lending laws. Stay away from lenders who are looking to take advantage of you. Make sure the loan is closed with a reputable title company or real estate attorney who understands the lending laws in your state.

Because of the difficulties in finding and closing hard money loans, they really only makes sense if you simply need a bridge loan to buy yourself time to sell the property. REFINANCE WITH A NEW LENDER If there is enough time and you have enough equity, and your credit isn’t completely destroyed, it’s possible (though difficult) to find a new lender to refinance you out of the foreclosing mortgage completely. These are usually called Foreclosure Bailout Loans. Check with companies such as Countrywide, Household Finance, Option One, and Beneficial.

ALICE’S BRUSH WITH TERRORISM In the summer of 2001, Alice had a successful courier business. Two or three times a week she personally shuttled important documents back and forth between Boston and New York City. Then in September the World Trade Center towers were attacked and destroyed. Overnight her courier business vanished. She had no job and no savings, and soon found herself four months behind on her mortgage payments. She was eventually able to find other work in the area, but her business was gone and her loan in foreclosure. Other than this set back, Alice’s credit was perfect. She had always paid her bills on time, and her credit report only showed a single 120-day late payment. Her credit score was 600. Unfortunately, Alice lived in New Hampshire, a state with one of the fastest foreclosure processes in the country. She didn’t delay. There was still a month before the foreclosure auction was scheduled. She also had equity in her home. So Alice called a few local lenders and found one that could close a brand new refinance loan and completely pay off her foreclosing lender in only three weeks. The income from her new job was enough to afford the payments, even though her interest rate was higher and her payment was going to increase. Three weeks later, she closed on her new loan. Her foreclosure was behind her. She was able to move on with her life and ultimately rebuild her business. NEGOTIATE A FORBEARANCE PLAN WITH YOUR LENDER

The Encarta Dictionary defines forbearance as “the fact of not exercising a legal right, especially of not insisting on payment of a debt at the due date and giving the debtor more time to pay.” This is precisely what a homeowner in foreclosure needs. This is often the simplest solution to implement, other than bringing the loan current. A forbearance plan works best when you can come up with some money, still have income, but you are unable to come up with enough cash to bring your loan current. It further assumes that a complete refinance isn’t an option. The first thing to do is contact the lender and attempt to negotiate a solution directly. This is the fastest and best avenue to success, because you’re offering the lender what they really want: to get paid on their loan. JONATHON’S BUSINESS PROBLEMS Jonathan owned a small printing business. He lived in a large home in the country with a little bit of equity. Then one month his business faltered. Some of his customers failed to pay their invoices, and he didn’t have any extra cash to pay his suppliers. Not unexpectedly, his suppliers began refusing to extend any more credit to him. He couldn’t pay his bills, and lost new business because he couldn’t get any supplies. Within three months, Jonathan was in foreclosure. Knowing that timing is critical, Jonathan immediately called his lender, explained his situation, and asked them about repayment options that would enable him to keep his home. They sent him a forbearance plan, which he agreed to. He was able to scrape together $4000 of the $10,000 he owed and sent that to the lender a few days later. His payments went up by about $500/month for a year to allow him to catch up. It was a struggle, but it beat losing his home. NEGOTIATE A LOAN MODIFICATION In the previous story, though Jonathon negotiated a forbearance agreement, he also could have sought to get a loan modification. The differences between the two plans are subtle. Basically, a forbearance plan is short-term; a loan modification is long-term. Notice that Jonathon’s forbearance payments were $500 per month higher than his regular monthly payment, but then they went back to normal after a year. The forbearance was a temporary plan. The advantage of a loan modification is that though the payments will

probably increase, they won’t increase as much as with a forbearance plan. The disadvantage with a loan modification agreement is that the bank is permanently altering the terms of the loan. Depending on how far behind the borrower is, the bank might change any or all of the loan’s terms: interest rate, principal amount, number of payments remaining, and payment amount. A loan modification begins with the borrower requesting it. If the lender is willing, they will usually require similar paperwork as when the original loan application. They will check credit again, calculate the loan to- value, check the borrowers’ debt-to-income ratios, etc. It’s like starting all over. If the lender approves the modification, they will often add some (or in rare cases all) of the back payments to the principal balance of the loan, and extend the number of payments to cover the new balance. The length of the loan could easily increase by a year for each month’s worth of back payments. The lender might also raise the interest rate to reflect the risk they’re taking, which would increase the monthly payment. A loan modification typically requires signing a loan modification agreement that is recorded in the county records office. It officially and publicly changes the terms and character of the mortgage. Note that if there are any junior liens or additional mortgages on record, state law or bank policy may prevent a loan modification from being a possible option.

REFINANCE WITH THE EXISTING LENDER Though rare, some lenders will actually consider a direct refinance with a homeowner in default. Those who do will most certainly require proof that the problems you faced were truly temporary, and that the problems are now behind you. They will also want to see adequate income and a credit report that is mostly unblemished apart from the foreclosure. NEGOTIATE A SHORT SALE AND SELL BILL AND BARBARA ESCAPE FROM DISASTER Bill and Barbara lived in a nice house and both had very good jobs. Like many American families, they occasionally had some overdue bills, and had gotten a home equity loan to pay them. This new home equity loan ate up all of their remaining equity. Things were tight, but they

managed. Then Bill got hurt at work. Just before Bill’s injury, their home equity loan’s interest rate went up and their payment jumped dramatically. “Workman’s Compensation” paid some of their bills, but not enough to maintain their mortgage payments. They found themselves suddenly behind on both of their mortgages, and owing $6000 to the city in back property taxes. Both of them realized that they simply couldn’t afford their house anymore. The interest rate increases, cost of gasoline, and all of the unexpected expenses were simply too much for them to handle. They knew that selling their home made the most sense, but they now owed more than it was worth! Instead of panicking and running away, as some people do, they found a real estate investor in their area who specializes in this sort of situation. They agreed that they would sell him the house as long as they didn’t need to bring any money to closing.

The investor determined the value of the property, unconcerned with the loans’ balances. He had the property listed with a local real estate company and immediately submitted an offer to buy it. His offer specified that both lenders would have to agree to accept less than they were owed on their loans. After about a month of negotiations with both lenders, the investor ended up with a price that was $37,000 below the loans’ balances. He helped Bill and Barbara find a new place to live, fixed up the house, and ultimately rented it to a young newlywed couple. ABOUT SHORT SALES Can you imagine yourself in a similar situation? The loan is in default and the loan balance is higher than the property value. What if the lender actually paid you to sell your house? With a short sale, that is essentially what the lender does! Negotiating a successful short sale simply means that the lender is accepting less than full payoff on its loan. This is also known as discounting the loan. Typically this is done in conjunction with the sale of the property. A short sale is most probable when the property in question has one or more loans against it in default and has little or no equity. The lenders know that if the property goes to a foreclosure auction, they are not

likely to receive their full payoff. Junior lien holders are often in danger of getting absolutely nothing! Therefore, they are often very motivated to accept a short sale offer. You always need to remember that banks are not in the business of owning houses. Thus, if the property can be listed and sold for a reasonable price, most lenders will negotiate the amount of the payoff so that they don’t end up with the house. In many cases, they will even give you extra time to sell it. Short sales will be covered in more detail later. SELL THE PROPERTY BEFORE THE AUCTION This is where most pre-foreclosure vultures spend their time. They try to convince the owners to sell them the house (usually for tens of thousands of dollars below fair market value). For some people, this is a realistic option, but understandably not their first choice. For a few, it could be their only option. But unless you really want to sell, this should be your last option. This section discusses some of the methods you can employ to sell your house before the foreclosure auction, and without resorting to selling to a vulture. ADAM’S CONDO Adam had a luxury condo he knew he couldn’t afford. Sales had been down lately and he simply wasn’t bringing in the income he used to. He was two months behind on his mortgage payments. The lender hadn’t started foreclosure just yet, but he knew it was only a matter of time. He decided to do something about it before it was too late. Being somewhat of a computer buff, Adam spent the weekend researching all of the condos in his complex that had sold recently. Then he looked to see what was currently available for sale – his competition, for lack of a better term. Over the next few days he interviewed real estate agents in a creative way. He made appointments with the listing agents of each similar condo in town that appeared to be similar to his. This accomplished two things: he got to see the competition firsthand; and it helped him get a feel for which agents he might want to work with. After seeing about a dozen condos, Adam had a pretty good idea of what he could get for his own. He knew he had to sell it quickly, so he priced it near the bottom of the condos that most closely matched his. He

understood that potential buyers would do the same types of comparisons that he just completed. However, knowing he had a little bit of time, he decided to try to sell it himself for a couple of weeks. He ran a small ad in the classified section of his local newspaper for two weeks. After the first weekend of fielding phone calls, dealing with low-ball offers and showings to unqualified buyers, he decided that selling it himself really wasn’t working. He found the business cards of two of the listing agents he liked the best and invited them over to see his condo. He chose the one who seemed to understand that he needed to sell fast, rather than hold out for absolute top dollar. Two weeks later, Adam accepted a contract that closed quickly and was within 5% of his asking price. He closed on the sale before the bank even had a chance to accumulate any foreclosure legal fees. PRIVATE SALE If time is on your side and the housing market is strong, selling the home on your own is very possible. You want to avoid the appearance of a desperate seller, which means performing any maintenance you might have neglected: paint, cleaning, removing excess personal property. The better the house looks and the fewer repairs required, the more money you’ll receive from the sale. Many homeowners like the idea of selling their house themselves and saving the real estate commission. However, research has shown that unless the sellers are extremely savvy about current market conditions, the amount of money lost selling it themselves often exceeds the amount of the commission they are saving. Note that this is not to say that you shouldn’t try to sell it yourself. Give yourself a time limit of 3-4 weeks, after which you will consider listing it with a professional. Remember, you’re racing against the clock. Now is not the time to stretch for every last dollar. SELL TO AN ALLY If you have a good friend or relative you trust and who has good income and good credit, consider asking them to buy the house from you and rent it back. There are lots of pitfalls with this approach, which will be covered in more detail later. But ultimately if you can sell the house to an ally who will let you continue to live there and eventually buy it back,

isn’t that what’s most important? LIST WITH A LICENSED REAL ESTATE AGENT If your home needs work, there isn’t much equity, or the housing market is tight, it makes far more sense to list the house with a competent real estate agent. It’s important to find someone who understands the foreclosure process and knows the market. Some real estate agents are even certified as specialists in loss mitigation (that is, foreclosure help). They are often difficult to find, so ask around. SELL TO A PRIVATE INVESTOR Not all private investors are vultures. There are plenty of honest, hardworking investors looking to buy property at a fair price. No, they aren’t going to pay full price, but they aren’t looking steal your house, either. Some of them can be found in the Real Estate Wanted section of your local newspaper’s classified ads. Many more can be found simply by calling a local real estate agent. Some agents will agree to a one party listing, where they bring you a buyer and you pay them a reduced commission. You may have seen so-called bandit signs proclaiming “We Buy Houses!” attached to utility poles throughout your neighborhood. Though you may be tempted to call them, it’s probably a waste of your time. While not always the case, these folks tend to be among the vultures of the industry and should be avoided. DEED IN LIEU OF FORECLOSURE Why a homeowner would choose this option is a mystery, but sometimes they do. In this situation, the homeowner in foreclosure contacts the lender and simply offers to give the house back. The lender’s attorney will prepare a deed in lieu of foreclosure, have the owners sign it, and then record it in the county records office. In most cases, the lender will actually continue the foreclosure sale anyway. This ensures them clear title and removes any junior liens that may be on record. FILE BANKRUPTCY Although bankruptcy isn’t really a solution, it is an option. It’s a sad fact that most homeowners believe bankruptcy will protect them from foreclosure. It’s simply not true. LAURA’S FAILED BANKRUPTCY PLANS

Laura was a single woman who lived alone with her Labrador retriever. Unfortunately she was also pretty irresponsible when it came to managing her finances. She fell behind on her mortgage payments and wound up in foreclosure. To solve the problem, she signed a sales contract with a local investor. The agreement required the investor to bring her loan current, and then gave her three months to buy him out of the contract, or sell him the house at the agreed-upon price. Three months passed, and Laura stopped returning the investor’s phone calls. She also hadn’t kept her mortgage payments current. The mortgage company was foreclosing again. The investor wasn’t totally unprepared for this situation. In additional to a sales contract, he had also had Laura sign a mortgage to him for the amount he paid her, plus interest and penalties. When he realized she wasn’t going to sell him the house, he recorded the mortgage and became one of her secured creditors. He offered Laura one more chance to comply with the contract, but she refused. So he foreclosed himself. This caused Laura to panic and she filed for bankruptcy protection. The bankruptcy forced the foreclosing attorneys to postpone the scheduled auction. But the very next day they filed motions with the court to have the house removed from the bankruptcy, arguing that Laura was acting in bad faith. The judge took almost two months to decide, but finally ruled in their favor. During the two months Laura had delayed, she had found another buyer for her house, and had used their deposit money to bring her 1st mortgage current. This buyer wasn’t quite as prepared for her as the original investor was, though. Laura left town. They were stuck with a practically worthless sales contract, and now the investor’s foreclosure was scheduled again. Ultimately the buyers’ and investor’s attorneys got together and were able to negotiate a settlement. The investor and bank got paid in full and the buyers got the house. Laura lost her home and received nothing for all her efforts. How much better for her had she simply completed the original sales contract? THE PROBLEMS WITH BANKRUPTCY Bankruptcy can postpone a foreclosure sale but almost always fails to

cancel it. Much of the mail homeowners receive comes from bankruptcy attorneys. They may offer to help file a Chapter 13 bankruptcy for just $1500 (plus court costs). They will say that bankruptcy will stop the foreclosure process in its tracks. That’s true. What they won’t reveal is that the bankruptcy really just delays the process. The lender is forced by law to stay, or delay, the sale. Once that happens, the lender has two choices: do nothing and hope for the best, or fight the bankruptcy. What do you think they’ll do? That’s right, they’ll fight. They can afford to do this, because they don’t have to pay the bill. If you carefully read most mortgage documents, you’ll discover that the lender can add to the loan balance any legal fees it incurs while trying to collect on the loan. In short, they can use the equity in the property as a blank check to fight the bankruptcy. So not only does the homeowner end up paying for their own attorney, they pay for the lender’s attorneys, too! And you can bet they won’t pick cheap attorneys who promise to do everything for one low price. Even so, some homeowners may be convinced that bankruptcy will offer some breathing room to sell or refinance. Although that’s true, there are better ways to delay the foreclosure. These strategies will be discussed later in this book. In October 2005, a new bankruptcy law went into effect in the US. While the full effects are not yet known, it is generally agreed that this new law will make it much harder to use bankruptcy as a solution to foreclosure.

WORK WITH AN INVESTOR Though touched upon earlier, there are many ways that investors truly can help homeowners in foreclosure, in addition to the story above. PAULA’S CHRISTMAS WISH It was a December 18, exactly one week before Christmas. Paula and her husband were losing their dream home: a beautiful chalet near the base of local ski resort. There were no Christmas decorations: no lights, no garland, not even a tree. No presents for their gorgeous 1-year-old baby girl’s first Christmas. Why bother? Their foreclosure sale was scheduled for 2:00 the next day. This young family was facing the frightening possibility of being homeless for Christmas. Sifting through the reams of mail they received from local foreclosure

vultures, Paula stumbled on a flyer that looked different. She assumed that the sender was no different than any of the others, but she took a chance and called the number printed at the bottom. The voice that answered the phone was pleasant and understanding. He asked her intelligent questions about her situation and desires. He patiently helped her consider all of her other options that would let them keep their home. Unfortunately, they had to rule out all of them. Paula decided that she had no choice but to sell. Obviously it wasn’t her first choice, and she appreciated the investor’s willingness to discuss other options first. The trouble now was time. Was it possible to close the sale of a house in less than 24 hours? Fortunately, she lived in a state that permitted a borrower to reinstate a foreclosing loan right up to the minute of the auction. Paula and the investor met early the next morning. She signed all the documents necessary to transfer ownership of the house to him. Then they drove to the auction and the investor brought her loan current. The investor then gave Paula her best Christmas present of all: he told her to stay in the house through the holidays and enjoy Christmas with her family. He said not to worry about looking for another place to live until January. A few weeks after Christmas, Paula and her husband found a small, affordable condo. The investor paid her security deposit and first month’s rent. Looking back a year later, Paula told the investor that he “saved our family.”

LEASE OR LEASE/OPTION TO AN INVESTOR This strategy works well when there isn’t a lot of equity, a short sale isn’t really an option, and the rental market in the area is really strong. The homeowner basically agrees to rent the house to the investor for the amount of their monthly payments. The homeowner moves out, the investor brings the loan current (or negotiates a forbearance plan), and puts his own tenant into the house for some rent more than he’s paying. Eventually, the investor will find a buyer for the house, and cash out the seller. In the meantime, the investor is simply playing the role of landlord on behalf of the owner. This is often done with a Real Estate Purchase Option agreement from

the homeowner to the investor. This agreement gives the investor the right to buy the house for a given price within a certain period of time. When the investor finds a buyer (for more than his option price with the seller), he simply exercises his contract and then sells the house to the new buyer.

SELL TO AN INVESTOR AND RENT IT BACK This is a very tricky strategy and one that almost wasn’t included in this book, because there is simply too much that can go wrong. But because homeowners are likely to find unscrupulous investors who will pitch this as a solution for them to stay in their home, it is included. If nothing else, this section might serve as a warning. If this strategy is done wrong, it can be a disaster, as illustrated here with an example. Picture a homeowner in foreclosure and assume that the house is worth $200,000. The first mortgage balance is $150,000, including $10,000 needed to bring the loan current. The investor has the homeowner sign a deed to the property and then records it in the county records office. The house now legally belongs to the investor. The investor brings the loan current and the sellers sign a lease. Everyone is happy. What can go wrong? Two months pass and the sellers (now tenants) are five days late paying their rent. The investor evicts them and resells the house. He only paid $150,000 for a house worth $200,000. The sellers have lost $50,000 in equity. Here is another potential problem. Maybe the sellers were savvy enough to protect their equity. So although they technically sold the house for $150,000, they required the investor give them an option to buy it back anytime within two years for $175,000. The investor gets rental income for awhile, then a $25,000 profit. Both sides feel that this is fair. A year goes by and the sellers (tenants) bounce a rent check. The investor evicts them and tells them that the option is now null and void. The result is the same. The sellers have lost their equity.

CASH FOR KEYS This is an easy solution, and one often overlooked for some reason. The

homeowners and investor trade an agreed-to amount of money for the keys and a notarized deed. The sellers move out and the investor disposes of the property as he sees fit. In the right circumstance, this can truly be a win for everyone. PARTNER TO SELL Assume the homeowners want to sell and they have equity. The problem is, they don’t have any cash or enough time to sell. The investor, rather than buying the property outright or lending them money, has the sellers partially deed the property to him. He can then either negotiate with the lender or bring the loan current. Now the sellers have time to sell it for a more favorable price.

This section of the e-book contains the forms, documents, and instructions you will need to evaluate your situation and determine your best solution.

BEFORE YOU BEGIN GATHER DOCUMENTS No matter which option you ultimately decide to use, there are some things you need to do and some information you need to collect first. Check each item off the list as you complete it. □ Gather the most recent mortgage statements from all mortgages on all properties you own. Each statement should include the property address, a customer service number, the loan balance, and account number. □ Gather two months’ of your most recent pay stubs from all jobs at which you are currently employed. Repeat for each employed owner of the property. □ Gather two months’ of bank statements for all owners. □ Request reinstatement and payoff amounts from the foreclosing attorney. If you have more than one mortgage in foreclosure, repeat this process for each. The figures you request should be good through the date of the auction or the end of the current month, whichever is closer. If you are less than a week before the sale, you will probably not get the information back in time. This should be done in writing. See Appendix B for a letter you can fax to the

attorney to request this information. Special note: In some states, you 38 cannot reinstate a loan during the final days prior to the auction. The sooner you get this information, the better. □ Call the foreclosing attorney and find out where and when the auction is scheduled. Also find out whether the auction will be conducted by the attorney personally, or by an auctioneer. If the auction is being conducted by an auctioneer, get the company’s name and number. □ Gather copies of the last two years’ federal income tax returns for all owners. □ Get a copy of your most recent property tax bill. Call the city or town and request a copy, if necessary. □ Try to get a copy of each owner’s credit scores. See Appendix C for resources. □ Gather recently statements from all retirement plans – 401(k) accounts, IRAs, Roth IRAs, CDs, mutual funds, etc. □ Make a list of all personal property of value: cars, boats, motorcycles, jewelry, computers, video games, etc. Estimate each item’s value in the event you were forced to sell it. This list is also needed if you decide to file bankruptcy, though hopefully it won’t come to that. Once you have completed this checklist, you’re ready to start the Foreclosure Evaluation Worksheet. Personal Financial Information 1. Non-house debt payments $ 2. Total House Payment $ 3. Total Debt: (#1 + #2) $ 4. Gross Monthly Income $ 5. Debt to Income (Divide #3 by #4) 6. Total Debt to Income (Divide #4 by #2) Property Financial Information 7. Fair Market Value $ 8. Total Owed $ 9. LTV (Divide #7 by #8) Foreclosure Information 10. Reinstatement Amount: $ 11. Cash on Hand: $ 12. Cash You Can Get: $ 13. Total Available Cash :$ 14. Cash Shortage (Subtract #10 from #13): $

15. Total Months’ Payments from Available Cash (Divide #13 by #2): 16. Percentage of Reinstatement You Can Get (Divide #13 / #10): Credit scores* 17. Owner’s FICO Score: 18. Co-Owner’s FICO Score: *FICO scores are available instantly online, at www.freecreditreport.com, www.myfico.com, and many others. Usually three scores will be reported. Lenders typically use the one in the middle (neither the highest nor the lowest).

Look up Your results by comparing the values above with the information here If the Value in Field Is at Least But No More Than Your Potential Options Are… (Check each matching row) 5 0% 35% Refinance 6 0% 50% Refinance 9 0% 60% Refinance 17 500 850 Refinance 18 500 850 Refinance 9 0% 50% Refinance, Private Loan 16 50% 100% Private Loan 14 $0.00 $0.00 Reinstate the Loan 15 3 8 Forbearance Plan 9 0% 70% Bridge Loan, Realtor Sale, Investor Sale, Friend/Family Sale 9 70.01% 80% Realtor Sale, Investor Sale, Friend/Family Sale 9 80.01% 8% Short Sale Note: In order for a Potential Option to be a Realistic Option, you must be able to put a check in each row where that option exists. For example, if you want to refinance, you must meet all of the Refinance Criteria to have a chance to qualify. Meeting 5 of the 6 tests will probably result in the denial. This table should be used as a guide only to determine which course of action has the best chance of success. It is not a complete substitute for expert advice and consultation. Please contact an ARES Representative to discuss your situation in more detail. Before you begin to evaluate your situation, you need to collect some information. It almost might seem as though you’re applying for a new loan, but realize that this information is necessary to evaluate your options accurately. If you haven’t completed the checklist in the preceding section, please do so now. You’ll need much of that information handy to begin. Once you are ready, complete the Evaluation Worksheet according to these instructions:

1. Non-house debt payments: Add up all your non-housing debt payments (credit card minimum payments, car payments, loan payments, etc.). Do not include utility bills, insurance premiums, phone bills, etc. 2. Total House Payment: Add up your entire regular monthly mortgage payments on all outstanding mortgages and home equity loans or lines of credit on all real estate owned. Add your property tax bill and homeowners insurance premium if they are not included in your mortgage payment. 3. Total Debt: Add the values you get for #1 and #2. This is your total monthly debt payment. 4. Gross Monthly Income: If you are paid monthly, enter the gross amount here. If you are paid weekly, multiply your gross pay by 52, and then divide by 12. If you are paid bi-weekly, multiply your gross pay by 26, and then divide by 12. If you are paid bimonthly, simply double your gross pay amount. If you are paid commissions, bonuses, or overtime, estimate the monthly total gross pay to the best of your ability. Make sure you include spouse’s income, if available. If you receive business or rental income, don’t forget to include it. 5. Debt to Income: Divide the value in #3 by the value in #4. Hopefully #4 is a higher number, which will make the calculated value a number between 0 and 1. Multiply the result by 100 and enter the new result in field #5 as a percentage. This number is known as your Debt-to-Income (DTI) ratio. Banks use this number to determine how high a payment you can afford. Government regulations typically limit total DTI to 55% or less. 6. Housing Debt to Income: Perform the same calculation for field #5, except you will divide the value in field #4 by the value in field #2. Multiply by 100 and enter the result in field #6 as a percentage. This is your housing Debt-to-Income (DTI) ratio, and should be a smaller (or identical) number than the result in field #5. Government regulations usually limit your housing DTI to 40% or less. 7. Fair Market Value: This number is your “best guess” of the value of your property in its current state, assuming you had the time to market and sell it through traditional channels.

8. Total Owed: This number is the amount of money it would take to pay off your house completely. Add up the total balances (including arrearages) on all existing mortgages, home equity loans and lines, tax liens, utility liens, municipal liens, lawsuit judgments against you, mechanics liens, IRS liens, etc. 9. LTV: Divide the value in field #7 by the value in field #8. This is your Combined Loan-to-Value (LTV). This number will typically be between 0 and 1, but could be greater than 1 in extraordinary circumstances. Multiply the result by 100 and enter that result in this field as a percentage. 10. Reinstatement Amount: This is the amount needed to bring the foreclosing loan(s) current. Hopefully you’ve already received an official reinstatement notification from the foreclosing attorney or trustee. Enter the total reinstatement amount(s) here. 11. Cash on Hand: Enter the total amount of all cash you have on hand or in the bank that you can put towards the reinstatement of your mortgage(s). 12. Cash You Can Get: If you have an IRA, or a 401(k) from a past or present employer from which you can take a loan or withdrawal, or can sell a car or other asset, enter the total cash you believe you can raise prior to the foreclosure auction. Don’t overlook relatives or friends as a source of emergency cash. 13. Total Available Cash: Add the values in fields #11 and #12. This is the total amount of cash you believe you can contribute to the reinstatement of the loan(s). 14. Cash Shortage: Subtract the value in field #10 from the value in field #13. This is the amount you’re still short. If the amount is negative, this means you can raise more than is needed to bring your loan(s) current. Congratulations! 15. Total Months’ Payments from Available Cash: Divide the value in field #13 by the value in field #2 and round down to the nearest whole number. This is the total number of months’ worth of payments represented by the cash you have or can get. This number is important when trying to negotiate a forbearance plan. 16. Percentage of Reinstatement You Can Get: Divide the value in field #13 by the value in field #10. Multiply the result by 100 and

enter the new value here. This is the percentage of the reinstatement you have or can come up with. This number will be important when determining whether a private loan is possible. 17. Owner’s FICO Score: If you have received a credit report since your foreclosure was begun, the number is probably valid. If you haven’t received a credit report since the foreclosure started, you need to find out what your current credit score (FICO) is. One quick way to get it is to ask a lender to pull your credit, or visit http://www.myfico.com and pay approximately $35 to get your score from all three major credit bureaus. Ignore the highest score and the lowest score. You want the one in the middle. This is what most lenders use to qualify borrowers for new loans. Enter your middle score here. 18. Co-Owner’s FICO Score: Repeat the process for field #18. Now it’s time to evaluate the results.

EVALUATE THE RESULTS Look up Your results by comparing the values above with the information here If the Value in Field Is at Least But No More Than Your Potential Options Are… (Check each matching row) 5 0% 35% Refinance 6 0% 50% Refinance 9 0% 60% Refinance 17 500 850 Refinance 18 500 850 Refinance 9 0% 50% Refinance, Private Loan 16 50% 100% Private Loan 14 $0.00 $0.00 Reinstate the Loan 15 3 8 Forbearance Plan 9 0% 70% Bridge Loan, Realtor Sale, Investor Sale, Friend/Family Sale 9 70.01% 80% Realtor Sale, Investor Sale, Friend/Family Sale 9 80.01% 8% Short Sale

Look at the value in each field referenced by the number in the first column. If it is between the “minimum” and “maximum” values shown in the second and third columns, 0 and 35%, check the box on that line. If you are able to check the box next to every instance of the same option, then that option is available to you. If you are unable to check each box

next to a desired option, then that option isn’t realistic for your situation. Now that you have figured out which options are available to you, this chapter focuses on how to proceed. Please refer to your completed Foreclosure Evaluation Worksheet. Each option will be covered step-bystep, in order of simplicity.

KEEPING THE HOUSE This section describes how to implement the strategies that will allow you to keep your home. Please make sure that you have thoroughly completed the Evaluation Worksheet so that you only spend your time on options that are likely to succeed. REINSTATE THE LOAN Quite frankly, if you can raise the cash, this is the only thing you should consider. Reinstating the loan brings it current and stops the foreclosure. Scrape together as much of the money as you can by borrowing from friends or family, emptying a retirement account, borrowing from your 401(k), selling assets, etc. If it’s enough to bring the loan current, do it. If it only gets you part of the way there, try a forbearance plan. NEGOTIATE A FORBEARANCE WITH THE LENDER Basically, if your problem was temporary, can afford the payments now, and can come up with at least a third to half of the reinstatement amount, then you probably qualify for a forbearance plan. So how do you do that? □ Get a copy of your mortgage statement and call the customer service number. □ When you reach a live person, immediately tell them who you are, your address and account number. Without pausing to take a breath, explain to the representative that you need to negotiate a forbearance plan. □ The representative shouldn’t give you any trouble at this point. You may be asked some questions, such as how much money you have, whether you can afford the payments, etc. Answer the questions as truthfully as you can. □ You will receive a request from the lender for a list of documents you’ll need to supply. Basically, they are looking for proof that you cannot afford to bring the loan completely current, and that you can

still make the payments. Usually this list consists of: □ Two months of bank statements □ Two months of pay stubs □ A detailed financial statement (they’ll usually provide a blank form) □ Two years of tax returns. □ Sometimes, they will want a letter explaining how and why you got behind on the payments. □ Gather all the requested documents and fax them to the lender and wait □ Follow up weekly (daily if you are less than a month from the sale) □ Ultimately the lender will approve or reject. If they approve, you just need to finish the process. If they reject, they’ll tell you why. Usually they will only reject if you can’t come up with any money, have too much money or assets and can afford to reinstate, or the Loan-to- Value isn’t within their parameters. If you can fix what they don’t like, give it a shot. If not, go back to the Evaluation Worksheet and choose another option. If the lender approves the forbearance plan, you’ll be given a few days to complete and sign the forbearance agreement, and then get the money and agreement back to the lender. Most lenders will require you to use Western Union Quick Collect to start a forbearance plan, but some will allow you to send them a cashier’s check via overnight carrier. The plan documents will state which they prefer. NEGOTIATE A LOAN MODIFICATION AGREEMENT If you can’t quite afford the payments in a forbearance plan, and you have some equity to spare, it is definitely worth your time to attempt to get a loan modification. So how do you do that? □ Get a copy of your mortgage statement and call the customer service number. □ When you reach a live person, immediately tell them who you are, your address and account number. Without pausing to take a breath, explain to the representative that you need to negotiate a loan modification (or a repayment plan, if they prefer that term). □ The representative shouldn’t give you any trouble at this point. You may be asked some questions, such as how much money you have, whether you can afford the payments, etc. Answer the questions as

truthfully as you can. □ You will receive a request from the lender for a list of documents you’ll need to supply. Basically, they are looking for proof that you cannot afford to bring the loan completely current, and that you can still make the payments. Usually this list consists of: □ Two months of bank statements □ Two months of pay stubs □ A detailed financial statement (they’ll usually provide a blank form) □ Two years of tax returns. □ Sometimes, they will want a letter explaining how and why you got behind on the payments. □ Gather all the requested documents and fax them to the lender and wait □ Follow up weekly (daily if you are less than a month from the sale) □ Ultimately the lender will approve or reject. If they approve, you just need to finish the process. If they reject, they’ll tell you why. Usually they will only reject if you can’t come up with any money, have too much money or assets and can afford to reinstate, or the Loan-to- Value isn’t within their parameters. If you can fix what they don’t like, give it a shot. If not, go back to the Evaluation Worksheet and choose another option. If the lender approves the loan modification agreement, you’ll probably have to go through another “closing” at a title company, because the loan modification documents have to be notarized and recorded in the county records. Remember that if you have any junior liens or other mortgages on the property, you may not qualify for a loan modification. REFINANCE To be honest, this doesn’t work very often. If you look at the Evaluation Worksheet, it’s easy to see why. The income, credit, and loan-to-value guidelines are so tight; there are only a few lenders in existence that will make these loans; and even fewer borrowers who qualify for this type of loan while they are actively in foreclosure. But if your Worksheet shows a check mark next to each Refinance option, and you have enough time, by all means try it. If you are getting close to the foreclosure sale, you may need to request a continuance, or

delay. Here is how to do that. □ Apply for the refinance loan □ As soon as you receive your pre-approval letter, you need to contact the foreclosing lender □ Call the customer service number on the copy of your mortgage statement □ When you reach a live person, immediately tell them who you are, your address and account number. Without pausing to take a breath, explain to the representative that you have been pre-approved for a refinance loan and that you need to know what documentation they need to postpone the sale to give you time to close. □ The lender may require you to enter into a forbearance plan in order to postpone the sale, but that will only work if you have some cash you can send them. Other lenders will give you time to close on your new loan simply because you asked them to do so. □ In any event, the lender will tell you what you need to do to get them to postpone. Cooperate with them to the fullest extent possible. □ Gather all the requested documents and fax them to the lender and wait □ Follow up daily with both the lender and foreclosing attorney □ Ultimately the lender will approve or reject. If they approve, you just need to close the new loan. If they reject, you may be forced to explore a private loan, bridge loan, or even bankruptcy (understanding that the bankruptcy will not ultimately stop the foreclosure and may end up costing you the ability to get the refinance loan closed). To make this work, you need time, equity, and good credit apart from the foreclosure. As you might imagine, it’s not often successful. PRIVATE OR “HARD MONEY” LOAN If you can afford to make the extra payments, have a lot of equity, you may qualify for a private or hard money loan. Many of these lenders are private individuals who lend their own money, as opposed to major financial institutions that lend their depositors’ money. Private lenders look at your equity and your ability to repay the loan, rather than focusing on credit. Many are willing to lend you enough money to reinstate the mortgage. But while their lending criteria are more generous than those of banks,

the terms of these loans are generally very short and the interest rates high. They are also hard to find. A recent Google™ search for “Hard Money Loans” yielded almost 13 million results, but most of them were commercial lenders offering loans to investors and builders. That’s not the kind of lender you need. If you feel that a private loan is your best option, there are a few ways to proceed: 1. Find a friend with an IRA and borrow from them. This strategy is explained in more detail elsewhere. 2. Call some real estate agents and title companies in your area and inquire about private lenders in your area. 3. Look in the newspaper classified ads under “Money to Lend.” Call the ads that don’t seem to be from large lenders. 4. Call local mortgage brokers and ask them if they know any private lenders. Once you’ve located a private lender, you’ll need to go through a typical loan process. This means filling out a loan application, probably getting an appraisal on the house, and providing most of the documents you collected at the beginning of this kit. SELLING THE HOUSE Although the primary intent of this book is to show you how to keep your home, please realize that it’s not always possible. If you have exhausted all of your other options for keeping your home, it may be time to realize that you’ve done all you could, and consider these strategies for selling it. PRIVATE SALE Has anyone ever told you that it’s illegal to sell a house while it’s in foreclosure? Hopefully not, but that rumor does make its rounds every now and then. If anyone tells you that, please try your best not to laugh. Remember, until the auction, it’s your house. In a redemption state, it’s still your house even after the auction, if you can come up with the money. If you have the time and the equity, and you think you can get it sold, you can certainly sell the property yourself. Put an ad in the paper, price it aggressively, and get it sold before the auction.

If you don’t have a lot of time before the auction, selling it yourself will be very difficult. Most lenders will grant you time to sell, but they will almost always insist on seeing a valid listing agreement with a licensed real estate agent. By all means, ask first. Simply follow these steps: □ Get a copy of your mortgage statement and call the customer service number on it. □ When you reach a live person, immediately tell them who you are, your address and account number. Without pausing to take a breath, explain to the representative that you need to delay the foreclosure auction 60 days to sell the house. □ The representative will probably ask whether you have it listed and under agreement. Be honest. They will probably demand that you list it, but you never know until you try. If they approve, you just need to run the ad and sell the house. If they reject, they’ll tell you why. Usually they will only reject if they don’t think you can sell it yourself. You can also combine this strategy with the bridge loan or the forbearance plan. Either of those strategies will stop the foreclosure and buy you time to sell it for top dollar. ALLY SALE Do you know anyone who would be willing and able to buy your home right now and let you continue to live there? At its core, an ally sale is identical to any of the strategies in the next section on selling to an investor. The primary difference is that you’re selling to someone you trust who will let you live there. Keep in mind that the same pitfalls apply as to the investor sales. You still want a competent title company to close the sale. You’ll probably want to do the sale as a subject-to sale, which will make it easier for the ally to sell it back to you later. There will be no loan applications and very little down payment. All your ally will have to pay is closing costs and your reinstatement (or forbearance plan) amount. With a little imagination and creativity, this can be a very powerful and advantageous solution. INVESTOR SALE Instead of letting the property go to the foreclosure sale, it is possible to sell it to an investor and get some money out of it. This strategy works

best if you don’t necessarily need every possible dime of your equity. Perhaps the thought of putting this all behind you now, rather than having it drag out, is more important to you than getting top dollar. In that case, consider selling the house to a local real estate investor. Most investors will be willing to pay around 80% of fair market value, less any needed repairs. Why so low? They need a cushion if they plan to fix it and rent or resell it. If they plan to hold it as a rental, the investor will want to make sure it has positive cash flow. So if you do want to work with an investor, how would that work? You have a few possibilities that are outlined for you here. INVESTOR PAYS CASH OR BRINGS IN A NEW LOAN This is the traditional way to buy a house, and the one you probably employed when you bought yours. However it is a method that many sophisticated real estate investors don’t care for. But if the investor can afford to do so, then this is an acceptable way to go. It ties up too much cash for many investors’ comfort, but it’s still important to know the option exists. SELL IT SUBJECT-TO THE EXISTING MORTGAGE(S) You could simply deed the property to the investor, subject-to your existing mortgage. What does this mean? It means that instead of bringing in a new loan, with new closing costs and lender fees, the investor simply reinstates the mortgage and continues to make the payments. These types of sales can be closed extremely fast, as illustrated in the story of Paula in a prior chapter. This is recommended only if the investor is intending to resell the property again very soon. You probably don’t want to run the risk of the lender calling the loan due and foreclosing all over again. If the investor is going to keep the house for six months or less, this is probably the easiest way to go: It has plenty of benefits: there is no lender qualifying; low closing costs; and it’s fast. Note: Make sure you close at a reputable title company who understands subject-to real estate transactions. Here is the step-by-step process for this type of sale: 1. Complete and sign a normal sales contract showing the sales price and the fact that the investor is taking title subject-to all outstanding liens and mortgages. 2. Sign a Special Power of Attorney covering the

property, and a Signature Authorization allowing the investor to contact the lender on your behalf. Samples of these documents are available in Appendix B. 3. You move out. 4. The investor then reinstates the loan and records the Deed – This stops the foreclosure. 5. The investor sends a notice to all lien holders that any future correspondence should be sent to you, care of (c/o) the investor, and provides his address and a copy of the signature authorization. 6. The investor does whatever work is needed to the house, and then sells it to a traditional buyer. You may be wondering, what about the due on sale clause? You may have been told that it’s illegal to take over someone else’s mortgage because of the due on sale clause. A quick reading of this clause in a standard mortgage should put an end to that misguided notion in a few minutes. Here is the text from a typical Fannie Mae mortgage: If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without the Lender’s prior written consent, Lender may [author’s emphasis] require immediate payment in full of all sums secured by this Security Instrument. Note the use of the word may. This clause is one small part of a contractual agreement between the lender and the borrower. It doesn’t say or even imply that the borrower will be guilty of committing a crime if the clause is breached. Furthermore, there is nothing in the language that would indicate any harm to the buyer. The only remedy allowed to the lender is that they may call the loan due and payable. They can’t sue you for damages. They can’t send you to prison. They can’t take your first born. If it’s really a concern, get a copy of your mortgage and read it for yourself. Again, it is not recommended that you sell your house subject-to the mortgages, if investor plans to keep the house for a long time. This should be considered a very temporary situation. If the investor wants the house for a long-term rental, the next section

explains how to do that. SELL SUBJECT-TO, THEN THE INVESTOR REFINANCES This is a very creative way to buy property. It’s similar to the subject-to strategy above, but the goal is to keep the property long-term, instead of just selling it right away. It’s a very similar process that is identical to selling subject-to, with an added step at the end. After the property is repaired and readied for sale, the investor calls a trusted lender and refinances it at 80% of its appraised value. You may be wondering how this is different from the investor simply getting a new loan. The difference is in the amount of cash the investor needs to get the transaction closed. If he gets a new loan to buy the property, because it’s a non-owner occupied house, most lenders will ask for a down payment equal to 20% of the purchase price. The actual value of the property is irrelevant to them. Sure, some lenders will offer 10% down or even 0% down. The investor ends up getting much higher interest rates. Plus, if his credit isn’t that great, they may want 30% or more down! But what happens if the investor already owns the property? Now it’s no longer considered a purchase money mortgage, but a refinance. What’s the difference? A refinance is based on the appraised value of the property, not the purchase price. This is another reason why sophisticated investors want to buy the property at 80% of its fair market value or less. Getting an 80% Loan-to-Value (LTV) refinance loan is pretty easy to do, even if the investor’s credit isn’t perfect. Most lenders view 80% LTV as the maximum safe LTV. It’s the maximum loan they will give without requiring private mortgage insurance. That means the monthly payments are lower. It’s also considered the par loan amount for determining interest rates. Go over 80% LTV and the interest rate climbs quickly. Likewise, if the loan is 70% LTV or less, the rate will be even better. LEASE/OPTION Another way to work with an investor to sell your house is through a Lease/Option Agreement. Assume for a moment that you have determined that your house’s after-repaired value is $200,000. The outstanding loans and liens total $160,000, including a $10,000

reinstatement (exactly 80%). After analyzing your options, you decide that you just want to be done with the property, as long as the foreclosure is stopped. The investor offers to stop the foreclosure and buy the property subject-to the existing mortgages. You agree, but think that $160,000 is too low a price. You think $170,000 is a more reasonable number. For that to work, the investor would have to pay $10,000 to stop the foreclosure, plus $10,000 to you. Under a Lease/Option Agreement, however, the investor could agree to your $170,000 price, but would pay you in a year or two. In the meantime, the investor brings the loan current and then rents the house from you at your current monthly payment amount. Unlike a traditional rental situation, the investor agrees to take care of the day-to-day management operations, minor repairs, etc. You retain ownership of the property and all the tax benefits that go along with it. There are lots of really good books on doing these sandwich lease/options, so this section won’t go into too much detail. Here is the checklist to follow to make this type of deal work.

1. You and the investor agree on a rental amount, sale price, and future sale date. 2. The investor’s attorney draws up the lease and option paperwork. 3. You move out. 4. The investor finds a tenant to rent the house with an option to buy. 5. Someday, the tenant will want to exercise his option. 6. At closing, the investor’s tenant buys the house, the investor gets paid, and you receive the rest of your money. There are certainly more information and pitfalls than can be mentioned here. The goal is to give you an idea of how to make the deal work. SELLER CARRY-BACK This is similar to the Lease/Option above, but you don’t retain ownership of the house. In this scenario, you want more money than the investor is willing to pay right now. But he agrees to pay you your asking price, if you agree to take the difference in the form of a payment plan rather

than cash. If you’re about to lose your home, this offer is actually quite advantageous to you. Because it’s not a lump sum of cash, no one can take it away from you. Additionally, you may be agreeing to an income stream of hundreds of dollars a month. If you’re having income problems, some extra money coming in each and every month is bound to help, right? Once you’ve found an investor and have agreed to a price and terms, follow this checklist. □ Complete and sign a normal sales contract showing the sales price and the fact that you are carrying back a mortgage. □ (If a subject-to sale) Sign a Special Power of Attorney covering the property, and a Signature Authorization allowing the investor to contact the lender on your behalf. □ The investor completes and signs a promissory note and mortgage to you specifying the terms of the repayment period. You keep the originals and record the mortgage in your county records office. □ You move out. □ The investor makes monthly payments to you, as agreed. □ When the investor finally sells or refinances, you get paid in full. Note that a seller carry-back works either with a new loan or a subject-to sale. PARTNER TO SELL If you and the investor prefer, you can deed some of the property to him in exchange for his bringing your loan current. Then you can sell it for its fair market value through a realtor or by yourself. This option has the advantage of being less risky for you, and has the potential to get your more money than you would otherwise receive. An example will help make this sort of transaction clear. Assume your home is worth $250,000 and doesn’t need any repairs – maybe just some paint and cleaning. The foreclosing lender is owed $185,000 including $15,000 to reinstate. Rather than sell the house to the investor, you agree 61 to the following terms: □ You (and your spouse if you’re married) deed the house to you and the investor, as “Tenants in Common.” This means that each of you now own equal shares of the house.

□ Both of you enter into a listing agreement with a local real estate agent for 5% commission and an asking price of $250,000. □ The investor pays $15,000 to bring the loan current. The payoff is now $170,000 ($185,000 - $15,000). □ The house sells for the asking price. After commissions and closing costs of $17,500 and paying off the mortgage, the net proceeds of the sale come to $62,500. Split two ways, you each get a check for $31,250. Of course, there are many different ways to make that work. You could split the money three ways, or you could offer the investor a different percentage of the total ownership. Just keep in mind that the simpler the deal is on paper, the easier it is to understand. Simple deals are easy to explain to investors. If you think that the investor’s $16,250 profit ($31,250 less his initial investment of $15,000) is too high, think of it as a fee for helping you to keep $31,250 of your equity that you’d probably lose at the foreclosure auction. Also note that this is a not a risk-free transaction for the investor. In fact, he bears all the risk where you bear almost none. There are many things that could go wrong with the transaction causing the investor to lose some or even all of his money. He will understandably expect to be compensated for taking the risk.

REALTOR SALE Finally, you can list the property, get it sold traditionally, and get paid. Naturally this will only work if you have enough equity and enough time before the sale. If you do have an impending auction date coming up, there may still be hope. Your real estate agent may be able to contact the lender and ask them to postpone the sale, giving you time to sell the house. If you think you can sell it before the sale date, you need to do nothing more. If you need to get the sale postponed, you and your real estate agent should take the following action. You should: □ Provide the agent a signed authorization from you. □ Complete and sign your agent’s normal listing agreement. □ Provide your agent with a copy of your mortgage statement. Your agent should:

□ Call the customer service number on the mortgage statement. □ When she reaches a live person, immediately tell them who she is, your names and address, and without pausing to take a breath, explain that she has a signed authorization from the borrowers giving the lender permission to speak with her. □ Ask the lender rep for a fax number to send the authorization. □ Immediately request another means of contacting them (email, direct phone, etc.). Sometimes they’ll provide it. Sometimes they won’t. □ Fax the authorization to the number they provide. Often the lender will require a day or two to process it. □ Call back, get to a live person, and repeat her name, your names and address, and ask the person to verify that authorization to discuss the account has been received and processed. If not, hang up and try back tomorrow. □ Immediately explain to the lender representative that she is the listing agent and would like to know what it will take to get the sale postponed long enough to sell the property sold and get them paid in full (those three words are like magic). □ The representative shouldn’t give the listing agent any trouble at this point. She may be asked some questions, such as the listing price, whether there are comps supporting the price, etc. She should answer the questions truthfully and as best she can. □ The lender will probably request copies of all documents relating to the listing, including the listing agreement, list of comparables, etc. If the agent is comfortable doing a Broker’s Price Opinion, offering it won’t hurt. The goal is to convince the lender that the property will sell and they will get paid in full, if only they grant your extension. At this point they will either grant your request or not. What if they won’t grant it? If you still have some time before the auction date, get the listing started and get the property shown. Once you get it under contract, your agent can repeat the above steps, this time explaining that you have a buyer. Sometimes the lender won’t grant an extension unless you’re within a month of the sale. So as you get closer and closer to the sale, continue to call and request an extension. Your agent needs to be prepared to show

the lender evidence that you are really trying to get the house sold. You’ll need to be aggressive about reducing the price if there are no offers after the first two weeks and then regularly thereafter until the house is under contract. If you finally get the house under contract and the lender still won’t cooperate with you on postponing the sale, try to get a bridge loan to get you through closing (see the next section). Ultimately the goal is to get your house sold through a competent agent, and pay the lender in full, before the auction. If all goes well, you can move on with your life, put some cash in your pocket, and start rebuilding your credit. BRIDGE LOAN This is not a strategy that can be used alone. Instead it is used in conjunction with either the FSBO or Realtor selling strategies. A Bridge Loan is a very short-term loan, typically with no monthly payments, designed to get you through a brief period (such as selling a house). There are many possible sources for a bridge loan, including: □ Local private lenders (see Private Money option) □ Family and Friends □ Local banks and credit unions (borrow against a CD or insurance policy) □ Credit card cash advances □ Your listing agent

Once you’ve found someone willing to lend you the money and give you time to close, simply complete a promissory note and mortgage (see the private money option). The recommended approach is to offer the lender a fixed amount of money or a fixed percentage return on his money. A fixed 10% return usually works well, and is a far better return than they can get anywhere else.

No matter how thorough a book such as this tries to be, as you work through your options, occasionally you will run into problems. Perhaps you have no equity (or even negative equity). Maybe a bank won’t cooperate. Maybe you just need to delay the process for a few days. This section will try to cover the strategies to use when you need to delay the

foreclosure auction. DELAYING TACTICS If you are only days (or hours) from the foreclosure auction, there isn’t a lot you can do other than file bankruptcy or reinstate the loan. In some states you cannot even reinstate the loan. Here are some delaying tactics you can use to postpone the sale, even if you don’t have all the money to bring your loan current. ASK YOUR BANK TO DELAY THE SALE This has already been covered elsewhere, but if you simply need a few days to complete the sale or refinance of the property (or if you just want to hang onto some hope that a long lost rich uncle will call), you can simply call the bank and ask them for a few days. You’ll need to have a valid reason for the request, such as: □ Pending refinance □ Pending Lottery Cash □ Expectation of a 401k plan check □ Pending insurance settlement

Basically, you need to show the bank some proof that you’re going to be able to bring your loan current in a matter of days if they grant your request. Follow the steps outlined in the Realtor Sale section from the previous chapter. SEND YOUR BANK A PURCHASE & SALES CONTRACT If you really do have your house under contract, then by all means tell the bank. In most cases, if you can show them proof that the sale will close and that they’ll get paid in full, they will grant an extension. This is not something you should do yourself. It makes far more sense to have a neutral third party (friend, real estate agent, attorney, etc.) to handle this for you. In fact, this is one of the services our company provides. See the chapter entitled “If You Need Help” for more information. To get the bank to delay, simply follow the steps outlined in the Realtor Sale section from the previous chapter. FILE SKELETON CHAPTER 13 Note: With the bankruptcy law changes that went into effect in October 2005, this strategy may already be obsolete. Use with extreme caution,

and only with competent professional help. If the only option left to you requires more time than the lender will allow, and you’ve run into dead ends with the other delaying tactics, there is one strategy left to you. It’s not pleasant, but sometimes the only choice you have is to file bankruptcy to stall the process a little. Be warned that the lender will come after you with a vengeance once you’ve started down this path. This strategy assumes that you will not actually complete the bankruptcy 68 process. The way it works is that you find a bankruptcy attorney who will allow you to file a Skeleton Chapter 13, or the minimum paperwork required to get the process started. In this way, you can postpone the foreclosure sale, take a breath, and then complete one of the other strategies. When the bankruptcy court reviews your file, they will discover that it is not complete. You will be given a certain period of time to furnish the missing items. If you fail to do so, the bankruptcy will be dismissed and the lender can proceed with the foreclosure. If you’re fortunate, you will have managed to buy yourself about a month with very little cash spent. You probably won’t be able to sell the property until the bankruptcy is dismissed. If you already have a closing scheduled, but the bankruptcy court hasn’t thrown out your case yet, you can have the bankruptcy voluntarily withdrawn. Simply contact the court clerk and tell them that’s what you want to do. It shouldn’t take very long. Then you can close on the sale and pay off the foreclosing lender in full. SHORT SALES Getting a short sale successfully negotiated is the single-most difficult and complicated strategy in this entire book. As mentioned previously, a short sale is a situation where the lender agrees to take less than the loan balance as payment in full. Why would a lender agree to such an offer? The primary reason is that the lender isn’t in business to own houses. They do not want to end up owning your house simply because no investor at the auction is willing to bid high enough. If they end up with the house, they face many months and many thousands of dollars in maintenance and holding costs, plus real estate commissions, taxes, extra legal fees, etc. In many cases, it’s far cheaper for the lender to discount $10,000 or more just to

avoid the risk of owning the house.

The danger to a 2nd mortgage holder is even greater. If the 1st mortgage is above 80% LTV, the lender holding the 2nd mortgage is facing the very real possibility of getting absolutely nothing at the foreclosure sale. Take the following example: Imagine your home is worth $100,000. The total balance of the 1st mortgage is $80,000. The 2nd mortgage balance is $15,000. If the 1st mortgage forecloses and the auction is held, there is the very real possibility that the investors bidding will only be willing to pay $70,000 or so. The 1st mortgage lender has two choices: either accept that amount, or take the property. Most lenders will accept the high bid if it’s close to the loan’s unpaid principal balance. But in that scenario, what choices does the 2nd mortgage holder have? They have none whatsoever. Regardless of the choice the 1st mortgage holder makes, the 2nd will get nothing. You can see why the 2nd would be willing to take less than they are owed. Any money they can get in this case is better than nothing. You may also see why the 1st might be willing to accept a discount, although not nearly as steep as the one the 2nd would consider. Continuing the above example, if you offered the 1st $75,000 and the 2nd $1,000, it’s likely you could sell your house quickly for below its market value, pay off the lenders, pay a real estate commission, and still not have to pay any money at closing. An important thing to understand is that when a lender accepts a short sale offer, one of their requirements is that the sellers receive no proceeds from the sale. In other words, you can’t ask the lender to accept a $10,000 discount and then pocket $5,000 for yourself. They simply won’t allow it. SHORT SALES STEP BY STEP In today’s softening real estate market, short sales are becoming more and more common. Because of this, it’s actually gotten easier to get lenders to accept a reasonable discount. The secret of the strategy is to do exactly what the lender asks you to do, and to be able to justify your offer with realistic data. To have the best chance of getting a short sale offer accepted, you first need to get the house listed with a licensed real estate agent. The listing agreement should specify a commission of no more than 4 or 5%.

Next, the real estate agent must aggressively market the house to serious buyers who can close quickly with few (if any) contingencies. It’s a good idea to pick a real estate agent who regularly works with many serious investors. You don’t have the luxury of marketing the house to first-time homeowners who will take two or more months to close an FHA loan. The asking price should be around 80-90% of the property’s ideal fair market value. Keep in mind that it doesn’t matter that the asking price is less than you owe; that’s the point. It has to be priced low enough to sell quickly. When your agent brings you an offer, make sure it specifies that the contract is contingent upon your lender(s) (name them specifically) accepting a short payoff of $x. For example: Sale is contingent upon Bank of Persia accepting $52,175 as payment in full. Without this contingency in your sales contract, an unscrupulous buyer could force you to sell even without your lender agreeing to a discount. In that situation you would be required to bring money you don’t have to closing. So never sign a contract without that clause. Once the property is under contract, have your real estate agent follow these instructions:

□ Get a signature authorization from the sellers. □ Get a copy of the mortgage statement and call the customer service number on the mortgage statement. □ When you finally reach a live person, immediately tell them who you are, the names and address of the borrowers, and without pausing to take a breath, explain that you have a signed authorization from the borrowers giving the bank permission to speak with you. □ Ask the bank rep for a fax number to send the authorization. □ Immediately request another means of contacting them (email, direct phone, etc.). Sometimes they’ll give it to you. Sometimes they won’t. □ Fax the authorization to the number they give you. Often you’ll have to wait a day or two for the bank to process it. □ Call back, get to a live person, and repeat who you are, the names and address of the borrower, and ask the person to verify that authorization to discuss the account with you has been received and

processed. If not, hang up and try back tomorrow. □ Immediately explain to the bank representative that you represent the borrower, and wish to request a short sale package on their behalf. Use their actual names. □ The representative shouldn’t give you any trouble at this point. You may be asked some questions, such as how much money they have, whether they can afford the payments, how long you’ve had the property listed, your asking price, whether you’ve received any offers, etc. Answer the questions as truthfully as you can.

□ The short sale package will mostly consist of a long list of documents you’ll need to get from the seller. Basically, they are looking for proof that the homeowner cannot afford to bring the loan current, and have no chance that you’ll be able to sell it for what’s owed. Usually this list consists of: 1. Two months of pay stubs. 2. Two months of bank statements. 3. A detailed financial statement (they’ll usually provide a blank form). 4. Two years of tax returns. 5. A hardship letter explaining how and why they got behind on their payments. 6. Copy of the listing agreement. 7. A Broker Price Opinion. They might accept yours, but will probably order their own. 8. A copy of the sales contract. 9. A list of comps of your own. 10. Interior and exterior photos of the property. 11. A list of repairs needed, if any, and an estimate of their cost. 12. A preliminary HUD-1 closing statement showing how much money they will actually receive at closing. See the section below on completing a HUD- 1 form. □ Gather all the requested documents from the sellers then fax them to the bank and wait. They will tell you that the process takes at least 73

three weeks, but you will need to follow-up weekly. □ Your first offer will probably be rejected, so make sure the buyer is ready for that possibility. □ Submit all offers and counter offers in writing, along with a new HUD-1 showing the updated numbers. □ Ultimately the bank will approve or reject your offer. It’s very difficult to get them to give you a counter offer, so keep trying. If they approve, you just need to finish the process. If they reject, it’s probably because your offer was too low. In these cases, it pays to be professional and honest with them. Simply ask what number will work for them and see what they say. Go back to your buyer and try to make the numbers work. It’s really no different than a normal negotiation between buyer and seller, except it’s between buyer and lender. COMPLETING THE HUD-1 FORM The HUD-1 form is the key to your success or failure in getting the short sale approved. It need not be perfect. In fact, the lender probably expects that it will be a preliminary document. You might even want to write “PRELIMINARY” in big letters across the document. That said, it is still critical that you complete it accurately, or the offer will be rejected. For this section, refer to the sample HUD-1 form in Appendix A. When completing a short-sale HUD-1 form, it is helpful to have a completed HUD-1 from a prior closing. This will help you know how much local title companies typically charge for handling closing, and what the traditional county and state charges will be. This will make your preliminary HUD-1 forms more accurate and professional. Start with the top of the HUD-1 form. Make sure you complete sections D, E, and G. Sections H and I are good, too, if you have an idea where you’ll be closing. If you need to change the closing date or location later, you won’t likely have any problems. When a lender is evaluating a short sale offer, the first thing they’ll look at on the HUD-1 is line 603, Cash To / From Seller. That number had better be $0 (or very close to it) or your offer will be rejected immediately. As mentioned earlier, lenders will not accept a discount if the sellers get any money. The next place they’ll look is lines 504 and 505, Payoff of First and Second Mortgage Loans. These lines had better match exactly the dollar

amount you’ve offered the lenders, as specified in the sales contract. If not, go back to square one and start over. If you are asking the 1st mortgage holder to discount and there is a 2nd mortgage, the 1st mortgage lender will almost always have a policy dictating how much they will allow the 2nd mortgage holder to get, usually $1000 or so. The same logic applies to the 2nd mortgage as to the seller. If the lender is taking less than they’re owed, why should the junior mortgage holder(s) get anything? After ensuring that the offer numbers are accurate, they’ll turn their attention to line 703 on page 2. They want to look out for a commission that’s too high. Again, the logic is the same. The rest of the HUD-1 will then be reviewed for accuracy, so make sure you double-check your math. Minor errors may be overlooked, but major problems and oversights could jeopardize your success. Sophisticated agents make use of software specifically designed to create HUD-1 forms. Every time you submit an offer, the lender will require an updated HUD.

SHORT SALE WARNINGS AND PITFALLS Technically, when the lender forgives loan principal, it is considered taxable income by the IRS. The lender is required to issue a 1099 if the amount exceeds $599. Granted, if the lender forgives $10,000, isn’t it better to pay taxes on that $10,000 than to have to come up with the whole $10,000? Some lenders neglect to issue the required 1099. Does that mean you don’t owe the taxes? Absolutely not! Your tax obligation is not affected by the lender’s failure to notify you. Another remote possibility is that the lender will accept your short sale proposal to release the mortgage, and then request that you sign an unsecured loan for the difference. Worse, the lender may seek a deficiency judgment after the short sale is over. Although possible, this situation rarely occurs. That doesn’t mean it won’t ever happen, and you should always be prepared for the possibility. But before you let these possibilities frighten you away from trying a short sale, remember that the lenders maintain these very same rights if they end up selling the house at the auction. So ultimately there is little difference, except in who controls the outcome: you or the lender.

How you respond to a crisis such as foreclosure often helps determines your outcome. Some people respond with denial. They assume that if they ignore the problem it’ll go away on its own. Other people sit back and hope for a miracle. Still others will get angry and look for someone to blame. But eventually the crisis doesn’t go away. It gets larger and closer as time goes by. Ultimately the individual is faced with a problem that’s suddenly too big to ignore any longer. They become desperate. They become targets. There are three things that a foreclosure scam artist looks for in a potential victim: Equity in the home Desperation Ignorance This document can’t do anything about the first two. But hopefully it will remove the third thing: ignorance. The scams detailed below can help you avoid the common traps and problems that most people encounter when they are faced with the loss of their home. HOW IT STARTS As soon as news of your foreclosure is made public, the predators are on the hunt. Some of them are blunt and unsophisticated in their approach. They might send you a sloppy letter offering to buy your home for a ridiculous price. Others may call you on the phone or even knock on your door, offering to buy your home. These are the amateurs and can safely be ignored. The dangerous ones are the slick, polished professionals who offer to 77 help. They will assure you that they’ll stop your foreclosure, regardless of your situation, and even let you stay in your home! Does that sound too good to be true? Well, in most cases, it is. Many of these offers to help from so-called “Investors” are really just scams designed to steal your equity. This report describes some of the most common scams in use today. Learn how to spot them so you don’t become a victim. While some of these solutions can be valid options in some cases, most of the time the investor has no intention of letting you live there – at least

not for very long. Most of these folks use contracts heavily biased in their favor, and the slightest violation on your part will allow them to take your home and evict you. In landlord-friendly states, this is a very popular strategy to take every penny of equity you have built up. So let’s look at the most common scams and work our way through them one by one. SELL AND RENT BACK YOUR HOME In this common scam, you deed your home to an investor and sign a lease. The investor takes over your payments and might even bring your loan current. He may even offer you an option to buy the house back sometime in the future... for a much higher price than he paid. What happens next is that the investor simply waits for you to make the slightest mistake. You sign the deed and the lease and pay your rent to the investor. One day you will probably receive an eviction notice from your new landlord. Maybe the lease says you can’t hang pictures or put nails in the wall. Or perhaps you’re a day late on your rent. He will then evict you and take the rest of your equity. Legally you no longer own the house, so you’ll have to go. EQUITY STRIPPING, PART 1 This technique is very scary (and very illegal), and remarkably similar to the previous scams. Basically it works like this. You sign the house over to the investor and sign a lease. The investor takes over your payments, but probably will not even bring your loan current. Instead, they will probably negotiate some sort of short-term agreement with your lender. They might offer you an option to buy the house back sometime in the future, but that’s not crucial to the scam. You sign the deed and the lease and pay your rent to the investor. This goes on for awhile, until one day you receive another threatening letter from an attorney telling you that they are foreclosing on you again. What’s happened is that the investor has been cashing your rent checks and not paying your mortgage payments. He’s made a few thousand dollars from your misfortune. You are, in fact, much worse off than you were before. EQUITY STRIPPING, PART 2 In this version, an unscrupulous lender teams up with an unscrupulous

appraiser. They conspire to over-inflate the value of your home and get you to refinance. Sometimes, they do this over and over again. Each time you close a new loan, your payments and interest rate may drop, but your loan balance increases due to the high loan fees. Eventually your equity is gone and you find yourself in a worse situation than you were before. This isn’t very common for people in foreclosure, but it happens occasionally, and you should be aware of it. DEED IN ESCROW “LOANS” This scam is mostly used in strong housing markets with high appreciation. Here’s how it works. A very professional-looking and sounding investor offers to lend you the money to bring your loan current. He smiles a lot and tells you what you want to hear. Instead of a 2nd (or 3rd) mortgage, he’ll want you to sign a deed to your home that he will hold in escrow. He’ll probably explain that this keeps his costs low and protects his investment at the same time. Don’t buy it. If you’re a day late with one payment, he’ll record the deed and evict you. You won’t have a single document to prove that he ever lent you any money, but he’ll have a deed signed by you proving that you sold him your home. If someone wants to lend you money to bring your loan current, sign a promissory note and give them a mortgage. Any other lending scenario was probably created by someone who isn’t licensed to lend money and is trying to circumvent state and/or federal lending laws. Is this someone worth trusting with your most valuable asset? TRUST AGREEMENTS Although slightly less popular than the Deed in Escrow, it’s been getting more popular lately. In this scam, a company offers to bring your loan current and protect your equity. They will charge you $5000 (or some similar figure) and will pay all legal costs. Rather than holding a deed in escrow, they have you deed your home into a trust, a legal entity set up to own real estate. The deed names the company as trustee, or the individual who controls the trust. The trust will probably have a very comfortable-sounding name, such as the 123 Main Street Smith Family Trust (assuming your name is Smith and you live at 123 Main Street). They do this to make you

feel as if the house is still yours. The promise is that when you pay them back, plus their fee, the trust will then deed the house back to you. 80 Do you see the flaw in this logic? You no longer own your home! The actual owner of the house is the trust, which is controlled by the scam artist’s company. Whether you realize it or not, you’ve just given your home away, but you are still legally obligated to pay for it. If you do everything they say, will they really deed the house back to you? Maybe, but what if you miss a payment or are even a day late in paying them back? They already own the house. There is no foreclosure process and no remedy for you if they refuse to do what they said they would. They can simply evict you and take your equity. “ADVANCE FEE” FORECLOSURE MEDIATORS The people who run these scams occupy the bottom rung of this business. Their promise is that for a fee equal to a “small percentage” of your back payments, they will negotiate with your bank on your behalf. They imply that they can force your bank to take a smaller payment now and rewrite your loan. They might tell you they’ll negotiate a forbearance plan. Or maybe they will talk your bank into giving you another chance and adding your back payments to the end of the loan. Don’t believe them. They only want one thing: your money. Here is how a typical scam works. You contact the company because their ads look good and they promise guaranteed results. They ask you some questions, and tell you that your situation is common and that they can definitely help you. But first, they need their fee. This is typically something between $1000-2000. You’re assured that the service is guaranteed. Along with your payment, you’ll need to send them some paperwork that they provide. It could be anywhere from one to 20 pages of documents! If you send them the money and documents they require, they’re finished with you. You will probably never hear from them again. If you do call them and manage to reach someone, you’ll find that the only option available to you is a forbearance plan. They will be very apologetic, but tell you that you need to come up with more money. They tried their hardest, but the bank’s representatives were just too stubborn. So you need to send them another $5000 or more. No, you can’t have your money back, because they did negotiate a settlement for

you. It’s not their fault you can’t come up with the rest of the money. Most homeowners give up in frustration at this point. The sad reality is that negotiating a forbearance plan really isn’t that difficult. You can do it yourself in a matter of minutes. Step-by-step instructions can be found in Chapter 4 of the Foreclosure Survival Kit. PREDATORY LOANS Did you know that it’s actually illegal for someone to lend you money if they even suspect that you can’t afford to pay it back? Yet there are still individuals (and sometimes even large banks) who will lend you money, knowing you cannot repay it. They are hoping that you’ll default so they can take the house themselves. These people aren’t interested in helping you keep your home. They’re simply counting on your ignorance of the law so that they can take advantage of you. BOTTOM LINE ON HELP Most of these people are counting on your confusion and fear, and want to capitalize on the fact that you probably don’t have a lot of time to investigate them or think about their offer too clearly. Fortunately, it’s not all bad news. For example, there is certainly nothing wrong with a company lending you money to bring your loan current (assuming you can afford to repay it). There is even nothing wrong with an investor renting the house back to you. And there is certainly nothing illegal with a buyer taking over your existing payments. You just need to be sure that if you do any of these things, your documents contain language allowing for a remedy in case the other party isn’t living up to their promises. You have more than your credit at risk. FINAL WORDS If you’re facing foreclosure now, there are people out there who want to steal your equity and kick you out of your home. Some of them make a very good living doing it, too. They are mean and nasty and take great pleasure in other people’s misery. Their #1 goal is to profit from your pain, and they are good at it. Some of the best ways to handle these vultures: Ignore them – they aren’t there to help you. Tell them you’ve already sold the house. Call the police if they are trespassing – until the auction is over and

they own the house, it’s still yours. Protect your rights. And even if you think the other person truly has your best intentions in mind, use this checklist to make sure: Demand that all agreements be made in writing and that you get an original, signed copy of each. Don’t sign a deed to anyone unless you really mean to sell them your house. Insist on closing sales or loans at a reputable title company. Never pay anyone money in advance for offering to “fix” a foreclosure. No honest company will refuse these reasonable requests. In fact, the best ones will insist on them. A FEW FINAL WARNINGS DON’T PROCRASTINATE When dealing with a foreclosure attorney, remember that they work for the bank, not you. Their responsibility is to see that their client gets paid. It typically takes the 5-7 days to get information to and from the bank. Therefore, the week before the foreclosure sale is the worst time to try to work things out. If you need a payoff or reinstatement figure, there may not be enough time. If you don’t know what it will take to bring your loan current before the sale, it’s too late. And remember, many states are non-redemption states, which means that once the sale is held, you can’t get your house back. DON’T EXPECT BIDDERS TO PAY FULL MARKET VALUE Many homeowners in foreclosure understand that when the sale price is bid higher than they owe the bank, that extra money belongs to them. In principle this is true. The reality can be quite alarming. Did you know that most of the people who attend foreclosure auctions are professional buyers? Most of them know each other and some even travel together. They know what the bank is owed on each property, and they take turns bidding on various properties so that they don’t outbid each other. This is called collusion and it’s a very shady thing to do. But it happens every day. If you expect an unsophisticated buyer to bid up your property to its full market value, you’re in for a major disappointment. The second problem that often occurs is that some attorneys don’t

automatically send the excess proceeds to the homeowner. Instead they deposit any additional money with state through something known as an Interpleader Action. In the state of Washington, this is actually required by law. At that point, you have to hire a lawyer to go after the money that is legally yours. These lawyers aren’t cheap, either. Most will charge you 40-50% of the money they get you. And if you don’t get the money for some reason, you still have to pay the lawyer! Rather than take your chances at the foreclosure auction, if you want to get as much money as possible for your equity, simply implement one of the selling strategies in this book.

Good information is your first defense against the vultures who want to steal your home. Although we try to cover most of the problems and pitfalls you’re likely to encounter in this book, we can’t conceive of every possible issue. If you find yourself at a dead-end, help is available. If you need assistance, feel free to call 24/7 951-278-2207 leave your name, phone number and a brief message and/or e- mail [email protected]

We can help continue the process. Signed Authorization to Release Information Completed Property Information Sheet Completed Foreclosure Evaluation Worksheet Recent mortgage statement from the lender that’s foreclosing

Please be aware that the information contained in this e-book has worked for us in some situations. Your situation may be unique and not suited to a cookie cutter solution. Though we have tried very hard to be sure of the accuracy of the information we provide, we are human and therefore prone to mistakes. We suggest that you get a Pre-paid legal plan through us for a monthly low- cost of $26.00. We will can work with any attorney on their network.

This section contains all of the forms mentioned in this e-book. Feel free to reproduce them as needed.

PROPERTY INFORMATION SHEET Foreclosure Information Lender: Mortgage Date: Book/Page: Attorney: Scheduled Sale Date: 1st Notice Date: Owner Information Owner(s) Name(s): Email: Phone: Phone: Property address: City: State: ZIP Code: Mailing address (if different): City: State: ZIP Code: Financial Information 1st Mortgage: Payment: Balance: 2nd Mortgage: Payment: Balance: Other Liens: Payment: Balance: Other Liens: Payment: Balance: 1st Mortgage: Current? Yes No Arrears (if any): 2nd Mortgage: Current? Yes No Arrears (if any): 3rd Mortgage: Current? Yes No Arrears (if any): Property Taxes: Current? Yes No Arrears (if any):

Property Information Fair Market Value: Style: # of Units: Total Living Area: Lot Size: # Bedrooms: # Full Baths: # Half Baths: # ¾ Baths: Year Built: Garage: Electric Service: Zoning: Schools: Water: Public Private Heating System: Heating Fuel: Sewer: Public Private Property Condition (check all that apply) Cracks in Foundation Driveway needs repair Cracks in Bricks/Siding Roof Needs Repair Roof needs to be replaced Roof leaks Chimney needs repair Chimney needs lining Yard/Landscaping issues Trees growing into house Trees need to be pruned Mold present in house Kitchen appliances missing Kitchen needs updating Kitchen to be replaced Bathroom(s) need updating Bathroom(s) to be replaced Needs interior paint Needs exterior paint Needs carpet Hardwood damaged Broken window(s) Garage door(s) damaged Electricity turned off Water turned off Septic tank needs pumped Septic tanks needs repair Septic system failure Property Vacant Current Rental Additional property information:

FORECLOSURE EVALUATION WORKSHEET Personal Financial Information 1. Non-house debt payments $ 2. Total House Payment $ 3. Total Debt: (#1 + #2) $ 4. Gross Monthly Income $ 5. Debt to Income (Divide #3 by #4) 6. Total Debt to Income (Divide #4 by #2) Property Financial Information 7. Fair Market Value $ 8. Total Owed $ 9. LTV (Divide #7 by #8) Foreclosure Information

10. Reinstatement Amount: $ 11. Cash on Hand: $ 12. Cash You Can Get: $ 13. Total Available Cash :$ 14. Cash Shortage (Subtract #10 from #13): $ 15. Total Months’ Payments from Available Cash (Divide #13 by #2): 16. Percentage of Reinstatement You Can Get (Divide #13 / #10): Credit scores* 17. Owner’s FICO Score: 18. Co-Owner’s FICO Score: *FICO scores are available instantly online, at www.freecreditreport.com, www.myfico.com, and many others. Usually three scores will be reported. Lenders typically use the one in the middle (neither the highest nor the lowest).

Look up Your results by comparing the values above with the information here If the Value in Field Is at Least But No More Than Your Potential Options Are… (Check each matching row) 5 0% 35% Refinance 6 0% 50% Refinance 9 0% 60% Refinance 17 500 850 Refinance 18 500 850 Refinance 9 0% 50% Refinance, Private Loan 16 50% 100% Private Loan 14 $0.00 $0.00 Reinstate the Loan 15 3 8 Forbearance Plan 9 0% 70% Bridge Loan, Realtor Sale, Investor Sale, Friend/Family Sale 9 70.01% 80% Realtor Sale, Investor Sale, Friend/Family Sale 9 80.01% 8% Short Sale

Note: In order for a Potential Option to be a Realistic Option, you must be able to put a check in each row where that option exists. For example, if you want to refinance, you must meet all of the Refinance Criteria to have a chance to qualify. Meeting 5 of the 6 tests will probably result in the denial. This table should be used as a guide only to determine which course of action has the best chance of success. It is not a complete substitute for expert advice and consultation. Please contact an ARES Representative to discuss your situation in more detail.

HUD-1

Note that the HUD-1 included in this document is too small to use effectively and should be used as a reference only. Fortunately, you can download a fully-functional HUD-1 form from www.hud.gov.

Authorization to Release Information: Use this document to instruct your bank or the foreclosing attorney to discuss your situation with another person. Without a signed authorization on file, the bank and attorney are prohibited by law from discussing these matters with anyone other than the borrower. Special Power of Attorney (Sample): This document can be used to give an investor (or friend or family member) the right to act on your behalf if you decide to sell him your house. The document is shown for illustration purposes only. It should not be relied upon as being valid in your state. Reinstatement and Payoff Request: This is the letter you can send to the foreclosing attorney to request the total amount required to pay off or bring your loan current. Simply fill in the blanks, sign at the bottom, and fax it to the attorney. Be warned. Some attorneys may take more than a week to respond to your request.

AUTHORIZATION TO RELEASE INFORMATION BORROWER INFORMATION Name: ______SSN#______Co-Name:______SSN#______AGREEMENT & AUTHORIZATION I hereby authorize verification of my past and present credit profiles, employment records, lender accounts, stock holdings, and any other balances that are needed to process my application. I also give further authorization to order a consumer credit report and verify other credit information, including past and present references. It is understood that a copy of this form will also serve as authorization. I hereby authorize ______or its agents to contact, negotiate and settle in my/our behalf any contracts, notes, mortgages, judgments and/or liens with any Company, Collection Agency or Attorney, in connection with my application. APPROVAL ______Signature Date

______Signature Date

SPECIAL POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That I, ______, of ______(address), have made, constituted, and appointed, and by these presents do make constitute and appoint ______my true and lawful attorney, for me and in my name, place, and stead, to execute and sign any real estate contract addendum, deed, contract, bond, possession agreement, settlement statement, or any other paper, form, or instrument necessary and incident to the placement, completion, settlement, and consummation of cash on property known as: 24 Lower Bow Street, Northwood, NH 03261-4108; and to furthermore make any necessary covenants, warranties, and assurances, and to do any and all acts and things necessary and incident to the purchase, sale, or refinance of said property. This Power of Attorney shall not be terminated by my disability nor shall there by any liability on any person, firm or corporation relying on this Power of Attorney subsequent to our death provided such person, firm or corporation has not received actual notice of our death. And we hereby ratify and confirm all lawful acts done by our said attorney by virtue hereof. The effective date of this instrument shall be ______, and shall terminate on the settlement and completion of the purchase, sale, or refinance transaction.

WITNESS the following signatures and seals on ______. ______Printed Name ______Signature State of ______County of ______On this, the ______day of ______, 20_____, personally appeared ______known to me or

satisfactorily proven to be the persons whose names are subscribed to the foregoing instrument and acknowledged that they executed the same for the purposes therein contained as their free act and deed. ______Justice of the Peace / Notary Public My Commission Expires: ______

REINSTATEMENT AND PAYOFF REQUEST To: From: Company: Company: Fax: Fax: Phone: Phone: Date: Pages: To Whom It May Concern: I am writing to you today to inquire about the property referenced above. As you know, your firm is handling the foreclosure on behalf of the mortgagee. Please find attached an authorization from the homeowner permitting you to discuss these things with me. I am requesting the current reinstatement amount and payoff on said mortgage, the current monthly payment, date of the last payment made, and balance of the escrow account (if any). Please fax your reply to the fax number above. If you have any further questions, you can reach me at the number below. I appreciate your prompt attention in this. Best regards, Owner & Property Information Owner(s) Name(s): Property address: City: State: ZIP Code: Bank: Loan #: