Start With Empathy
Imagine you can’t pay your mortgage. If you find yourself in that situation, it’s because bad things have happened leading up to this point. You have likely suffered one or more misfortune, including unemployment, a health crisis (with medical bills being the most common reason for bankruptcy filings), divorce or a business failure. Now, you’re in danger of losing your home or investment property. When attempting to buy foreclosure properties, empathy is essential.
A homeowner facing foreclosure is likely the kind of motivated seller that investors want to find. As an attorney, I built my legal business during the foreclosure crisis which began in 2008. I’ve represented hundreds of distressed families and investors through all stages of the foreclosure process. I’ve also worked with many investors who have enjoyed success finding and buying distressed properties. This article will share some lessons I’ve learned about foreclosures to help investors succeed in this market.
There are many good opportunities available to investors through distressed properties. There is, however, beyond the numbers, a major emotional component to understand. Empathy is crucial when dealing with homeowners facing foreclosure.
As a starting point, investors should think of the people from whom they want to buy properties as “homeowners” rather than “sellers.” Though both terms refer to the same people, the former helps investors understand them as human beings rather the other party in a transaction. That’s where empathy and a meaningful dialogue begin.
Why Are You Looking To Buy Foreclosure Properties?
Foreclosures create opportunities for investors to do good while doing well. If you’re facing foreclosure, you have a problem in need of a solution. Investors can do quite well while for themselves while doing some good for the homeowner in a win-win deal.
Before you approach the homeowner, consider the range of emotions at play. They’re likely feeling, at various points, fear, shame and embarrassment, denial, anger, and despair, among others. Finding empathy shouldn’t be a stretch because, with few exceptions, just about anyone can end up in foreclosure. Among the many lessons I’ve learned through the foreclosure crisis is that few of us are immune from a financial or health crisis that can make everything we’ve worked to build come tumbling down. I’ve had many clients who were doing great for a sustained period until, suddenly, they weren’t. Life is more tenuous than we’d like to admit.
There has been much written and talked about the power of “why” in recent years. The idea is that we all need a powerful, overriding purpose in our endeavors to succeed. The “what” and “how” should flow from the foundation of our “why.” If making money is your primary “why,” then you won’t enjoy sustained success in any business. Money should be a byproduct that comes from providing a great product or service to help people solve their problems. We need to listen more than we speak and find the homeowner’s pain points to help them.
Educate Yourself and Your Sellers About Foreclosure Solutions
A good starting point is to seek to educate the homeowner about their foreclosure situation and options. If you find foreclosure leads, as many investors do, through a court data subscription service, you may want to avoid leading with talking about the foreclosure. Consider the emotional state they’re likely in and how they may react to your knowledge of their situation. Most investor solicitation letters open with a ham-fisted acknowledgment of the pending foreclosure and buying the home. If you break from the pack, your letter may avoid the trash bin.
When discussing legal matters, you must avoid giving legal advice if you’re not a licensed attorney. There are many gray areas here and it can be easy to cross that line with good intentions.
A good rule of thumb is that you’re likely safe in simply relaying facts homeowners can look up themselves, but you run into trouble when you suggest what to do in response to those facts. A foreclosure legal summons may say they have twenty days to file a response in court or risk losing by default and you can point that out. Telling them how to respond is crossing the line. If you’re uncomfortable approaching the line where unlicensed practice of law may be drawn to suggest they seek professional legal advice.
The stage of the foreclosure is important, and the borrower should understand the significance of timing. I consider the “pre-foreclosure” stage to begin when a borrower falls behind in their mortgage payments but hasn’t been sued for foreclosure yet. During this period of payment arrears, borrowers begin to get letters and calls from their lenders or servicing agents.
If the default isn’t cured, the matter will almost certainly lead to a foreclosure filing, but how long that takes varies greatly. In most cases, the earlier the point in time the borrower is on the foreclosure spectrum, the better the opportunity for a solution.
Once the lender files a foreclosure case in court, they’ll also file a legal notice in the public records called a “lis pendens.” This is legal jargon for a case pending against that property which clouds the title and puts the world on notice that there is an active foreclosure in court.
Served With Court Papers
When served with court papers in Florida, the homeowner will have twenty days to respond. From that point forward, unless they actively fight the case, the matter may move from service of court papers to a final hearing or trial and then, a court sale, within a matter of months. Once the court auction is scheduled, the case is in the end-stage and the timing is urgent.
The homeowner’s biggest concern will be finding a solution to the foreclosure problem. Most homeowners want to save their homes first. They won’t be ready to have a serious discussion about selling until they have the peace of mind of knowing they’ve exhausted all efforts to stay in the home.
The most likely solution to keep the home is known as a loan modification. Loan modifications come in many forms, but they’re always a kind of re-working of the mortgage terms designed to help the borrower get out of arrears and make the loan “performing” again so that the foreclosure may be dismissed. There are many service providers who can assist borrowers in applying for loan modifications. They include attorneys, as well as HUD-certified counselors, some of whom work for nonprofits for no fee to the borrower.
Educating people about loan modifications, which does nothing for the investor, is a great way for investors to set themselves apart from everyone else interested only in getting the property. Quite often, the borrower won’t qualify for a loan modification or default on the payments, only to fail and find themselves in foreclosure again. At that point, who is the homeowner going to call? Investors need to remain in touch and stand by to help again when the homeowner is now ready to sell.
Another solution is known as a “short sale.” This is the sale of the home for less than the total mortgage debt owed because there isn’t enough equity to pay off the lender in full. Short sales are slow, frustrating nightmares of lender bureaucracy. Any investor interested in purchasing a short sale would need to wait months to seek approval. The borrower will need a trained professional to negotiate the short sale on their behalf. Negotiators are usually the listing agent, title company or an attorney.
Lenders don’t allow their borrowers to collect seller’s proceeds from a short sale. If the lender is accepting a discounted payoff, they don’t want to let the borrower walk away with money. Lenders, do however, often allow for some relocation expenses to trickle down to the seller at closing, often called “cash for keys.” The most important short sale term for the borrower to seek is a “deficiency waiver.” This is a written agreement by the lender not to seek to collect from the borrower the difference between how much the lender was owed and what the lender ultimately collects from the deal.
A more creative solution is known as a “subject-to mortgage” purchase. This is a sale of the property without paying off the outstanding mortgage balance. Instead, the buyer pays off the arrears, brings the note current and takes over the payments moving forward. Commonly, the investor will then rent out the property at a rate higher than the monthly mortgage payment and keep the “spread” as profit.
Taking Over Mortgage Payments
A more creative solution is known as a “subject-to mortgage” purchase where the buyer takes over the borrower’s mortgage payments. This is a sale of the property without paying off the outstanding mortgage balance. Instead, the buyer pays off the arrears, brings the note current and begins making the payments moving forward. Commonly, the investor will then rent out the property at a rate higher than the monthly mortgage payment and keep the “spread” as profit.
Florida Land Trusts
This kind of deal is an advanced investor transaction and is rife with dangers and pitfalls. Among the important points for all sides of the deal to understand is, the lender doesn’t release the current borrower and take on a new one. The seller remains liable for the mortgage debt and the lender doesn’t care that the buyer promised to pay it. Though the reasons for this are beyond the scope of this article, investors should purchase subject-to mortgage homes through a land trust. Here are some links to learn more about Florida Land Trusts: https://www.celebrationlaw.com/practice-areas/real-estate/land-trusts/ https://www.celebrationlaw.com/use-land-trusts-protect-assets/
A much simpler and more easily understood solution is a conventional sale of the home. Following the steady recovery of the housing market of recent years, it is much more likely now that any foreclosure property will have enough equity to pay off the mortgage and put money in the seller’s pocket. Many borrowers can’t meet the monthly mortgage obligation, but have equity they don’t want to lose. There is often enough of a cushion for the investor to buy under market value, pay off the lender and have the seller collect sale proceeds.
Through all economic conditions, there will always be foreclosures and motivated homeowners ready to sell. Foreclosures present purchase opportunities for investors, but the investors who enjoy the greatest success in this market approach deals from the point of view of helping the homeowner first. Investors must be ready and willing to educate and offer solutions for win-win outcomes. At Widerman Malek, we help investors succeed in business and life as their trusted advisers. If you’re a real estate investor, call me to discuss how I can help you as part of your success team.
The Conventional Sale
A much simpler and more easily understood solution is a conventional sale of the home. Following the steady recovery of the housing market of recent years, it is much more likely now that any foreclosure property will have enough equity to pay off the mortgage and put money in the seller’s pocket. Many borrowers can’t meet the monthly mortgage obligation but have equity they don’t want to lose. There is often enough of a cushion for the investor to buy under market value, pay off the lender and have the seller collect sale proceeds.
Through all economic conditions, there will always be foreclosures and motivated homeowners ready to sell. Foreclosures present purchase opportunities for investors, but the investors who enjoy the greatest success in this market approach deals from the point of view of helping the homeowner first. Investors must be ready and willing to educate and offer solutions for win-win outcomes.