GEORGE ACHENBACH is President of a private venture capital and income property investment company. As a graduate engineer, he started ten businesses and built more than 7,000 homes and apartments, as well as many commercial and industrial projects. He has spent almost thirty years buying and selling properties using the techniques presented in this bestselling book.

Goldmining in Foreclosure Properties 5th Edition

By George Achenbach

John Wiley & Sons

Copyright © 2003 George Achenbach
All right reserved.
ISBN: 978-0-471-46485-3

Chapter One

Your Place in the Distress Property Cycle

Techniques only work when you do. -Carlos Royal

Goldmining in Foreclosure Properties deals with homes, condos, and smaller rental units that have fallen into the "distress" category, meaning that the owners are in a hurry to sell. These people may be prompted to sell by personal problems or financial problems, but in either case the result is the same. They need to get out with some financial arrangement tailored to their needs and with at least a shred of dignity intact.

As a private party, you are better able to help the troubled owners (and yourself) than the experts are. You know the consumers' problems. You can take the time and make the effort to work on one deal at a time, whether it's for your own home or for an investment. If you're really motivated, you might even undertake "goldmining" as a small part-time business. It could bring you between $40,000 and $100,000 a year, depending on the energy you expend.

A Unique Opportunity

Human nature being what it is, there is always someone who wants to get rid of a property because of a personal situation-a divorce, a falling-out with partners, a job transfer. By staying alert for cases like these, specialists in distress property should always be able to find deals. Case Study 1.1 is an example of such a deal.

But the time has never been better for aspiring real estate investors. Today the real estate industry is saturated with overfinanced properties. The economy is threatened with slowdowns due to overseas problems which could create havoc in home building and construction. But in chaos there is opportunity, and the real estate industry is no exception. In current conditions, people with skill, capital, and vision can make great profits. The existence of these opportunities is no secret. There is a shortage of capable real estate entrepreneurs, however, so this field is ripe for the taking.

Because of the inflated real estate prices over the past several years, buyers have had to take out larger loans than ever before, with extremely large monthly payments. The lenders are all too willing to help. In fact, lenders' actions seem calculated to overload borrowers. If the lenders repossess and sell a property, they could increase their profits dramatically, unless the loan is greater than the value of the property. But the borrowers will lose everything-home, equity, and credit. In many cases, even a small financial reversal can get the borrowers in trouble. A tremendous flood of distress properties seems all but inevitable.

In 2002 the rate of mortgage foreclosures reached the highest rate recorded in 30 years. In one three-month period, the proportion of loans on which foreclosures were started reached four per 1,000. Mortgages in the foreclosure process at any one time rose to more than 12 per thousand. The trend has stirred concern among industry leaders, fearing that the industry has been weakened by over-financing of homes.

Now is a very good time for knowledgeable investors to step in and enrich themselves while helping troubled owners and lenders resolve their problems. Why? Because properties could soon be in more trouble than ever before. More default notices are filed today than at any time in the past ten years. More borrowers and owners of property cannot make payments on their first, second, or even third or fourth loans. The current estimate of delinquencies is well over 3 million per year. The estimated number of foreclosure actions started in court is about 400,000 per year.

What's happening to the other 2.6 million delinquencies? Some are resolved by the owners before foreclosure takes place. But lots of deals are being made, too. If you want to buy a home to live in or to invest in, you should try dealing in distress property. Whether you are male or female, single, married, or living with someone, senior citizen or youngster, this is a great opportunity. With the forms and procedures provided in this book, you can help yourself and save the credit rating of the troubled owners.

The Distress Property Cycle

The life cycle in distress properties has four distinct stages:

Stage I: Before Legal Action Begins. This is when the owners first stop making payments on the loan (or loans). Financial setbacks, personal changes, and family pressures may all play a role.

Stage II: After Legal Notices Are Filed. At this point the foreclosure clock starts to tick. Only a limited number of days are left for the owners to pay up, sell, or make other deals with creditors.

Stage III: Auction Time. This is how the court legally sells the property to satisfy the unpaid loans.

Stage IV: REOs and Repos. When no one bids the amount owed, the property reverts back to the lender. It becomes an REO (real estate owned) property. When it reaches this stage, you must deal directly with the lender (who is now the owner).

Most specialists in distress property work in all four of these stages eventually. As a beginner, you'll probably want to choose one. The Distress Property Cycle chart in Figure 1.1 can help you decide. Then you can go on to consider a number of other important areas.

Analyze the Deal's Advantages and Disadvantages

Each prospective deal has advantages and disadvantages. You have to determine, in light of your own situation, what's most important for you. Plenty of deals are available. You just have to pick the one you'll be most comfortable with.

Start by analyzing your reasons for seeking title to a distress property. Are you after income from property management? Appreciation of capital? A tax shelter? More cash flow? Profit from resale of the property? A home of your own?

Once you've identified your motives, you can focus on the distress property itself. Each investor has a different way of analyzing values, but several key factors will have to be addressed:

The total amount of investment necessary

When the funds will have to be invested

How much of the return will be in "hard" dollars and how much in "soft" dollars

When the investment dollars will be returned

Obviously, before you can make a profit dealing in distress properties, you have to understand the details of any transaction. You are concerned with the same basic questions as the original mortgagee of that property.

In conjunction with your own economic review, you will probably ask the lending institutions certain threshold questions: Are additional funds available from the original lender? Will the lender indemnify you, as the new buyer, against any unforeseen claims against the property?

Avoid the Excessive Cost of Banks, Lawyers, and Realtors

This book does not and cannot give legal or professional advice. It does show how, with the right research and information, you can avoid all excessive professional costs associated with taking over existing property. For the most part, you just have to be aware of the applicable local, county, and state laws and be alert to some of the economic fundamentals. Although the procedures outlined here will not work in every county or every state, they provide enough basic information so you can consummate these transactions at minimum cost. You need only think a little and perhaps consult occasionally with an attorney or local professional.

Avoid Leverage Tricks

Leverage is advocated by most books with titles like "How to Make a Million Dollars in Thirty Days." Leverage is fine in a hypothetical example on paper. In real life, however, leverage works both ways. Prime rates go up and down (from 4.35 to 15.75 percent in the past 20 years or so). The banks and other lenders continually pressure the consumer to pay the piper. When you use other people's money ("OPM," as it's called in most get-rich-quick books on leverage), you invite total ruin. A better, safer way to operate is as an individual investor, handling only what you can manage.

When you use your own money (meaning yours, your family's, or your business's), you eliminate a variable factor that could upset your planning. If all the money is yours, nobody can call your loan and ask for the money back.

It is never a good idea to rely on other people's money, except when buying a property subject to an existing mortgage. Unnecessary risks are foolish. To accomplish the ends presented in this book, you do not have to use leverage in the speculative sense, nor do you have to borrow other people's money.

Observe the Laws That Apply in Your State

Although the ideas included in this book have been shown to work in most areas of the country, you must carefully check your local laws. It is impossible in a book of this kind to interpret the real estate laws of all fifty states and set down one group of rules that will work for all of them. For instance, some states have mortgages; others have deeds of trust. Even if the terms are essentially interchangeable, you would be well advised to consult a trusted attorney or accountant for the answer to any specific question concerning a specific area.

Critical Success Factor

The basic economic principle behind this program is the law of supply and demand. But other factors that contribute to its success are under your control:

Intimate knowledge of a particular location

Ability to maintain the property you acquire in such a manner as to increase its value

Sincere concern for the welfare of troubled owners

Willingness to work outside the regular nine-to-five hours of most professionals

Willingness to deal directly with the sellers and the buyers

Knowledge of how to buy property subject to existing mortgages and thereby avoid red tape

Remember, you probably know more about the territory than the experts do, and you can react more quickly. Your unique position as a specialist and your interest in helping owners who are in trouble will be your greatest advantages.

Where Do You Fit In?

The number of distress properties available changes when business conditions change. During times of full employment and low interest rates, there probably will be fewer. During bad times, when unemployment and high interest rates present a problem, the number of distress properties increases. But this issue is really beside the point. What's important is where you'll operate. What will your area be? How many housing units are in this area? How many properties do you want to buy per year? What are your personal goals?

One of my friends is content with one deal per year. His "farm" area consists of about three tracts right around where he lives. He gets all the information he needs from a small newspaper that comes out twice a week. It lists divorces, deaths, and trustee sales. He is very selective. He lists the suspect properties. He develops prospects and easily gets his one good deal per year.

I know another fellow who operates in three large counties in California-Orange County, Riverside County, and San Bernardino County. He and his two partners go for one deal a week. They haven't reached that level yet, but they have been averaging about two to three deals per month.

Once you have full knowledge of how the process operates, you have almost unlimited opportunities. The important thing is to get the knowledge and then develop a system for yourself. Pick a market large enough to accommodate your personal goals. Of course, another limiting factor is the amount of cash you have. I always recommend starting small. If you can get one good deal a year, you can expand to two deals or more as your skills expand.

Each stage of the distress property cycle has its own opportunities and its own problems. But they are all solvable, practical, bread-and-butter problems. There is nothing esoteric about them (like having to put a man on the moon). As long as you know where to go and who to ask for answers to these problems, you will be alright.

The Value of a Positive Mental Attitude

As you read this book and make preparations to go into the field, bear in mind that you are doing several people a favor. Your acquisition of distress property will stabilize or improve the credit rating of the struggling owners. You will help the people in the neighborhood by turning a property that is starting to run down into a property that has some dignity and potential value. Finally, you will help yourself (if you move into that home) or the people who lease or buy the place by providing a decent residence at a reasonable price.

Maintain an "I know what I am doing and I am doing something good" attitude. You need to approach every situation with a positive manner and a desire to make good things happen. The sellers need to feel that their problems are receiving sympathetic consideration and that you are offering personal service as well as service to the neighborhood. This whole endeavor should be a source of pride and confidence for you and everyone else involved. A positive attitude is your most valuable resource.

I remember one particular deal that started out so poorly I felt like quitting real estate over it. It was only my positive attitude that finally caused the bad deal to yield a big profit. A real estate agent called to say his broker wanted to sell an investment condo she owned. The broker needed cash for another investment. The condo was a 4 bedroom, 2.5 bath, two-story townhouse in very bad condition but in a good location.

After days of meeting with the agent, the broker, and the tenant (who turned out to be the real owner), I realized the deal was too confusing. The original buyer had sold the unit to the broker, who sold the unit to the present owner under a long-term contract of sale, very much like a lease with an option to buy. The buyer was making lease-type payments to the broker. The broker had obtained additional loans on the unit, as had the buyer.

By the time I decided to back out, the broker had committed herself to another deal using the money she was expecting to receive from me. In fact, all three parties had planned a chain of purchases. When I told them I wanted out, their cries of anguish could be heard halfway across the state.

This was a classic case of misunderstanding upon misrepresentation upon mistake. No one had really lied or intended to defraud. The problem was just that no one had presented all the facts in a normal way.

In response to the reaction, I guess, I stepped back and reviewed all the facts. Actually, the numbers did work. A good profit was possible on a sale one to two years down the road. All I had to do was be sure that all the liens and encumbrances were included and that I had safeguards. My positive attitude prevailed. I met with all three parties at a lawyer's office, and a few hours later we had a deal.

Everyone, except me, was in a hurry to make the deal. So I got all the safeguards I wanted and a few extra price concessions besides. I agreed to refinance the unit, replacing all financing with a new first loan. The agent, the broker, and the owner all got their money, and I got a choice property that eventually earned a neat profit-because I kept a can-do, positive attitude.

(Continues...)

Excerpted from Goldmining in Foreclosure Properties 5th Editionby George Achenbach Copyright © 2003 by George Achenbach. Excerpted by permission.
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