Dealing with Banks

I said a little earlier that banks really do not want to acquire your property, that they would much prefer to concentrate on the business of selling or renting money. Once banks are put into the position of being property owners, they share the burdens, problems, and objectives _of all the other people who own and want to sell property.
Homeowners. are fond of saying things like "The bank still owns half of _his place." Let's remember that although the bank's mortgage loan is generally far in excess of the mortgagor's equity in the property, the bank really does not own the house-until a foreclosure situation develops. At that point, the bank does have to take over things like watering the lawn, cutting the grass, fixing the rain spouts, and the hundred and one other chores that homeowners must perform. And that's not really the bank's idea of the ideal job. But when the banker

moves into title through the foreclosing process, he owns the property and must see that such work is done.
Many banks have a property management officer who has the respon,sibility of safeguarding properties. Some banks employ property management concerns, usually local real estate brokers who provide the services for a fee. Of course, that's a fee the bank would rather not have to pay. If the property is damaged through vandalism or natural causes, the banks have to decide what to do in response. Those aren't the kinds of decisions bankers are trained to make, and focusing on such issues detracts from the day-to-day fulfillment of bank duties.
There is a big difference be"tween r__gular sellers_and bank sellers: Banks are not permitted to make a" profit on real estate sales!
It should be abundantly clear, then, that the bank really has no interest in foreclosing on your property. When a bank has to do so, it adds a new obligation to the debit side of the financial statement. That debit is known, as "owned real estate," often referred to as ORE. Bankers hate tochave this show up in their statements. ORE represents loans that went sour, even though all the most conservative standards ,were applied_in the consideration of the original application.

HoW on earth did this happen ?

Bankers would seem to have as much reason to ask this kind of
question as the defaulting mortgagor. One of the primary reasons the bank finds itself in title is that no one has offered to buy the house at the foreclosure sale. Often, the ,great buys are grabbed up on the steps of the county courthouse; what's left are the ones the bahk had to bid in at the sale.

It's worth noting, too, that today's home mortgage is usually a family's largest single monthly obligation. As such, it is often the ftrst to suffer when hard times hit. In years past, a homeowner typically had substantial equity in his home and was able to sell it and stay out of the debt morass.
But, at its root, the question "How did this happen?" is, in virtually every case, actually much more difftcult to answer. Who could have known that after nineteen years of marriage, a man with ftve children would completely disappear, leaving no way for family or friends to ftnd him? Who could have foreseen that a man with twenty-two years on the job would decide that he was meant to be an entrepreneur-and sacrifice everything on a dubious business venture? Who can predict a plant closing, a decision to move a business to another state, sharply increased foreign competition, or any of the other factors that can suddenly make it impossible for a homeowner to meet his obligations?

Changing environments: Of banks and HUD offerings

In the mid-eighties, there were some areas of the country where realty values simply skyrocketed. In some cases, properties advanced 30 to 40 percent in a single year, an unbelievable rate. During those heady days, the properties offered at foreclosure auctions were almost guaranteed to be fought over, and ftercely. Even if a bank had to take back a property, it could rely on a broker who would help dispose of the property. Banks were never left with a large inventory of OREs. It was quite a period in the history of the industry; to some people, it looked like it would never end. It did, although the banks'

mechanisms for handling foreclosed properties have remained essentially the same.
Any bank losses are alleviated by private mortgage insurance coverage, known as PMI, which is required to betaken out for mortgages in excess of 80 percent of appraised value. Today, the insuranceocompanies are beingChit hard with claims.
There is_ a different set_ of procedures with Veterans Administration and Federal Housing Administration (now referred to as Secretary Housing and Urban Development, or HUD) guaranteed loans. In these cases, the banks are out of the picture once they complete the foreclosure process. Those prop" erties are turned over to the respective agencies once the banks acquire title; the VA and FHA have their own methods for disposing of the properties. The VA has them managed by a local broker; FHA/HUD once had a policy of fixing up the properties completely and then placing them on the market at a fak;nlarket value. That is a thing ofthe past, however.:
At one time, I was the property management broker for FHA for southern Nassau County on Long Island, New York.
. The properties were brought up to excellent condition; where new kitchens, boilers, stoves, or other components were required, FHA would furnish new units. Although done by bid, the work was performed by completely competent professionals. The ()fferings were good", values; the financing terms furnished by FHA were excellent. People buying thepropertie,s were getting a tremendous value., .
In our area, the FHA_had to discontinue the program and offer an all-cash, "as is" program jn its _Jead. This is_;ti1e program that is presently in effect then_. today. Many of ihe offerings are excellent values but are, unfortunately, not available for

the low-cash, low-income buyer seeking affordable housing. Considering the condition of these properties, they can't be mortgaged through conventional sources. Since all cash is required, they're really open only to speculators and renovators.
Why was the "flX-Up" approach halted? Consider the following story.
One Saturday morning, as I went into an advertised house to open it for public inspection, I received a big surprise as I made my way down to the basement to turn on the circuit breakers. The basement was ankle-deep in water.
Now, the plumbers had just installed a new heating system with all copper tubing throughout. And a set of enterprising thieves had entered the basement shortly afterwards and cut away all the copper tubing, presumably for resale at a junk yard.
That was outrageous, but what really made me angry was the thieves' failure to turn off the master valve. They just cut and cut-probably getting a good dousing in the process-and left the water running continuously. I had to shut off the water, resecure the property, and post a ,note informing visitors that the sale had been called off.
There were numerous incidents of this kind. After a while, the FHA decided that it would be less costly to sell at a lower price and avoid added expenditures that could be (and too often were) instantly wiped out by vandalism.
HUD offerings still appear in the newspapers. If you can raise the money for the unconditional purchase, it's possible to get a good buy. Offerings are by bid; the terms of the sale are listed in the ad.
Good real estate offices are familiar with the process. They can advise you and will also be able to supply the necessary

HUD forms and file them for you. The.. offices receive a commission from HUD, so don't feel that you're imposing on them if you seek out their help.

VA offerings

The VA sends a.monthly list of its offerings to brokers who have registered with it'The VA usually does not fIX up properties but offers them ata fair price.
The VA also offers very favorable financing terms, "but the procedure is a bit different It sells on an installment plan basis. You don't have an actual deed, but you do have equitable own'"
ership. That means, iIYessence, that tile house is yours. You can improve it and do anything to it that does not miriimize the security (i.e., the nome). As_in a mortgage clause, you can't divest any of the property.
If you choose to sell the property at'a later date for much more than you paid for it, your purchaser may arrange his financing iri the ordinary way. At the closing, the'VA will a'ct in much the same way a mortgagee would. Its claim will be paid directly, and your purchaser will receive a deed from the Administrator of Veterans Mfairs.
'At any time after your purchase of < a VA foreclosure, if you have reduced the amounr of the mortgage to 75 percentofihe purchase price, ybu receive a deed and are removed from what was aotually an installIl1ynt contract (If you had paid 25 percent down at purchase you would have received a deed outright) Until the point where the mortgage amount is re<duced to 75 percent of the original purchase price, the VA is in title and the deed for your sale to a third party would have to'come directly from the Administrator of Veterans Mfairs.

These VA installment contracts were (and still are) an excellent source of affordable hQusing. Through the years, I've sold many homes by this process to persons who never believed they had sufficient cash or credit to purchase a home.
Again, your local broker should have access to these properties; he's paid a commission by the VA. Make the contact. (The only problem in higher-priced neighborhoods is that, generally speaking, there haven't been many VA loans in such areas recently, so there are no foreclosures.)
In many regions, FNMA and FMAC have appointed management brokers to help dispose of their acquisitions. Some of these brokers are members of their local Multiple Listing Service; you'll often fmd numerous foreclosure listings in the MLS bulletin. Your broker can access these.
For the person who needs bank financing, buying owned real estate from a bank can be the answer. If you're a creditworthy individual, you may be pleasantly surprised to learn that the bank is actually'looking for you! As I mentioned earlier, these properties represent only headaches for the bank. If you can qualify to buy, you're helping to alleviate a bad situation.
Never approach a bank with hat in hand if you're looking to purchase one of its owned properties. Believe me, if your credit history is good, it will bend over backwards to help you purchase that property.
I stated earlier that the bank can't make a profit in disposing of owned real estate. It is usually in no position to. One of the reasons the bank took the property back was that the existing obligation was greater than the price the auction" attending public was willing to spend. That's how it became an ORE!

So the bank will entertain,pffers. All businesspeoplerknow that if you're going to make investments, every once in a while you;,re going to make a bad one. A stockholder who s.ees his stock plummet from 100 to 60 is often unwilling to wait:, until the stock.!reaches or exceeds its original purchase prige; he may sell at 75. The bank, too, realizes its investment has _taken a downturn. Acccordingly, it has taken back its commodity, money, in a different form. It's now called real estate. The bank has to return the commodity to its original form (money). Getting rid of the real estate is a priority. The bank must sell.

Market forces

When you and hundreds of people are looking to purchase a given home, you must deal with the marketplace factor: competition. The price goes up if tnere is little or no competition for the property;'! However, you the buyer are in a much stronger position.
The Edsel is often referred to as one of the greatest blunders of the automobile industry, but I don't go along with that. AHhe time, there werdow-end automobiles" (Forqs and Chevys) and high-epd automobiles (Cadillacs and Lincolns)-and then there was "the great, crowded middle market (Oldsmobiies, Buicks, Mercurys, and Chryslers). That middle segment was glutted,cand it was into that group that the Edsel was marched with such fanfare. In and of itself, that might not have been,'such a bad decision, but the timing was bad. The country was in a serious economic recession by the time the Edsel debuted. (I remember that the industry had come up with a slogan about that time: "Help beat the recession; buy a new car.")

The real estate industry is experiencing something similar as of this writing. In the Northeast, for instance, affordable housing is below $150,000; that's where the greatest demand exists. If the property you're interested in is at that lev_l, you won't sway the bank's officer as readily as if you were contemplating purchasing one of his Edsels. That doesn't mean you're looking for substandard housing; it does mean you standJo get a far better property if" the property is one in which very few people have expressed interest.
The banks will negotiate. They want to remove the properties from their inventories. When they sell at a loss, the properties become part of their true financial picture, so a bank officer will want to work with you in such a way as to minimize the bank's loss.
That officer is much different from homeowners who must sell but are hung up on their original purchase price. Those homeowners are emotional sellers. They can point out every tack they hammered and every blade of grass they planted. Something quite personal is invested in the home. The bank officer, on the other hand, is making a business decision, and the cold logic of business does not have to contend with the many emotional distractions of the homeowner. It's a matter of dollars and cents.
The bank officer is prepared to take a loss. His only ques
tion now is. How far can he sway you Without losing you?
I

All-cash offers

If yours is an all-cash offer, it will befar more attractive to the bank officer. With that sort of offer, there are no contingencies

that can cancel the agreement. Once the bank accepts your offer and contracts to sell to you, full attention can be paid to the other troubled properties in its possession.
I_ you have a source for the needed cash, you present yourself as a strong, completely qualified, and very attractive potential buyer. (We'll discuss some financing arrangements that will allow you to obtain the necessary cash a little later in the book.)

Bidding

When bidding for a property, you should have a price set in your mind that is the maximum you will spend.
The bank officer handling the negotiations is usually picked for the job because he's the best "rug trader." This officer expects your initial offer to be a starting point and will treat it that way. If you offer your final price at the outset, you will have eliminated the bargaining process completely. It will be difficult to restore the sense of balance and progression good negotiating calls for. Never give the bank officer your "firm" figure at the I beginning of the session.
The bank officer may make light of your initial offer. (j good many have been known to make abrasive comments at this stage, such as, "That's ridiculous.") Move up, but grudgingly.
If, when discussing the various potential prices for the property, you are asked to "split the difference," be sure that the halfway point you are being asked to accept is no greater thaI your predetermined price. If the figure exceeds the amount YOt established before beginning the negotiating process, do no agree to the terms. (You may decide to make an exception to thiJ if the figure in question is only slightly above your predeter. mined price.)

If you can't get an agreement, thank the officer for considering your offer,", explain that you're unable,Jo go higher, and ask that your name be kept on file. If the property is one the bank is unlikely to get other offers on, you may get your terms then and there. If you don't, hold out. (Even if you decide to walk out the door, you may well hear from_the bank at a later date.)
You should be sure to close the agreement when you and the officer arrive at the price that is acceptable to you. If you don't and the property gets away, you may have regrets later. Do be careful, though, hot to "telegraph" your eagerness to purchase the property. Let the bank officer feel that you're prepared to walk away if you can'J get it at your price.
Having said that; I should acknowledge that a good deal of perspective and balance is essential in negotiating, especially if you are negotiating for a property you intend to occupy yourself. No one ever moved into a "great deal." People move into homes with gardens that can be tended, workshops big enough to manage special projects,_ and decks that are perfect for family barbecues. If you end up paying somewhat more than some expert said you should because you know that the home is just right for you and within your financial reach, buy the property. Price will eventually be forgotten. Don't let your future be clouded by "should haves."

Opportunities

The greatest opportunities for the would-be homeowner today can probably be found in the local bank's ORE inventory.
Many banks publish their offerings in local papers each week; clieck them oub Make an appointment to inspect the property with the bank officer handling it. Ask questions; feel

the situation out. Determine whether there have been any offers so far. If you name a price and the officer tells you that the bank turned down a higher offer a little while ago, ask if you can submit your offer in writing and have it placed in the bank's files. That way they can contact you if they have a change of heart. (Many offers come in early on in the process and are rejected in the belief that greater offers will be received; when they aren't, you can bet that the people at the bank have some second thoughts.)
Be persistent. If you don't hear from the bank, call. You may be able to reach a compromise figure that furthers everyone's interests.

Deed in Lieu of Foreclosure

There may be among you readers someone who is not necessarily looking to buy a foreclosed property but is contemplating the effect of foreclosure.
What do I mean by that? Well, at all times we have people who are changing employment and in need of a move to another locality, maybe many states away.
In the case of company transfers, there is usually no problem. The company will buy the home at a predetermined figure. The company will then continue the sale and will be responsible for the care in the event of vacancy. Not all job moves are within the company. Sometimes the transferor is doing it on his own. He has been offered a better position elsewhere, but the responsibility of the move is completely his. First of the items to be completed is the sale of his present domicile. It is possible that he had anticipated an out of town move some time before and had put his home up for sale. Now several months later, he finds that a sale at the figure he wants is out of
sight. Nothing in the neighborhood is moving. The price he is being offered would not even cover his mortgage. In addition, he would have to pay a brokerage fee. This would force him to dip into his small savings he had hoped would cover the transfer. Looks hopeless, doesn't it? What should he do? Call in a
mover and drift into the night and let the bank foreclose?
That could be a solution, but as the bank notices pile up and the foreclosure commences, what happens to his usually impeccable credit history? Not a particularly good solution, is it?
Well, how about renting it out? That could be a solution. But what if your good tenant loses his job or gets sick and cannot make his rent payments? This happens.
You see, on the whole, renters are generally people who do not have the wherewithal to purchase a home, and so they rent. Their credit patterns are not as secure as those of homeowners. Well, there you are in Colorado and your bank back in New Jersey wants its mortgage payments.
That's just one scenario. There are so many things that can happen.
You did not buy the house to rent it out. You bought it to live in. At this point your equity is very little or nil. Your credit has been good, you have paid all your bills, and there are no_ judgments or legal proceedings pending against you. If you walk away from the mortgage and leave the path open to the bank to commence the foreclosure proceeding against you, you have given it a burden. The burden is the foreclosure procedure, which requires time and money. In addition, the bank now has an empty house that it must protect. If it does not, the house could be 'stripped and vandalized, resulting in untold repairs and replacements.
Under these circumstances, you could offer the bank "a deed in lieu of foreclosure. What is that?
You go up to your banker and tell him that you are leaving the state and that you have attempted to sell the house and have been unable to do so and are offering the bank title to the house "as is" and you want to go on your way.
Well, the bank is not required to accept a deed from you, but what are the alternatives if it does not? Either' way, it is going to have an empty house to add to its2inventory with all of the problemsAhat attend such circumstances.
In the event oUhe foreclosure proceeding; if the bankcgets a call from an interested buyer, what can it do? It would have to tell him to wait until it completes the legal process. Now the process can take months and even years.
The former owner has to be served with courtpapers. If the bank does not know where he is, this may have to be done by publication. This means further delays and expense. All this can b"e avoided by acceptance of the deed from the mortgagor, you.
So, when you agproach the banker to accept a deed, he is going to ask'you about your credit. Are there any liens against the property? The bank will conduct a search of all the public records, and if it is clean it will gladly accept a deed.
This brings me to the purpose of my introducing this process in a book on foreclosures. After all, the property was not foreclosed,Obut now it is a part of the bank's OREs.
N ow the bank is in the position ofAhe former owner. It has
a property to sell. It has to get rid of it. The property has to be reduced to money, the commodity of bank commerce. It does not make the bank's balance sheet look better. Owned Real Estate (ORE) or, as some banks show, REO (Real Estate Owned), is not an asset. It is a liability. In this position, this real estate is like the bonds you bought for $1,000, which you now want to sell. You discover that bank rates have risen above the interest you are receiving and you now have to sell at a discount. The banks are used to this concept. They have no trouble in adjusting to the market conditions and they will sell the property for less than the mortgage balance.
You could not have gotten this deal from the former homeowner. He could not do it. But the bank can do it and does do it. That is why I advise all persons who are looking to buy foreclosures to contact the banks first. The best opportunities for a great buy are from the bank's inventory.
As I state, have stated, and will continue to state, if you are credit worthy, the bank will be very happy to deal with you and you might get a very favorable mortgage loan from it as well.
I would like to tell you of a case that happened to a dear friend of mine. She had seen a house with a broker in a very fme area of Westchester County, New York. The house was owned by one of the New York banks. It was very impressively perched on a promontory and had commanding views on all sides. The bank was asking $185,000. Although the house was in good shape, the prior owner had started several improvements that were not yet completed and these involved plumbing and electrical work. The work that had been done was all of excellent quality. I advised her to offer $100,000, all cash. The bank agreed to accept $120,000. I arranged a source for interim fmancing for her and then secured a mortgage loan for $135,000. The $15,000 excess plus the $10,000 she had was more than enough to cover the repairs plus closing costs. Shortly after she moved in, she had a call from the village clerk. The clerk asked, "Did you pay only $120,000 for that house?" When told yes, the clerk continued, "We have it appraised for $314,000."
Now I am not telling you that you can duplicate this. I would just like to impress upon you to check the banks. There are still plenty of good deals to be bought directly from the banks.
At the foreclosure sale, you do not know what is in the house. When the bank owns it, you can get in and check it out. If you want to bring a plumber friend or an engineer, you will have access and will be able to gauge your costs.
Homes taken by deeds in _lieu of foreclosure are probably the better homes in the banks' inventory because the former owners did not lose the home. They probably took excellent care until they moved.
When you were out shopping for a home, you may have made an offer on a hous'e and were told, "Your price is lower than my mortgage. I would sooner turn it over to the bank." When you hear that, the bank now owns this home; go see the bank officer and make a deal. You may very well get it for the figure you set previously.

Other Reasons fOr Foreclosure

Occasionally, you may read ih your local paper' about public sale of tax liens. Taxes take precedence over all other claimsincluding those of the mortgage.,
Some background on this type of foreclosure is probably,in order. Prior to World War II, the banks took payments of"principal and interest only; mortgagors were permitted to make tax payments directly to the receiver of taxes. One of the-main considerations in allowing this was the facUhat the ratio of debt to value in those days was usually quite low. If the banI< had to foreclose and pay up back taxes, the value of the prbperty was sufficient to cover all obligations.
With the advent' of the Federal Housing Administration and the provisions of the Servicemen's Readjustment Act of, 1944, however, low equity mortgage situations became more common. The Veterans Administration permitted homes to be bought for no cash down, that is, the VA guaranteed 100 percent of the mortgage. The FHA administered a low-cash down payment program for nonveterans, requiting as little as 3 percent down payment.
Banks became concerned about the prospect of purchasers failing to make tax and insurance payments when due. Under existing arrangements, taxing authorities could have taken over the property in such cases, mortgage or no mortgage. To correct this, trust fund arrangements were set up with lenders.
These new mortgage arrangements provided that payments for taxes and insurance would be prepaid to the mortgagee, who would then pay the obligation when due. It was a fine setup that brought a measure of discipline to the process, and the same procedure was eventually transferred to conventional bank practices.
Today, most mortgagees require that escrow funds be established with the bank for the purpose of making sure that taxes are paid on time and that fire insurance is continually in force. The funds can provide another source of bank money; although they are escrow or trust funds, in some jurisdictions they may be used by the bank in normal banking practices. Most banks, of course, are regulated by state laws. Some states require that a percentage of the total amount be maintained and do not restrict the movement of the regulated portion. The majority of banks calculate the amount of the escrow based upon a need factor, although some build in large cushions in these accounts. Because of this practice, many states require that interest be paid on the escrow accounts since they are savings reserves and belong to the borrower. The amount of interest is usually a token figure, often as little as 2 percent a year.
As we have seen, banks want to do business with you, the borrower. That point should be even clearer to you when you realize how the bank benefits from escrow balances. Add in all the various servicing fees, and you can readily see that banks do well when they loan out money at favorable interest rates to persons with good credit.

Tax sales

Most tax sales don't originate with properties that are mortgaged with regulated mortgage companies or banks. They take place on properties that are usually free and clear of mortgages.
That this is so is not difficult to understand, given the elaborate safeguards just discussed. Payment of taxes is a vital part of the bank's mortgage procedures. It is quite rare for a regulated lender to neglect to pay taxes. In fact, in today's computerized society, it's almost impossible to forget to pay taxes due on mortgage accounts.
Who, then, defaults because of problems with tax payments? In many cases, senior citizens who simply don't understand their obligations; no one tells them about what payments must be made or the consequences of nonpayment.
Often, a husband dies and the widow is completely unable to cope with taking care of what she regards as business pursuits. A summons arrives in the mail; she ignores it. A judgment is made against her; she doesn't understand it. Someone buys the lien; she doesn't know about it. The legal machinery cranks onward slowly; she assumes things have blown over. She is usually the last person to learn that she no longer owns the property. Sadly, " there was no one in her circle to make clear ,to her the gravity of her situatign.
Ip. such an unfortunate (but not uncommon) case, the sysJem progresses regardless of the state of knowledge of the homeowner. Tax sales and foreclosure. actions are instituted. Thes_ sales (and sheriff's sales, which we'll examine a little later) differ from the foreclosure sale in that there are often homestead exemptions and redemption periods involved.
Let's look at the mechanics of the tax sale. When the municipality puts the tax liens up for _ale, that taxing authority (usually the county) is selling the bid to the public; Depending on local statute, the p_rt): who buys the claim has the right to claim title to the property afterexpiratio!l of the statutory time for redemption. That period could be perhaps one or two years, depepding on local law.
During the redemption period, interest is accruing at a rate permitted !1nder the statute. This rate .qmld be as much as 20 percent. You can see, then, that the per,son who purchases tax liens has a good .deal. H_ is offered a gopd rate'of return on his investment",andif the defaulting party does not redeem the lien, then"he has acquired a good property at very little cost.

SHeriff's sales

Recovery by a creditor for obligatipns. other than mortgage default is usually carried out by means of a sheriff's sale. In these actionsAhere are other considerations and"regulations that enter into the process. I must str;,ess here_once again that there is no nationaelaw on these subjects;.they are governed b_ local law. You should consult your lawyer with respect to any of these situations; Many states and municipalities have homestead exemptions, which apply in sheriff's sales for judgments other than mortgage debt. The exemption is usually expressed in dollar amounts. New York, for instance, has a $10,000 exemption. What this means is that if you acquire a property under this type of sale, you must give ancallowance of $10,000 to the foreclosed party.
Why is such a measure necessary? There were once some pretty shady characters who abused the system, buying up judgments from creditors and foreclosing mercilessly on unfortunate owners. The homestead exemption is one small window of protection for the homeowner. Without it, many victimized homeowners (particularly widows) would be destitute.
In addition, you should know that foreclosure actions by sheriff's sale differ from customary mortgage foreclosures in that they usually carry with them a right of redemption. The period in which the defaulting party has the opportunity to make restitution is generally identified by local statute. Such a provision constitutes another protection for the person in default.

Nonmonetary reasons for default

Foreclosure actions can be instituted for nonmonetary reasons, too, although this is surprising to many people. The trick is to remember that the mortgage agreement is a contract; when you breach a contract, there are avenues of relief open to the aggrieved party. You can't rewrite what you agreed to according to what you believe it should be. If you break the agreement, you may well face some unpleasant consequences.
Today one of the most common nonmonetary reasons for default is the sale to a third party of property subject to an existing mortgage that is nonassumable and "due on sale." That means that in the event of a transfer, the mortgage must be paid up. The",remedy for breach is foreclosure.
There are other reasons for nonmonetary actions, including breach of covenants and restrictions contflined in the mortgage and divestment of any part of the mortgaged security, whether it be land or appurtenances-buildings attached,to the property. When these c;onditions exist, the rportgagee has the right to accelerate the payments, in other words"call for payment of the entire principal balance, evendhough all the monthly payments have 'been made. In these instances, the payment history is not at issue; the nonmonetary violations are of such'a nature that the mortgagee wants out. The option of making payments on a monthly basis is simply revoked.

Third-party actions

Occasionally a Foreclosure action will be halted before the sale by the action of a third party who pays the plaintiff (the mortgagee) and takes an assignment of the proceeding. One of the most common reasons/for this is that the new successor mortgagee has considerable obligations due him and is seeking to protect his interest by contr911ing tl1e foreclosure. By getting an assignment of the foreclosure action; the third party can protect his interest and acquire the title witho_t the penalty of the. other liens. (His interest may be by mortgage or judgment, of course.) Such a lien is a junior lien to others; if the foreclosure sabis not carried out, the initial liens still apply to the property.
I had an experience with an int@resting ci;lse that shows how this works. It involved a divorced couple the wife continued to live in the house and was quite content there, but the husband had stopped making the mortgage payments. The wife, wishing to avoid making any payments that would enrich the husband, also failed to pay the bank. A foreclosure action resulted.
The wife's brother, an attorney, wanted to ensure that his sister could continue living in her home. He purchased the mortgage from the bank and continued the action. (A puzzling choice; one might have expected him to simply stop at that point, but read on.)
The auction was duly scheduled; the brother entered as a bidder, determined to overcome all others trYing to obtain the property. This he did, and once he owned the house outright he allowed his sister to remain there permanently. He was willing to bid well above market value because he would become the owner; any excess sums that were bid would inure to his sister's benefit. (Of course, the husband had an interest in any surplus money received; presumably the attorney/brother made the proper arrangements with him.) The end result? The initial squabble had been resolved, the brother prevailed, and his sister remained in the house.
Now don't get the idea that you can divest an ex-spouse of interest in a jointly owned home by buying up the mortgage and foreclosing. There is a little warning you should bear in mind before you embark on such a course of action.

It is a criminal act to purchase a mortgage for the sole purpose of foreclosing.

How, then, did the brother get away with his purchase? Remember: The foreclosure action had been started by the bank. The brother stepped in to protect his sister; he did not initiate the proceeding.

CHAPTER SEVEN

Before the Sale

Broadly speaking, there are three types of people who look to purchase foreclosures.
The first group is made up of those who are seeking to buy a home to live in and are attracted to foreclosures because they are affordable. I call them "nesters."
The second group comprises people who already have a place to live but would change it if they could get a good buy in some area that represents upward mobility to them. I call this group the "climbers."
The third group is made up of individuals who want to buy for rental income and/or future appreciation. I would include in this group real estate professionals looking to buy low and sell high. I call these people "pros."

The nesters

Many of the people in this group have almost no cash, little in the way of established credit, and employment records that are still developing. No- and low-cash down arrangements with 30 year mortgages may have worked 30 years ago for fIrst-time homebuyers, but these conditions don't exist today on properties that are being offered for public auction.
The typical basis for these auction sales is 10 percent of the price with the' opening bid; the balance is due in cash within 30 days. That's a tall order for a young couple with one or two children still trying to make ends meet.
Often, there is a belief that "the bank will loan the balance" after the 10 percent deposit is managed. This assumption ignore_ the fact that a sold property has many problems the ordinary property being foreclosed does not have, including (but not limited to) difficulties with accessibility, ability to pass inspection, terminated utility services, hostile occupants, and general physical appearance.
MallY people reading this book will"qualify as nesters. If the advice on bidding and auctions that follows in this chapter is unworkable for you, take a hint. Set your sights on the bank's OREs. Don't go the auction route only to learn that the commitment you've made will not be supported by any bank in your area. As we have seen, the banks will give you generous terms on something they cannot unload in any other way if they think you can afford the property. You may not get the once-in-a-lifetime deal you'd hoped to come across at the foreclosure sale, but then again...

The climbers

Those attempting to benefit from defaults in high-income areas are often unsuccessful. Foreclosures that take place in these neighborhoods are typically too expensive for the climbersauction or no auction. The climber's best bet is to wait out the foreclosure sale, or even attend it to see if the property ends up with the bank as the new owner. .

The pros
Professionals are common attendees at foreclosure sales. These people, who do not usually have problems coming up with the funds to secure property, can be quite formidable competitors.
If you are a bidder for investment, you will eventually find yourself in competition with members of this group. If they feel you are a novice, there is a good chance that they will try to hurt you by bidding you up to pay a price that will prove to be a bad investment. They want to eliminate you as a future competitor.
The professionals know each other and work within a loose network. This is not to suggest that they are noncompetitive. Although they don't actually get together before sales to set limits, they may have a general feel for whose "turn" it is to get the best of a deal.
You have to be pretty strong to buck them, but if you're prepared, you can protect yourself. (You can, for instance, pull out and leave an aggressive professional holding a bid that's too high. He'll soon reconsider your status as a novice.)

Financing

Regardless of you,r circumstances, if you are trying "to secure a piece of property at auction you will need to make arrangements so that you'll have the bid money immediately and the balance in cash in 30 days.
Consider a home equity loan; it_s""one of the yery best options open to you. If you own a home, you wi1llearn-if you don't already know-that banks are competing to loan you money on what is basically a second mortgage on your present home. (Of course, if you have no existing mortgage, the"*'new one can't be a second mortgage.) As a rule pf thumb, the bank will loan you up, to 75 percent of the appraised value less any existing mortgage.
You don't have to borrow the money immediately. You can go through the entire procedure, get a commitment for thy total sum, and take out the cash only when you want Jo use it. The arrangement is similar to a business's line of credit at_the bank. You can take cash as needed and pay interest only each month on the unpaid balance. :rhere are no monthly repayment commitments, but if you choose to" reduce, at any time your next monthly interest payment is reduced.
You'll be required to pay interest only. If you have reduced the principal balance and find a future need for funds, .you can again borrow up to the original 75 percent figvre. There is no requirement to. pay it up for five years. At the end of the five_-year period, the loan wilt become a permanent lqan and yqu will then be requiredto,retire it on a15,year amortization basis"
If you're an investor, you can use any part of the money, when and if you need it. Let's say you use it to purchase and fix up property. You can then apply for a permanent mortgage loan on the new property and payoff the equity loan.
Or say you're a young couple seeking affordable housing. You may be able to get one of the sets of parents to make the home equity commitment and loan you the necessary funds. When you're in title, you can apply for a permanent mortgage. There's just one caution in order: If you're in title, the loan is actually a refinance. On a conventional mortgage refinance, the bank will usually give only up to 75 percent of the appraised value of the home. The procedure is different from that followed in a first-time purchase.
Suppose that 75 percent figure falls short of what you owe; there are a couple of avenues you can follow. The first is to purchase the home in your parents' names. They can then contract to sell it to you, and as a purchaser you can get as much as a 95 percent loan. You can then get sufficient cash to pay not only for the purchase, but for the needed repairs as well. (If you're within FHA guidelines, you might even get more favorable terms. Consult a good local mortgage broker.)
When you have your permanent loan you can pay the parents back for the down payment, interest, and costs involved; they can repay the home equity loan. All you'll owe is heartfelt gratitude, and in all likelihood, the parents will be overjoyed to have helped you bring it all about. Everyone will be happy: you'll have encountered one of life's win-win situations.
Of course, not all of us are in a position to take advantage of such an arrangement. Let's talk now about "hard money" lenders. As we learned earlier in the book, the greater the risk, the greater the return must be. There are places you can contact ahead of time that will be a fairly good bet to give you the commitment you need, but you must remember that this is not an easy situation. You're seeking to purchase a property that's corning up for sale. You haven't bid yet. There's no certainty that yours will be die winning bid, and there's no guarantee what that bid amount will be.
These are not insurmountable pro15lems, but you may have to spend some money on inspections, despite the, fact that th_ property may never be yours. Other than that, the question boils down to one of interest. You give.the lender your credit information in advance; if all checks out, _ou learn 'how much you could borrow. That commitment is based on your credit (although the lender may not make all the money available to you if the property is somehow questionable). The point is, though, that the money the lender advances is not long term; as a result, it's at a higher rate than the customary Dank mortgage. Charges are often more, too.
Before you get angry, stop ana think. The lender is making it possible for you to buy a $100,000 house for $50,000. His rate, probably about 16 percent, is higher than. that 'charged.by the banks-but the banks won't take this kind of risk! The reason-for the short term on the mortgage is that you're expected to go out for a permanent loan once you've acquired title and made the improvements. S() don't be horrified; say "thank you"! At least your interest payments lessen'as you pay. (The same can't be said for most credit cards, which charge similar rates and compound infere 'St charges.)
In business, manufacturers borrow from hard money lenders (or "factors") on a continuous basis and are happy to get the>loans. They help the companies stay. in business, and the borrowers know it. Hard money lenders, if used properly, can make some pretty impossible-sounding dreams come true.

Lawyers and the sale

People often ask whether they should take a lawyer with them to the sale. The answer is probably no. There's little or nothing a lawyer will be able to do for you at the sale itself. The terms are published; they won't be altered. Although I believe in using lawyers in all real estate transactions, the only thing they can do with regard to a foreclosure is order title insurance. You probably won't need a lawyer for that; usually, the company that did the bank's search will be glad to give you a title policy at standard rates.
An explanation of a title policy is in order here. You can order an "abstract of title," which is a search of title, but it will not insure you. Such an abstract merely checks the records.
The policy that insures your interest is called by different names depending on what part of the country you're from. "Title policy" and "fee policy"are the most common. If you get a mortgage from a lender at the time you purchase the property, you will also pay for a mortgage policy for the bank. That insures the bank against something going wrong with the property's established and accepted chain of ownership. Over and above that amount, you should arrange to pay a lesser figure to insure your own interests as well.
In essence, you are insuring your ownership. Ifany person or organization materializes with a valid claim to the property t_at overrides yours, the title company makes good. Such coverage is an absolute necessity in a foreclosure purchase. Check with your local agent to get information on the varieties of coverage available.

In my forty-plus years of experience, I've personally seen only one claim that could affect the total value of aproperty. You will find that other professionals in the real estate field have similar experience with this issue. Such problems are extremely rare.

Engineer's reports

These days, if you engage the services of a young lawyer, you're likely to be advised to "get an engineer's report" on the property before signing anything. This has more to do with the C.Y A (cover your anatomy) training they give lawyers today than with any tangible benefit to you. If he advises you in this way, the lawyer is essentially inoculating himself against any problems that may eventually corne up with the property. You may be interested to learn that for the first twenty-five of my years in the real estate business, no one had ever heard of an engineer's report. People looked houses over and bought them. I never heard anyone complain of buying a "pig in a poke."
Today's lawyers, though, will advise you to get the report before you buy the house. This means that if you don't win with your bid, or if you run into some snag that has nothing to do with the report (and these are not exactly uncommon developments) you will have paid $300 to inspect a property you will never own. Moreover, the defaulting mortgagors or tenants are in possession' of the building. What do you think are the chances they won't let the engineer in? What do you think are the chances you'll be charged for his time anyway?
If you want to have an engineer check the house after you've bought it, by all means do so. But ask yourself what he's going to tell you. That the plumbing leaks? That the oil burner is shot? That the electrical system needs to be upgraded? Are these things" you wouldn't deduce on your own? You've just purchased a foreclosed house. You know it may need some work. That $300 fee will pay a good portion of the plumber;s bill"And tlie,oil company will check your heating system and tell you what repairs are needed; after he fIxes it, the repairman will give you a service contract. There area lot of "good electricians outthere who can check the wiring for you and do what's necessary for you. i'They may not be able to turn out a fancy report, though.
These are my opinions, of course; the final choice is yours.
But you should know there is a distinct possibility that the real reasons the engineer's report is recommended have as much to do with the lawyer's peace of mind as with yours. 'Think twice before acquiescing.

Inspecting vacant properties

It is not uncommon for the property being foreclose a to be vacant. The mortgagors abandon the property; perhaps a neighbor notifies the bank out ofcoricern that vandals may torch the property and put other homes in dangef.
The bank sends a crew out to board up the house and secure it: although it does not"own the property at this point. It is merely taking steps to protect an investment. Noone wants to see the home become the target of neighborhood kids or a domicile for transients.
It maybe possible to contact the bank and arrange for an ihspection of stich a property. Obviously, there are significant risks in taking on an abandoned house; in this case, you should definitely attempt to get a look at the property before, you make any commitment. If you can, get a general contractor to accompany you on the visit. You may be able to get a goc idea of the amount of work involved in this way.
One largely overlooked factor that is not a matter of publi_ record has to do with environmental and zoning problems. Sud difficulties are showing up with greater and greater frequenc: these days and may very well be the reason the mortgago walked away from the property.
You're probably already familiar with the horror stod about radon, asbestos removal, gasoline contamination fro nearby storage tanks, and the like. Do a little creative researc make sure you're not walking into a nightmare.
Some years ago, a fellow offered me a very attractive prop'
erty at what seemed like a remarkably low price. I did some. research and learned that the deal that seemed to be too good to be true really was. A trip to the state Department o' Transportation yielded the information that a proposed roadway was slated to pass right through the house. I politely declined the offer.
The possibility exists that the property you have your eye on breaches local zoning laws. These violations will have to be corrected before you compl_te the deal, and they might be costly. Don't wait for the title company to tell you that the two-family house you bought is zoned as a one-family house. Once the title company gets into the act, you've already put a bid in! Take a trip to the town's building department and confirm that you are looking at a legal two-family unit. Do this before the sale.
It may be possible that you are looking at a two-family house in an area that is zoned for one family. You may have a situation here that precedes the date of the zoning laws and is permitted because certificates of occupancy for two-family houses weren't issued at that time.
In this case, if you are planning to use the income from the rental apartment in your credit statement, it's possible that the bank may not accept it. In the event of a fire or wind damage, the town would not permit you to restore it as a two-family. The new construction must conform to the present zoning restrictions. When you buy this type of property, you are taking that risk.

Junior lienors

Others besides the bank that issued the first mortgage may have an interest in the property; be prepared to encounter junior lienors at the sale if the existing mortgage is low. You can expect them to bid the price up to a level that will cover their interests, even if they have to buy the property themselves. Chances are, though, that they won't want to buy it-they'll simply want their money. As a very rough guideline, then, you can expect to pay a sum equal to the first mortgage plus the second mortgage for the property.
Don't let the fact that a second mortgage shows up in the Lis Pendens keep you away. There's no guarantee that second lienors will be at the sale. Occasionally they will have been paid off, but the transaction will have gone unrecorded due to an error on the part of the mortgagor, leaving the second mortgage on record. There is only way to be absolutely certain: Attend the sale.

The Sale

Foreclosure sales can be held just about anywhere that is centrally located and accessible. They are typically held on the courthouse steps (weather permitting) or in Town Hall. By the way, when the notice refers to the courthouse steps, it really does mean the steps outside the building. If you're in any doubt as to whether the front or rear steps are being used, ask a receptionist or guard for directions.
Be early. It is often far too late to arrive at 9:03 for a sale that is scheduled for 9m.M. sharp. Don't take the chance that the parade will pass you by; show up well before the appointed time. (The day before the sale is scheduled you should call the office of the attorney who has been appointed receiver to conftrm that it is still on.)
Chances are that you won't be alone on the steps. You've thought the property worthy of consideration, and you can expect others to, as well. The sale will begin with a recital of the action by the referee; we'll learn more about this person a little later. Mter this introduction is concluded, the referee begins the sale. This may be over in as little as three minutes. You can s
now why promptness is so essential

Buying from the winning bidder

We've discussed the "pros" a little earlier, those regulars whc purchase properties, fix them up, and then offer them for sale. : can tell you something about these bidders: They know theiJ markets. What's more, they know what to expect once they'vf purchased the property. They know how to cope with problems
They are not buying the property to live in, however. Am that may be a very important piece of information for you.
If yours is not the winning bid (or if you choose not to bic at all because of cash constraints), you can speak to the winn at the sale site and make a commitment to buy it from then and there. You'll be saving him money. All he's putting out at that time is the 10 percent down payment. He'll have very short holding period while you're getting your financin and he can pass the savings on to you. Under these circumstances you can make a highly favorable transaction. The winning bidder is often happy to give you the time to secure permanent financing-and you may be able to get valuablJ
information from this person on the best sources for mortgag_ money, as well.
The reason I'm suggesting that you speak to these people that they usually offer their properties at a far more competitive price than the rest of the market. They know what is mo and for how much; they tend to price their properties below I level. What's more, they are eager ,to' find buyers quickly; holding prop"erties for a long time dissipates profit potential Unlike homeowners who are e"tnotionally tied to the homes they've lived in, these operators do not fall in lovewitfi the merchandise. They areengagea ina business venture. If you can help them turn a quick profit, they'll Be amenable to your purchase offer.
Don't latch on to the first professional'youmeet; make the effort to get to know a few of them. Some of these folks are knowledgeable, reasonable businesspeople; others would tear the wing_, off butterflies for relaxation. Let the buyer beware. Reduce all agreements to writing, no matter how'charming your contact is. Show everything to your attorney before signing.

Properties to avoid

The opening bid price at the auction is called the "upset price." This price is determilled by the amount due the bank, which would include the mortgage balance, all charges for late payments, plus costs 'incurred in the foreclosure action such as legal charges, title chargeS, process service, publication, and other expenses. Add it all together and you have the amount that is due the bank. At the sale, the bid is usually opened by a representiitive of the bank. This person makes the opening bid in the event no one else does. That bid of the bank's will be the upset price.
I said the bid is usually opened by a representative of the bank. Occasionally, though, a mortgagee will nof'bid in at the sale. It hardly seems logical that someone who is owed money secured by real property would refuse to bid on the property. What underlies such a strategy?
The answer lies in the fact that, as a creditor, the mortgagee is not charged with the responsibilities of ownership. If the bank knows there are building or health code violations or derelict automobiles strewn about the front yard that must be disposed of, for example, it may not bid on the property in question. As long as the bank is not in title, it's just another aggrieved party. Once the bank becomes the owner, it has all the responsibilities of ownership. If there are no counterbalancing advantages from the bank's point of view, there may be no bid, and, assuming no one else wants the property, it may enq, up with the taxing authorities.
The lesson for you? If you do not hear a bid from the bank to start things off, beware. They may know something you don't.
Consider a typical area reflecting these conditions: uptown Manhattan. Here, rent controls prevented real estate operators from getting a fair return on their properties. The controls had their roots in the wartime emergency housing measures of the 1940s, but eventually became a political football. People with no business knowledge set standards for the rental industry that were so low and so onerous that landlords, realizing they were losing money by holding on to their properties, just gave up in the same way the bank gave up in the example above. Eventually, people will stop spending good money for bad results and walk away. In such cases, urban renewal projects are the most likely result, and public authorities will propose their solutions for the stricken areas.
And stricken is exactly the word for what you'll find here. If you've ever spent any time in New York City, you know that Manhattan has many such areas (as do Brooklyn and the Bronx). As you drive through these parts of the city, you might think you're taking a tour of Berlin shortly after the Allied victory in World War II. Gutted, boarded-up buildings are everywhere; the region is not R'neighborhood at all but a permanent' disaster area. Unless you have access to an unlimited amount of capital funds, don't ever bid for these properties.

P0stponements

Last-minutepostponement of the sale is not uncommon. Often, the action will be resolved or postponed at the eleventh hour, and the receiver will appear on the steps to_xpress his apol9gies to all those who showed up for the sale. Qf course, these plans can be changedpgain. If you're interested in the property, keep in touch with the receiver; sometimes the only thing holding up the sale ,is a legal technicality that must be attended to.

Who gets the money?

As we have seen, banks are not out to foreclose your property and then sell it off at a profit. The bank caq only make a, claim for the amount of its judgment. That is usually the amount of th¥ upset price; the overage is known as "surplus money."
Surplus money is paid out to the junior lien holder,s in the order of the priority of their liens. This is not an automatic process. A junior lien holder wno knows that the 'property was .
sold for a price in, excess "of the upset _price can't simply §it back and wa_t for a check; There is a process known as a surplus money profeeding in which the junior lien holder makes an application to the receiver, through the court, for the claim. It's the obligation of the junio; lien holder to make claim and certify that the debt in question was never repaid.

Other costs

We've established that costs are incurred in the pursuance of a foreclosure action and that these costs become part of the process by being included in the upset price. What other costs will the purchaser at auction have?
Well, virtually none if you want to live like a Mississippi riverboat gambler. There are some outlays you should make, however, to protect yourself, and chief among these is a title policy. We've discussed this briefly earlier in the book. Essentially, title insurance is your protection against someone challenging your right to own the property. If you've managed to fmd a lender to fund your purchase, that lender will require a mortgage policy, but this will not protect you. It will only protect the lending institution. Cover yourself as well.
Suppose you've paid someone to do a title search and it's come up clean; there is no record of any snag in the chain of ownership of the property. The coast appears to be clear. No one seems to have any grounds to challenge your title. Why should you pay extra for title insurance when you're already in possession of all the facts and have found nothing to worry about?
There's only one reason, but it's a compelling one that overrides everything. You pay to protect yourself against what hasn't shown up in the record and could come forth and be a valid, sustainable objection to title. It is true that these claims are quite rare, but some of the reasons that have surfaced have been so far-fetched as to seem inconceivable. But it could happen to you, and even an illegitimate claim has to be defended. That costs money. If you don't have insurance, you'll have to pay it out of your own pocket.

If you do get the insurance, however, the title company will send its lawyers to represent you no matter what the claim is, just as in an auto accident case. If you're found to be at fault, the company will pay any award.
No-one will require you to buy title insurance. But if you don't want to, r recommend that you don't buy real estate, either. Too many titles have been clouded by missing heirs, creditors, forged documents, and who knows what else to take the risk.
The only other charge you'll needc to consider is that of recording your deed. Again, this is not required. But if you fail to record the deed the public has no notice that the property has been transferred. You've just purchased a property that had a previous owner who was in all kinds of financial hot water. If.
you don't record your deed and put an end to his ownership as far as the public is concerned, you may find that a few more unwelcome claimsu against the property have materialized. This is not the time to pinch pennies. Your best course is to record the deed in the customary manner. (Note: If you choose to buy title insurance, you don't have the option of not paying to record the deed; the title company will see that this takes place.)
A little more background is probably in order about title insurance. In a foreclosure judgment, the court appoints a receiver to conduct the sale. This receiver is called a referee and has the power to sell the property and to sign a valid, legally acceptable deed (known as a "referee's deed"). When the referee signs that deed, any interest of the previous owner is terminated. The new owners have title, but not necessarily good title.
Most deeds contain covenants, warranties, and agreements that are passed along with the deed. A referee's deed doesn't contain any such covenants and warranties; it gives you title,period. If the bank's title company uncovered any zoning or occupancy violations, the company is not obligated. Their job is to give you marketable title; they insure your ownership of the property, although not your right to occupy it as it exists. The title company is giving you what it got, and nothing more. You can't even look to the bank for redress, because you didn't really buy the property from the bank. (In fact, you were in competition with it.)
We saw a little earlier how there is always the potential for zoning or building code violations. These are excepted by the title company. "Excepted" means that the company is not insuring the items in question, and that you cannot look to the company for correction of the problems. When the title closer tells you that he is excepting something, make sure you understand what he is talking about! Ask questions. Exceptions on your title policy don't mean that you won't get marketable title. They are simply the title company's way of disclaiming responsibility for problems that may arise in certain narrow areas.
Congratulations!
You are now the proud owner of a foreclosed property warts and all. What next?