Real Estate Investment

Salt Lake County Trustees’ Sales (a.k.a. foreclosure auctions) are held at the Third District County Courthouse in Salt Lake City, Utah inside the rotunda (see below). Auctions are commonly scheduled Mon-Fri at 10:15 AM, 10:30 AM, 11:30 AM and 5:00 PM.

In order to bid you need to bring a Cashier’s Check for $5,000.00 made out to yourself for two reasons: 1) if you don’t use it, you can deposit it in your bank and 2) if you do use it, you can write “Pay to the order of” on the back of it and sign it over to anyone you like. In this case, it is the name of the foreclosing attorney.

The remaining balance is due by 12:00 PM the next day so most people use cash or hard money to purchase these homes. However, I have heard rumors that Tom Lakey of Aspen Home Loans has worked out a mortgage loan program with our local Mountain America Credit Union to finance auction winners.

On average there are about 20-30 people bidding on properties (see below) and almost all of them are experienced investors. Some have been buying at auctions for as many as 10 years or more. I was surprised to find NONE of them go to our local real estate investors associations WAREIA or SLREIA.

Since Notice of Trustees Sale are required to be recorded against the property and published in The Record, which is a local legal newspaper in limited circulation, many of them had lists of the auctions for that day mixed in with data such as opening bid which can be readily obtained by contacting the foreclosing attorney’s office with a file/case/trustee number.

Of course, they have their secretaries compile this information daily while they attempt to drive by the home for an exterior inspection, and offer to help the homeowner by purchasing the home directly from them for what the owe or by negotiating a short sale and thereby getting access to the interior for inspection and eliminating the competition of an auction.

Sometimes, when the house is vacant, investors have been known to cut screens and go through windows or kick-in doors as a last resort effort to see what kind of condition the home is in before bidding at the auction. Some investors will indirectly admit to the fact and justify as moral gray area because 1) the homeowner has abandoned it and 2) the bank doesn’t own it yet so 3) nobody is around to call the police.

The house I was going to bid on was worth $370 in Cottonwood 84121 (great middle/upper-class area experiencing high appreciation) and had at least $200k in equity. The foreclosing lender would have had an opening bid of somewhere around $180k. (see below)

As is often the case, I called 3 hours ahead to confirm the auction was still a go and the foreclosing attorney’s secretary confirmed that it was, but when time for the auction came it was announced as having been cancelled (most likely due to last-minute bankruptcy or reinstatement).

I was surprised to see how many foreclosures were happening in Magna which is about one of the worst cities in Salt Lake County and well-reknown for its terrible water even though there is worse water in places like Sandy.

It was interesting to listen to bids. I had my notebook with me so I was able to quickly jot down the sequence of bidding on a particular property in Magna. There were only two bidders and seeing their interest made me wonder what’s out there? I might have to drive by the property to see, but here’s how it went:

Auctioneer:

klausen property – 5258 s rome indy park unit #185 in magna (or something like that)

sale held pursuant to deed of trust held by settlor aka. homeowner
recorded by trustee aka. mortgage servicer or title company
beneficiary is beneficiary aka. foreclosing lender
opening bid is $79,364.35

One man raises his finger above his shoulder.

Auctioneer:

opening bid taken as a dollar over
do i have any other bids?

Bid increments:

1 dollar over
100 dollars over
$79,500
$79,600
$79,700
$79,800
$79,900
$80,000
$80,100
$80,200
$80,300
$80,500
$80,600
$81,000
$82,000
$82,100
$82,200
$82,300
$82,400
$82,500
$82,700
$82,800

Auctioneer:

going once, twice, SOLD!

Notice the variation in the bid increments. They start at a dollar. Who knows? If nobody else wants it, why pay any more? A smart move and also a well-known classic; notice how the auctioneer immediately assumes it. As a novice bidder participating in a live auction you may think that it is smart to listen carefully to the bid increments, and get a feel for your opponent’s threshold as the bid increments are said with more hesitency and with lesser amounts.

Yet they bid at 100, then 300, then 100, then 400, then 100… trying to throw each other off. There is no hesitency and no excitement–it’s almost as if they’re using a bidding metronome to keep pace and monotone voice with a poker face to match.

Finally he bidding ends abruptly at $82,000 and the losing bidder takes his leave signaling that he was obviously waiting for only that one property. Everyone else stays until the bidding is over and some are friendly enough to talk with me, an obvious newcomer since 99% of them do this every single day.

I was delighted to exchange business cards and receive offers for hard money, deal partnering, etc.

I was disappointed to see that one or two had a negative attitude toward newcomers–seeing them only as competition and trying to tell me scary stories about how there’s no deals and all the bad deals they’ve gotten–hoping to scare me away.

Maybe you are interested in this data from Q4 2005 that I got from the
SL County Realtors.

I pulled some statistics for myself to answer the following questions:

Q: What price range of houses can most people afford right now?
A: Between $140k-$160k

Q: How long does it take for most homes to sell on the MLS right now?
A: Less than 30 days

Q: How are most people paying for their homes right now?
A: Conventional Financing

Q: What are the best cities to buy houses in? Which has the most
appreciation? Which has the most sales? Which has the best of both
worlds?
A: 84065 Riverton, 84121 Cottonwood, 84084 West Jordan, 84092 Sandy, 84093 Sandy

Later I will post two more similar reports to answer the
following questions:

1) How is the population flowing in Utah? Where are most people living
right now and how has that changed from previous quarters.

2) What can the average household afford? What are their incomes?

Recently I was reading on Robert Kiyosaki’s RichDad.com Community Forum a question asked by a newbie seeking truth. None could answer, so I answered for him. I posted a copy of my message here hoping to benefit and inspire others who also seek it.

His question was: “For the purpose of holding title to investment real estate properties, when would a trust be more beneficial than a corporation?”

Later in the post someone asked him if he meant a Real Estate Investment Trust or REIT. He replied, “Well, I really don’t know the first thing about trusts, but I assume it’d be an REIT.” I had to laugh, and answer his question:

——-

no lol it’s not an REIT–its called a Land Trust.

Land Trusts protect property.
LLCs protect people.

An LLC can be a beneficiary of a Land Trust, thus protecting property AND people. This is the best configuration for a real estate investor.

If Robert Kiyosaki needs another million dollar book idea he should get Bill J. Gatten on his team of advisors and write a book with him about the Land Trust.

Furthermore, when you combine a Land Trust with a Triple Net lease to the tenant buyer as a beneficiary of the trust, magical things can happen. None can partition the property to satisfy judgments or creditors–not the seller, not the investor, not the tenant/buyer. None can lose the property as a result of a lawsuit, bankruptcy, or marital dispute–not the seller, not the investor, not the tenant/buyer. Landlords can convey tax benefits to the tenant buyer (namely the income tax deduction for paying mortgage interest and property taxes) None can attach a lien, or judgment, or otherwise cloud title to the property–not the seller, not the investor, not the tenant/buyer.

Only when the seller and/or investor and the tenant/buyer are in completely unanimous agreement can anything legally be done with the property. This is a blessing, not a curse.

Lease Options, Contract For Deeds, All-Inclusive Trust Deeds, Wrap-Around Mortgages, etc. all violate the lender’s Due on Sale clause, but there is no sale when the seller places their property into a Land Trust. Further, there is a legal exception allowed by the federal government that protects homeowners who place their property into a Land Trust from the Due on Sale clause–no lender can call it, regardless of whether their contract states it or not.

Likewise, these ‘other’ methods of creative real estate investment that are so popular today do not protect the property by themselves. For example, what would happen if an investor with 10 lease options were to file for bankruptcy, or if his wife were to fight for the cashflow in a marital dispute or divorce, or if he were to injure another in a automobile accident and be sued. What are the tenant/buyer’s rights?? They have none. The property would be taken to satisfy a judgment.

Further, what would happen if a tenant/buyer were to allow the water softner company to put a lien against their lease optioned property, and then not pay the bill? Or not pay the rent? What are the Landlord’s rights?? None. The house cannot be sold until the lien is satisfied.

Take heed. Many reputable attorneys are not specialized in the Land Trust. Very few even know what it is. Estate planning attorneys do not always recognize them, because they are not the every day type of trust. A Land Trust is a living revocable inter-vivos trust. Furthermore, the type of Land Trust I am speaking of is co-beneficiary directed, or more specifically known as the Equity-Holding Trust.

Do not let them tell you these are illegal where you live. They only want to sell you another lease option document. Research and you will find that they are legal in every state in the union without exception by virtue of the statue of uses (basically, they are legal because they are not specifically illegal).

I hope this has illuminated your confusion regarding the ‘trust’ used for real estate investment purposes.

Every day we are bombarded by ads. We all have learned to filter these out of our daily life. For example, how many of us all sort our mail over the trash can? Consider how much time you give each ad before it hits the round file–It’s usually less than a second for me.

However, when most people start out trying to create their own advertising, they instantly feel even though the ads don’t work on them they MUST work on other people–or else why would anyone else be spending money to do it in the first place? People think that copycatting so many of the other types of advertising they have seen (and unconsciously filtered) in the past is how things are done.

For example, some think putting words like ‘FREE’ or ‘INCREDIBLE’ or ‘THIS OFFER WONT LAST’ is just going to SUCK PEOPLE IN LIKE A MAGNET!!! To me, these are the classic words that instantly label what I am reading as another junk mail/spam/advertisement as I shoot it toward the trash bin at lightning speed.

Q: So, what is the BEST way to advertise to find deals?
A: The EXACT OPPOSITE of what you see everyone else doing. In other words, refrain from the “Monkey see, monkey do” method. Here are some terrible examples I see every day in my town.

Negatively Stereotyped/Overused:

WE BUY HOUSES!
SELL YOUR HOUSE FAST!
CA$H FOR HOUSES!

Only Attracts Newbies:

NO MONEY DOWN!
INVESTMENT HOUSE!
CHEAP FIXER!
HANDYMAN SPECIAL!

Q: Should I put my phone number on my ads or my website address?
A: Deciding to call someone is making a minor commitment. It is a commitment because they have decided to do so even though they are running the risk of losing face if they sound stupid or feeling that they’ve wasted your time on the phone unless they are positive you can offer them the solution they need. People who have questions avoid commitments. That is why, when given the choice between the two, most people will visit your website before calling you (if they have to) Visiting a website offers a no hassle, no pressure, no strong-arm salesman way to learn more before making that commitment.

PLUS, a website address adds credibility and professionalism to your ad. Not only that, but it’s automated. Personally, I CANT MEMORIZE phone numbers, and I have yet to write down phone numbers on ANY advertisment. But I CAN remember website addresses.

Q: What do you think about bandit signs?
A: Bandit signs, in my opinion, are generally ugly and over-used and many people despise them. You have to check with every city to make sure you won’t get slapped with a fine and they are generally a hassle. You are spending money on the signs, time writing on them if you use markers, time driving around and putting them up HIGH where hopefully nobody will be able to get them easily, and spending GAS $$$ to check on them monthly? weekly? daily?

Here in Utah, they pay the Boy Scouts $0.25 for every one of those signs they tear down. And have you ever noticed that when a Realtor sign goes up with all the nice red directionals around the neighborhood, your signs are nowhere to be found??

But in general, people around nicer neighborhoods especially will tear them down and it I personally feel there is no faster way to create an instant negative reputation for yourself than this method of advertisement.

Hopefully, if you choose to use bandit signs, you are at least TARGETING your advertisement by placing them near the neighborhoods you’d like to purchase in (eg. appreciating neighborhoods, or neighborhoods full of junkers, or pretty house neighborhoods, or whatever your niche is)

And regardless of the advertising method you choose, you must be TRACKING it so you know where to continue spending your advertising dollars in the future. Every time a new person calls you, you should ask “How did you hear about us?”

You should be tracking every penny you spend on your advertising efforts and finding out how much it costs you per successful deal and which method of advertising is working best for you.

Foreclosure is THE #1 WORST THING that can happen to your credit report—even worse than bankruptcy. Besides losing your home, your equity, and any shred of credit you had left, this means:

• NO new loans of any kind for a minimum of 3-7 years.
• NO renting/leasing where credit reports are pulled.

The average foreclosure costs lenders $58,792 and requires 18 months to resolve. Besides the cost, there are BIG financial and economic reasons why:

- HUD wants to homeowners to keep their homes.
- Fannie Mae, Freddy Mac & Friends want to find ways to cut mortgage losses.
ESPECIALLY during periods of job loss in economic recession.

Today, mortgage workout options are widely used throughout the industry. Lenders are encouraged to find foreclosure alternatives whenever possible. The following is a list that would be very valuable to any homeowner who has just received a Notice of Default (NOD).

But first you have to understand the lender’s perspective:

Most lenders require an involuntary inability to pay before workouts are approved, meaning the borrower does not have the capacity to fully reinstate and carry the mortgage due to illness, job loss, significant property damage or depreciation, or other significant economic shock.

Obviously, if the homeowner has money and they are voluntarily borrowing their mortgage payment to keep current on a new Ferrari then there is no reason for a workout. That is why most lenders pull credit and require homeowner W-2 forms, 2 months bank statements, 2 most recent pay stubs, 401(k)s, etc. prior to approving a workout option.

Regardless of lender policy, the borrower can simply fully reinstate or cure the mortgage
by paying all the past due amounts and fees owed, and thus retain ownership interest in the property. The borrower can do this at any time prior to the finalization of the foreclosure and even after foreclosure sale in states that allow redemption

From the lenders perspective, a “cured” loan is any loan that either fully reinstates, gets
modified, is assumed by a new borrower or is paid off. While a “failed” loan is any loan that results in the loss of the home through foreclosure or foreclosure alternative such as a deed-in-lieu, short sale, or workout assumption.

Lenders WANT to work with homeowners because they want their loans paid. But curing delinquency is a lot like cancer: The earlier you catch it, the more options you have. Lenders know more than 61% of loans that get to 120-days delinquent will fail—at that point lenders recognize they’re obviously going to lose money and the question becomes, “How much?”

So turning to that question, there are many different alternatives to foreclosure once a borrower is in default. In fact, many of these alternatives are relatively recent innovations in loan servicing (eg. from the 1990’s). Not every lender has every workout option available—most of them do but they call them by different names.

So the following list is divided into two groups: The first group involves workouts that allow the borrower to reinstate the mortgage over time and keep the home. The second group involves workouts result in voluntary title transfers if a borrower has demonstrated involuntary inability to pay.

Home Retention Workout Options

Partial reinstatement is when the borrower resumes regular monthly payments and agrees to a repayment plan over a period of up to 12 months for the remainder due. In this case, the borrower’s credit record will indicate that the borrower is meeting his or her obligation and that a repayment plan is in place. Nevertheless, the number of months for which the borrower was delinquent and the severity of the delinquency will continue to appear on the borrower’s credit report. If the borrower partially reinstates the mortgage but does not enter into a repayment plan, then his or her credit record will indicate a continuation of the delinquency for the number of months due in arrears, e.g., the borrower would remain two or three months at “60-days delinquent” status, also known as 2×60 or 3×60 days delinquent.

Short-term forbearance allows for the suspension of up to three payments or a reduction
in payments for up to 6 months with a repayment plan to follow at the end of the forbearance period.

Long-term forbearance allows for the suspension or reduction of payments for a period of 4 to 12 months with a corresponding repayment plan for full reinstatement or payoff within 12 months of the end of the forbearance. If the borrower seeks forbearance prior to delinquency, his or her credit report will only indicate the presence of a repayment plan; otherwise, such as with the case of partial reinstatement, if the borrower pays as agreed under the repayment plan, he or she limits the damage to his or her credit history from the delinquency.

Loan modification is a permanent change in one or more terms of a borrower’s loan that allows the loan to be reinstated and results in a payment the borrower can afford. A loan modification is negotiated when a cooperative borrower has indicated a desire to retain ownership of the property and a capacity to support a mortgage under the new terms and does not qualify for a refinance of the loan under lender/investor policies. Under a loan modification, a borrower’s credit record is restored to “currently paying as agreed” status.

Partial claim or Advance Claim is offered under the FHA loan loss mitigation program, and is a workout in which the lender will advance funds on behalf of the borrower in an amount necessary to fully reinstate a delinquent loan (not to exceed 12 months of principal, interest, taxes and insurance (PITI)). The borrower, on acceptance of the advance, will execute a promissory note and subordinate mortgage payable to HUD. Currently, these promissory or partial claim notes carry no interest and are not due and payable until the borrower either pays off the first mortgage or no longer owns the property.

Refinancing is good option as long as you have acceptable credit, can afford closing costs on the loan, and have no liens or judgments clouding title. A good mortgage broker knows how to get you financed as high as 106% LTV. Obviously you want to make sure you can afford the new payment and you won’t default again or it’s back to square one.

Filing Bankruptcy may be an option for those who haven’t done it before. You can only do it once per chapter and there are multiple chapters of bankruptcy, but the two that apply to residential homeowners are Chapter 7: Asset Liquidation and Chapter 13: Payment Reorganization. Although it is possible to keep your home in both chapters, it is not a guarantee. If there is enough equity, the judge may order the home to be sold to help pay off creditors—even if the home is somehow sold for a profit after all creditors are paid you would only get the maximum homeowner’s exemption allowed in your state (eg. $20k in Utah) while the rest goes straight into the Bankruptcy Trustee’s pocket. In any case, a good bankruptcy attorney knows how to delay foreclosure proceedings for a year or two while the homeowner lives rent free. The only downside is if you lose, you now have a bankruptcy and a foreclosure on your credit report. Ouch!

Voluntary Title Transfer Workout Options

Selling traditionally is probably the best option provided there is enough time before the foreclosure auction and the homeowner doesn’t owe more than the house is worth. Sometimes if there is a lot of equity the lender will even lower or stop payments for a while to give you time to sell (see above: reinstatement)

Deed-in-lieu of foreclosure is the simplest case, and involves the borrower foregoing any continued ownership interest in the house in exchange of the cancellation of the mortgage obligation – essentially the borrower just hands over the keys.

Short sale or short payoff or preforeclosure sale or sale and compromise is a negotiated and lender approved sale where the borrower has found a buyer for the property (such as an investor), but the sale proceeds are less than the amount owed inclusive of sale costs and other fees. In this case, the lender either negotiates an unsecured repayment plan with the borrower for the additional amount owed or forgives the remaining debt.

Workout mortgage assumption permits a qualified applicant to assume title to the
property and the mortgage obligation from a borrower who is currently delinquent or is in
imminent danger of default because of involuntary inability to pay. This is valuable if the mortgage carries a below-market interest rate that would make its sale more attractive, and in cases in which the assumption permits the purchaser to obtain a higher loan-to-value ratio than could otherwise be attained. Lenders will waive the due-on-sale clause of fixed-rate mortgage contracts as needed to assist troubled borrowers sell their properties and avoid foreclosure.

Conclusion
In many cases borrowers are better off getting out of their existing homes. There may be a need to find employment elsewhere, a divorce settlement that requires selling the property, reductions in income that necessitate moving to lower cost housing, or a deceased borrower with an estate to be liquidated.

Since these are serious problems that most real estate professionals are not trained to handle, it’s a good thing there are Investors out there to help these people.