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target="_blank" rel="nofollow" href="#fb3_img_img_3d4e7125-9d12-55c3-bf85-62c9094f766b.png" alt="Tip"/> The phone number on the mortgage payment coupons may put you in contact with the loan servicer that processes the payments instead of the lender that actually owns the loan. The loan servicer may not offer much assistance, so ask the loan servicer who the lender is and contact the lender directly.

      Mortgage modification or repayment plan

      To enable financially strapped homeowners to make up missed payments slowly, a lender may agree to a mortgage modification or repayment plan:

       A mortgage modification consists of adding the past-due payments and penalties to the remaining principal, so the homeowners pay off the past-due amounts and penalties over the life of the loan. This arrangement is commonly known as adding amounts due to the back of the loan.

       A repayment plan enables the homeowners to submit payment of a portion of their past-due amount and penalties with future payments until the past-due amount and penalties are paid off.

      When homeowners are already having trouble making their monthly mortgage payments and don’t have the resources to cover higher payments, mortgage modification and repayment plans are rarely ideal solutions. Often, these options simply delay the inevitable.

      Filing for bankruptcy

      Filing for bankruptcy sounds like a permanent solution to a significant financial predicament like foreclosure, but it’s not the ideal solution. It destroys the homeowner’s credit rating for seven years or so and doesn’t exactly wipe all debt off the books. Bankruptcy simply relieves some of the debt burden and provides homeowners some extra time to restructure their remaining debt.

      Bankruptcy is one more option for distressed homeowners, however, and it’s certainly something you should know about as a foreclosure investor. By filing for bankruptcy at least a couple of days before the auction date, a homeowner can delay the foreclosure process and leave a property that you’ve already purchased in limbo — at least until the foreclosure trustee and the courts sort out all the legal issues.

      

Bankruptcy is another opportunity for real estate investors. As the trustee or courts decide how to liquidate the property, you may be able to step in and work with the lawyers and trustee to purchase the property and make their lives a little easier. Chapter 14 explains how to acquire properties in bankruptcy.

      Agreeing to a deed in lieu of foreclosure

      When homeowners have very little to no equity or even negative equity built up in their property, and they have no hope of turning the financial tide, they may offer the lender a deed in lieu of foreclosure. The homeowners agree to sign their deed over to the lender and give them the keys to the property without having to go through a messy public foreclosure process.

      Although this approach may give the homeowners a less-embarrassing escape route, it often leaves the lender with a property that it doesn’t want, along with the expense of repairing and rehabbing the property and then selling it. As an investor, you may be able to step in as the ultimate middleman, negotiate with the lender, getting it to accept less than the full loan amount due (what real estate insiders call a short sale), and still provide the homeowner a clear escape route.

      

Some investors around the country make a really good living just working short sales. If you can’t purchase a foreclosure property for a low-enough price to make a profit, negotiating a short sale can make the deal more profitable. Keep in mind, however, that lenders won’t agree to short sales if they foresee the homeowners walking away with money, and you shouldn’t negotiate a lower payoff to put money in the pockets of the homeowners. See Chapter 15 for details.

      Getting one last chance during the redemption period

      Reasonable people would assume that when they buy a property at a foreclosure sale, it’s automatically their property, but that’s not always the case. Many areas of the country have a mandatory redemption period, which can last from a few months to an entire year. Check out the appendix at the back of this book to find out about the redemption period in your area.

      During the redemption period, the person who purchased the property at the sale is responsible for insuring the property and paying the property taxes, but the foreclosed-upon homeowners have the right to redeem the property. To do so, the homeowners must come up with enough cash to pay off the mortgage in full, along with any interest and penalties and, in some cases, the investor’s expenses.

      

Depending on the rules that govern redemption in your area, the buyer may or may not have the right to recover expenses (including property taxes and insurance) from the homeowners. Consult your real estate attorney to find out exactly what you’re allowed to recover if the homeowners redeem the property.

      If you purchase a property at a foreclosure sale in an area that has a mandatory redemption period, you end up with the property about 50 percent of the time. The only sure way to end up with the property is to buy in markets that don’t have redemption periods. (Check out the appendix at the back of the book to determine whether your state has a mandatory redemption period.) To protect your investment in areas that have a redemption period, take the following precautions:

       If possible, repair any defects in the house that may be considered to be unsafe or lead to further deterioration of the property. If the property is vacant and unsafe, and you don’t take care of the problem immediately, the property is likely to lose value. Avoid investing any more money in repairs than is absolutely necessary; if someone redeems the property, you stand to lose that money.

       Insure the house and file an affidavit of payment so that if the homeowners redeem the property, you have a better chance of recouping your expenses. Consult your real estate attorney to determine your rights to recover expenses.

       Pay the property taxes, and file an affidavit proving payment.

       Don’t invest in any renovations. If the homeowners redeem the property, you could lose all the money you invested in the renovations. Generally, you perform repairs only to protect your investment if the house is vacant or if you’ve worked out an arrangement with the occupants to ensure that you won’t lose any money you invest in the property. Different states may have different abandonment laws that may restrict you from doing anything. Your real estate attorney can provide guidance here.

       Keep an eye on the property to protect it from vandalism and theft. Some disgruntled homeowners may strip the property before vacating it.

      For additional advice on surviving the redemption period, see Chapter 16.

      

All sales aren’t final in areas with redemption periods. If you miss out on an opportunity during the foreclosure sale, you haven’t necessarily lost the property for good. The homeowners still control the property, and you can work with them to bump the investor who purchased the property out of the deal. The knife cuts both ways, of course: You could end up getting bumped. You get your money back, but you lose out on the property.

      LOSING OUT ON A JUNIOR LIEN

      I bought a first mortgage (senior lien) at the first foreclosure

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