Have you ever wondered… ”So why don’t owners just list their houses with a Realtor so they can get top dollar?” Great question… but… what if they don’t want to sell?
Now you must be wondering… “If they don’t want to sell through a Realtor, why would they want to sell their house to you (an investor) at a discount?” Another great question…
Because it’s better for them to get some money and a fresh start, then to lose all their equity and credit, plus get kicked out on the street by the winning bidder at the trustee sale auction.
Now if I’ve totally confused you… don’t worry. I will explain further.
But first let’s review ALL the Owner in Default Options available to him.
As a new investor, you will quickly find out that the most important part of working with owners in default is FIRST GAINING THEIR TRUST! That means instead of focusing on “YOU buying their home” you must work through every possible option THEY may have to keep their home FIRST while discussing the benefits and disadvantages of each. Then you can discuss selling their home and how they can do that… but only after you’ve spent much time with them by phone offering free help.
Some investors try to avoid discussing all owner options (because they see it as a threat to their offer) or just don’t want to bring up possible objections that they don’t know how to overcome. These investors would rather discuss “buying their house”, and would prefer to just come in at the end of the foreclosure process when they know the owner has run out of choices. (Sounds more like a vulture doesn’t it?)
I do not agree with this line of thinking at all!
In my 20+ years of investing experience (as well as an investor trainer for the last 13 years) the one thing that holds true in every type of sale, is that in order to “close any deal” you must FIRST overcome all objections… spoken and UNSPOKEN.
So, if you think by not “talking about it” will make it go away, you are gravely mistaken!
So, let us go through the most common options an owner may consider when in foreclosure on their home. Also remember, that all these options may not be available to every owner in default, so do ask many questions and LISTEN before you start “lecturing” the client about what they should or should not do.
By the end of this article, you will find the answer to your question… “Why Don’t Owners in Default Just List Their House for Sale?”
Option One: Work with their Current Lender:
- Forbearance: Forbearance is an agreement between the current lender and the borrower that reinstates the delinquent loan through the payment of a lump sum or a schedule of payments over a period of time. If a borrower got behind in his or her payments, (because of a lapse of employment, and now has income coming in again) the lender may allow the borrower to pay the money back through installment payments over six months.
The lender may also decide to allow the borrower to pay a reduced monthly payment until the borrower has an opportunity to get back on his or her feet and pay any remaining arrearages in one lump sum.
The forbearance may be an oral agreement or written contract between the lender and the borrower. Generally these agreements will not extend beyond 12 months.
- Loan Modification: A loan modification is a change in any of the terms of the original note. This includes decreasing the interest rate, re-amortizing the remaining balance, extending the term of the loan, or other options at the lender’s discretion to assist the borrower through a temporary setback.
Generally a lender will consider a loan modification when foreclosure is imminent and the borrower’s income has been decreased and he or she is unable to make the mortgage payments on the existing terms, but will be able to keep the loan current after the loan modification.
Option Two: Work with a New Lender
- Refinance: Mortgage refinancing is a good option when a new lender would allow the borrower to refinance his or her existing mortgage, wrap in any late payments and fees, and cash out part of his or her equity in the home to allow the borrower to regain control of a deteriorating financial situation. Refinances are generally open to borrowers that face a temporary setback in their financial situation, have an outstanding credit history in the past, and can prove that he or she can support the new mortgage payment.
- Junior Mortgage, Line of Credit: A new lender may offer a second loan or junior lien to a borrower in order to make up any back payments, late fees and other charges necessary to reinstate the loan. The borrower, in return, will be required to make an additional mortgage payment to cover the principal and interest payments on the second loan. Loan fees are typically 5-10 times the average loan fees for an “A Credit” borrower. Plus interest rates often rival credit cards.
Use caution before you choose a new loan. If they cannot make payments on their current loan(s), how can they on a new more costly loan? Make sure to watch out for Predatory Lenders Readmore about that here.
Option Three: File Bankruptcy
Bankruptcy is a way for people who owe more money than they can pay right now, (debtors), to either work out a plan to repay the money over time in a chapter 11, chapter 12, or chapter 13 filings; or wipe out (discharge) most of their bills in a chapter 7 filing. While the debtor is working out a plan, or the trustee is gathering the available assets to sell, the Bankruptcy Code provides that creditors must stop all collection efforts against the debtor. When the bankruptcy petition is stamped “Relief Ordered” upon filing, you are immediately protected from your creditors.
What chapter you choose to file under, what bills can be eliminated, how long payments can be stretched out, and what possessions you can keep, will be controlled now by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure (the owners will NO longer have control over any of his assets). These are federal laws, which means they apply all over the United States. The Code and Rules are found in Title 11 of the United States Code. Here is the U.S. Bankruptcy Code & Rules Booklet – January 2007 Black Line Edition
Borrowers in default should think carefully before choosing bankruptcy, because it will have a serious financial impact on their lives for the next 10 years!
The bankruptcy petition, schedules and plans are public documents and are available for viewing through that district’s website. Credit reporting agencies regularly collect information from the petitions filed and report the information on their credit reporting services. Bankruptcies normally will remain on your credit report for up to ten (10) years and will be taken into consideration by any person reviewing a credit report for the purpose of extending credit in the future. The decision whether to grant you credit in the future is strictly up to the creditor and varies from creditor to creditor depending on the type of credit requested.
The best way for one to obtain credit in the future is to generate an adequate and regular income and pay all financial obligations in a timely and responsible manner. Many creditors will not deal with a borrower who filed bankruptcy in the future unless he or she has already established credit with someone else and demonstrate that they are reliable debtors. In general it is recommended that, after the filing of a bankruptcy, one must learn to live within his/her income and not request credit that is not absolutely necessary.
Many owners, who file bankruptcy and then later realize that they cannot keep their home and must sell it, find it impossible to find a place to rent. Oftentimes after a bankruptcy filing and a foreclosure, getting a landlord to accept you as a tenant, is an almost impossible task. Now these owners find themselves homeless… something I’m sure they did not expect to have happen (but that happens quite often)!
So make sure you help these owners by STOPPING them from filing bankruptcy! Have your owners read this information, from the bankruptcy courts direct, before they do a thing!
Option Four: Sell Their Home
- List with a Realtor on the MLS (Multiple Listing Service): Some owners have the great idea to try to “hedge themselves” by shopping for a new loan at the same time they list their house on the market. They quickly find out that this doesn’t work! Their mortgage broker (or new lender) has strict policies that state if you put your house on the market, they will terminate your loan application! So that means the owner must give up on any chance of a new loan, once they decide to list and sell their house. Quite often this is too big a decision to make, so they decide to “put off” listing their house until the very last minute.
Once the owner has decided to sell, and if they have at least 6 weeks prior to their foreclosure auction, it is wise for them to contact a Realtor to represent them. If their house is in livable condition in a hot market (like in or near the coastal markets), they will find a buyer quickly (hopefully in 2 weeks) and should get close to fair market value. However, they have a big risk because the buyers will have to get their own financing. Can it close on time before the pending foreclosure? The process of lenders approving the buyers credit, appraising the house, completing underwriting, reviewing title, getting payoff demands and drawing documents — can take 4 or more weeks to complete (assuming no problems pop up). If the new buyers could not get the loan, or they could not close in time, the seller will helplessly watch their house go to auction. This is a gamble many would rather not take.
- Sell to an Investor: After the owner has exhausted all their options above, selling their house to an investor who offers “cash at closing; no new loan contingencies; no repairs needed (as is); fast escrow; a for sure sale providing a fresh start with reputation and integrity intact would be their best option. Although the investor’s price is less than fair market value, the investor will also be able to salvage the sellers credit, bring his loans current, keep them current (and improve his credit) and let them retain a big portion of their remaining equity in their home. This is a MUCH better solution for the seller than doing nothing, and losing everything at the foreclosure auction.
Option Five: Giving Up and Letting it Go
- Deed-in-Lieu: A deed-in-lieu (DIL) of foreclosure is a voluntary conveyance of title to the lender. Generally this is a last ditch effort by the borrower to avoid the negative consequences of foreclosure. In return for the voluntary conveyance to the lender, the borrower is often released of any personal responsibility for the mortgage. In order to qualify for a DIL, most lenders state that there must NOT be a second mortgage or junior liens on the property. Properties with values in excess of the amount owed against the home (to include normal closing costs) should consider selling the property before voluntarily conveying the home to the lender.
- Pray for Auction Overbid: Last and least favorable choice is to do nothing and let the house go to auction. Sometimes procrastination takes over, and the owners simply hide from the world and hope “it will all go away”. Well it does go away, just not as they expected. The lender will hold an involuntary sale of their house and sell it to the highest bidder at the foreclosure auction. If there are no bidders, the lender wins the house by default and it is now an REO (real estate owned) property. I have seen many cases where the owner gets a letter from auction bidders trying to get the owner to let it go to auction. These investors promise the owner will get more for their house (due to competitive overbid at the auction) then if they sell to an equity investor before the auction. That is NOT TRUE! Oftentimes there is collusion at the auctions and the auction bidders all agree to NOT bid against each other… but instead bid $1 over the minimum and “split up the deal” after the auction. Make sure you warn your sellers to not fall prey to this scheme!
We’ve covered a lot in this article, and now you can have learned the TRUTH about why a seller doesn’t just “list their house for top market value”. There are too many variables involved in this very personal decision about their family home in foreclosure. But if you take the position to serve the seller FIRST, to do what you would want someone to do for you in a time of need, and treat these owners with RESPECT and DIGNITY…. You will find yourself in the position of buying homes below market value and making friends at the same time. You will never worry about lawsuits or unhappy people calling you… because you live by the GOLDEN RULE and GOOD KARMA… and are truly wealthy in every way possible!
Now THAT’S what I call living the life of a SUCCESSFUL FORECLOSURE INVESTOR!
To learn more about foreclosure investing (what to do and exactly how to do it) please read here.
Alexis 
