Property Rights members attend Real-Estate Foreclosure workshop

Make money in real estate foreclosures,” read the headline of a full-page ad run in the Star Tribune for several days in late August, 2007. “Learn how easy it can be to tap into the hottest opportunity in real estate!” This invitation seemed right up our alley. I decided to check it out. Howie Gangestad, who has bought foreclosed properties in north Minneapolis, also attended the event.

The two-hour seminar was held at the Marriott hotel in Bloomington on Sunday, August 26 starting at 3 p.m. Three others were scheduled on consecutive days. Our instructor was a man named James who had lost a job with Montgomery Ward. In 1997 he took the course, sponsored by the National Foreclosure Institute, and moved quickly to put its concepts into practice. A foreclosed property which he bought for $713,000 five years ago had recently been appraised at $1.6 million.

National Foreclosure Institute offered a one-year guarantee on the course. If attendees did not make enough money from real-estate deals in the first year to pay for the course, they could apply for a full refund. Insufficient funds or bad credit were not a problem. The Institute maintained a directory of 124 private lenders who would help with the funding.

James explained that it was important to get in at the entry point of the real-estate cycle. Housing prices rose in the period between 1999 and 2005. Home foreclosures were now at a 30-year high. So now is the time to take advantage of foreclosed properties - before too many other people found out how easy it was to make money in this area.

The main point which our instructor, James, made during the seminar was that to benefit from its knowledge, you had to act. The hard part was to take that first step. Numerous times he demonstrated that point physically. He would take a giant step forward - which I took to mean, signing up for the seminar. The three-day course cost $3,995.

Getting into specifics, James explained that the seminar focused on four types of situations pertaining to foreclosed properties: pre-foreclosures, foreclosures, short sales, and REO properties. The last category was properties that could be bought directly from the bank.

James said he would focus on pre-foreclosures and short sales. He said that because most people did not know about them, there was little or no competition from others making the same approach. (Howie whispered to me that this was not true. There was plenty of competition.) You could buy properties at huge discounts and, if you did not have the money, obtain financing from the Institute’s directory of private lenders. Properties could typically be bought at 20% to 60% below fair market value. Since history indicates that prices will rise in accordance with the real-estate cycle, the purchaser could sell those properties at a big profit.

Pre-foreclosures were the first area to be discussed. This is where someone purchases the property from the current owner before it goes into foreclosure. Foreclosure is a legal action taken by the bank to recover its loan by forcing the property to be sold at a sheriff’s auction. The owner, unable to pay the delinquent mortgage, loses all interest in the property six months after the sheriff’s sale. So if an owner is facing this situation, it is in his or her interest to sell the property to an investor who can take over the mortgage. It is better, after all, to receive something from the property than nothing.

However, many people who are about to lose a home to foreclosure are in denial and wait until the last possible moment to act. As an investor, you have to be patient and persistent. (The problem today is that 95% of mortgage foreclosures are upside down so there is little chance for investors to make a profit in acquiring properties before the short sale.)

Short sales were the other promising area. James claimed that 90% of the public did not know about this. Unlike foreclosure sales at the court house, there was virtually no competition. Short sales, he said, “went through the roof” this summer after in the period between January and April banks acquired the most foreclosed property in U.S. history.

What is a short sale? It is where an investor offers to buy a foreclosed property from the bank at a discount - below the amount of the mortgage. Why would a bank want to do that? There are several reasons. First, the foreclosure process costs banks an average of $50,000 to $60,000 per property. If banks can avoid this cost and still unload the property, they will jump at the opportunity. Second, banks are desperate to get rid of bad loans and clean up their books. Today’s banker will not hold onto bad loans. If he can unload these, the bank will have money to put into performing loans.

James’ last reason was one which makes particular sense in today’s corporate world. Banks, like most business bureaucracies, have cut staffing to the bone. The employee responsible for disposing of foreclosed properties has a huge backlog of properties needing to be processed. He or she is desperate to make deals to whittle this down to a manageable size. If an investor makes an offer, even at a discount, with all the paperwork in order, the bank employee will be more than happy to accept it. But you have to know what you’re doing. You have to do most of the work properly so that the bank can dispose of the property quickly and without further effort.

“Think like a banker,” James advised us in the audience. If the banker sees that you are a trained professional, he’ll be eager to deal with you. If fact, banks will often call you up to see if you are interested in bidding on properties in their portfolio. That has been his experience in the San Diego area. Once the word get out that you are a serious investor who knows what he is doing, the deals will come to you. Amateurs, however, need not apply - in other words, you really need to take our course. The National Foreclosure Institute gives its graduates all the knowledge and information, including forms, to come across as a real-estate professional.

Now for a reality check, courtesy of Howie Gangestad: Yes, it is true that pre-foreclosures and short sales are a more attractive way to acquire foreclosed properties than in bidding on them at auction. Besides the competition, property-acquisition at auction requires the successful bidder to give the sheriff a cashier’s check for the full amount of the purchase. The current home owner has six months to redeem the property. That means that you have your money tied up for six months while the current owner can try to come up with the money to satisfy the mortgage or sell the property to someone who can. Furthermore, there are few bargains to be had at auction. In Hennepin County, the banks automatically put in a bid for the outstanding amount of the mortgage. If you want the property, your bid must be above that amount. In many cases, this exceeds the property value in today’s market

Where Howie took issue with James was James’ suggestion that the process was so easy. No, it is seldom that deals will come to you. You, as investor, have to work hard to find attractive acquisition opportunities and to sell your proposal to the property owner, whether it be the delinquent homeowner or the bank. The unreturned phone call is the typical experience. With their backlog of properties, banks will often take weeks or months to respond to an offer, if they respond at all.

James’ argument seemed unrealistic when he gave examples of what investors could expect. For example, a particular property in Florida financed by GMAC had a mortgage balance of $110,000. An investor put together a package for a deal in perfect form offering the bank $50,000. The bank accepted the offer. Within 41 days, he sold the property for $127,000, earning a hefty profit - $76,673.27 to be specific. (The calculation forgot other expenses such as taxes, repairs, interest, and commissions.)

Does that sound good to you?, James asked. The foreclosure business was not a “get rich quick” scheme, he said, but simply a business. Some people fail at this business, but most make money. Some make lots of money. The important thing was to take that “first step”. At this point, James visibly took that step.

James suggested that ridiculously low bids were not so ridiculous when it came to short sales. Think like a banker. On a particular $400,000 mortgage, the bank had already collected $216,360 in principal and interest payments before the property became delinquent. So you, the investor, could offer the bank $200,000 for a short sale. (Howie Gangestad thought these numbers unrealistic.)

It is a fallacy to think that you can only make money when there is equity in the property. If the purchase price is low enough, you can always make money. Put aside some money for the purchase, and additional amount for rehab costs, and then fix up the property and try to resell it as quickly as possible. You’ll make a huge profit. But don’t be greedy. Limit yourself to three to four deals of this kind per year. As a new investor, you don’t want to take on too much new business. Take on what you can handle.

James presented a hypothetical situation to the audience. Let’s say the property value is $98,950 and the loan balance is $104,500. Is it a loser to acquire this property? Not necessarily. If you can buy at a price that is low enough, you can make money. So what should you bid in that situation? There were several guesses. Then James made his own suggestion. Bid $38,400. Would the bank accept $38,400 to satisfy a $104,500 mortgage? Maybe or maybe not. If your bid is too low, you can always raise it. In fact, you should be embarrassed by your first offer.

It was obvious that novice investors, taking this course, could make lots of money. But knowledge was not enough. You needed to take that “first step”.

To make it easier to pass the initial hurdle, National Foreclosure Institute was offering several incentives. First, was the moneyback-guarantee that you could make at least the cost of the course in real-estate deals in your first year. Second, the course founder, Ann Goldschmidt, was offering a $1,000 discount for anyone who signed up for the course on this day. The price would then be $2,995 rather than $3,995. Third, you could think over your decision between now and when the course would be given (September 7th through 9th) and even take the first day of training, and then receive a full refund if you decided the course was not for you. The course would be put on CDs so you could review the course material at your leisure. Finally, James was offering his own incentive. He would personally coach or answer questions for anyone who enrolled in the course. Just see the three people at the back of the room to enroll, he said.

There were roughly thirty people in the audience. Four or five people accepted James’ invitation. The rest of us naysayers sat meekly in our chairs until we were excused. Even at a price of $2,995 per person, I did not see how National Foreclosure Institute could make money pitching to people like us.

During his presentation, James had mentioned that Trump Mortgage was the latest in a long line of mortgage bankers who had recently gone out of business. In today’s Star Tribune (September 16, 2007) on page AA3, I found a full page ad for Trump University, with Donald Trump’s picture, with a headline that read: “Foreclosures soar 90% in less than one year - “I’ll show you how to turn this sizzling real estate market into a tidal wave of profits.”

Maybe the Donald will prove a better salesman than James.

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