INTRODUCTION -...

Advanced Strategies of Defaulted Paper

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INTRODUCTION

n this home study educational course you will learn how to buy defaulted mortgages for your own portfolio. This course assumes you already have our basic course on marketing for the defaulted mortgages and how to flip them to investors for a quick profit.

Briefly, this course will discuss the following: • The Process For Buying The Defaulted Paper• Where to Find the Cash for Defaulted Paper• The Risks Involved• The Foreclosure Process• Judgments• Techniques To “Fix” The Defaulted Paper• How To Buy Property For Pennies On The Dollar• And More

Defaulted paper means different things to different people. In a nutshell defaulted paper is:

• Mortgages• Trust Deeds• Contract For Deeds• Land Sale Contracts• Notes

Each of the above is supposed to have a monthly payment to the holder of the note as payment for the sale of real estate. Each of these pieces of paper has real estate as collateral. This is also called a secure investment. It is also an area that is overlooked by over 95% of all investors.

When people think about defaulted paper they think: 1. Problems2. Foreclosures3. Evictions4. Lawyers5. No money


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While these thoughts are real they also hide all of the benefits of defaulted paper, which from my point of view far outweigh the negatives. Keep in mind that no matter what you do there are always pluses and minuses associated with everything. If you remember from the first course, John D. Rockefeller’s quote: “I always tried to turn every disaster into an opportunity.” - John D. Rockefeller

We have always found that assets people considered to be problems

represented huge profits with very little (if any) investment for someone who knew what to do with the paper. Quite literally, we found a goldmine in our own back yard and over time we found out that there is plenty of this paper in every city in the country. Most investors ignore defaulted paper because they do not understand it. Learning how to buy the paper at a huge discount leads to huge returns. Learning how to “flip” the paper to another investor generates immediate cash.

Before we get into buying the paper let me take a few moments

to talk about some of the benefits of the defaulted paper industry. Little Or No Start-Up Cost Profiting from defaulted paper does not mean you have to use any money. You can get started just by providing the information to others who will pay you a substantial fee for your “research”. Works Anywhere

The paper business has no geographical boundaries. It does not matter where you live now or where you want to live in the future. You can do this work anywhere in the country, whenever the mood strikes you. From the biggest cities to the smallest towns. From Boston to Baton Rouge, Portland to Pasadena. If you’re a

night owl, you can do your work at night, leaving your days free for your favorite leisure activities. There is simply so much defaulted paper available you could never hope to handle it all.

100% Home Based And Employee Free

You can choose to work out of your own home, we don’t, but


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we choose not to because we have a large operation and need employees to handle the large number of deals that are brought to us by our students.

You can do the business without having an office downtown or having a bunch

of employees with payroll responsibilities, taxes, workers compensation, etc. We mean you can run your paper business out of your home. No more driving to an office building where you work to make someone else rich. There’s one bad thing about this business. Weekends lose their importance. It’s true. You see when you have so much free time during the week, Saturday and Sunday aren’t so important. We don’t know about you, but that’s OK in our book.

You do not need to have a big staff to make money from defaulted paper. We

have had people write us or call us and say how they love the defaulted paper business because it provides them with immediate cash and little or no overhead. You also have the tax benefits of owning your own business and the additional opportunity to use defaulted paper as part of your retirement plan so your income is tax free or tax-deferred.

Huge Upside

Are you totally committed to doing what it takes to

make the income you want? We ask you that question because we know a lot of people go 95% of the way toward getting what they want and they stop just shy of their victory. If they'd just take one more step hang in there just a little longer, they'd get it all.

Defaulted paper allows you to make $2,000 a month

or even $40,000 a month or more. Your income is totally dependant on your efforts. What you put into the

business is exactly what you will get out of the business. You may be happy doing just one deal a month for $2,000. You may only work deals that will make you $5,000 or more per deal so you only have to do 10 of them a month to meet your goal of $50,000 for the month.

Realistically, a single note deal could yield you a cash profit of $10,000 to

$50,000 or more. If you only want to put in 10 – 12 hours each week, there’s no reason you cannot do one or two of theses deals a month.

Virtually no competition.

As you will soon discover, there is a lot of defaulted paper out in the marketplace

but no one knows what to do with it. You see everyone only wants the good paper meaning paper that is receiving a monthly payment every month without any problems. Where the payer (debtor) has perfect credit, a great job and lots of


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assets. All of the other investors are competing for the same deals. Well guess what, defaulted paper has very little competition. We (that’s you) only want “bad” paper. We can pick and choose the very best of the bad paper to invest in. We can find properties where there is a ton of equity, yet because the homeowner is not making any payments on the mortgage, investors are not willing to buy the note from the note holder. Most every single bank that you find treats defaulted paper as food poisoning. They don’t want it in their system and want to get rid of it as fast as possible. None of the banks, mortgage companies or investors wants defaulted paper. Where does it go? To you and us. Banks want to get rid of it because too much defaulted paper on a bank’s books can force the bank to close down so they must get rid of the bad paper. Finance companies and mortgages are only looking for the good paper to make a small rate of return. This leaves a huge viable opportunity for you to make a lot of money. Buy Real Estate at Huge Discounts

Working with delinquent paper gives you the option to purchase the real estate that is held as collateral at prices that make buying properties at foreclosure look like you are paying retail. For anyone that buys foreclosures, buying at 50 – 60 cents on the dollar is fairly commonplace. We are not arguing with this at all. We are simply saying that when you work on the defaulted paper side of the equation you are able to purchase property for literally pennies on the dollar.

You have a virtually endless supply of paper that you can purchase. There is even more of an opportunity when dealing with defaulted paper simply because most investors do not know what to do with the paper or how to profit from the defaulted paper.

What this means is that since so few people know how to

purchase defaulted paper; you are able to get the very best discount on the paper you locate or buy. This equates to a very large return on our investment.

Defaulted Paper = HUGE RETURNS

Tax Free

We’ll never forget that day we found out that you could get returns on your investments tax-free. Yes that’s right, tax-free. The benefits to you and your family are huge. Imagine making your high double-digit returns without having to pay taxes


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on the gain. We already mentioned that rates of return are in the big double-digit numbers, but imagine making an additional 20% or more on your investments each year. We cover tax-free investing in our advanced course on defaulted paper in complete detail. This course is designed to teach you how to find the defaulted paper and what to do with it to make some money.

Tax-Free investing is a great opportunity if you are looking to make money

quickly for retirement or looking to grow your portfolio to outrageous sums over the long term. This is not a loophole but is a time tested IRS approved technique that allows you to quantum grow your investments. In short, the IRS allows you to buy defaulted mortgages in your retirement plans such as an IRA, ROTH IRA, KEOGH, 401K or other pension plan.

Essentially, any self-directed account can be used to purchase defaulted notes secured by real estate. By buying the defaulted mortgage in your retirement plan you are able to make tremendous returns on your investment where the gain is either tax-deferred or tax-free. We cover this topic in more detail a little later.

Above Average Return On Investment

When you have a little money to invest, your rates of return will be better than you could have ever imagined. You Don't Have To Settle For Underachieving Investments such as:

• Low Interest Rate CDs • Poor Performing Stocks, Bonds or Mutual Funds • Unsatisfactory Insurance Products

With just a few of the techniques covered in this

book you will be able to make consistent double-digit return on money that you invest. Your money is completely secured by real estate and you are not subject to fluctuating interest rates or the stock market. We all know that you can make money in the stock market. Some investors believe in the buy and

hold strategy while others try to time the market. There are seminars that encourage you to trade options or futures and courses that attempt to teach you how to become a day trader. The work may be nothing more than doing research on a particular stock or company. Other times the work involves watching the market fluctuations, interest rates, the bond market, contacting your broker, using the internet for research and checking business reports or reading investment newsletters. Even after you do all this research, you still do not have a guarantee that you will make a


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higher return than what you could make from a basic CD or mutual fund. And there is research that shows many investors in the stock market lose money every year. You can make very good returns in the stock market if you research properly, watch the market diligently, have enough money to invest and have a little bit of luck. If you were asked what rate of return you were going to make at the end of the year with almost 100% certainty, would you have the answer? Do you want to put your money in the market where anything can happen and often does or would you rather have an investment vehicle that can provide you with an average of high double digit and sometimes triple digit returns each year and every year, perhaps even tax-free? This educational course is not about getting rich quick. It is about making choices that are different from the mainstream. By making the right type of investments you can increase your yields while having a high level of security. That does not sound right does it? How can you have high returns unless you have high risk?

You invest where others are not.


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GETTING SO RICH YOU CAN’T STAND YOURSELF

Which rate of return would you rather earn, before taxes – 3% or 10%? Most people when asked this question will go for the 10%, same as you would. And so, when a home seller is faced with selling their property and ending up with cash proceeds that need to be reinvested, many home sellers will opt to take back a loan from the buyer. We call this a seller-take-back. Unless they need it for a down payment on a new home, sellers today are better off not receiving cash on a sale. Receiving a lump sum of cash for the sale of their home makes them subject to expensive capital gains taxes. A seller-take-back loan has the benefit of legally deferring capital gains taxes through the installment rules. The home seller only pays taxes on the payments received each year. Now you can begin to see the wisdom in a seller lending their buyer the money to buy their property.

Our initial efforts are going to focus on notes created by sellers, or seller-take-backs so it is important to understand reasons sellers may want to take back a note for another person.

1. Hold the note for monthly income 2. Use it to buy more property 3. Pledge as collateral for another bank loan 4. Discount the value of the note for immediate cash 5. Defer paying capital gains taxes. 6. Receive better than average return on money, better than CD’s, Stock

Market, Insurance Products. In the basic course, we used the example of Jack and Jill to illustrate a typical seller-take-back transaction. Let us reintroduce our characters:


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JACK AND JILL DO A DEAL Jill is a homeowner. Jack is a homebuyer. Jill wants to sell and Jack wants to buy. Let’s see what happens when they get together.

Jill is trying to sell her house for the very best price she can get. Jack is looking for a house to buy but is concerned about being able to qualify for a loan from the bank.

Jill’s house is on the market for sale with a fair market value (FMV) of $100,000. Since Jill is retired she is more concerned with getting steady monthly income rather than a lump sum. Jack is looking in the newspaper and sees an ad for a house in the area he is interested in. The house is listed for sale by owner (FSBO). Jack decides to call on the ad and see if there might be a deal. Jack contacts Jill about buying her house and offers Jill a creative way for her to get full price on her house without paying a real estate commission.

Jack has $30,000 that he can put down right now to buy the house from Jill. Jack asks Jill if she will act as the bank for Jack. What this means is that Jill will be using the equity in her house as a loan to Jack. Jack will make a regular monthly payment to Jill just like he would do to a bank. Only he makes his payment directly to Jill, instead of a bank.

Both Jack and Jill go to closing. Jack puts $30,000 down and buys the house. Jack now has a $70,000 first mortgage (first loan) on the house at 10% interest rate amortized over 30 years. Jack’s principal balance is $70,000. Jack now has $30,000 equity in the property

Jill sold her house at full value. Jack bought a house without qualifying with a bank and having to borrow the money. Jill will now receive monthly payments for the next 30 years until the note is paid in full. Over 30 years she will actually receive around three times the $70,000 balance or $221,000. The reason she receives $221,000 is that over 30 years Jack is making payments on the original mortgage amount plus interest. It is the interest on the mortgage that makes the total funds that Jill receives so large.

Jack’s monthly payment is $614.30. Jack, as part of his purchase signs a

promissory note that lays out all of the obligations (for paying back interest, monthly payments, length of note, fees for late payments, penalties for failure to pay, and location where he should send his monthly payment to Jill) as well as a mortgage. The mortgage encumbers or pledges the house Jack bought as collateral to ensure


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that Jack will make the monthly payments. The mortgage is recorded at the local county courthouse, in the land records department. Jack does not pay as he agreed (defaults), Jill may as a last resort and at her option, foreclose on the mortgage sell the property at a foreclosure auction to pay off the mortgage owned (held) by Jill. Jill does not want to foreclose; it is too expensive and she does not know how to do it. But Jill still needs the stream of income from the mortgage payments. She is running out of savings and she needs cash now. The timing is right for Jill to sell her mortgage and note at a discount and be done with this transaction. Here comes our student Steve, (this is you), who found out about the defaulted mortgage. Steve contacts Jill and makes an offer to purchase the note from her at a discounted price. She accepts his offer and at closing, Jill gets the lump sum of cash she needs now and Steve purchases the note for pennies on the dollar. Our student, Steve now works with Jack to bring the mortgage current, begins foreclosure action or he receives the house through a Deed in Lieu of Foreclosure.

Where did Steve get the money to buy Jill’s defaulted note? Keep in mind that it does not require money-to-make-money. You can make thousands of dollars per month even if you have no money. We will teach you in this course how to build your investment nest egg. If you already have money to invest you are about to learn how to make exceptional yields on your investments while having your investments completely secured.

You know you will never make any money working for someone else. Today you can’t even count on job security or a good pension. Owning your own business is one of the smartest things you can do-for yourself, for your family, for your comfort and security-today and tomorrow. Have you ever wondered what it would be like to walk out to your mailbox and find money there day after day? How would you like to make so much money that you would not know what to do with it all? Sounds great doesn’t it? Well it is entirely possible if you stick to a very simple plan. Following a simple plan on a consistent basis allows you to make money very quickly. When you combine a simple plan with defaulted mortgages you can exponentially grow your earnings and dramatically reduce the time it takes to reach your goals. How does $100,000 sound? What about $1,000,000? What about $10,000,000?


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What if you had a boring, simple plan that would allow you to reach the above numbers in a very short period of time? Would you follow it?

The biggest mistake in investing is to do what everyone else is doing. You can never get ahead if you are doing that, because only a small percentage of people following the herd succeed. Note that the richest people in our country like Bill Gates, Ross Perot, Ted Turner, or Donald Trump became rich by not following the herd. That is why it is critical that you get information that is not known or readily accessible by your competition.

To know how much money you can predictably make, you need a few easy to understand formulas. Now, we were never a big fans of math, but when it came to calculating how much we make on a deal, we learned how to get very good with just a few equations. Before we can discuss some of the simple formulas we need to talk about something called the Time Value of Money.

The easiest definition of the Time Value of Money is an analogy of what a dollar today would be worth at some point in the future. Another way to look at the Time Value of Money is simply the money’s ability to earn a return for you (the investor) over a specific period of time.

We want to talk about the time value of money since it directly affects how much you will make on any of your investments. Let’s look at an example of what $1,000 would be worth if you invest the money and do nothing with the investment other than gain interest for the next 30 years. Keep in mind that each year the interest you earn also earns interest (this is called compounding). At the end of 30 years what is your initial $1,000 worth? At 8% you receive $10,935. At 10% interest you receive $19,837. At 15% you would get a whopping $87,540. As you can see by increasing your interest rate just a little bit makes your money grow by huge amounts.

“But, gee guys, I don’t want to wait 30 years, I want cash now. I could wait a couple of years, but certainly not 30 years.”

Well, what if by waiting just 10 years we could show you how to amass a fortune in excess of $1,000,000 (that’s 1 million dollars)? Would you wait? We would and we think you will too.

To further understand what we are talking about let’s go back to our student Steve. Whatever money Steve invests today, he expects to get some kind of return in the future. Steve invests his money today but pays less than the full value of the defaulted mortgage because Steve has to wait for the mortgage to pay off. The longer Steve expects to wait for the defaulted mortgage to pay off, the less Steve will pay for the defaulted paper.

But why must Steve pay less for the defaulted paper? Let’s look at it this way. Do you remember the story about the $10 and $20 bill? If we offered to give you a $10 bill or a $20 bill for free, you would obviously choose the $20 bill. If however,


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we offered you the same choice except that you had to wait 15 years to get the $20 bill you would probably take the $10 bill rather than wait 15 years for the $20 bill. Almost everyone would. The idea behind this example is that the $10 bill is worth more today than it is sometime in the future (the time value of money). It stands to reason then that the mortgage payments that you must collect on the mortgages that you buy in the future are worth less than face value. Add to that the fact that Jack (the homeowner) has stopped making the payments altogether, then you can see that we must discount the value of the note if Jill (the person receiving the payments or mortgagor) wants all the cash now, in today’s dollars. Since Jill needs cash she is willing to take less than what is owed so that she can get a lump sum that she can now invest somewhere else.

The discounts you receive are what will make you rich. So let’s see how we can make some money with this.

To make this kind of money requires some huge returns. Obtaining a large discount on a defaulted mortgage is what provides you this great rate of return on your or your investor’s money.

We were having a conversation with a few associates at a party and everyone was trying to “one-up” the other person (meaning they want their story to be better than the other persons story). The conversation eventually turned to money and what are some good areas in which to invest. Most people were talking about the stock market and how much money they lost. Others were talking about savings bonds or bank certificates of deposit (CD’s). Everyone was so excited about how much money they made on one deal but really sad when they talked about the three deals that cost them money. Overall, most of the people were in a negative financial position. They had all lost money. If they made money they were barely keeping up with the cost of inflation. We were standing off to the side drinking a coke and smiling. Amy leaned over and asked us what was so funny? We told her that we could not care less about what the stock market does or whether interest rates are up or down because we like to double our money every year regardless of what happens. Well, Amy got this funny look on her face that said, “yeah, right, sure you do”. She said, “OK I’ll bite. How do you double your money every year regardless of how the market does?” John said it’s pretty easy. All you really have to understand is the Rule of 72.

John asked Amy, “How much of a rate of return do you need in order to get so rich that you can’t stand yourself?” Amy started laughing and said “heck, I would be happy with 6% on my money”. John told Amy, and by now we had everyone listening in on the conversation, that to calculate how long it is going to take her to get rich she will essentially have to double her money many times to reach this goal. John asked Amy how long she thought it would take her to double $1,000 at her 6% interest per year. Not surprisingly, she said she did not know. John said, “Let me give you a very simple rule that you can use to calculate how long it takes to double your money. We use what is called “The Rule of 72”.


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The Rule Of 72 Is The Golden Rule

One of the easiest formulas that you should keep in your toolbox of moneymaking calculations is a formula called the Rule of 72. The Rule of 72 enables you to easily see how fast your money will double in value. By double, we mean make a 100% return on your money. Another way of saying this is how fast can we turn a $1,000 investment into $2,000. The nice part about what we are going to show you is that anyone can use this rule. Many people want a guarantee on how much money they can make. How much can you make? Truthfully, we don’t know how much you will make because we don’t know anything about you. Some of the people I’ve taught make less than $1,000 extra dollars per month. They choose to have it that way because they don’t want to put in more than an hour or two each month. They’re happy with an easy extra $5,000 to $12,000 per year.

Other people we’ve taught bring in a few extra thousand dollars per week. They

quit their “9 to 5” jobs in just a few months. We can’t say exactly how much you’ll make, but we do know one thing: This business has provided our families very comfortable lives.

Believe us, you can do the same thing we’ve done. There’s nothing special

about us or the other people to which we have taught this method. We’re not financial wizards by any means… and you don’t need to be one either.

After applying what you have learned in this course, you could easily pocket an extra $1,000, $5,000, even $10,000 each month. That translates to $50,000, $60,000, or even $100,000 per year!

Let’s see some possibilities of what you make from your efforts. There is a little known rule called the Rule of 72. It has been our experience that not many investors understand what it means. The ones we have found who understand it the best are people involved in real estate. They realize that compounding your money is the name of the game and real estate is the best way to accomplish it. Albert Einstein once commented that compound interest is one of the most powerful forces on earth. How does it work? It is simply earning interest on your interest, as well as your principle.

The Rule of 72 is a fast and easy way to calculate how long it takes an amount of money to double depending on your rate of interest. Let’s go back to Amy at the party: John asked Amy for a sheet of paper and someone else gave her a pen. This is what John drew on the paper:


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72

Rule of 72 =

Current Interest Rate

On Your Money

= Number of Years To Double Your Money

Here is how it works I said:

Divide the whole number of the interest rate or rate of return into 72. The result is how long it takes for that amount to double in value.

For example, if you wanted to find out how long it would take $1,000 to double if you could earn a 6% return you divide 72 by 6. This result is 12.

72

Rule of 72 =

6% Current Interest Rate

= 12 Years To Double Your Money

John explained to Amy and everyone else that this means it would take 12 years for the $1,000 to double at 6% per year. That’s a long time for our money to double in value John said. We prefer to have our money double in value every year. It is not unreasonable to make a double digit or even a triple digit return on your investments with defaulted mortgages. This comment opened up a whole can of worms where the first question was “what are defaulted mortgages”? John went through the basics of defaulted mortgages and finished with saying the key ingredient is investing in the right areas. Investing where everyone else invests is not going to help you achieve your goals. Amy was nodding her head now as John kept talking.

John explained that defaulted paper investors figure their rate of return before buying a note and will usually want at least a 30% return on their investment. We literally heard a few gasps from the crowd that was gathered listening to John. We could easily see the enthusiasm building in their facial expressions as they realized they could get out of the trap of working to make someone else rich. I heard one person say “boy I wish I was making 30% a year, I would actually be able to retire. I said 30% is not an unreasonable expectation. This type of return is common by investing in defaulted notes and mortgages.

Bill, who was standing in the back of the group said “John, this all sounds great and I want to make the same returns as other delinquent paper investors, but to be frank with you I was laid off from my job last year and I don’t have any money to invest. Is there anything I can do?” John said to Bill, the best part of what I am talking about is that you don’t even have to have any money to get started. Several people in the group raised their eyebrows in excitement. “How?” Bill said. “Bill, do


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you remember when I mentioned that defaulted paper investors like to make at least a 30% return on their paper investments?” “Yes”, he said. “Well what if you found a defaulted paper deal do you think the investor might be willing to buy it?” “Yeah, I suppose he would”, said Bill. “Do you think the investor might pay you a finder’s fee for finding the defaulted deal for him?” “Maybe”, said Bill, “but how much will he pay?” “Let me give you an example”, John said.

Let’s say Bill, you or Amy do a little research at the local courthouse and locate a $70,000 mortgage in default that is owned by a lady named Jill. Since you found the mortgage you contact Jill and find out that she is willing to sell the mortgage. You get some basic information about the mortgage such as the amount, interest rate, payment schedule, information on Jack, and information about the property such as type of house, number of beds and baths, debt on the property and approximate value of the home, etc. You then place an ad in the local newspaper for investors who want an 18% return or better on their money. You get a couple of calls and explain that you have a mortgage that is in default where the owner of the mortgage wants to sell the defaulted mortgage. You give the information about the mortgage and the property to the investor so the investor can give you a quote on how much he would pay for this non-paying mortgage. If you (Bill) knew the investor would offer $40,000 for the defaulted mortgage you now have a deal in hand. You call Jill up on the phone and say “Jill I went over the numbers with my partner (that’s your investor) and the best we can do is $35,000”. Once Jill accepts the $35,000 you (Bill) call the investor back up and you proceed to closing. At the closing table the investor will cut two checks. One to Jill for the $35,000 and one check to Bill for $5,000. The $5,000 is the difference between what Jill agreed to accept for the purchase of the mortgage ($35,000) and what Bill was offered by the investor ($40,000). The $5,000 is pure profit for you, Bill, without having to buy the mortgage or deal with the homeowner in any way. Bill, you walk away with five grand and move on to your next deal. Not bad for a few phone calls and a little research.

After John finished with the example everyone was very

quite. John asked what’s wrong? Amy said, “John, if I understand you correctly this means we will never have to

worry about having money to invest or even using any of our own money to buy defaulted mortgages. And with the kinds of returns available we will never have a lack of investors. These defaulted paper deals bring the investors to us not the other way around.”

“You got it!” John said.

“Okay, everyone let’s look at another example.” John pulled the paper back out and went over another example. “If I am making a 30% return on my investment per year, how long will it take for me to double my money? Take 72 and divide it by the rate of interest you will earn (30%).”


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72 / 30 = 2.4.

At 30% it would take just 29 months or 2.4 years for that money to double.

Think about what John just said. Instead of $2,000 at the end of 12 years like the person investing at 6%, your value over 12 years at 30% would make your money worth not $2,000 but $16,000 for the same 12 year time period! You make an additional $14,000 more than the person who invested at six percent. This is why knowledge is so important John said. Knowing other places to invest (other than where everyone else invests their money) your money yields you the greatest rewards.

As John saw the concerned looks on everyone face, he asked, “What’s wrong?” The common answer was that they never knew they could invest in defaulted paper to get such great yields. They were also upset their accountants and stockbrokers did not tell them about this investment vehicle. John said, “Don’t blame your accountants or stockbrokers; it’s not their fault. I bet if you asked them if they knew anything about defaulted mortgages they would not have a clue about what they were or what you could do with a defaulted mortgage.”

People who invest money in CD's today at 2%-3% will see their money double in just over twenty years. The problem with putting your money in the bank these days at 2% - 3% interest is that the interest the bank pays you does not even keep up with the cost of inflation. Historically, inflation has increased around 3.5% per year. Well if you are only making 3% at the bank at the end of a year you would be behind by .5%

(3.5% inflation rate – 3% savings rate). Not only that but at the end of the year you would have to pay taxes on the 3% you made from the bank. Unless you find another way to make more money, you will always lose if all you do is put your money in the bank.

Imagine investing your money or an investor’s money. The person investing $10,000 per year at 30% would have realized a gain of over $11,242,132 after twenty years. All thanks to the power of compounding. Compounding is truly a powerful weapon to have in your arsenal of financial tools.

Let’s say we want to invest $10,000 of our money in a $30,000 defaulted mortgage. How long will it take to double my money? Let’s go through it. Assume our rate of return is 30% since we only paid $10,000 for the defaulted mortgage. If we use our original formula of 72 divided by our rate of return of 30% we get 2.4 years.


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72

30% Interest Rate

= 2.4 Years To Double Your Money

You have tremendous leverage through real estate and it gives high rates of compounding if you structure the deals properly. Only on a few occasions have we purchased a note that gave us less than a 30% return for the money invested. On the other hand, one deal we did was over 1,000%! If you can find a better way to compound your money with as little risk as real estate notes, call me. Our bet is we won't have any calls.

John knew he had Amy’s and everyone else’s attention. “What would happen if you could double your money every year? Would you do it?” Some of the people immediately nodded their heads; others took a more cautious approach and said, “Maybe.”

OK. Then what rate of interest do you think you would need? What if we took 72 and divided it by 72, what would we get? The answer is 1. We would double our money each year if we could make 72%. Investing in a defaulted mortgage could easily earn you 72% on your money. What if you only bought one defaulted mortgage each year got paid off and then reinvested that money the next year. Essentially doubling your money every year for 15 years. How much would you have? Amy wasn’t sure and asked us to go through the math. John drew the chart below to illustrate what he was talking about. You start out at year zero with $1,000. You double your money so next year you have $2,000 to invest. You double your money again so that at the end of year two you have $4,000 to reinvest, then $8,000, then $16,000 and so on for 15 years. You would cross the $1,000,000 dollar threshold in just 10 years. At the end of 15 years you would have a whopping $33,000,000!


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Year Amount of Money

0 $1,000 1 $2,000 2 $4,000 3 $8,000 4 $16,000 5 $32,000 6 $64,000 7 $128,000 8 $256,000 9 $512,000

10 $1,024,000 11 $2,048,000 12 $4,096,000 13 $8,192,000 14 $16,384,000 15 $32,768,000

Amy scratched her head and said, “I can see making the $64,000 or even the $128,000 but what do I have to do to make the rest”. “Easy,” John said, “You can definitely make these returns on your money.” You need to be aware that as you make more and more money each year you have to buy more defaulted mortgages or the mortgages that you buy need to be in larger amounts. Additionally, you would need to make exactly 72% each year. Keep in mind that as you make more and more money you will be able to hire staff to handle most of the paperwork and research for you. You will be able to sit back and watch what you have created continue to grow every year. Does creating a company to do all of the work intimidate you? Don’t let it worry you. As you do more and more deals they become easier. You experience grows and so does your confidence. Over time, you can start small; you will find that having staff specialize in processing the defaulted paper deals that are brought to you and your company allows you to focus on the big picture. The big picture can be many things for different people. You may be thinking about buying another house or car. Possibly you are thinking about paying for your children’s college education. John recently did an evaluation of what it would cost to have his son and daughter go to a middle level college. The cost? $250,000 for room, board, and tuition for just four years. So for both of my kids he needs to come up with $500,000. That’s a lot of money. How does John pay for it? With defaulted paper! Can John have his kids, while in school, look for defaulted paper in their area where they are going to school? Sure. Will buying some of those defaulted paper deals help pay for their expense at the time they are in school. You bet! Bottom line is defaulted paper can give everyone the opportunity to do things they normally could not afford to do.


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Let’s get back to the party. Amy, said “Is this realistic for me to be able to do, I mean that’s a lot of money, I could retire”? “Yes”, John said. The numbers are large and they assume a few things. Such as making a consistent 72 percent each year and reinvesting all of your profits each year. What we are trying to point out is that all you need to do is one deal each year and you can make a tremendous amount of money. Defaulted paper affords you the ability to pick and choose your deals. There is so much delinquent paper available, and not many buyers, that you can choose only the best of the best deals for your investments.

Amy still had this puzzled look on her face. “Amy, what’s wrong?” John asked. “I am trying to think of where I can come up with some money to invest in defaulted paper”, she said. John asked her how much she had in her stock account. She said her stock account was down almost 50% and that if she pulled her money out she would incur penalties. John thought about what she said for a moment. A giant light bulb went off in his head and John asked Amy if she had an IRA. She said “yeah, why?” “How much money do you have in your IRA?” I asked. “About $6,000” she said. “Amy,” I said, “you’re in luck! You have all the money you need to get started right now.” You can use the money in your IRA to buy defaulted mortgages. Work on behalf of your IRA to get the mortgage either brought current or paid off. When the defaulted mortgage pays off you have all of the full value of the defaulted mortgage deposited into you IRA where you do not have to pay any taxes until you take the money out. Alternatively, if the mortgage is brought current, you can sell it to a mortgage broker that only purchases “good paper” and the proceeds remain tax-free until you withdraw the money from your account. You could take that $6,000 and turn it into $12,000 or even $18,000 in less than a year. Then you do it again doubling your money each year.

We saw this far away look in Amy’s eyes and asked her what she was thinking. “I’m thinking about all the money I can make and how I will be able to have enough money to retire and money left over to give to my kids”, she said. “Amy, you’re on the right track,” John said, “and everyone else here tonight at this party can do the same thing.”

Just then a remarkable thing happened. Barry, who was standing at the back of

the group said: “John, I don’t know if I have all of the time to find these defaulted mortgages. If I give you the money can you help me do some of these deals?” My friends, this was the start to a very beautiful relationship. We now had investors who would be willing to put up all of the money to buy the defaulted paper deals that we found. We would do the work, they would put up all of the money, and we would share the profits 50-50. We now had a way to buy as many defaulted paper deals as we wanted.


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Looking at the previous chart do you think it would be difficult to reinvest your profits after year 9? As you make more and more money it does get harder to reinvest all of the money. Investing at the larger level requires more effort and possibly larger deals. You could even buy defaulted mortgages on commercial property. This is where you can find large mortgages that you can purchase for pennies on the dollar.

What if you want to get started right now, but you don’t even have $1,000 to get started. What could you do? You could find other investors to flip your defaulted paper deals too or approach some friends or family about investing their IRA money. What else could you do? How about if I help you get started?

Let’s say you found two deals and flipped them to an investor to purchase. On each deal you made a solid fee of $5,000. Now you have the money ($5,000 x 2 deals = $10,000) to start buying deals for your own

portfolio. You have $10,000 in seed capital to get started on your road to financial success.

Let’s bring Steve back into the picture. Steve over the next year does a couple of deals on his own. He has saved up $40,000 (or can borrow the balance he needs). We have a student named Steve (this is you) who found out about the defaulted mortgage ($70,000 mortgage owned by Jill) and contacted Jill directly. Steve contacts Jill and offers her $40,000 for the note. Keep in mind that the normal range for buying defaulted mortgages is around 20 cents to 50 cents on the dollar. Jill accepts the offer and she now has a lump some of $40,000 that she can spend or invest any way she likes. Steve has a note that he must work to bring current and make it a paying note again or have the note pay off through sale of the property or through refinance of the defaulted mortgage.

It turns out that Steve, like the investor, really likes the Deed in Lieu of Foreclosure method. So Steve contacts Jack (the homeowner who is not making payments on the $70,000 mortgage) to see if there is a way to resolve the situation without having to foreclose on Jack. It turns out that Jack lost his job and has no immediate prospects for getting a new job. He has already used all of his savings to cover all of his other bills. Jack knows he is going to lose the house to foreclosure. Steve offers Jack a way out of foreclosure and the damage it will do to his credit report. Jack, in an effort to preserve his credit rating and any additional fees and expenses decides he just wants out of the house anyway he can. Jack (homeowner) signs a Deed In Lieu of Foreclosure to Steve (Steve bought the defaulted note from Jill for $40,000; a tremendous discount). A Deed In Lieu of Foreclosure is nothing more than Jack signing the Deed to his house over to Steve. By signing over the Deed Jack avoids foreclosure of the house. Another piece of

Year Amount of Money 0 $1,000 1 $2,000 2 $4,000 3 $8,000 4 $16,000 5 $32,000 6 $64,000 7 $128,000 8 $256,000 9 $512,000

10 $1,024,000 11 $2,048,000 12 $4,096,000 13 $8,192,000 14 $16,384,000 15 $32,768,000


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this puzzle is that the house has a fair market value (FMV) of $100,000. Steve accepts the Deed In Lieu of Foreclosure and now owns the house.

Steve can now sell the property at full value. If Jack’s house is worth $100,000 and there is a $70,000 first mortgage (this is the note that Steve bought from Jill for $40,000) there is $30,000 worth of equity in the property above the amount of the debt ($100,000 - $70,000 = $30,000 equity) on the property. But wait. Steve did not pay $70,000 for the defaulted note he only paid $40,000. So how much equity is really in the property?

$100,000 (Sale Price of House)

-$40,000 ($40,000 note purchase or Steve’s investment)

$60,000 (equals equity position).

On the surface it looked like the equity in the property was only $30,000 ($100,000 property value - $70,000 amount of the mortgage). In reality there is $60,000 in equity ($100,000 property value - $40,000 invested by Steve). Steve just increased the equity on the property to $60,000 ($100,000 - $40,000) since Steve only paid $40,000 for the defaulted mortgage.

When Steve sells the house (assuming he sells it at the full value of $100,000) the additional profit over the debt ($100,000 value - $70,000 mortgage) that Steve is owed is $30,000. So what are the benefits to Steve and what did Steve make total on this deal?

1. Steve did not have to go through the time and expense of foreclosure.

2. Steve paid $40,000 for the mortgage but received $100,000 as payoff on the mortgage when the property was sold. Remember Steve is able to keep all of the profit above the original $70,000 he was owed on the defaulted mortgage. His additional profit is $30,000.

3. Total profit to Steve is $30,000 ($100,000 value - $70,000 mortgage) plus $30,000 ($70,000 original mortgage amount - $40,000 what Steve paid for the defaulted mortgage) or $60,000 profit from an initial investment of only $40,000. Steve made over a 100% profit on this deal in a matter of months.

Is this a good deal for Steve? You bet. Now imagine doing one or two of these deals each year. If Steve borrowed the $40,000 from a friend or friend’s retirement account (see chapter on tax-free investing) Steve would need to pay the money back to his friend, plus interest. For example, if Steve borrows the money from Henry, Steve now has $40,000 with which to buy the defaulted mortgage from Jill. Steve worked out a deal with Henry so that Steve would pay Henry back 15% interest on


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his money. The catch? Steve would pay it back at the end of a year. This way Steve does not have any monthly out-of-pocket carrying costs on the money he borrowed from Henry. At the end of a year Steve would owe Henry $40,000 plus $6,000 in interest for a total of $46,000.

Now, let’s look at the profit after everything is paid off. Henry gets his $46,000 (principal plus interest). Steve received $100,000 when the property was sold. Subtracting out the payback to Henry ($100,000-$46,000) leaves Steve with a very nice profit of $54,000on a deal where he had no money out of his own pocket. Steve has an infinite rate of return on his investment since he used none of his own money. Steve essentially created money out of thin air by using his imagination, being creative and having the right knowledge.

Now Steve has the ability to take his $54,000 in profit and reinvest it into another deal or possibly several deals all at the same time. Each time he reinvests the money he is able to make it grow by using the simple concept of defaulted paper.

$10,000 Turns Into $350,000,000

Let’s look at another example. You purchase a $30,000 defaulted note, gaining interest at 10% for 30 years, for $10,000 or almost 30% of its face value. After you work with the homeowner to bring the note current you convince the homeowner to refinance the note. What is the incentive? How about you give the homeowner a $5,000 discount just to encourage them to refinance their house. Why $5,000? Why not? If you can get the homeowner to refinance the defaulted mortgage you now get all of that cash in your pocket that you can spend any way you want.

What would happen if you simply reinvested the payoff of the notes each year into more notes and did this process for 10 years?

Look at the table below. By taking the $10,000 you made by referring two deals to our office (or by doing them yourself or with a money partner) you now have the startup capital to get started. Starting with just $10,000 you buy a defaulted mortgage worth $30,000. You contact the homeowner and give them an incentive to refinance over the next year and save $5,000 in principal. The reduced payoff to you is $25,000. So on the next deal or deals you have $25,000 to invest instead of the $10,000. What size note can you purchase now? Assuming you don’t spend any of the money and reinvest all of the $25,000 you are able to invest in more defaulted mortgages at essentially the same discounts. This means your next note purchase is for approximately $90,000 worth of defaulted paper. You then repeat the process each year for a period of 10 years. At the end of the 10 years how much money do you have? A whole bunch!


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Year Invested Amount

Fair Market Value (FMV)

1 $10,000 $30,000 Reduced Payoff $25,000 2 $25,000 $75,000 Reduced Payoff $70,000 3 $70,000 $210,000 Reduced Payoff $200,000 4 $2200,000 $660,000 Reduced Payoff $600,000 5 $600,000 $1,800,000 Reduced Payoff $1,700,000 6 $1,700,000 $5,100,000 Reduced Payoff $4,500,000 7 $4,500,000 $13,500,000 Reduced Payoff $12,500,000 8 $12,000,000 $37,500,000 Reduced Payoff $35,000,000 9 $35,000,000 $105,000,000 Reduced Payoff $100,000,000 10 $100,000,000 $300,000,000


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By repeating this process just once a year and reinvesting your money each year (without spending any of it, of course) your total profit at the end of 10 years can be a whopping $300,000,000. That’s right 300 million dollars in 10 years. We think that justifies a little reinvestment of your profits. We don’t know about you but we call 300 million pretty stinking rich.

My friends, if the above chart does not get your heart pumping a hundred gallons a minute or make you think of what you could do with all that cash (go ahead and think about it for a minute-does a boat in the Caribbean sound good? What about a Swiss chalet? How about several vacation homes)? Then we need to get you to the doctor for an immediate checkup. Just kidding of course. We are sure this excites you as much as it does us. Don’t let the numbers scare you. Will you make the kinds of money outlined in the above chart? Possibly. But, remember just 1/10th of what is outlined above is still $30,000,000. Would you be happy with even $100,000? As you can see it does not take all that much effort to make a whole lot of money with defaulted paper.

People often come up to us at our workshops and ask several of the same questions:

1. Doesn’t it take money to make money?

2. Isn’t investing risky?

3. How can you get such high returns without risk?

4. What if the stock market crashes?

5. What if we have a recession?

You can learn to take control of your financial future if you have the desire. If someone says, “you can’t do that,” it’s not because you can’t do it is because they cannot do it themselves. Remember; always consider your source of advice.

In today’s society, people want the greatest return with as little risk as possible. Some of the wealthiest people in the world got rich because they followed a simple financial plan. Saying to family members and to other investors that you invest in defaulted paper is not as glamorous as saying you own shares in Yahoo, Microsoft, General Motors or another big company. Knowing what kind of returns you are going to make over a specified time period is better than betting on the next IPO (Initial Public Offering.) You might be asking yourself, “If this is such a great investment how come everyone is not doing it?” While this is an excellent question consider that most people reading this course did not know about this investment vehicle before they bought this course.


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Some of the people who read this course would be interested in the ideas presented but do not have the financial resources available to get started. Simply by finding defaulted mortgages that investors are willing to purchase through our website can provide you with the start-up capital you need to get going.

The best methods of investing may not be the most glamorous

- Anonymous


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WHERE DO I START?

Again, we are making the assumption that you have studied the techniques and

terminology set forth in the Basic Course and we will summarize them below.

How Much “Time To Invest”

This section is designed to provide you with an outline on a suggested way to invest your time so that you are able to achieve the maximum results and profits for your efforts. We discussed in the Basic Course the referral sources identified in this task list and provided a separate volume of materials with samples of marketing letters, sample flyers and postcards. You can use these or develop you own forms.

Task Hours 1. Meet with Attorney to explain program

1

2. One financial planner per week

1

3. Lunch with one accountant

1

4. Mailings to mortgage holders

2

5. Follow-up phone calls to defaulted mortgage holders

2

6. Land records research/Multiple Listing Service

1-2

7. Review of old sales listings (Redi/Lusk Directory) and Foreclosure Listings/Records

2-3

Total Time 10-12 Total time invested is only 10-12 hours per week. Most of the work can be done

in the evenings or on weekends.


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Summary - Locating Mortgages Options

18 Referral Sources For Finding Mortgages to Buy

1. Land Records 2. Classified Ads 3. Lawyers 4. Realtors 5. Mailing Lists 6. Accountants/Financial Planners 7. Banks And Mortgage Companies 8. Foreclosure Ads 9. Foreclosure Listing Services 10. Finance Companies 11. Redi/Lusk Directories 12. Money Fast Ads 13. Internet Searching 14. Developers 15. FSBO’s 16. Probate Records 17. Bankruptcy Records 18. Your own personal contacts.


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COURTHOUSE RESEARCH….

This program assumes you have our basic course on marketing for mortgages, which includes basic information about using the courthouse. Our other course, “Courthouse Strategies-uncover hidden profits at your local courthouse” covers in-depth techniques for using the courthouse.

AFTER THE COURTHOUSE….

Now that you are successful in locating several leads on potential mortgages to buy, we recommend sending a letter or postcard to the mortgage owner describing our services and following up with a phone call. Please refer to the Marketing & Forms Kit contained in the Basic Course.


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SAMPLE TELEPHONE SCRIPT FOR

DEFAULTED MORTGAGE OWNERS You (Researcher): Hi, My name is Steve Adams and I am trying to reach Jill Jones please. Jill (Mortgage Owner): This is Jill You (Researcher): Hi Jill, my name is Steve Adams of

MegaCapital. I sent you a letter last week regarding a mortgage that you own that may be in default on a property located at 123 Main Street

Jill (Mortgage Owner): Do you remember getting my letter?

Jill (Mortgage Owner): Yes, I got it. You (Researcher): Jill, I am calling today to see if you might be interested in selling

your non-paying mortgage for CASH TODAY? Jill (Mortgage Owner): How did you know it was not paying? You (Researcher): I received your information from Paul Casey, an attorney, who

thought I might be able to help since you are no longer receiving any monthly payments.

Jill (Mortgage Owner): What can you do? You (Researcher): The way this works is I will prepare an offer in cash on the

defaulted mortgage based on the terms of the mortgage and the likelihood of being able to collect any money in the future. How much is the monthly payment that you are supposed to be receiving?

Jill (Mortgage Owner): We were supposed to get $418.36 a month. You (Researcher): When was the mortgage created? Jill (Mortgage Owner): April 1998


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You (Researcher): Did you start receiving your monthly payments starting the next month?

Jill (Mortgage Owner): Yes You (Researcher): Is this the first time the homeowner has ever been late on his

monthly payments? Jill (Mortgage Owner): No, he has been late twice before. You (Researcher): How many back payments are owed by the homeowner right

now? Jill (Mortgage Owner): 7 You (Researcher): Do you know haw many payments would be left on the mortgage

if he had not been late? Jill (Mortgage Owner): 60 months including the 7 that are late. You (Researcher): For how many years was the mortgage created? Jill (Mortgage Owner): 10 years You (Researcher): What was the interest rate that was supposed to be paid on the

mortgage? Jill (Mortgage Owner): 8.5% You (Researcher): How much was the mortgage for? Jill (Mortgage Owner): $54,500 You (Researcher): How much did you sell your house for? Jill (Mortgage Owner): $74,000 You (Researcher): Is this mortgage a first mortgage? Jill (Mortgage Owner): Yes You (Researcher): Do you remember how much the homeowner put down when he

bought your house? Jill (Mortgage Owner): $15,000


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You (Researcher): Do you know why the homeowner has not been able to pay? Jill (Mortgage Owner): He lost his job. You (Researcher): Is there anything else I should know about this note before we

draw up a cash offer for you? Jill (Mortgage Owner): No, I don’t think so. You (Researcher): Ok. Let me tell you what the next step is. I will contact my

business partner who calculates our offers. By the way how much would you like to receive for this defaulted mortgage if we could get the cash to you within the next 30 – 45 days?

Jill (Mortgage Owner): I liked to get as much as I can, but I guess I would go for

$30,000. You (Researcher): Ok. I will get started on the offer right away for you. When is the

best time for me to call you back? Would tomorrow at 10:00 am work or would tomorrow at 7:00 pm be better.

Jill (Mortgage Owner): I work all day so tomorrow at 7:00 would work best. You (Researcher): Ok. I will call you back tomorrow at 7:00. Thank you for your

time. Jill (Mortgage Owner): Your welcome. You (Researcher): Good-by Jill (Mortgage Owner): Good-by


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PROCESS FOR FINDING

DEFAULTED PAPER DEALS

1. Solicit paper 2. Calculate FMV and ITV 3. Evaluate collateral 4. Make offer 5. Run Title 6. Investor 7. Close the note 8. Foreclose or not 9. Hold paper in trust 10. Foreclose 11. Capture yield 12. Reinvest 13. Repeat

See Chart on Next Page.


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Solicit for Paper

$ $$

Calculate FMV & ITVMeet Your Guidlines

$

$

Title Clear?

Contact Investor

Closing/Purchase

Foreclose on Note?

$

Contact Attorney & Foreclose

Bring Note Current

No

Yes

Pay InvestorHis Share

Yes

No

YesNo

Good

Not Good

Yes

No

RepeatProcess

StartHERE

Yes

No

Property MeetsYour Requirements

OfferAccepted

Get Your Yield


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WHAT TO BUY

So far we talked about 1st mortgages and how you could buy them. What about 2nd mortgages? Does this mean you can buy defaulted mortgages that are in 2nd position? The answer is yes. Just be careful to make sure the total debt on the property including all late fees does not exceed my personal preference of 70% Loan To Value. The Loan to Value Ratio (LTV) is the amount of the loan divided by the fair market value of the property. For example if the total of the 1st and 2nd mortgages are $70,000 and the fair market value is $100,000. The LTV is 70%. You must take into account any overdue payments. Remember each late payment reduces the equity available in the property to pay off your defaulted mortgage.

If you plan on finding deals that you can give to us to buy here is what we want

you to look for: • Look for properties where the LTV does not exceed 60% - 70% • Stay away from 2nd mortgages on the first few deals. You can add 2nd’s

later after you get more experience. • Get the basics on the property and defaulted mortgage to include amount

of the note, interest rate, payment schedule (how long), information on Jack (the homeowner), and information about the property such as type of house, number of beds and baths, debt on the property and approximate value of the home, and the LTV (loan to value).

We will give you a purchase quote on the mortgage. You contact Jill and offer

her less than what we offered you. We had a student (Janice) who was really exited about a mortgage she was submitting for us to purchase. All the paperwork was in order and we gave her a quote of $40,000 on an $80,000 defaulted first mortgage. She was very excited and contacted the note holder right away and offered her $45,000. The Seller (note holder) accepted the offer. Janice called us back up and said, “it worked, and they agreed to accept $45,000”. We said, “that’s great Janice, but we only offered you $40,000 for the defaulted mortgage.” There was dead silence on the other end of the phone line for a couple of seconds. Finally, she said “oh my gosh. I just offered her $45,000 and you are only going to pay $40,000 what do I do”? We said, “Well we guess you will have to come up with the extra $5,000 out of your own pocket.” Dead silence on the phone until Janice finally says “but I don’t have $5,000, I was hoping to make $5,000 on this deal with you”. We could tell she was starting to get upset so we said, “Janice, don’t worry. Mistakes happen. Let me tell you what to do”. We told her to contact the seller and tell the seller you made a mistake. Instead of $45,000 you can only offer the seller $38,000.

Janice was reluctant, but agreed to call the seller. A couple of days later we got

a call from Janice. She said, “I got them to accept $38,000”. We said, “That’s great Janice, how did you do it. She said, “It was easy. I just called up the seller and said


34

that my financial partner made a mistake and that all we could offer the seller was $38,000 and she took the deal”. We started laughing and told Janice that was a great idea of using us as the bad guy who made the mistake so that Janice still looks like the good guy (person) when she talks to the seller. This is a clear case of turning lemons into lemonade or as John D. Rockefeller liked to say “I always tried to turn every disaster into an opportunity.” W say Janice created a $2,000 opportunity.

NOTE One of the points we want you to get out of this story is that if you make a mistake on your offer to the seller, don’t panic. You can go back and fix the deal. Just tell them that your financial partner (that’s you) made a mistake and you can only offer the new amount. Make sure to apologize and try to come to a new agreement. The worst thing that can happen is you have to walk away from the deal.

You might be asking yourself “what if the seller won’t take the revised offer”?

Well, let’s think this through. You understand that the seller is not going to be happy about the mistake, but do you think the seller will walk away from the deal? The answer is no, the seller will not walk away from the deal. If the seller were to walk away what would the seller have? The same thing she had before; a worthless document that is not paying her monthly like it is supposed to. So how much does Janice make on this deal? Janice was hoping for $5,000, but she made a mistake and offered too much. Janice had to go back to the seller and offer less so she decided to give up a little bit of her commission in order to make sure the deal would go through. We bought the defaulted mortgage for $40,000. The seller received $38,000 and Janice got the difference, $2,000, as her fee. This was still a great deal for Janice and she learned a lot and still made $2,000. Not bad.

NOTE

If you find a deal that you are not able to negotiate for purchase, an investor may want to purchase the deal. All you need to do is give them the information though our website and they will contact the note seller. If the investor is able to structure a deal they will pay you a fee.

The moral of this story is to make sure you have your numbers correct before

you talk to a note seller. Write everything down on a piece of paper before you make any calls. This helps you keep your numbers straight. Follow the process and it will work for you. I want to you realize that defaulted paper is like liquid gold. No matter how you look at it, you still make money. This is why I love this business. If the note is brought current, you win. If you get a Deed In Lieu of Foreclosure, you win. If you foreclose, you win.


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WHERE YOU COME IN

You Buy The Note

Let’s suppose that Jill has a house worth $100,000 and has the house listed for sale through a local real estate agent. It turns out that Jill owns her house free and clear (no debt on the property) since she has lived in the house for many years. Jill is looking to retire and is very nervous about putting all of the sale proceeds from the house into the stock market. Jill would prefer to have a nice steady return on her cash profit from the sale.

Jill receives a call one day from a man named Jack who is interested in the house. Jack it turns out is self-employed but makes a very good income. The problem is that he does not fit the typical mold of what banks want to see when they consider lending money. In essence, Jack is going to have a tough time getting a loan, even though he could make the mortgage payments without any problems. Jack now asks Jill if she will act as a bank and take back a mortgage on the house. Jack will make his regular monthly payments to Jill and Jill will now receive a monthly

check from Jack. To make it even more tempting for Jill, Jack has offered to put up $30,000 as a down payment on the property. Jill and Jack come to an agreement where Jill will carry back a note for $70,000. This is the difference between the $100,000 sale price and the $30,000 down payment made by Jack. Why would Jill even consider doing this?

1. She defers paying any taxes on the profit she makes from the sale of the

house; 2. She gets better than average rates of return on her money; 3. She is nervous about the stock market; 4. CD’s are only paying 2% - 4%;


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5. Jack is offering to pay her 10% interest on the loan; 6. She also get the house she lived in as security for the loan to Jack

Everything is going along great for a couple of years. Jill is getting her regular

monthly payment on the note and everyone is happy. One day Jack gets hurt on the job. Since he is self-employed he needs to work to make money and he can’t do that because he is hurt. So Jack stops paying the note on the property. Jill calls Jack trying to get him to start making payments again. Six months go buy without any payments. Jill is running out of savings and needs a way out.

What will she do now? That’s Where You Come In

Could Jill sell her note to someone else who will try and get Jack to pay and then receive monthly payments for the next 30 years?

YES! You will buy the note from Jill for a lump sum of cash, but… you don’t pay full

price. You buy the note at a discount and here is why.

Since Jill needs cash she is willing to take less than what is owed so that she can get a lump sum that she can now invest somewhere else.

We have a student named Steve (this is you) who found out about the default and contacted Jill directly. How did Steve find Jill? There are a number of ways to find owners of defaulted paper. Let me give you two great ways to find owners in distress. One way is to advertise for note owners who are in distress because the owner of the property is no longer making their monthly payments. Another method is to follow the foreclosure listings where the creditor (note holder) is an individual that is foreclosing (additional methods are covered in the section on “Summary – Locating Mortgages”). They are in distress because the note holder is not receiving any payments and in most cases has no idea where they should turn to resolve the problem. We like to run ads in local newspapers. These ads are simple and easy to read. We like to place the ad in the money to lend section of the classifieds. The ad can go like this:

“Not Receiving Payments On A Mortgage? Top Dollar Paid For Non-Paying Notes And Mortgages. Call John At..”

See Marketing and Forms Kit in the Basic Course for more samples.


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Another technique for finding defaulted mortgages is to look for people who took

back a mortgage when they sold their house. An easy way to find these people is to go to the land records office at your courthouse. You are entitled to look at all of the information in the courthouse for free. If you are not sure how to find what you are looking for, simply ask the court clerk to help you. We have found the people at the courthouse to be very helpful. Try to ask for help when they are obviously not swamped with lots of other people asking questions. Remember, there is a phrase that says, “You catch more bees with honey.” So be nice, polite and professional and you will get what you need. Simply look for mortgages where the owner of the mortgage is an individual. Write down their address and send them a letter offering them cash for their mortgage. Be sure to mention in your letter that you also buy delinquent or defaulted paper where the note holder is not receiving their regular monthly payment.

You can say this by:

• Are you having problems receiving payments on your mortgage? • Is your payer slow? • Is he behind? • Does it look like he will get behind in his payments? • We can help

These phrases are key to getting the note holder to call you and sell the

mortgage. I have found that there is always a percentage of people who have notes that are in default.

Let’s jut say that for example 90% of all loans are done by banks. That leaves 10%. It seems to me that there are always more and more bankruptcies and foreclosures happening around the country. This 10% represents a huge number of paper deals. There are always a percentage of deals that fall into the defaulted category. Most investors do not want to deal with defaulted paper even if they knew how, which most investors do not. It means to you that you have no competition. You have more deals than you can possibly handle. Think about doing this in your town or multiple cites by running ads. The upside is limited only by your efforts.

Remember, most people have no idea that they could even sell their mortgage much less sell a mortgage where someone is not making their payments.

So let’s get back to our example. Jill is afraid to foreclose on the note because of

several possible reasons: 1. Does not want to foreclose; 2. Does not know how to do it; 3. Afraid it costs to much; 4. Does not have the money to foreclose; 5. Just wants out


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Steve contacts Jill and offers her $40,000 for the note. Keep in mind that the

normal range for buying defaulted mortgages is around 20 cents to 50 cents on the dollar. You will take over everything. She no longer has to deal with Jack or worry whether or not she will get her much needed monthly payments. She does not have to worry about how to come up with the money to foreclose if it is required. She does not have to worry about working with lawyers or understanding the legal system. She does not have to wait 30 years to get back all of her money.

Jill now has a lump some of $40,000 that she can spend or invest any way she likes. You have a note that you must work to bring current and make it a paying note again.

But what happens if Steve does not have the cash to buy the mortgage. Easy. You can bring the note to our website at www.notesforsale.com. An investor will buy the note and pay you a finder’s fee. Let us show you how this works.

Assume we have the exact same scenario as above. You find the note, contact Jill and find out that she is willing to sell the mortgage. You get some basic information about the mortgage such as the amount, interest rate, payment schedule, information on Jack, and information about the property such as type of house, number of beds and baths, etc. Steve then contacts our office or an investor through our website and gives us the information. Steve asks for a quote on what we would be willing to pay for this non-paying mortgage. If Steve (you the student) knew we would offer $40,000 for the note he now has a deal in hand. Steve calls Jill up on the phone and says “Jill I went over the numbers with my partner and the best we can do is $35,000”. Once Jill accepts the $35,000 Steve calls DWA back up and we proceed to closing. At the closing table we will cut two checks. One to Jill for the $35,000 and one check to Steve for $5,000. The $5,000 is pure profit for Steve without having to buy the mortgage or deal with Jack in any way. Steve walks away with five grand and goes on to the next deal. Imagine doing just two of these deals a month. That makes an extra $10,000 in your bank account for doing some simple research or just simply running an ad. Wow! Now, you might be asking yourself why in the heck would Jill sell here mortgage at such a huge discount. The answer lies in the marketplaces perceptions of defaulted paper. The beginning investors as well as some sophisticated investors believe that defaulted paper is nothing but a basket full of problems without any real upside potential. We know otherwise and so will you by the time you finish this course.

You might also ask yourself why would an investor or we buy this defaulted

paper. You make money right away when we purchase the mortgage. We make money as we rehabilitate the paper.


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Fortunately for you and us this works to our advantage for many reasons as outlined below.

Specifically the marketplace considers defaulted paper like the following: 1. Nothing but problems; 2. Costs, time and hassle of foreclosure; 3. Potentially low loan-to-value ratios; 4. Property in need of lots of repair and deferred maintenance; 5. Hassle of keeping up with all of the paperwork.

The above list is an accurate list of what could be involved with investing in

defaulted paper. Since defaulted paper is viewed as a hassle there is not much of a market where investors are willing to purchase the paper. Jill does not have anyone else to sell her mortgage to. She is not getting any payments and she needs cash now. To foreclose, even if she knew how, could cost her thousands of dollars. At least that is the answer the attorneys might tell her.

While this is a typical deal where you could bring the defaulted paper to us, we are not the only company in town that will buy this paper. There are other individuals or companies and sell the mortgage and get a fee.


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FLIPPING A MORTGAGE TO INVESTORS

The note brokering business always creates a win-win-win situation for everyone involved. Your client will be happy because now they will have a lump sum of money instead of waiting years to collect their money. We are happy because our investment will offer us a favorable return, and most importantly you will be happy because you will make a great fee on each and every transaction.

Review: What does a Note Broker do?

A note broker locates individuals who receive payments from mortgages where the payer (homeowner) is late or several months behind on their monthly payment. You (the note broker), using our money, offers a lump sum of cash to your client for the “possibility” of receiving future payments. You are paid the difference between what we offer for the defaulted mortgage and what you offer the note seller. You are the middleman putting the deal together.

Is it easy to make money-brokering (flipping) notes to Investors?

Flipping your defaulted mortgage deal to investors is a very simple and proven process. Lets go back to our original example with Jack and Jill. Jill would like to cash out the mortgage note she is holding on a home she sold, but she is no longer receiving any payments on the mortgage. She has called around and no one wants to buy her mortgage. When Jill calls you, all you do is ask her the questions on the easy to read Mortgage Qualification Sheet that comes with the course, and then tell her you will get back to her in a few hours with a quote. You then call, fax or email this information to us and we will tell you how much we are willing to pay for this note. You subtract your commission from our price and then quote Jill the new price.


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Let's illustrate this example:

Property type: Single Family Residence Original sales price: $100,000 Down payment: $30,000 Original note balance: $70,000 Interest rate: 10% Months financed: 240 Monthly payment: $675.52 Number of payments remaining: 228 Current balance: $68,841.68

Months behind: 4

Total past due: 4 x 675.52 = 2702.08

In this example, we would pay you $34,420.84 for this note. Lets say you would like to make $4,000 on this deal; you would then quote Jill a price of $30,420.84. When she accepts, we will help you obtain the necessary paperwork or you can then step aside and we will do all the necessary work to close the transaction. This usually takes 2 to 3 weeks.

Our price $34,420.84 Your price to Jill $30,420.84 You make $ 4,000

For additional requirements and forms see the Purchase Guidelines in Appendix A of the Basic Course. Purchase requirements are subject to change without notice.


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QUOTE CHECKLIST

1 Fill in the mortgage qualification worksheet; 2 Fax qualification worksheet to DWA; 3 Obtain a quote; 4 Give client a quote; 5 Contact Investors to complete the closing; 6 You’re done!

All of these steps are outlined on our website at http://www.notesforsale.com


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YOU BUY THE NOTE You now have the knowledge necessary to profit in an area that others know

nothing about. Since other investors don’t know anything about defaulted mortgages they assume that they are worthless. You notice we used the word assume. Please pardon my language here but when someone assumes something it generally makes an “ass” out of “u” and “me” (ass-u-me). This assumption and ignorance on the part of other investors gives you and us a wide-open playing field where we can take the best deals and make the most profit without having to compete with anyone else.

Let’s talk about some other issues when you buy a defaulted mortgage.

Title Company When you buy the note here is what you do. You contact a title company to

handle all of the paperwork for you. Don’t try to save a little money and do this yourself. You are only asking for trouble if you make a mistake. This is what I call:

“Jumping over dollars to save a few pennies.”

Investigate your selected title company to insure that they have a good rating by

Demotech, Inc. a company that performs financial stability ratings analysis of nationwide title insurance companies. Ratings are found on their website at www.demotech.com. Let the title company verify that the title to the property is correct and that the mortgage is valid.

You now have a note that is secured by real estate. You have a built in equity cushion (the difference between what is owed on the property versus what the property is worth) because you bought the mortgage at a large discount. Keep in mind that the note (or mortgage or deed of trust) that you bought is a defaulted note, meaning it is not receiving any payments. Once you have the note you can do several things.

Fixing The Note (Options): 1. Foreclosure 2. Reinstate The Mortgage 3. Refinance The House 4. Forbearance Agreement 5. Deed In Lieu Of Foreclosure 6. Sell The Property

http://www.demotech.com/


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Which method is the best choice? Most people would think foreclosure but is it the best solution? Probably not.

Let’s take a look at the problem.

In the event that the homeowner for any reason was unable to pay back the money, he or she (after missing a payment or two) would be notified by warning letters or past-due notices. This is only a past-due notice and not a notice that foreclosure is in progress. The content of the letter would vary from one lender to the next but they are all designed to sound as if the homeowner is on the verge of losing their home if payment is not sent immediately. The homeowner is instructed to send in their full delinquency (past due amount) plus a late fee, which usually amounts to an additional four to five percent of the monthly payment. If they do not send in their payment the lender has the right to seize the house and sell it at auction to recover its money. Most mortgage contracts allow foreclosure to begin when a default exists even when the payment is as little as two weeks late. Lenders generally do not initiate the foreclosure process so early in the default. They want to give the homeowner the benefit of the doubt so that the homeowner has the chance to bring their payments current.

Mindset Of The Homeowner Let us set the stage for what we are going to talk about with foreclosures. To do that, we need to understand the mindset of the homeowner. What are they thinking, what are they feeling and how they react to the stress of foreclosure. When a person is in foreclosure they are under a lot of stress and possibly very scared. They are not sure what they should do to handle the problem. When someone stops paying on their mortgage they have already stopped paying on all of their other debts. These other debts include, credit cards and personal loans. The mortgage payment is always the last thing to stop being paid. Some people when faced with foreclosure try to look at every possible scenario and by doing so they are faced with a situation called “paralysis by analysis”. What this means is that that homeowner gets so caught up in looking at all of the details they never end up doing anything at all. Next thing the homeowner knows is that the house has been sold to an investor and they have to move. Other people in foreclosure will get confused because they do not understand the legal process. This confusion actually causes some of them not to do anything,


45

simply because they do not understand the process. The homeowner actually freezes and does nothing. This is a terrible waste. The homeowner is controlled by fear and loses their house when there was a chance the house and their credit rating could have been saved. How You Can Help

You have the unique opportunity to help the homeowner avoid foreclosure and solve their problem. In the process you make a substantial return on your investment. Depending on how you structure your deals you can easily double your money every year or less.

You might ask yourself why do people get into this situation in the first place. For some people life just gets in the way. Sometimes bad things happen to good people through no fault of their own. For others it is a medical issue. Others lose their job and remain unemployed for a long period of time. Since they are unemployed they have no income and quickly burn through all of their savings.

History has shown that the most common reason for foreclosure is divorce. When a couple gets divorced they are both still obligated to pay the mortgage but neither wants to be responsible. Both parties start to dig in their heels expecting (even demanding) that the other party pay the bills. Well neither party pays and the mortgage goes into default. When the mortgage is not paid the creditor will eventually foreclose. In this scenario both the husband and the wife lose not only their house, but also any equity that may have been built up over the time they owned the property.

Let’s go back to our original home seller (Jill) and our original homebuyer (Jack). Jill has a house that is worth $100,000. Jack has $30,000 that he can put down right now to buy the house from Jill. Jack asks Jill if she will act as the bank for Jack. What this means is that Jill will be using the equity in her house as a loan to Jack.

($100,000 - $30,000 = $70,000 equity)

Jack will make a regular monthly payment just like he would do to a bank if he got a typical loan from the bank. Only he makes his payment directly to Jill, instead of a bank. Jack puts $30,000 down and buys the house. Jack now has a $70,000 first mortgage (first loan) on the house at 10% amortized over 30 years. His monthly mortgage payment is $614.30. A first loan is what most people think of when someone says mortgage. Jill likes this idea because she is able to get her monthly


46

payment, which is the most important thing to her, and she avoids having to pay taxes on the entire sale amount of her house. If Jack went to the bank and borrowed the money to buy Jill’s house he would be required to make his monthly mortgage payment directly to the bank. But lets go back to dealing with Jill and Jack.

Jack’s life is going along great until one day Jack gets laid off from his job. He is now out of work and must rely on his savings to cover all of his expenses including paying the mortgage on the house.

If Jack does not pay as he agreed, Jill could eventually foreclose on the house as a way to get back the money the Jill loaned to Jack (by way of the mortgage she owns). This goes back to my first question: “is foreclosure the best option?”

Before Jill forecloses she should contact Jack to try to get him to pay. Unlike with banks (which typically have no human involvement) Jill could work one-on-one with Jack to help him get back on his feet and start making payments again. Jill, not being a real bank, does not really want to foreclose. She would however like most of her money back from the mortgage. We have found it is always easier to deal with an individual to get the very best discount when buying a defaulted mortgage. An individual has a greater incentive to work with us to get some money from the mortgage.

Remember, most people have no idea that they could even sell their mortgage much less sell a mortgage where someone is not making their payments. Jill, in most cases, assumes her mortgage is worthless or at the very least not worth what is actually owed on the mortgage.

So let’s get back to our example. Jill is afraid to foreclose on the note

(mortgage) because of several possible reasons:

1. Does not want to foreclose; 2. Does not know how to do it; 3. Afraid it costs to much; 4. Does not have the money to foreclose; 5. Just wants out.


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STEVE (YOU) HAS THE CASH

TO BUY THE NOTE

So, now we have an affiliate Steve (that’s you) who contacts Jill and offers her

$40,000 for the note. Keep in mind that the normal range for buying defaulted mortgages is around 20 cents to 50 cents on the dollar. Let’s look at the benefits:

1. You will take over everything. 2. She no longer has to deal with Jack or worry whether or not she will get

her much needed monthly payments. 3. She does not have to worry about how to come up with the money to

foreclose if it is required. 4. She does not have to worry about working with lawyers or understanding

the legal system. 5. She does not have to wait 30 years to get back all of her money.


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HOW DOES STEVE FORMULATE AN OFFER? It is important for you to have a good understanding of how to establish the offer amount. In order to formulate an offer, you take the information gather from the mortgage seller (Jill) such as the interest rate; number of payment periods and the monthly payment amount and determine the present value of the mortgage using a financial calculator. You next determine an appropriate rate of return on the mortgage and the discount amount. Lets go through the calculations step by step:


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USING THE CALCULATOR

Essential Financial Calculations

The financial calculator is a very powerful and indispensable tool. You can use it to instantly figure out mortgage payments, interest rates and terms to help you make fast, prudent decisions when working with discount mortgages. Unfortunately, most people are afraid to use this crucial tool. In fact, at first glance, the financial calculator can appear intimidating and cause a reaction similar to "computer shock." But looks are often very deceiving, and the truth of the matter is that the calculator is not that diffi-cult to master once you learn the basics.

There are many different financial calculators on the

market. Our consultants have used and evaluated many of them. But in today's fast-changing technology, calculators with advanced features come out almost every day. You need to find a calculator to fit your personal needs. When choosing a calculator, consider the size, price, display and keys. You may want a small calculator to fit in your pocket or purse. You may want a calculator with a large display that will show all of the values on one screen, so you can see what you are calculating. You may want a calculator with a tape so you can keep a record of the calculation. No matter what kind of financial calculator you're using, they all have five basic keys in common. However, though these keys are common to every financial calculator, they may appear in a different order on different brands of calculators. On some calculators these keys will appear in a vertical line, while on others they are in a horizontal line like the one in the illustration below. These five essential financial keys are common to all financial calculators:

Here's another common secret to all financial calculators. Give it four known values and it will always solve for the fifth unknown value. As long as you know how to input the information, and assuming you enter the numbers correctly, the calculator will solve for the unknown for you. Introduction to the Financial Keys These essential keys will eventually become as familiar to you as those of a regular calculator. To simplify matters, we'll always associate each key with a function of a mortgage -

N i PV PMT FV


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later on we'll advance to more complex matters. For now, view these keys in relation to mortgages.

N stands for the total Number of payment periods. For instance, a normal 30-year mortgage will have 360 monthly payments (based on 12 payments per year for 30 years). However, if the payments on that loan were made annually, then there would only be a total of 30 payments (one for each year). i stands for the Interest per payment period. On most calculators you can automatically plug in interest per year. For example, 12% annual interest would be 1% per month if the interest payments were made on a monthly basis. If the payments were made annually, at the same rate, we would enter 12%. PV stands for the Present Value (the amount) of the mortgage. PMT is the Amount of each mortgage payment. FV is the future value of the mortgage after a specified period of time. If you know any four values (even if one is zero), you can easily find the fifth by simply “asking” the calculator. Refer to your calculator manual for keystrokes. The calculator will give you the answer in no time flat and without any arguments! Here are some of the basic functions that are fundamental to your success. How To Compute Your Mortgage Payment Example: What is the annual payment on a $50,000 mortgage at 10% for 20 years? Here's How It's Done: The first thing to do is to "chart" the problem. This makes it easy to put the numbers into the calculator and go on to solve other problems. Charting the Problem: Using the numbers in the example, your chart should look like this: N I PV PMT FV 20 10 50,000 (?) 0 Note: Financial calculators adhere to a strict "sign" convention. A "positive" PV will be balanced by "negative" payments.


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Now solve for the payment on the financial keys. Enter the knowns and solve for the PMT

Press these keys You See

Enter 20 (1 payment per year) into N 20.00

10 (interest per year) into i 10.00

50,000 into PV 50,000

0 into FV** 0

Compute the value by pressing PMT* 5872.98

*Sometimes proceeded by a "compute" or "shift" key depending on the calculator. ** If you have cleared the calculator this will already be zero, but it is safer to assume there might be left over "garbage" in any unused register.

This means that for a $50,000 mortgage with a 10% annual interest rate there will be 20 yearly payments of $5,872.98. Remember, the rule here is simplicity. If you just use the chart above you'll have no trouble figuring out where to put the numbers. Since most mortgages are monthly, let's figure the same problem with monthly pay-ments. To do this you must multiply the number of years by 12 (the number of months in a year) and then divide the interest rate by 12 (for the interest rate for each monthly period). Here's how it looks on the chart.

Press these You see

240*

N 240.00

10 /12= 0.83*

i 0.83

50000 PV 50000.00

PMT 482.51


52

Therefore, your monthly payments on a $50,000 mortgage with a 10% interest rate for 20 years will be $482.51. *Most calculators use an alternative key to multiply periods by 12. See your calculator manual for the specific keystrokes. Many calculators allow you to set the number of payments per year so you can set the i key to annual interest each time. Let's do some more practice problems. If you've been following the examples closely, all you really need is a bit more practice to achieve mastery. We're going to challenge you by not giving you any more keystrokes! Are you ready to meet the challenge? Let's find out! What Are the Payments On the Following Mortgages? Practice Problem # 1: $75,000, 10% interest for 10 years, payments are made annually. What's the yearly payment? N I PV PMT FV 10 10 75,000 (?) 0 Answer: $12,205.90 per year. Practice Problem #2: $75,000, 10% interest for 10 years, payments are made monthly. What's the monthly payment? N i PV PMT FV 120 10 75,000 (?) 0 Answer: $991.13 per month.

Note: N must be the total amount of payment periods (in this case 10 years times 12 months = 120). 1 is the interest rate per compounding

Press these You see

120*

N 120

10 /12= 0.83*

i 0.83

75000 PV 75000.00

PMT 981.33


53

period. If your calculator does not automatically provide the interest rate divided by the number of compounding periods per year, divide the annual rate by 12 before putting it into i. Refer to your owner's manual.

Practice Problem #3: $200,000, 7% interest for 25 years, payments are made monthly. What's the monthly payment? N I PV PMT FV 300 7 200,000 (?) 0 Answer: $1,413.56 per month. Practice Problem #4: $200,000, 2% interest for 30 years, payments are made monthly. What's the monthly payment? N i PV PMT FV 360 7 200,000 (?) 0 Answer: $1,330.60 per month. Practice Problem #5: $65,000, 81/2% interest for 20 years, payments are made monthly. What's the monthly payment? N i PV PMT FV 240 8.5 65,000 (?) 0 Answer: $564.09 per month.

Press these You see

240*

N 240

8.5 /12= .71*

i .071

65000 PV 65000.00

PMT 564.09


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CHAIN CALCULATIONS

It is possible to do chain calculations without clearing the financial keys.

Example: Let's look at a $200,000 mortgage for 20 years at 12% and at 13%. What are the monthly payments? Step 1: Enter the knowns and solve for the monthly payment at 12% interest. N i PV PMT FV 240 12 200,000 (?) 0

Answer: $2,202.17 per month (If you got $24,000 your "payments-per-year" is set to 1, or you are using a calculator that doesn't allow you to enter annual interest.) Step 2: Find the payment for the same mortgage at 13%. The calculator remembers all the numbers you put into it, so you only need to change the i. Enter 13% into i and you're ready to solve for the monthly payment. N i PV PMT FV 13 (?) Answer: $2,343.15 per month. Step 3: Let's change the term from 20 to 30 years. All you need to do is to change N to 30 years (360 payments) then solve for the payment again. Now you know that the monthly payment for a $200,000, 30-year mortgage, at 13% interest is $2,212.40. Remaining Balances and Balloons What happens if you decide to pay your loan off early? How do you figure out the balance due (it's particularly important to do this even if the bank gives you a payoff figure - especially if the bank gives you the payoff figure)? If you took back a mortgage to sell a house recently, and the borrower wants to pay you off, how do you figure it out? If you signed a balloon mortgage, you'll do the same thing to figure out your balloon amount. Here's how to do it (actually you may already know how to do it, but you probably don't know that you know!)

Press these You see

120*

N 120

12 /12= 0.83*

i 0.83

200000 PV 200000.00

PMT 2202.17


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Problem $100,000 mortgage, 15% interest, 20-year term. What is the remaining balance after five years (15 years remaining)? Step 1: Chart it out. N i PV PMT FV 240 15 100,000 (?) 0 Then, determine the payment to fully amortize this loan. Answer: $1,316.79 is the monthly payment for the above mortgage.

Step 2: Solve for the Present Value of the remaining payments; in other words, what the loan is that will be amortized by 180 payments of $1316.79, at 15% interest.

Note: This is the first time that you're solving for something other than payment. Be sure to press the right keys!

Key in the number of payments remaining to N, and solve for PV. The other values didn't change, so don't re-enter them. Answer: $94,084.15 This is the balance due after five years with 15 years remaining. Let's see what the balance would be with only five years remaining. Enter 60 into N and solve for PV Answer: $55,350.71 is the balance due after 15 years with five years remaining.

Press these You see

120*

N 120

15 /12= 1.25*

i 1.25

100000PV 100000.00

PMT 2202.17

Press these You see

180*

N 180Compute PV PV 94084.15


56

Alternative Method: An alternative, the "Future Value Method" of determining the remaining balance of a partially amortized loan, is to enter the number of payments already made into the N key, then solve for the future value, or payoff, of the loan at that point. Let's go back to an earlier example and start all over. First we calculate the monthly payment (PMT). We must always calculate this number first before proceeding to the determination of the remaining balance. N i PV PMT FV 240 15 100,000 (1316.79) 0 What is the remaining balance after five years of payments? Enter 60 (months) in N, and solve for FV. N i PV PMT FV 60 (?) Answer: 94,084.15.

Note that this is the same answer we got with the "present value of remaining payments" method. You will want to go back and re-solve the problems in Practice Session 2 using this future value method. Either method will produce the same result - the one to use is the one that seems easier or more logical to you.

Press these You see

240*

N 120

15 /12= 1.25*

i 1.25

100000 PV 100000.00

PMT 1316.79


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DISCOUNTING MORTGAGES

Of all the financial functions you'll be learning to do, mortgage discounting is one of the most complex techniques to learn. But don't worry - we'll make it easy. If we were to buy a $10,000 mortgage (10-year term, 12% interest with monthly payments of $143.47) in the marketplace, how would we determine the price? Would we pay $10,000 or would we pay less? If our investment strategy was to have each invested dollar earn 18%, we couldn't buy this mortgage at "full price" since we would only be

getting 12% interest. To get an 18% return we would have to pay less than $10,000. This is the concept of discounting mortgages. Though we pay less for the mortgage, the monthly payments remain the same - they will still be $143.47. So the real question is this: If we were getting payments of $143.47 for 10 years, how much will we have to pay for that $10,000 mortgage in order to get an 18% return (yield)? Let's find out. Example: $10,000, 12% interest for 10 years Step 1: Let's solve for the payment. N i PV PMT FV 120 12 10,000 (?) 0 Answer: $143.47 per month. Now there's only one step left to do to derive the answer. Fasten your seat belts. Step 2: Solve for an 18% yield.

Hint: You now have all the information about the original mortgage. To determine the price you'll have to pay to get an 18% yield simply enter 18% (18 / 12 = 1.5) in the i key and solve for PV.

Answer: $7,962.42. Surprised? To get an 18% on your money you would have to pay $7,962.42. Another way of saying this would be - the present value of 120 payments of $143.47 to yield an 18% return is $7,962.42.

Press these You see

120*

N 120

12 /12= 1*

i 1

10000 PV 10000.00

PMT 143.47


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The Difference Between Discount and Yield Many people get confused about these terms. They have different meanings and it's essential that you use them properly. Discount is the amount by which we reduce the price of the mortgage. (In this case, it was $10,000 - $7,962.42 = $2,037.58.) Yield is the rate of return you require. (In this case it was 18%.) Let's look at the difference in the above example. Yield: The yield was 18%. Percentage Discount: The discount was just over 20% (2,037.58 - 10,000 = 20.04%) Example: $10,000 mortgage, 12% interest, 20 years Step 1: Solve for the monthly payment. N i PV PMT FV 240 12 (?) 10,000 Answer: $110.11 per month Step 2: Discount it to yield 18% (solve for the present value). N i PV PMT FV 18 (?) Answer: $7,134.57 Now let's look at the difference between the discount and the yield. Yield: The yield is still 18%. Percent Discount: The discount is 28.65% ($10,000 - 7,134.57 = 2,865.44. Divided by 10,000 = 28.65%) See the difference? If you agreed to an 18% discount you would have paid too much! It's a must to know these concepts. There's another lesson to be learned in this example. The longer the mortgage, the greater the discount the seller will have to take and the lower the price you'll pay to get your required yield. Let's do some problems together using the original mortgage ($10,000, 12%, 10 years).

Press these You see

240

N 120

18 /12= 1 5*

i 1.5

PMT 110.11

PV 7134.57


59

Original Mortgage: N i PV PMT FV 120 12 10,000 (?) 0 Answer: $143.47 is the payment Problem 1: Discount to yield 16% N i PV PMT FV 16 (?) 0 Answer: $8,564.76 Problem 2: Discount to yield 20% N i PV PMT FV 20 (?) 0 Answer: $7,423.89 If you look closely at these answers you'll notice that the higher the yield you want, the less you'll want to pay for the mortgage. Of course, if you're on the other side of the transaction and you're selling a mortgage, you can quickly analyze what you're being offered by using the same analysis.


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HOW TO BUY A ‘DEFAULTED SEASONED

MORTGAGE" In many cases the defaulted loan you buy will be "seasoned." A seasoned mortgage is one that already has a number of payments made on the loan. We must always know how many payments we will be receiving, so we can determine the present value and the price we will pay. Using the original mortgage ($10,000, 12%, 10 years), let's take a look at the present value of the loan assuming there were only eight years left (which means two years of payments have already been made) and we wanted to obtain an 18% yield. Step 1: The original mortgage N i PV PMT FV 120 12 10,000 (?) 0 Answer: $143.47 is the payment Step 2: Solve for PV (present value) with eight years remaining, discounted to yield 18%. N i PV PMT FV 96 18 (?) 0 Answer: $7,274.22 Now let's analyze what we just did. We have figured the value of 96 payments of $143.47 to yield 18%. The secret to remember is the N must always equal the number of remaining payments. (Note: The face value of this note - the amount the borrower owes - is $8,827.44, which you can compute by putting 12% in i and solving for PV. Let's do some more of these exercises using the same mortgage. Be sure you have the right number in each function key.

Press these You see

120*

N 120

12 /12= 1*

i 1

10000 PV 10000.00

PMT 143.47

Press these You see

96*

N 96

18 /12= 1.5*

i 1.5

PMT (do not change) 143.47

PV 7274.22


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The original mortgage N i PV PMT FV 120 12 10,000 (143.47) 0 Problem 1: Your yield requirement has changed. Now you only need a 16% yield and the mortgage only has six years remaining. What is the present value? N i PV PMT FV 72 16 (?) 0 Answer: $6,614.05 is the present value (PV) Problem 2: The mortgage has only four years remaining and you want the same yield (16%). What do you have to pay? (What's the PV?) N i PV PMT FV 48 (?) 0 Answer: $5,062.44 is the present value (PV) Problem 3: Now there's only one year remaining on the mortgage. One year of 12 pay-ments. What will you have to pay to get a 16% yield? Come on now, are you going to buy it or not? N i PV PMT FV 12 (?) 0 Answer: $1,581.28 is the present value (PV) Here's what we've done so far: We've figured the discounted value on new and used cash flows. However, frequently mortgages are paid off early or have balloon payments. A balloon payment is usually a large remaining principal balance payment on the mortgage, which is greater than the preceding installments and pays the loan in full. What we'll do next is compute the discounted value of those remaining values or balloons.


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DISCOUNTING REMAINING BALANCES

AND BALLOONS

To simplify matters, let's look at the following situation: We have a mortgage that has a balloon payment of $26,976.80 due in 10 years. What is the present value (PV) of the balloon if we want an 18% yield? Notice that the $26,976.80 is a Future Value. This is the first time that we're using Future Values. It's really easy -just place the Future Value in its place on the chart. Here's how it looks: N i PV PMT FV 120 18 (?) 0 $26,976.80 Answer: $4,519.24 is the present value (PV)

The answer indicates that $26,976.80 10 years from now is worth $4,519.24 today if you expect to yield 18% on your money. To check and see if the is answer is correct, do it in reverse. The problem would be - What is the future value of $4,519.24 in 10 years at 18% interest? Enter the known values and solve for FV. N i PV PMT FV 120 18 $4,519. 24 0 (?) Answer: $26,976.80 is the future value (FV) Not bad! What you've done in this section is find the present value of a future amount. In the previous section we figured the present value of the cash flow. Now, let's put them both together. What is the present value of the cash stream and the remaining amount (or balloon payment) of the mortgage?

Press these You see

120*

N 120

18 /12= 1.5*

i 1.5

PMT 0

FV 26976.8

PV 7274.22


63

DISCOUNTING CASH FLOW AND BALLOONS

The Problem: What is the value of a $50,000, 12%, 15-year mortgage with a 10-year balloon? Step 1: Enter the knowns and solve for the PMT of the original mortgage. N i PV PMT FV 180 12 $50,000 (?) 0 Answer: $600.08 is the payment Step 2: Now figure the present value (PV) of the payments for the remaining 10 years to yield 18%. N i PV PMT FV 120 18 (?) 600.08 0 Answer: $33,303.74 Step 3: Compute the amount of the balloon. N i PV PMT FV 60 12 (?) 600.08 0 Answer: $26,976.80 Sound familiar? You have just figured out the amount of the balloon (which is the amount to be received in 10 years). Remember that 60 is the amount of months remaining on the mortgage. Step 4: Solve for the present value of $26,976.80 to yield 18%. To do this remove the PMT of $600.08 from the calculator by entering a zero and then placing $26,976.80 in FV. Remember that the balloon occurs in 120 months, so make sure you change the N. N i PV PMT FV 120 18 (?) 0 $26,976.80 Answer: $4,519.24 Sound familiar? Go back several steps and check. You see, the answer to our problem really is: $33,303.74 (present value of the payments) 4.519.24 (present value of the balloon) The answer indicates that you would pay $37,822.98 if you wanted to buy this mortgage to yield 18%.

Press these You see

180*

N 180

12 /12= 1*

i 1

PMT 600.08


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SHORTCUT Now here's a shortcut. You can go from Step 1 to the answer immediately as follows: Step 1: Set up the original problem. N i PV PMT FV 180 12 $50,000 (?) 0 Answer: $600.08 Step 2: Change the N to reflect the balloon in 10 years. N i PV PMT FV 120 12 $50,000 $600.08 (?) Answer: $26,976.80 Step 3: Change the yield to reflect 18%. N i PV PMT FV 18 (?) Answer: $37,822.98


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USING AN INVESTOR AS A PARTNER

Sometimes you may find a great deal, but all of your cash may be tied up in existing deals. What do you do? You bring in an outside investor to partner with you on the deal. We have included a list of note buyers in the Marketing and Forms kit. You can also develop your own list of investors by advertising in the newspaper for individuals who want a greater yield on their investments while have their funds secured by real estate. Let’s go through an example of using an investor for one of your deals.

Step 1: Solve for the monthly payment. N i PV PMT FV 240 12 (?) 10,000 Answer: $110.11 per month Step 2: Discount it to yield 18% (solve for the present value). N i PV PMT FV 120 1.5 110.11 0 Answer: $7,134.57 In other words you would only offer $7,134.57 for this defaulted note if you want a yield of 18%. Let’s say you don’t have enough money to buy this defaulted note on your own. You find a co-investor who has $6,000 to invest and he wants a yield of 12% on his money. How much money would you need to invest and what would your yield be?

Press these You see

240

N 240

18 /12= 1 5*

i 1.5

PMT 110.11

PV 7134.57


66

We already know the monthly payment is $110.11. This stays the same. For the investor N i PV PMT FV 120 1 6000 ? 0 Answer: $86.08 If the investor will receive $86.08 each month from the $110.11 monthly payment that leaves a monthly payment of $24.03 to you. The difference between what the investor puts into the deal ($6,000) the amount you are willing to pay for the note ($7,134.57) equals $1,134.57 ($7,134.57-$6,000). Substitute $24.03 for PMT, $1,134.57 for PV and solve for i. Yield To You N I PV PMT FV 120 ? 1134.57 ? 0 Answer: 22.75%

Press these You see

240

N 240

14 /12= 1*

i 1

PV 6000

PMT 86.08


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STEVE GETS THE DEAL

Steve has carefully done his calculation and is successful in getting the deal. Jill

now has a lump some of $40,000 that she can spend or invest any way she likes. You have a note that you must work to bring current and make it a paying note again.

Steve’s first thought might be that he will foreclose as soon as he gets all of the

paperwork completed for the transfer of ownership of the mortgage from Jill to Steve. But before he forecloses he decides to review some of his alternatives. Alternatives to Foreclosure

There are a number of alternatives to foreclosure, which should be considered. The alternatives are particularly worth considering because it could result in a quick return of your funds if done correctly. Remember, most people in foreclosure feel trapped within the walls of their property and don't know what to do or whom to turn to. How could all of this have happened to Jack? Jack feels like he is stuck because now he is behind on his payments. An avalanche affect takes place and the bills pile up and Jack knows he might lose his house. As I mentioned earlier there are several alternatives to foreclosure:

1. Sell the Property 2. Reinstatement 3. Deed In Lieu of Foreclosure 4. Refinance 5. Forbearance Agreement

Additionally, make sure to pay close attention to the checklists included with this

manual. The checklists are designed to help you in closing on the defaulted mortgage and making sure you cover all of your bases. As always have everything reviewed by your own legal counsel to make sure the documents are correct and you are not in violation of state laws.


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Fixing (Rehabilitating) the Mortgage

There are many, many methods to fix a mortgage that is in default. The key

ingredient in fixing a mortgage is:

1. Your Imagination 2. Willingness And Cooperation Of The

Homeowner 3. Laws In Your State 4. Access to Funding Sources

There are a number of alternatives to foreclosure, which should be considered. The alternatives are particularly worth considering because it could result in a quick return of your funds if done correctly.

Remember, most people in foreclosure feel trapped within the walls of their property and don't know what to do or whom to turn to. How could all of this have happened to Jack? Jack feels like he is stuck because now he is behind on his payments. An avalanche affect takes place and the bills pile up and Jack knows he might lose his house. I am going to discuss 5 of the main techniques for rehabilitating a defaulted mortgage.

Option #1:

An easy answer to avoid foreclosure is for Jack to sell the property. Steve (you as the new note owner) can make a visit to Jack’s house. On his visit, Steve may take two people with him; his attorney and his real estate agent. Steve knocks on the door and introduces himself as the new owner of the note when Jack answers the door. Steve also needs to explain that Steve’s attorney is there to explain the foreclosure process to Jack so he understands what is about to happen. Steve also introduces his real estate agent and how Jack can avoid foreclosure if he will list the property for sale with the agent. Jack, the real estate agent and Steve all benefit. Here’s how.

Jack’s Benefits

1. By listing the property for sale with an agent Steve will hold off on the foreclosure.

2. Jack saves his credit rating by not having a foreclosure listed on his credit report. This is a very bad mark on a persons credit report. Having a foreclosure on the credit report can make it very difficult to obtain financing or rent anything in the future.


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3. Jack does not lose the equity that is in the house. He can sell the property at full value. Jack still has to pay off the mortgage and any late payments and legal fees.

4. Jack now has cash to move somewhere else so that he can start over. Jack can use the profit (sales price minus the debt on the property including late payments and legal fees) to start over.

Real Estate Agent Benefits

1. The agent gets a property listing that they would otherwise not have known anything about.

2. The real estate agent gets a commission for selling the property.

Steve’s (You) Benefits

1. Steve benefits because he does not have to foreclose. He allows Jack to sell his house and avoid the foreclosure showing up on Jacks credit report.

2. The note pays off at full value ($70,000). Steve gets the full amount owing on the note when the house sells to a new buyer who will generally obtain a bank loan to buy the property.

3. Steve gets all of the past due payments. If Jack is 10 months late by the time the property goes to closing (the new buyer completes the purchase) the total overdue payments equals $6,143.00.

4. Steve gets all of the late fees that are due. Since most mortgages typically have a 5% late fee on missed mortgage payments each missed payment has a late fee of $30.72. After 10 months Jack also owes $307.15 in late fees.

5. Steve gets his money ($40,000 is what he paid) right away without having to do anything to get the money back.

6. Steve makes a quick $30,000 profit ($70,000 owed - $40,000 purchase price) in a short period of time.

Total profit to Steve from this deal is $36,450 ($30,00 note payoff + $6,143 in overdue payments + $307 in late fees). That’s almost a 100% rate of return on Steve’s investment in less than a year. That sure beats every other investment out there today.


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Option #2

Reinstatement. The mortgagor (person making the payments-this is Jack) may attempt to avoid foreclosure by paying the back payments plus late fees. If the Mortgagee (person receiving the payments-this is Steve) is willing to accept the payments, the foreclosing attorney will verify the amount required to reinstate with the Mortgagee and demand a certified check, cashier’s check or money order.

Most conventional mortgage forms give the mortgagor the right to reinstate, and most FHA and VA forms do not provide for reinstatement once the Mortgagee has accelerated the debt. On FHA and VA mortgages, the Mortgagee may allow reinstatement and the attorney should include all expenses, attorney fees and costs, and charges incurred by the Mortgagee.

Let’s go through the same example as Option #1. Jack finds a way to borrow money from friends and family and decides to bring the mortgage current. This can be several thousand dollars depending on how many months the mortgage is delinquent. If Jack reinstates (brings the it current) the mortgage what happens to Steve?

Steve benefits because he does not have to foreclose on the property. Steve now receives a monthly payment of $530 each month on the note. Remember Steve bought a mortgage of $70,000. Even though Steve only paid $40,000 for the mortgage he is still entitled to the full monthly payment on the $70,000.

Steve receives all of the back payments, late fees and legal fees that were owed when the mortgage became delinquent. This can amount to several thousand dollars depending on how many months the mortgage is behind. Let’s say that Jack is behind a total of 10 months by the time Jack decides to bring everything current. If the monthly payment is $614.30 per month he would owe $6,143 in back payments. Late fees are typically 5% of the payment amount or $30.72. For 10 months this equals another $307.20. Legal fees Steve may have incurred might be $1,000. Total due and owing to bring Jack’s mortgage current is $7,450.72.

Let’s take this one step further and say that Steve borrows the $40,000 to buy the $70,000 defaulted mortgage. If Steve went to a bank or borrowed money from a friends IRA (See chapter on tax-free investing) at 10% per year for a period of 10 years Steve would have a monthly payment of approximately $303. Now, here is where it starts to get really good. Steve used other people’s money (OPM) to buy the defaulted mortgage. His cost is $303 per month. By working with Jack he gets Jack to bring the mortgage current and Steve receives an immediate lump sum of cash in the amount of $7,450.72. Steve also receives a monthly payment of $614.30 from Jack. Keep in mind Steve is paying $303 to his friends IRA, but he is receiving


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$614.30. This means he has a positive monthly cash flow of $311.30 ($614.30 - $303 = $311.30). On an annual basis this equals $3,735.60 per year.

So let me see if I have explained this correctly. Steve had no money out of his own pocket to buy the mortgage. He got $7,450.72 now plus $311.30 a month until the mortgage is paid off. Keeping in mind that people will typically sell or refinance their house every 5 – 7 years, Steve should receive the whole balance of $70,000 paid off in 5 – 7 years. If Jack took 5 years to pay off, Steve would have a positive cash flow of $311.30 for 60 months (5 years). Total positive cash flow equals $18,678. This is a fantastic deal! Assuming at the end of five years Jack would still have a balance of $70,000 for the mortgage, Steve would be paid $70,000 to pay it off in full. Subtracting what Steve paid for the mortgage ($40,000) Steve has a profit of $30,000 plus the monthly positive cash flow of $18,678 plus the late payments of $7,450.72 for a grand total $56,128.72. How many of these do you need each month to make you happy?

Option #3

Deed in Lieu of Foreclosure. A Deed In Lieu of Foreclosure is a fantastic opportunity. If Jack knows he cannot make the monthly payments he must find another solution. He knows foreclosure of the house is just a matter of time. Jack, in an effort to preserve his credit rating and any additional fees and expenses decides he just wants out of the house anyway he can. Jack (homeowner) signs a Deed In Lieu of Foreclosure to Steve (Steve bought the defaulted note at a tremendous discount). A Deed In Lieu of Foreclosure is nothing more than Jack signing the Deed to his house over to Steve. By signing over the Deed Jack avoids foreclosure of the house. This is how the phrase Deed In Lieu of Foreclosure comes about. Jack also avoids any future liability associated with the mortgage.

Should Steve take the Deed In Lieu of Foreclosure or should Steve foreclose on the house? We will give you the lawyer answer; it depends. It depends on what a title search of the property reveals. A title search is where a title company (the company that handles all of the closing documents when someone buys or sells a house) goes to the courthouse and looks to see what debts are attached to Jack’s house. The mortgage that Steve bought will show up, but there might be other debts on the property including judgments liens (result of lawsuit in court) and tax liens (result of unpaid property taxes). If there are any other debts attached to the property Steve may not accept a Deed In Lieu of Foreclosure. What helps Steve make this decision is the amount of equity in the property. You will remember that the equity is determined by subtracting what is owed on the property from what the property is worth (Fair Market Value or FMV). In this case we have a house worth $100,000. Debt on the property is $70,000. Therefore the equity is $30,000. We


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also have something called the loan to value ratio or LTV. The LTV is calculated by dividing the FMV by the debt on the property.

$100,000 / $70,000 = 70% LTV

The LTV is important because as a general rule of thumb you do not want to buy a note where your investment (the amount you pay for the note) exceeds 60% LTV. By keeping this one rule in mind you should have a very profitable defaulted paper business.

If Steve accepts the Deed In Lieu of Foreclosure he will also be accepting any other debts that are attached to the property. So lets say there is a $10,000 judgment lien attached to Jack’s house. What happens?

If Steve accepts a Deed In Lieu of Foreclosure from Jack, Steve will now own the house. Steve can now sell the property at full value. If Jack’s house is worth $100,000 and there is a $70,000 first mortgage (this is the note that Steve bought from Jill) there is $30,000 worth of equity in the property. However, if Jack was 10 months behind (using the same example from Option #2 above) he has $7,450.72 in additional debt (every time Jack misses a payment, the principal balance of the mortgage increase) that is owed on the property for a total of $77,450.72. That means instead of $30,000 worth of equity there is only $22,549.28. Any additional profit Steve might get from the sale of the house is starting to decrease. Now let’s add on the $10,000 judgment lien. If the debt (including back payments) is $77,450 (rounding off) we need to add the $10,000 judgment lien for a total of $87,450. The judgment lien must be paid off before Steve can give clear title (ownership) to the new buyer of the property. So now the amount of equity that remains is only $12,549.

When Steve sells the house (assuming he sells it a full value of $100,000) the additional profit over the debt that Steve is owed is $12,549. So what are the benefits to Steve and what did Steve make total on this deal?


2. Steve paid $40,000 for the mortgage but received $77,450 as payoff on the mortgage when the property was sold. His profit was $37,450

3. Steve must pay off the judgment lien on the property, but any money left over goes into Steve’s pocket. This amount is $12,549.

4. Total profit to Steve is $49,999 ($37,450 + $12,549) profit from and initial investment of $40,000. Steve made a little over 100% profit on this deal in a matter of months.

Now let’s take a look at the numbers if there are no other debts attached to Jack’s house. If Steve accepts a Deed In Lieu of Foreclosure from Jack, Steve will now own the house just as was described in the example above. Steve can now sell the property at full value. If Jack’s house is worth $100,000 and there is a $70,000


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first mortgage there is $30,000 worth of equity in the property. However, if Jack was 10 months behind (using the same example from Option #2 above) he has $7,450 in additional debt that is owed on the property for a total of $77,450. That means instead of $30,000 worth of equity there is only $22,550. You need to always keep in mind the back payments that are owed on a property. Any back payments affect you overall yield (rate of return on your investment, i.e. your profit).

When Steve sells the house (assuming he sells it a full value of $100,000) the additional profit over the debt that Steve is owed is $22,550. So what are the benefits to Steve and what did Steve make total on this deal?


2. Steve paid $40,000 for the mortgage but received $77,450 as payoff on the mortgage when the property was sold. His profit was $37,450

3. Steve does not have any additional debts attached to the property that must be paid off. Additional money out of pocket = $0

4. Steve sells the property for $100,000. Steve is entitled to keep all of the sales proceeds. He paid off the existing mortgage (which he owns), which means he has an additional profit of $22,550.

5. Total profit to Steve is $60,000 ($37,450 + $22,550) profit from and initial investment of $40,000. Steve made a 150% profit on this deal in a matter of months.

Which was the better deal. The better deal is when Steve takes a Deed In Lieu of Foreclosure when the property has no additional debts. He has a higher profit margin (additional $10,000 in profit). Is it worthwhile for Steve to take a Deed In Lieu of Foreclosure even with other debts on the property? Yes! Steve gets title to the property without having to go through the foreclosure process. He can turn around and sell the house quickly and get the defaulted mortgage he purchased paid off in full. With a Deed In Lieu of Foreclosure, Steve is able to get the property for what he paid for the mortgage ($40,000). Steve can now sell the property at retail and keep the difference between what is owed and the sale price of the property. More Deed In Lieu of Foreclosure a little later in this chapter.

Option #4

New Loan. Steve can refer Jack to a mortgage broker who will help Jack refinance the property to pay off the existing mortgage plus back payments. The new loan will pay off the existing mortgage plus any past due amounts. Jack (homeowner) now makes payments to the bank. Through the refinance the mortgage would be paid in full plus any overdue amount.


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Did you know that you can pull Jack’s (homeowner) credit report without Jack’s permission in an effort to determine weather or not you want to even buy this particular note. This right is provided under what is called the Fair Credit Reporting Act (FCRA). Under the FCRA, subsection 604 here are the permissible reasons for containing a consumers (Jack) credit report.

1. In response to a court order (judgment award is an example)

2. The consumer gave written permission to pull the report.

3. A business transaction that involves a consumer. Purchasing a mortgage qualifies. You pull the credit report to establish to likelihood of being paid on the mortgage. Since we now we are buying a mortgage that is in default we are not as concerned about the homeowner’s (Jack’s) credit.

4. For employment purposes.

5. For insurance underwriting.

If Jack is going to attempt a new loan they will probably pull his credit report to determine the likelihood that Jack will be able to make the monthly payment. Many mortgage companies will overlook bad credit if Jack meets one important requirement. That requirement is equity in the property. Since we are only purchasing mortgages that do not exceed 70% LTV (loan to value) there is still 30% equity left in the property to protect the loan in the event of default. On a $100,000 house the total debt on the property that Steve might be interested in does not exceed $70,000 (including late payments and legal fees). When Jack goes to borrow let’s say $80,000 that would leave the bank with 20% ($100,000 - $80,000 = $20,000 or 20% LTV) equity in the property for protection. The new $80,000 loan allows Jack to payoff the $70,000 note he owes to Steve, plus any late payments and legal fees. Steve gets all of his money and Jack stays in his house and does not lose the remaining $20,000 in equity on the property.

Let me just summarize the benefits in this scenario. Using the same example in Option #2 and Option #3, what are the benefits?

Jack’s Benefits

1. Jack saves his credit rating by not having a foreclosure listed on his credit report.

2. Jack does not lose the equity that is in the house ($20,000 remains after the refinance)

3. Jack does not have to move.


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4. Jack still has close to $4,000 that can go towards home improvements or to pay off other debts.

Mortgage Broker Benefits

1. The broker gets to refinance a property he would otherwise not have known anything about.

2. The real estate agent gets a commission for selling the property.

Steve’s Benefits

1. Steve would receive $77,450 from the refinancing of the house.

2. Steve does not have to foreclose on the house.

3. Steve makes a profit of $37,450 within a couple of months when the new mortgage (from the bank) pays off his mortgage.

Option #5

Steve could offer Jack a Forbearance Agreement. For complete details see our course on “Stopping Foreclosure”. A forbearance agreement is where Steve agrees to not foreclose if Jack will work with Steve to bring the mortgage current over time (typically 12 months). Here is how it usually works. Steve contacts Jack about bringing the mortgage payments current to avoid foreclosure. Jack wants to bring everything current but because he lost his job he does not have enough money to bring

it current. Fortunately Jack has a new job and can make his regular monthly payment. Using the same example as covered above, Jack is 10 months behind in his payments. He owes a total of $7,450 in back payments. Jack does not have the $7,450, but he does have $3,000. Should Steve take the $3,000 or should Steve foreclose?

If I were Steve I would take the money. Why? Jack now has the ability to make his regular monthly payment of $614.30. So Steve would now start to receive a positive monthly cash flow of $311(see Option #2). Steve would take the $3,000 now. Jack still has an overdue balance of $4,450. Most forbearance agreements have a maximum time limit of 12 months to bring the overdue payments current. If Jack still owes $4,450 (back payments), to pay the over due amount off in 12 months we divide the $4,450 by 12. This equals a monthly payment of $370.83. Jack must now make his regular monthly payment of $614.30 + $370.83 (monthly payment to bring the overdue amount current) which equals a total monthly payment of $985.13.


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Could this be difficult for Jack? Yes it could, but if Jack really wants to save his house and his credit rating he will find a way to make it happen. Steve is giving Jack a great deal by holding off on the foreclosure with the understanding that Jack will make the full $985.13 payment each month. If Jack misses a payment, Steve can immediately foreclose as the forbearance agreement between Jack and Steve is now null-and-void (canceled because Jack missed a payment).

Overall, Steve gets all of the $7,450 in past due payments that were owed, plus $311 (remember this number is the difference between what it costs Steve to borrow the money at $303 per month versus what he receives each month at 614.30 ($614.30 - $303 = $311) each month over the next year until the note in brought current. At the end of the year Steve has in his pocket $11,182 ($7,450 +($311 x 12) in pure cash profit.

In our minds this a great way to do business because everyone wins. Jack wins because he is able to keep his house, avoid foreclosure, save his equity and maintain a good credit rating. Steve wins because he received $11,182 at the end of one year plus $311 a month in positive cash flow until the note is either paid off or refinanced. When the note is paid off Steve receives a lump sum of $70,000. He now gets an additional $30,000 in profit.

All of the above examples should be reviewed with your attorney to ensure that you have not violated any laws or regulations in your area.


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THE DEBTOR’s FICO SCORE

FICO Scores and Your Mortgage

Years ago, credit scoring had little to do with mortgage lending. When reviewing the credit worthiness of a borrower, an underwriter would make a subjective decision based on past payment history.

Then things changed.

Lenders studied the relationship between credit scores and mortgage delinquencies. There was a definite relationship. Almost half of those borrowers with FICO scores below 550 became ninety days delinquent at least once during their mortgage. On the other hand, only two out of every 10,000 borrowers with FICO scores above eight hundred became delinquent.

So lenders began to take a closer look at FICO scores and this is what they found out. The chart below shows the likelihood of a ninety-day delinquency for specific FICO scores.

FICO Score odds of a delinquent account

595 2.25 to 1 600 4.5 to 1 615 9 to 1 630 18 to 1 645 36 to 1 660 72 to 1 680 144 to 1 700 288 to 1 780 576 to 1

This chart is important when you purchase a defaulted mortgage to help you determine if the debtor will go into default after you do a workout or forbearance with him. Knowing the FICO score also helps you if you need to go back and negotiate with the note seller. The chart allows you to use statistics to devalue the mortgage in the note seller’s mind.


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WHAT IF STEVE DOES NOT

HAVE THE CASH?

But what happens if Steve does not have the cash to buy

the mortgage. Easy. You can bring the note to our firm or list it on our website. We will buy the note and pay you a finder’s fee. Steve (you) still benefits under any scenario including foreclosure. Let us show you how this works.

Assume we have the exact same scenario as above. You

find the note, contact Jill and find out that she is willing to sell the mortgage. You get some basic information about the mortgage such as the amount, interest rate, payment schedule, information on Jack, and information about the property such as type of house, number of beds and baths, debt on the property and approximate value of the home, etc. Steve then contacts us and gives us the information. Steve asks for a quote on what we would be willing to pay for this non-paying mortgage. If Steve (you the student) knew we would offer $40,000 for the note he now has a deal in hand. Steve calls Jill up on the phone and says “Jill I went over the numbers with my partner (that’s DWA) and the best we can do is $35,000”. Once Jill accepts the $35,000 Steve calls DWA back up and we proceed to closing. At the closing table we will cut two checks. One to Jill for the $35,000 and one check to Steve for $5,000. The $5,000 is pure profit for Steve without having to buy the mortgage or deal with Jack in any way. Steve walks away with five grand and goes on to the next deal. Not bad for a few phone calls.

Lets look at Steve’s deal a little bit more.

In comes Steve who offers Jill $35,000 for her defaulted mortgage. Why would

she take it?

1. Does not want to foreclose. 2. Does not know how to do it. 3. Afraid it costs too much. 4. Does not have the money to foreclose. 5. Just wants out.

There could be any number of reasons why Jill would take a discount. I teach my

kids all the time “if you don’t ask – you don’t get”. I think this is a powerful trait


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everyone should learn. If you don’t ask Jill if she will take a discount, you can be guaranteed the answer will be no. If you do ask you have a very good chance she will say yes.

But let’s go back to why DWA would be “dumb” not to buy this defaulted mortgage?

1. We buy the mortgage and pay out $40,0000. We can send a letter to Jack or

go visit Jack and discuss some of the options listed above. 2. We could go over to house and talk to Jack. He can’t bring the payments

current but he is willing to list the property with a real estate agent for a quick sale. Everyone wins. Steve got his $5,000 when we bought the defaulted mortgage. Jack wins because he is able to sell his house on the open market and avoid foreclosure. This also saves his credit report rating. We win because we receive $76,565 (includes late payments discussed in option 2) from the sale of the house. If we subtract our purchase price of $40,000, that leaves a quick $36,565 profit within a few months. Is $36,565 a good profit for a little work? I would say so. DWA just goes merrily to the bank to deposit a very nice profit.

3. If Jack is not sure what to do or does not want to sell the house, we could

offer Jack a way out and avoid foreclosure by allowing Jack to do a Deed In Lieu of Foreclosure. I had a deal where I wanted to buy a house and the homeowner was many months behind in their mortgage payments. They did not know what their house was worth nor did they care. These people had to leave town. The husband lost his job and the family was quickly running out of money. I gave the homeowner $5,000 (for moving expense) and they signed a Deed In Lieu Of Foreclosure. The $5,000 was a godsend to the homeowner. He could now move his family and start over. The benefit is the homeowner avoided foreclosure, thereby saving their credit rating and having the ability to start a new life. In essence they just signed the house over to me. In Jack’s case I can now take the house and sell it on the open market. Let’s say I only get $90,000 instead of $100,000 because of a fast sale. I have $40,000 invested to buy the note. $5,000 in moving expenses for Jack. For a total of $45,000. We sell the property for $90,000 and subtract out our total cost of $45,000, which leaves us with a profit of $45,000 net. We did not have to go to foreclosure and Jack saved his credit rating, plus he got $5,000 to start over somewhere else. Lets assume this house takes 6 months to sell. I walk away with a $45,000 net profit in 6 months. Did everyone win? Yes. Jack won because he was able to start over with $5,000 in his pocket. DWA wins when we sell the house on the open market. Steve (you) win when we bought the defaulted note and paid Steve $5,000.


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4. Worse comes to worse, comes to worse. Assuming all of the other remedies don’t work we may have to take our legal right to foreclose on the property. Even if we must foreclose we still win. We could simply foreclose on the mortgage to get paid. We want to point out that we never like to foreclose. We would always prefer to find a way to solve the problem quickly and with as little hassle as possible while giving the debtor as much as possible. So let’s say we go to foreclosure. One of two things happens: My opening bid is $75,000 (rounded off to include principal balance, late fees, overdue payments, legal fees, court costs, etc.).

a. Someone bids at the auction and bids $1 over the minimum bid of $75,000. We get all of my money and a return of $30,000 ($75,000 - $45,000). If the bidding goes up to $80,000 we still get the full $70,000 principal plus $5,000 in fees for a total of $75,000. The remaining $5,000 goes to Jack as surplus sales proceeds.

b. No one shows up and bids on the property. We get the house. The

house is valued at $100,000, but we only paid a total of $45,000 ($40,000 principal plus $5,000 in fees). We can now rent the property for rental income. We could sell it at retail. We could lease option to a buyer who will buy it in the future. There are a lot of options for what you can do with the real estate when you only pay pennies on the dollar for a house that is worth $100,000.

5. You know we have to tell you that when we said the above was the worst that

could happen, we once had a guy at a seminar who asked us was that really the worst that could happen. Maybe not! Well, let’s say I am driving home one day and I get a phone call. On the phone is my wife saying she just got a phone call from the fire department who told her the house that we have this mortgage against just burned down. It turns out Jack is angry and burns down the house. Am I upset? Nope. On the way home, I stop by the store and get a bottle of champagne. I walk into my house and pop the cork. My wife is confused because she thinks we just lost $45,000 (what I paid for the defaulted mortgage including Steve’s fee of $5,000). In fact I just made $75,000. Here’s the secret. Whenever you buy a mortgage you are placed on the insurance policy as an additional insured. Since we are insured we get a check from the insurance company for $75,000 (including late fees) because the house burned down. Thank you very much as I sip champagne with my wife.

No matter what we don’t lose-We can’t lose if we wanted too.


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MY FAVORITE TECHNIQUE

We want to take a few moments to talk about our favorite method. The Deed In

Lieu of Foreclosure. Foreclosures are unfortunately commonplace events that all defaulted mortgage investors must consider. An alternative to a foreclosure is accepting a Deed in Lieu of Foreclosure. A Deed in Lieu of Foreclosure may be submitted by the borrower by mutual agreement of the borrower and lender or sometimes the borrower will submit the Deed in Lieu of foreclosure without even being asked by the Mortgagee (person receiving the payments). The ordinary effect of the taking of a Deed in Lieu is to extinguish the lender's deed of trust and vest the lender with title subject to all other existing liens and encumbrances. In effect, the lender becomes the new owner. The lender is not required to accept the Deed in Lieu of Foreclosure and can show his refusal by filing a Notice of Non-Acceptance with the County Recorder. In any event, a decision is required whether or not to accept the Deed in Lieu of Foreclosure. We must caution you that proper consideration should given for the property received under the Deed in Lieu. It is possible for the borrower to come back and reclaim the property accusing the lender of taking unfair advantage. Special wording should be added to the Deed in Lieu of Foreclosure to document the understanding between the borrower and lender. This can be handled by the settlement attorney when we close (accept) the Deed In Lieu of Foreclosure.

Before accepting the Deed, an examination of a Preliminary Title Report should be made to determine the existence of other liens previously known or not. As mentioned earlier, these liens remain after the Deed is transferred. This is generally different from a foreclosure in which the liens junior to the foreclosing deed holder can be wiped out if the foreclosure sale comes up short. By junior liens, we mean liens that were placed on the property after the original mortgage was filed. Accepting the Deed in Lieu of Foreclosure may leave me (the Trust Deed investor) with substantially less if the existing junior liens eat up a substantial part of the property's equity (see Option #3). Legal experts generally advise the issuance of a new owner's title policy insuring that the lender will be acquiring marketable title. We would always do this even if the attorneys did not recommend it. We would rather be safe than sorry.


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The safest route is to have the transaction handled by an escrow company with new title insurance. If the transaction were handled informally outside an escrow, it would leave you vulnerable to liens filed just before the filing of the Deed in Lieu of Foreclosure.

Bottom Line? Use an attorney and Title Company for everything. Get title insurance to protect you and make sure to look at all of the documents.


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FORECLOSURE

WORSE CASE SCENARIO OR IS IT?

Let’s take a moment to review some of the basics about foreclosures.

What does foreclosure mean? If the debtor falls behind in their monthly house payments you may try to take

their house back. This is generally called foreclosure. In foreclosure, the debtors lose not only their house, but also all of the money they have invested in it.

How was the debtor’s home financed? The foreclosure procedure will vary depending on the

type of financing that was obtained when the house was purchased. Financing of a home is usually done through one of the following methods:

• Mortgage

• Deed of Trust

• Real Estate Contract

Look at the documents they signed when you bought the contract to determine what type of financing they have.

What is the foreclosure procedure? Mortgage

If the debtor falls behind in their monthly mortgage payments the lender (you or a bank or mortgage company) can begin the foreclosure procedure immediately. Verify your state’s guidelines on the foreclosure process and requirements.

Be aware of any redemption periods on foreclosures in your state. The redemption period could allow the homeowner the ability to still sell their home after the foreclosure auction has occurred. A way around this issue is to pay the homeowner a fee where the homeowner sells you their rights to the redemption of the property. You can then immediately market the property for resale. Make sure if


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you buy the redemption from the homeowner that they agree to vacate the property before final payment is made.

Deed of Trust If you own a deed of trust and the debtor falls behind in their payments, you can

foreclose on their house without going to court. You can also foreclose on the deed of trust like a mortgage, by going to court.

Real Estate Contract If you own a real estate contract and the debtor falls behind in their payments,

you can end ("forfeit") the debtor’s contract without going to court. You may also foreclose your contract like a mortgage. In most areas if you intend to forfeit the debtor’s real estate contract without going to court, you must first send the debtor a Notice of Intent to Forfeit, and then send a Declaration of Forfeiture.

If the seller forecloses your real estate contract like a mortgage, he must follow the procedure for foreclosing a mortgage described in an earlier section. You will have the same rights in the foreclosure action as a person with a mortgage.

Let’s go back to Jack and Jill. Steve has purchased the mortgage and has been working with Jack to come up with a solution to bring the mortgage current. Jack is out of money, has not prospects and is not even returning telephone calls. Steve has suggested every alternative to foreclosure and Jack has been unresponsive. As a last resort, Steve starts foreclosure proceedings. It is important that you understand the foreclosure procedures in your state and seek the assistance of an attorney to complete the transaction. Keep in mind that approximately 70% to 80% of foreclosure proceedings never result in the seizure of the property, meaning that the homeowner (Jack) finds a way to bring the mortgage current or is motivated to consider one of the alternatives such as Deed in Lieu of Foreclosure.

Foreclosure Procedures by State

The foreclosure process varies somewhat from state to state, and depends primarily on whether the state uses mortgages or deeds of trust for the purchase of real property. Generally, states that use mortgages conduct judicial foreclosures; states that use deeds of trust conduct non-judicial foreclosures. The principal difference between the two is that the judicial procedure requires court action.

To foreclose in accordance with the judicial procedure, a lender must prove that

the mortgagor is in default. Once the lender has exhausted its attempts to resolve the default with the homeowner, the next step is to contact an attorney to pursue court action. The attorney contacts the mortgagor to try to resolve the default. If the


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mortgagor is unable to pay off the default, the attorney files a lis pendens (action pending) with the court. The lis pendens gives notice to the public that a pending action has been filed against the mortgagor. The purpose of the action is to provide evidence of a default and get the court's approval to initiate foreclosure.

Non-judicial foreclosures are based on using deeds of trust that contain the power of sale clause. The clause enables the trustee to initiate foreclosure, without having to go to court. The trustee is required to issue a notice of default and notify the trustor (borrower) accordingly. If the trustor does not respond, the trustee then initiates the steps for conducting the foreclosure sale. The following table represents our current knowledge of which states use mortgages (judicial) or deeds of trust (non-judicial) or both. Please check with your local county office to verify which one is used in your area.


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State Security Instrument

ForeclosureType

Initial Step

# of Months Redemption Deficiency

Alabama Mortgage Non-judicial Publication 1 12 months Allowed

Alaska Trust Deed Non-judicial Notice of Default 3 None Allowed

Arizona Trust Deed Non-judicial Notice of Sale 3 None Allowed

Arkansas Mortgage Judicial Complaint 4 None Allowed

California Trust Deed Non-judicial Notice of Default 4 None Prohibited

Colorado Trust Deed Non-judicial Notice of Default 2 75 Days Allowed

Connecticut Mortgage Strict Complaint 5 None Allowed

Delaware Mortgage Judicial Complaint 3 None Allowed

Dist. of Col. Trust Deed Non-judicial Notice of Default 2 None Allowed

Florida Mortgage Judicial Complaint 5 None Allowed

Georgia Security Deed Non-judicial Publication 2 None Allowed

Hawaii Mortgage Non-judicial Publication 3 None Allowed

Idaho Trust Deed Non-judicial Notice of Default 5 None Allowed

Illinois Mortgage Judicial Complaint 7 None Allowed

Indiana Mortgage Judicial Complaint 5 3 months Allowed

Iowa Mortgage Judicial Petition 5 6 months Allowed

Kansas Mortgage Judicial Complaint 4 6-12 months Allowed


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Kentucky Mortgage Judicial Complaint 6 None Allowed


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ForeclosureType

Initial Step


Louisiana Mortgage Exec. Process Petition 2 None Allowed

Maine Mortgage Judicial Complaint 6 None Allowed

Maryland Trust Deed Non-judicial Notice 2 None Allowed

Massachusetts Mortgage Judicial Complaint 3 None Allowed

Michigan Mortgage Non-judicial Publication 2 6 months Allowed

Minnesota Mortgage Non-judicial Publication 2 6 months Prohibited

Mississippi Trust Deed Non-judicial Publication 2 None Prohibited

Missouri Trust Deed Non-judicial Publication 2 None Allowed

Montana Trust Deed Non-judicial Notice 5 None Prohibited

Nebraska Mortgage Judicial Petition 5 None Allowed

Nevada Trust Deed Non-judicial Notice of Default 4 None Allowed

New Hampshire Mortgage Non-judicial Notice of

Sale 2 None Allowed

New Jersey Mortgage Judicial Complaint 3 10 Days Allowed

New Mexico Mortgage Judicial Complaint 4 None Allowed

New York Mortgage Judicial Complaint 4 None Allowed

North Carolina Trust Deed Non-judicial Notice Hearing 2 None Allowed

North Dakota Mortgage Judicial Complaint 3 60 days Prohibited

Ohio Mortgage Judicial Complaint 5 None Allowed


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ForeclosureType

Initial Step


Oklahoma Mortgage Judicial Complaint 4 None Allowed

Oregon Trust Deed Non-judicial Notice of Default 5 None Allowed

Pennsylvania Mortgage Judicial Complaint 3 None Allowed

Rhode Island Mortgage Non-judicial Publication 2 None Allowed

South Carolina Mortgage Judicial Complaint 6 None Allowed

South Dakota Mortgage Judicial Complaint 3 180 days Allowed

Tennessee Trust Deed Non-judicial Publication 2 None Allowed

Texas Trust Deed Non-judicial Publication 2 None Allowed

Utah Trust Deed Non-judicial Notice of Default 4 None Allowed

Vermont Mortgage Judicial Complaint 7 None Allowed

Virginia Trust Deed Non-judicial Publication 2 None Allowed

Washington Trust Deed Non-judicial Notice of Default 4 None Allowed

West Virginia Trust Deed Non-judicial Publication 2 None Prohibited

Wisconsin Mortgage Judicial Complaint Varies None Allowed

Wyoming Mortgage Non-judicial Publication 2 3 months Allowed

Note: Laws change constantly. Check with your local

law library for the most up-to-date information regarding foreclosure procedures in your area.


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Non-Judicial Foreclosure Let us actually break down the foreclosure process into 20 easy to understand

steps. These steps should not be used as legal advice. Most states have a non-judicial system to carry out a foreclosure. Meaning that no court procedure is required for a lender to take back the property. Few states carry out a formal judicial process. The following steps will outline what is all typically involved in a non-judicial foreclosure.

1.) MISSED PAYMENTS OCCUR. Usually after the third missed payment the Lender will initiate a foreclosure. This is done by issuing a Declaration of Default and Demand for Sale, which is passed on to the foreclosure trustee.

2.) DEPOSIT DEED OF TRUST AND NOTE WITH TRUSTEE. The Lender (Beneficiary) deposits the deed of trust and note with a Foreclosure Trustee. The Trustee is chosen by the lender and is usually identified in the original note. The Trustee is usually an attorney or other real estate professional having a detailed knowledge of real estate foreclosure transactions. If there has been an assignment of the deed of trust, such assignment must also be deposited. If the original note has been lost, foreclosure can still be commenced, but the Beneficiary must post a lost instrument bond in most cases.

3.) The Trustee must examine the documents for any special provisions other than those supplied by law.

4.) The Trustee prepares the NOTICE OF DEFAULT, which must set forth specifically the nature of the breach by the homeowner. It does not have to specify the amount of the default, just the nature of the breach.

5.) The Notice of Default must then be executed (signed) by either the Trustee or the Beneficiary. It is usually considered better to have it executed by the Beneficiary(s) by most title companies.

6.) Following execution, the Trustee will cause the notice to be recorded in the county where the property is located. In some states such as California, this notice does not even have to be notarized, which makes it one of the few documents that do not have to be notarized to be recorded.

7.) After recording the notice, the Trustee should obtain evidence of title, which determines all persons who have filed a request for notices of default and notices of sale, all other persons legally entitled to notice by mail (in essence all other creditors), whether the owner of any interest is either bankrupt or in receivership, and whether there are any subordinate Federal Tax Liens. All of this information is obtained by the trustee as a Trustee Sale Guarantee, issued by a title company. This Guarantee includes all of the information needed to properly conduct the foreclosure.


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8.) 10 DAY NOTICE BY MAIL is made by certified or registered mail, return receipt requested, to all parties specified in step seven above. These parties include junior lien holders as well as any others who have recorded a Request for Notice form with the county recorder. It is the Trustee's obligation to make these mailings. Some of these requests may be in the Trust Deed itself, and the Trustee must take special note of this. Note: The Trustor, or borrower, is someone whose request for notice is most often buried in the Trust Deed.

9.) PERSONAL SERVICE, OR SERVICE BY PUBLICATION WHEN REQUIRED. If the Deed of Trust does not have a sufficient address for mailing the Notice of Default to the Trustor, then this must be accomplished by hand delivery or published in a newspaper of general circulation in the country where the property is located. If published, it must be published once a week for four weeks, commencing no later than ten days from the date when the Notice was recorded.

10.) ONE MONTH NOTICE BY MAIL. Within one month of the recording of the notice of default, copies must be sent to the following: the successor in interest (current record owner) as of the recording date of the Notice, the Beneficiary of any junior lien to the one being foreclosed, any assignee of such junior lien described above, the vendee of any contract of sale or the lessee of any lease of the estate or interest being foreclosed which is recorded and which is subordinate to the deed of trust being foreclosed, the successor to any interest in the above. The notices to these parties must also be mailed by registered or certified mail, return receipt requested.

11.) REINSTATEMENT WAITING PERIOD. The Beneficiary must then wait three months from the recording of the notice of default before he proceeds any further. During this time, the Trustor may reinstate the mortgage by simply catching up the back payments plus the costs already incurred in the foreclosure proceedings. The loan may also be reinstated by one of the junior lien or trust deed holders. The made-up payments then become part of what the Trustor owes him, and the junior lien holder may then initiate foreclosure proceedings of his own. When the foreclosure proceedings are stopped by the reinstatement, a Rescission is filed by the Trustee to stop the proceedings.

12.) FINAL CHECK BEFORE NOTICE OF SALE IS ISSUED. After the three months noted above have elapsed, the Trustee then contacts the Beneficiary to confirm that the default continues and has not been waived, which may be done by accepting a payment on the obligation after the filing of the Notice of Default. In most cases, though, the acceptance of a payment not sufficient to make up the default does not constitute a waiver. The waiver is usually granted only where the Trustor can prove he was misled by the Beneficiary into believing a partial payment would stop the proceedings. If the default has not been cured, the Trustee should contact


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the title company for a title bring down to see if any recent bankruptcies or federal tax liens have appeared. A bring down is a quick title search without all of the normal documentation and detail. The Trustee must then get an affidavit from the Beneficiary setting forth factual data that leads to the conclusion that the Trustor is not a member of the armed forces, nor has been a member of the armed forces within the past three months from the date of his discharge, unless it is pursuant to a written agreement or court order.

13.) PREPARATION AND PUBLICATION OF THE NOTICE OF SALE. The Trustee must then prepare and publish, in a newspaper of general circulation in the country where the property is located a notice of sale. The notice must be published once per week for a period of at least 20 days prior to the sale date.

14.) POSTING NOTICE OF SALE. The notice must be posted in a conspicuous place both on the property and in at least one public place in the city where the property is to be sold. The Trustee should then prepare and have executed an Affidavit of Posting.

15.) MAILING THE NOTICE OF SALE. The Trustee should mail by certified or registered mail copies of the notice of sale to all of those that were entitled to receive both the ten-day and the one-month mailings.

16.) The Trustee must RECORD THE NOTICE OF SALE with the county recorder at least fourteen days prior to the date of the sale. The Trustee may also postpone the sale at any time up until the date of sale at his discretion or if the beneficiary so instructs him. The Trustee need merely announce the postponement at the original time, date and place of the sale, and give the new date and time (the place must be the same).

17.) TRUSTEE'S SALE. The Trustee will start the sale by reading aloud the complete notice of sale. He will announce the amount of the opening bid, which is usually the value of the unpaid principal and interest on the trust deed being foreclosed, along with any advances and Trustee's fees paid. The bid price must be paid at the drop of the hammer, either in cash, money order, certified check, or cashier's check. If the beneficiary is the purchaser, the balance due on his trust deed may offset against the bid price. A junior note holder, however, cannot offset his trust deed in this way. The Trustee does not guarantee title nor express an opinion as to the condition of title. During the sale, the Trustee has the right to require every bidder to show evidence of his ability to deposit with the trustee his full bid in cash prior to accepting the bid. If the last and highest bidder fails to deliver to the Trustee the amount of his final bid in cash or the equivalent of cash in satisfactory form, such bidder shall be liable to the Trustee for all damages which the Trustee may sustain by the refusal to deliver to the Trustee said amount of the final bid, including any court costs and attorney's fees


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18.) PREPARATION OF TRUSTEE'S DEED. This deed may be delivered to the highest bidder at the close of the sale and the payment of the bid price, or the Trustee may record it as a courtesy.

19.) ENDORSEMENT OF NOTE. The Trustee must place on the face of the note the amount of the indebtedness and the amount for which the property was sold.

20.) DISBURSEMENT OF SALE PROCEEDS. Should the property sell for more than the amount of the fees, and the principal and interest owed, then the proceeds of the sale shall be paid first to any junior lien holders, and when these are satisfied, to the Trustor or current owner of record. If the property has been homesteaded, the Trustor comes before the junior lien holders up to the extent of the homestead exemption, and then to the junior lien holders. State and federal tax liens come ahead of the homestead exemption, though.

These, then, are the 20 steps of the foreclosure process. In any real estate investing involving foreclosed property, these points are important to keep in mind.


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Judicial Foreclosure

Let us break down the foreclosure process into easy to understand steps. These steps should not be used as legal advice.

Judicial foreclosure begins when the lender files a lawsuit. The lender will sue the borrower and any person who has a claim to the ownership or a possession interest. The lender, as plaintiff, has a summons and a complaint served on the borrower. The summons commands the borrower to come to court and answer the lender’s complaint; the complaint is the lawsuit proper, which describes the lender’s legal and factual basis for foreclosure. A notice of lis pendens must be filed. The lis pendens is a notice that a lawsuit is pending, the outcome of which affects title. Often, the borrower fails to answer. In that event, the court will appoint a referee to compute a figure for the foreclosure. The court may then sign a judgment of foreclosure and sale. If the borrower appears and defends against the lawsuit, then the court will determine the merits of the defense. The referee will need an oral hearing. If the lender wins, then a judgment of foreclosure and sale will be awarded.

Typically the foreclosure sale is advertised for 4 to 6 weeks. The sale is made by public auction to the highest bidder. The lender may bid, as well. The lender must distribute the proceeds according to the terms of the judgment signed by the judge. Surplus money will normally be held by a referee.

Let’s examine the judicial foreclosure process in more detail. When a property goes into foreclosure, as is the case with Jack when he falls behind on the payments to the bank, state law dictates the actual foreclosure process. You need to become familiar with the foreclosure process in your area.

In most states, properties are held by deed of trust. In these "trust states", the foreclosure process is much faster than in non-trust states such as New York. Foreclosures are auctioned off at the County level via Trustee Sales arranged by the lender without the involvement of the State Courts. These are "non-judicial foreclosures” (meaning that the court is not involved). Therefore, the time between a Lis Pendens of Mortgage Default and the foreclosure Auction can be as quick as several months.

In New York, loans for real property are secured through mortgages rather than through deeds of trust. New York, unlike trust states, is what is called a judicial foreclosure state. Only 10 states, Maine, New York, Connecticut, New Jersey, Pennsylvania, Ohio, Indiana, South Carolina, Florida, and Louisiana and North Dakota are judicial foreclosure states. Simply put, most foreclosure proceedings in New York and other judicial foreclosure states must go through the courts before a property can be sold at public auction. On average, it takes 12-18 months after a lis pendens (notice of mortgage default) has been filed for a foreclosure proceeding to move through the court system and the property to end up on the auction block.


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What is the reason it takes 12-18 months for a foreclosure proceeding to move through the courts? In a nutshell, all parties named in the action (including other mortgage holders, creditors, tenants of the owner, etc.) must be served with papers.

Why is it important to know the difference between judicial and non-judicial foreclosure? Because, you need to know the laws of YOUR state when educating yourself about the foreclosure process and investment strategies. Many books, foreclosure seminars and infomercials provide information that focus exclusively on deed trust states and Trustee Sales.

Let’s look at some of the steps in a little more detail for a judicial foreclosure.

1. Lis Pendens

2. Foreclosure Auction

3. Bank ownership or R.E.O (real estate owned)

Lis Pendens Lis Pendens is Latin for "suit pending". Lis Pendens for mortgage default is the

first filing made during the foreclosure process. Properties in this stage are often referred to as "Pre-foreclosures ". After a mortgage has gone unpaid for 3 consecutive months, the lender (Plaintiff) files a lis pendens (notice of mortgage default) and the mortgagor (Defendant) is served with a summons and complaint. In simple language, the mortgage holder (now the Plaintiff in the action) sues the borrower (now the Defendant in the action) for non-payment of the mortgage.

Foreclosure Auction If the mortgagor does not respond to the summons and complaint issued by the

lender, then the lender's attorney must submit a report to the court stating the facts of the case and requesting that the court appoint a referee (the attorney who ultimately conducts the foreclosure sale). The referee issues a report that includes a computation of the amount due the lender. The judge then signs a Judgment of foreclosure and Sale that directs a Notice of Sale to be published and the referee to sell the property at auction. The court then assigns a date and time for the auction and the auction date and time is published in the Notice of Sale in a local newspaper approximately 4 weeks prior to the auction.

If no one at the auction bids the lender's minimum (or the "upset price") the property reverts back to the lender. The referee executes a deed conveying ownership of the property back to the lender. The property then becomes part of the lender's inventory of homes, and is referred to as an R.E.O. (Real Estate Owned).


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Most lenders then farm their inventory of homes out to local real estate brokers for resale. These are the types of properties that are often advertised by real estate brokers as "foreclosures" What Happens At The Auction

Let’s assume for a moment that you are the potential buyer going to an auction to place bids and hopefully purchase one or more properties. Keep in mind that foreclosure properties are "as-is, where-is" for cash or cash-equivalent. Use extreme caution when buying at trustee's sale. You'll own it. You need to know everything you can about the property!!

Information is everything! Up to date accurate information is essential for investing in foreclosures. THE SALE

The auctioneer will ask if anyone wants to qualify, either before all properties are announced or before individual properties are announced. To qualify, you will need to show the auctioneer cash or cashier's checks sufficient to cover any bids you will be making. Some Trustees specify checks are to be made out to them, usually you can get cashier's check made payable to you, then if you are a successful bidder, you endorse them payable to the Trustee. Common practice is to have large checks to cover most of the expected bid, with smaller checks to cover increases in the bidding. You really do not want to have one check for $300,000 if you are going to be bidding on a $150,000 house or if you will want to buy more than one property. Once you sign your check over, you will not have the surplus funds available for a while. When bidding and qualifying, keep in mind that anyone around you is a prospective bidder, if you allow them to see the maximum amount you can bid to, you have weakened your position. The same holds true for notes you have written or numbers keep your information private.

BIDDING

The auctioneer will ask if anyone would like to bid when they are auctioning a property. If it is a property you are interested in, your bid should be a dollar over the opening bid. The property will not sell until the third call and some people like to wait and see if anyone else is showing an interest. Relax; wait to see if other bidders are going to jump in, if no one does put your "dollar over" bid just before the third call. If other bidders are interested in the same property, bids will go up usually in hundred dollar increments. Know the maximum bid you are willing to place and do not exceed that number. It's very easy to get involved in a contest of who's going to win the bid, if you are investing, you need to make a profit, not prove you can bid higher.


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AFTER THE BIDDING

If you are the successful bidder, you will need to sign checks over to the Trustee. Usually, after all sales are complete, the auctioneer will write you a receipt, ask how title is to be held and you'll be done. The Trustee can record the Trustee's Deed for you or they will send you the deed along with any excess funds from your checks. Sales are sometimes invalidated by legal reasons such as last minute bankruptcy, if so; you will receive your funds back. Expect to have everything done one to two weeks after the sale.


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SPECIAL CASES

FORECLOSURE

When The Senior Lien Goes To Foreclosure As a defaulted mortgage investor, you not only have to take steps to avoid a

foreclosure situation on your own note, but, with the existence of senior debt, you must be aware of the ramifications of any trouble that may befall the junior lien. With a senior lien foreclosure, the junior lien faces options that may be less than desirable. But, wait a minute. You might say what the heck is a senior lien and a junior lien. Let’s say that you decided to buy a defaulted note that was in junior position. Junior position just means that there was something else (mortgage, judgment, tax lien) filed at the courthouse before the mortgage you purchase was recorded. Let us give you an example. Let’s say there is a property worth $100,000. There is a first mortgage of $40,000 recorded at the courthouse on April 1st, 2000 and a 2nd mortgage of $20,000 recorded April 15, 2000. The position of a debt (junior or senior position) is determined by the date the documents were recorded at the courthouse. The earlier recorded document is always in a more senior position.

Total debt on the property is $60,000 ($40,000 + $20,000). Jill owns the 2nd mortgage. The first mortgage is owned by Big Bank USA.

Big Bank USA can foreclose on the property. If at the foreclosure auction the property only sells for $50,000 what happens. Big Bank USA would receive all of the $40,000 (let’s assume for this example that $40,000 includes late payment and attorney fees) owed on the first mortgage. The remaining $10,000 would be paid to Jill (since she is next in line on the property). But wait a minute, $10,000 does not pay all of what Jill is owed. She’s owed $20,000, right? Right. But there is a problem. When the property sold at auction, the only funds that were left over after paying of the first (the foreclosing lien of $40,000) is $10,000 ($50,000 sale price - $40,000 owed on the first = $10,000 remaining for other lien holders). It does not matter that Jill is owed $20,000. She will only receive $10,000 from the auction. Jill would need to attend the auction and either buy the property herself or ensure that the bidding on the property went up to at least $60,000 (the amount that is owed to the first mortgage and to Jill combined) in order to get all of her money back.

Let’s look at some of the options that Jill has in her back pocket that she can use to protect her investment. During the foreclosure/default process, the junior lien holder (Jill) can advance monies to bring the senior lien (Big Bank USA) current. Jill can then tack the advances on to the junior lien amount and consequently start the foreclosure process at the junior lien level. Of course this requires the cash needed to make this happen. A more drastic measure is to attend the foreclosure/trustee


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sale and make sure the bids are high enough to pay the senior liens and the junior liens. Without this help, the bids may only be high enough to satisfy some or all of the senior liens and result in the junior liens being wiped out or paid at less than full value.

As often is the case, the best results come with some investigation and preventative measures. When investigating your trust deed investment don't forget to look at the senior debt. Here are some things to look for:

• Payment Terms: There are some HUD programs that allow the suspension of payments for a period of time if the borrower is having difficulty. These unpaid amounts are tacked onto the loan balance thereby increasing the senior lien and reducing the security of the junior lien(s). There are some negative amortization programs that have the same affect.

• Payment History. The payment history on the senior debt is some indication of the credit-worthiness of the borrower.

• Due on Sale Clauses. This can be good and or bad. The good: A sale can trigger a refinancing which can mean an early payoff on the junior trust deed. The bad: A foreclosure by a Junior Trust Deed may cause the due on sale to be invoked on the senior lien.

• Prepayment Penalty. This can reduce the chances of a refinance and therefore an early payoff of the junior lien.

Let me go through another example that involves a senior lien holder and a Deed In Lieu of Foreclosure combined. Our Example: Property Value $100,000 Big Bank USA 1st Loan - First Trust Deed - Foreclosing Lender $40,000 Other Liens Junior to Big Bank USA Deed of Trust: $20,000 (that’s you)

In a Foreclosure Sale with the successful bid being the Fair Value of $100,000, $40,000 would go to Big Bank USA and $60,000 to the Junior Liens. You would receive all of your $20,000. This still leaves $40,000 left over. Who gets the left over money? Jack. Jack is entitled to any sales proceeds in excess of the debt that is owed on the property. If the total debt owed on the property is $60,000 and the house sells for $100,000 then Jack receives the remaining $40,000 to spend any way he wants.

If a Deed in Lieu of Foreclosure is accepted by Big Bank USA, the Junior Liens (you) stay on the property. This in effect leaves Big Bank USA, as the new owners of the property, equity of $40,000 (Value of $100,000 minus the $20,000 in Junior Liens). Big Bank USA must pay you off. You still get all of your money back.


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When The Junior Lien Goes To Foreclosure

What happens when the junior lien forecloses? Let’s create a different example. I will use Jill as the 1st mortgage ($50,000) note holder that is in default. Jack is the Homeowner of the property. There is a 2nd mortgage ($30,000) on the property that is in default. Steve contacts Jill about buying the note and negotiates a purchase price of $25,000. Jill did not want to foreclose on Jack for some of the reasons listed earlier. While Steve is completing the purchase of Jill’s’ defaulted mortgage Steve receives notification from an attorney telling Steve that the 2nd mortgage holder is foreclosing. Should Steve cancel his purchase of the defaulted mortgage? No. Actually, just the opposite. Steve should speed up (if possible) the purchase of Jill’s defaulted mortgage. Why? When the 2nd mortgage forecloses it is required to pay off, in full (including late payments), the 1st mortgage (Steve’s). This means that Steve will receive the full $50,000 plus late payments even though he only paid $25,000. Steve is able to make a $25,000 profit and he does not have to do any work to get his money back and his profit. We actually like it when a junior lien (to mine) forecloses because we know we will always be paid from the sales proceeds.


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THE FORBEARANCE AGREEMENT

The stars of loss mitigation, they are known by a number of different names. But they are best known as "forbearance agreements" or "repayment plans". The forbearance agreement can be a powerful tool in an effort to convert non-performing loans to performing status.

The motivating force behind loan workout agreements is simple — it’s easier and cheaper. Taking back a property by foreclosure is bad for you (the mortgage buyer), possibly the most expensive way to enforce a mortgage obligation. Losing a property to foreclosure is obviously bad for the borrower. Finding a way to get you (the mortgage buyer) paid without having to foreclose benefits both the borrower and you.

How Forbearance Agreements Work Forbearance agreements typically come about due to

the mortgage owner (you) starting foreclosure proceedings against the homeowner (mortgage payor) when a borrower who either does not have the financial ability to reinstate or satisfy his loan and who cannot or does not wish to file bankruptcy to stop or slow the foreclosure. In most situations, the borrower will lose his house to you or a third-party purchaser in the foreclosure sale.

Just when it appears that all hope is lost, a borrower offered a forbearance agreement has the opportunity to reinstate the loan over a period of time. A typical arrangement requires the borrower to pay an amount up-front to be applied against the arrears and then to pay the remaining balance of the arrearage in six to twelve equal monthly installments. This payment is in addition to the regular monthly mortgage payment.

Assuming the forbearance agreement is properly drafted and that a court will enforce it, the agreement will retain the viability of the lender’s declaration of default and pending foreclosure until the borrower has fully performed under the forbearance agreement and cured all defaults. The pending foreclosure keeps the borrower motivated to perform.


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NOTE

Remember the foreclosure is not canceled, it is only postponed pending the payments required of the homeowner. If the homeowner misses a payment you (the mortgage owner) can start the foreclosure process right where you left off. Only after all overdue payments have been brought current is the foreclosure canceled.

In judicial foreclosure states, forbearance agreements may be documented in the form of a stipulation that is blessed by the court.

In non-judicial foreclosure states, however, forbearance agreements are simply creatures of contract. As contracts, they are only reviewed by a court after a controversy has arisen and the mortgage owner — typically defending a wrongful foreclosure action — has asked the court to strictly enforce the terms of the forbearance agreement.

Resuming Foreclosure The most important forbearance agreement provisions deal with the your remedy

if the borrower defaults under the terms of the agreement. Since you want to retain the ability to continue the foreclosure even after you accepts money under the forbearance agreement, the most carefully drafted agreements should stipulate that:

1. The foreclosure has not been terminated, but has been placed "on hold";

2. The next step to be taken in the foreclosure process is [to be filled in as appropriate];

3. If the borrower defaults under the forbearance agreement, the foreclosure will be taken "off hold" and the next step in the foreclosure process will be taken without further notice to the borrower (unless the next step itself involves notice); and

4. The borrower waives all defenses to resumption of the foreclosure without further notice (unless the next step itself involves notice) if he defaults under the forbearance agreement.

Including this language or similar wording that expressly reserves your right to

resume the foreclosure without the homeowner claiming other defenses and without


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notice beyond the minimum statutory notice requirements. This is especially important given that courts will almost always interpret the agreement in a manner most favorable to the borrower. Still Not Always Strictly Enforced by the Courts

On the other hand, strict enforcement of the agreement should not be taken for granted. Even if a forbearance agreement contains all of the desired "magic words" preserving your right to resume foreclosure after a homeowner’s default under the forbearance agreement, a court may decide not to enforce those provisions.

This may come as a shock and a surprise to some investors, but not all states and not all courts will support forbearance agreements if challenged.

NOTE Some states do not allow consumers to waive statutory rights. To the extent that a forbearance agreement requires a borrower to waive defenses to a foreclosure based upon your acceptance of partial reinstatement or based upon a waiver of re-breach laws, the courts will not enforce forbearance terms that violate these policies.

NOTE

In some jurisdictions, consumers may not enter into loan workout agreements with mortgage owners or lenders unless the contracts contain language stating that the borrower has been urged to consult with independent legal counsel and has initialed that provision. Absent such language along with the borrower’s initials demonstrating that he truly read the provision, the forbearance agreement will not be enforced.


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SELLING POINTS TO MOTIVATE POTENTIAL SELLERS OF DEFAULTED MORTGAGES

When people think about defaulted paper they think:

• Problems • Foreclosures • Evictions • Lawyers • No money

Why would Jill even consider selling her mortgage?

1. She is having problems receiving payments

from the homeowner; 2. The homeowner is slow to pay and may be

behind in payments 3. It looks like the homeowner may get behind

on payments (loss of job, divorce, etc.); 4. She cannot afford to make two mortgage

payments until the homeowner brings the mortgage current.

5. Jill is being transferred and does not want to manage the property and payments long distance.

6. The house going to tax sale and getting something now is definitely better than nothing.

7. The house is in disrepair and she does not have the money to fix it up and I would just like to sell and be done with it.

8. There are code violations on the property and the city will bulldoze it if it is not brought up to standard.

9. Jill needs money for college tuition, improvements for her residence, to pay off debt, use for a down payment on a new residence.

10. Her job situation may be unstable, she may be disabled or elderly and wants more available cash for living expenses.

11. She does not want to worry if the taxes or insurance premiums are being paid on the property.

12. She has been receiving payments and wasting the money on small living expenses and luxuries and has nothing to show for it.


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Why Jill will not foreclose:

Jill is afraid to foreclose on the note because of several possible reasons: 1. Does not want to foreclose 2. Does not know how to do it 3. Afraid it costs to much 4. Does not have the money to foreclose 5. Just wants out

Specifically the marketplace considers defaulted paper like the following:

1. Nothing but problems 2. Costs, time and hassle of foreclosure 3. Potentially low loan-to-value ratios 4. Property in need of lots of repair and deferred maintenance 5. Hassle of keeping up with all of the paperwork


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12 METHODS FOR FINDING CASH

Sometimes you might find you need some

creative ways of coming up with the cash to buy a great deal that has come your way. Below is a list of 12 techniques for finding cash for your deals. 1. Personal Loans

- Banks - Family 2. Revolving Accounts - Bank "A" -- open account for $1000 - 3 days later enter bank, go to manager and ask to borrow $1000 with your

$1000 savings account as collateral (the bank can place a hold on your funds until the bank is paid off)

- Make payments for 3 months - Bank "B" -- open account for $1000 with the loan from bank "A" - 3 days later enter bank and borrow $1000 secured by your account. - Bank "C" -- Repeat

3 months later go to Bank "A" and pay off the loan with the money from Bank "C" to have the hold removed from your savings account. Take out $990 and pay off Bank "B". Have the hold on that account removed. Withdraw $990 from Bank "B" and pay-off Bank "C". Remove the hold on that account.

3 weeks later repeat the process at Bank "A" for double the amount (your deposit

is still $1000 but you ask for a loan of two thousand dollars based on your good payment history with the bank) and continue steps through Bank "C".

Ex: Dep: A = 1000 B = 1000 C = 1000

Borrow: A = 2000 B = 2000 C = 2000

This leaves you with $3,000 cash in your pocket. 3. MasterCard & Visa Citibank AT&T Chase MHT


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4. Increase credit lines on the charge cards - Ask for double and they will give you a percentage of that amount 5. Advertise - partners/lenders Penny saver N. VA. SUN Washington Post Washington Times Thrifty nickel 6. Contact people with money - Letter of introduction - Phone - Use the newspaper -- look at recent sales - Write a letter to the seller at the old address - Write address correction requested on the letter (post office charges 35 cents

to give you a new forwarding address - Mail every 90 days - This is a great source for new second mortgages. 7. Your Own Resources House 2nd mortgage Equity lines Rental property Automobiles CD's Personal Property Private lenders from newspaper secured by your assets 8. Sell some of your resources 9. Get a part time job


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10. Pension Funds $10,000 = 1 Man Company $25 million = small corporation Offer 8-12% interest, do not offer higher interest or they will get scared. Indicate that the money they lend you will be secured by first mortgages on the

property you buy. Ex: FMV = 250,000 Contract = 185,000 Borrow $185,000 at 12% with a first mortgage. Entice them with a penalty fee of

2% if you pay off the note early. Research the public library for names and addresses of the various funds. 11. Small Colleges. - Trust departments w/endowments - Meeting with the V.P. of department in charge of investments - Colleges look for long-term investments 8-12% 12. Religious Denomination - Meeting with the person on the regional level - Long-term investments at 8-12%.


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EVALUATING RISK OF DEFAULTED MORTGAGES

1. Down Payment/Equity

2. Number months delinquent

3. Reason for delinquency

4. Owner occupant v. Investor

5. Price Range of Property

6. Land

7. Commercial

8. Condo

9. SFH

10. Appraisal

11. Tax Assessment

12. Title Insurance


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DANGER SIGNS

Clauses to Watch Out For

1. Subordination

2. Right of First Refusal

3. Substitution of Collateral

4. No Personal Recourse

5. Right To Cure Default


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CHECKLISTS

1. Due Diligence Checklist 2. Closing (Purchase) Checklist


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DUE DILIGENCE CHECKLIST

The lists below are items you should request from the note seller. Do not confuse this list with the “closing checklist”. The list below helps you make a decision to buy a note. Required items

1. Name, address and social security number of person selling the note with their contact information.

2. Contract between you and the note seller. 3. Name, address and social security number of person making the payments

on the note with contact information. 4. Copy of the promissory note. 5. Copy of the mortgage or deed of trust or land contract you are buying. This

is a recorded document you should be able to obtain even if the seller doesn’t have it.

6. Copy of appraisal. You must get “comps” if it isn’t to determine the after repaired market value.

7. First mortgage information if you are buying a second. 8. Payment history record. 9. Title Report-verifies the position of the note you are buying 10. Credit Report – shows how many other debts are outstanding and gives you

a clue as to whether the payor will go into default again. 11. Option to Purchase Agreement

Nice to have items (as additional support)

1. Loan application by buyer of the property if the house is owner occupied, if available.

2. Copy of Mortgagee title insurance policy. 3. Copy of the Mortgagee title insurance policy. 4. Copy of hazard insurance policy (or evidence of insurance). 5. Copy of closing statement (or settlement statement). 6. Location map (see maps.com). 7. Any lease or rental agreements if occupied, if available. 8. Photos of the property. 9. Description of the property and any improvements made to the property

since the note origination date (roof, landscaping, bathroom, etc.) This course is not meant to replace your legal and accounting professionals. It is always in you best interest to have your own competent attorney review your paperwork and assist you through the transaction. Let the attorney find any possible traps and provide ways around them as well as steps you should take to protect yourself.


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CLOSING (PURCHASE) CHECKLIST

The lists of documents below are required at the closing table before you purchase a note. When in doubt ask your attorney what is necessary. Required items

1. The original note or whatever your attorney will accept as a replacement (if

the original is lost ask your attorney what you need instead.

2. Title insurance policy to you (prepared by closing agent).

3. Mortgage insurance policy covering you.

4. After repaired appraisal or a minimum some very strong “comps” from a real

estate agent that you approve.

5. First mortgage information if you are buying a second (closing agent will

acquire upon request or you can).

6. Estopple letter from the note seller (prepared by closing agent or note

buyer).

7. Properly executed assignment of mortgage, trust deed or land contract

(prepared by closing agent or note buyer)

8. Deed from note seller to you if you are buying a land contract (prepared by

closing agent)

9. Purchase Agreement for Mortgage (make sure the seller is selling the

mortgage with recourse)


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DOCUMENTATION

The following documents are required if you are going to buy OR sell a mortgage.

Originals are required, but can be substituted for certified copies. If you have

certified copies they must be provided by the Title Company, not the note seller.

1. Original (or certified copy) of mortgage (Trust Deed)

2. Original note

3. Mortgagor Estopple Letter (signed and notarized)

4. Closing statement form original sale

5. Mortgagee Title policy, commitment and abstract

6. First page of the property insurance policy

7. This step only if the mortgage in question is not in first position.

a. Copies of all senior mortgages and notes

b. Mortgage verifications for all senior notes (signed) showing current

status and balance.

8. Appraisal

9. Credit information on the mortgagors

10. Amortization schedule for note

11. 2 color pictures form 2 different locations showing the property

12. Copy of rent and expense sheet (for rental property) also found on schedule

“C” of the owner’s tax return


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THE TOP 3 DOCUMENTS REQUIRED FOR PURCHASE

1. Credit Report 2. Title Report 3. Appraisal


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The Credit Report

The credit report is an important document to have. If you were buying a mortgage that is current you would pull credit to make sure the homeowners (payor) credit is still good. This reduces the likelihood of default after you purchase the note.

But, what about a note that is already in default. Why bother with the credit report?

We always want to see the payer’s credit report. If you remember from the previous section on FICO scores, the lower the FICO score the higher the possibility the debtor will go into default. What I am looking for from the credit report is not that he is late on his mortgage, rather I am looking to see the extent of all of his other debts. Depending on the types of debts that are in default could cause potential title problems later. For instance, if the debtor has several major credit card bills (like Citibank) the creditor may start a lawsuit and obtain a judgment. This is fairly common for Citibank. The judgment by itself is normally not an issue. If the creditor files the judgment in land records (see section on judgments and judgment liens for more details) the judgment would attach to the property and be part of the chain of title. By having Citibank in the chain of title might cause me to not want to accept a Deed-In-Lieu of Foreclosure. If I accept the Deed-In-Lieu I am also accepting other debts that are attached to the property. So when I go to sell the property on the open market I will be required to pay off Citibank just like the original homeowner would have been required to pay off Citibank. This can dramatically reduce the profit I thought I was going to make on this deal. It may even be that foreclosure is really the best solution since it will wipe out all other debts depending on the sales price of the house at the courthouse steps. Cost is around $2.50 - $60.

The Title Report The title report is usually done by an attorney or title company depending on the states law where the property is located. The title report determines the existence of other liens previously known or not. As mentioned earlier, these liens remain after the Deed is transferred. This is generally different from a foreclosure in which the liens junior to the foreclosing deed holder can be wiped out if the foreclosure sale comes up short. By junior liens, we mean liens that were placed on the property after the original mortgage was filed. Accepting the Deed in Lieu of Foreclosure may leave me (the Trust Deed investor) with substantially less if the existing junior liens eat up a substantial part of the property's equity (see Option #3). Legal experts generally advise the issuance of a new owner's title policy insuring that the lender will be acquiring marketable title. We would always do this even if the attorneys did not recommend it. We would rather be safe than sorry.


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The safest route is to have the transaction handled by an escrow company with new title insurance. If the transaction is handled informally outside an escrow, it would leave you vulnerable to liens filed just before the filing of the Deed in Lieu of Foreclosure.

Cost is Around $200 - $450.

Bottom Line? Use an attorney and Title Company for everything. Get title insurance to protect you and make sure to look at all of the documents.

NOTE You want to obtain “lenders Policy” while the original homeowner would have obtained an “owner’s policy”. Never buy property without title insurance.

Property Appraisal Having the property appraised is a way of determining the properties true value. Why is the value important? The value of the property plays a critical role in determining what we would pay for a mortgage that is in default. Lets say we had a property we though had a fair market value of $100,000. There was a 1st mortgage of $50,000 and with anticipated legal fees, and back payments of another $5,000. Total debt equals $55,000. The total loan to value ratio would then be 55% (55,000/100,000).

Using the same scenario above we hired a company to due a full appraisal on the property. It turns out the property is only worth $85,000. What is the new loan to value ratio (LTV)? We still have the same amount of debt ($55,000) but now the value is only $85,000. So we divide the $55,000 by $85,000, which gives us a new loan to value of 64.7%.

You have the same property but two different property valuations. Which deal would you want to buy? Me too, we would take the property with the lower loan to value ratio of 55%.


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Always get an appraisal of the property to insure that the equity you think is in the property really is in the property.

NOTE

Keep in mind that when you buy defaulted mortgages and trust deeds you need to assume that you will get the property. Getting the property is one thing. How much it costs to get the property and resell the property is another.

Cost is around $80 - $400


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WHAT IF…

This section covers some of the “what if questions” that always seem to come up. You have learned a lot about defaulted mortgages, how to buy them, how to flip them and how to fix them, but what if something else happens? What do you do? Here are my answers to many of the questions you might run across.

What if No One Calls? You have sent our your marketing letter and even sent 2 follow-up postcards, but nothing happens. Should you just drop the lead as dead and move on to the next lead? No. You still have a potential goldmine at your fingertips. You should always prepare a follow up to your mailings. By follow-up we are referring to calling the note owner. You can locate their phone number by looking in your phone book, calling information, or searching the Internet. Searching the Internet is the easiest for us. We like to use the following Internet phone book sites to obtain free information:

• 411.com • Yellowpages.com • Bigfoot.com • Questdex.com

When you contact the note owner introduce yourself and why you are calling. Try a phrase like: “Hi, Mrs. Note Owner, My Name is Michael and I am calling because I was doing some research at the local courthouse and ran across a mortgage that you own that may be in default and I wanted to know if you would like to receive CASH for your defaulted mortgage. Is this a good time to talk about the mortgage that you own?”

Another phrase you could say is: “I am calling regarding a postcard I sent you in the mail regarding a paying you CASH for a defaulted mortgage that you own. Is this a good time to talk?”

NOTE

The normal response rate for direct mail is somewhere between 1% - 3%. If you mail out 100 letters you should get 1-3 calls. When mailing to owners of defaulted paper on the other hand you should get a much higher response rate of around 6%. That’s double of the normal rate.


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NOTE The above question is a great way to analyze the effectiveness of you mailing campaigns. When you contact the note owner ask them if they received your postcard or letter. If no one says they got your letter it could mean :

1. They never received the postcard 2. Saw the postcard but threw it in the trash 3. Read the postcard by still threw it in the trash 4. Did not understand the postcard (confused)

What If The Note Seller Does Not Remember The Mail Piece?

If the note owner does not remember getting your mail piece it could mean it never got to the note owner. Make sure to send you mail by first class and not by bulk rate. Bulk rate “sometimes” gets lost in the mail. Make sure you piece gets there. Some other solutions if the note owner does not remember you mail piece are:

1. Make your mail piece an odd size so that it sticks out from the rest of you

mail. 2. Make the envelope or postcard a different color than white. 3. Send 4-color postcards. 4. Hand label your mail piece to make it more personalized. 5. If you send an envelope stick something inside the letter such as a small

rubber frog. These frogs cost about 10 cents each and can dramatically increase your response rate. Think about it. If you got a letter in the mail and it had something lumpy inside you would want to know what it is. You open the letter and see the small rubber green frog. Don’t you want to know who sent you the frog? Of course you do, so you will read the letter. Even if you are not interested in the offer to sell your note at that time you will remember the frog and may give it to your kids if you have any. Either way you will always remember getting a rubber frog in the mail and will possibly keep the mail piece for future reference.

6. Have a special notice printed on the outside of the envelope, either the front or the back that says “Do You Want Cash Now?” This phrase needs to be short and sweet and to the point. You want the note owner to open the mail piece to see how they can get cash. This is called teasing the note owner to open the mail piece to find out how they can get cash.


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What If The Note Seller Does Not Understand The Mail Piece? The easiest way we have found to make sure everything we send out in the mail is understood is to write everything at a 5th to 6th grade level. We then give it to someone who knows nothing about the business and ask him or her what he or she thinks the letter is about. If they understand it then so will the note seller (hopefully). What if The Note Seller Is Not Interested?

You should expect that some of your calls will result in the note seller saying they are not interested in selling their defaulted mortgage. We have found that this is often not the case. The note seller is unsure of what to do and possibly a little intimidated. When someone is scared, embarrassed or confused the best solution for him or her is to do nothing.

Don’t give up. Persistence is the key to success. It is important to remain upbeat in any conversations. Also do your best to make the note seller feel that they are not threatened and are making the right decision.

Let me give you a few alternative phrases: 1. I know you are not interested in selling right now, but what would you do if you

had the cash you need right now? 2. Do you mind if I call you back in a few weeks to see if you have any other

questions? 3. Would it be ok if I send you our Note Owners Handbook at no charge? This

handbook is a critical resource for mortgage owners to help them stay in control of their mortgages and take all of the tax advantages available.

4. Please keep my name and number with your mortgage documents. When you decide to sell in the future please call me and we can discuss all of your questions.


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What If My Offer Is Not enough?

This is one of the most common objections that come up in discussions with note sellers who own defaulted mortgages. A typical scenario is the note owner is interested in selling their defaulted note, but does not like your price.

It is important to convey your knowledge about defaulted mortgages and remind the note seller about the negatives involved with holding their defaulted note.

Remember, most people have no idea that they could

even sell their mortgage much less sell a mortgage where someone is not making their payments.

Keep in mind the note seller is afraid to foreclose on the note because of several possible reasons:

1. Does not want to foreclose 2. Does not know how to do it 3. Afraid it costs to much 4. Does not have the money to foreclose 5. Just wants out 6. Nothing but problems 7. Costs, time and hassle of foreclosure 8. Potentially low loan-to-value ratios 9. Property in need of lots of repair and deferred maintenance 10. Hassle of keeping up with all of the paperwork

Let’s say you make an offer to purchase the defaulted note for $40,000. Keep in

mind that the normal range for buying defaulted mortgages is around 20 cents to 50 cents on the dollar. You will take over everything. She no longer has to deal with the homeowner who is in default or worry whether or not she will get her much needed monthly payments. She does not have to worry about how to come up with the money to foreclose if it is required. She does not have to worry about working with lawyers or understanding the legal system. She does not have to wait 30 years to get back all of her money.

Jill now has a lump some of $40,000 that she can spend or invest any way she

likes. You have a note that you must work to bring current and make it a paying note again.

Another question you can ask the note seller is “how much cash do you need now?” This can give you a clue as to how much money the note seller really needs.


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Maybe the seller does not need all of their money right now. This could open the possibility that you could purchase a partial of the defaulted mortgage.

Another solution to the “not enough money” issue is to make multiple offers so the note seller is forced to choose between offers rather than just say yes or no. To make the offer seem more concrete to the note seller we recommend that you put your offers in writing. Everyone loves to see things in writing. Everyone typically feels better when deals regarding money are in writing. Don’t be offended if the note seller counters your offer. Remember, every deal is a negotiation and it is important to make all parties to feel like they have won the negotiation. You have a price you want to pay and the seller has a price they want to sell. Give your self a little bit of wiggle room when you start negotiating. Start lower that you expect so that you have some room to make a higher offer. Even if the note seller refuses your offer, send a follow up letter to the note seller with your offers in writing.

What If I Forget What To Say When The Note Seller Calls?

The phone rings, you answer it and it is a potential defaulted

mortgage client (Jill). Jill says she got your postcard in the mail and wants some more information on how to sell her defaulted mortgage. Up to this moment you were prepared. You knew all of the questions and answers. You knew without a doubt you would get a deal once the mortgage owner called. Unfortunately, you forgot everything as soon as Jill said she wanted more information. What do you do?

First, don’t panic. Second, take a deep breath.

Third, pull out your Mortgage Qualification Worksheet and start filling in the blanks. Use the questions on the qualification sheet to tell you what questions to ask.

Fourth, don’t worry about making mistakes. We make mistakes and so does everyone else. If someone says they don’t make mistakes they are either lying or they just got started in the business and have never done a deal. Even if you make a mistake on the phone Jill does not know you made a mistake. She has no idea


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what you are going to say. If she did she would not be calling you. You can always ask other questions at the end of your conversation or you could even call them back and say that you forgot to ask a couple of other question so that you can give her the best possible price for her defaulted mortgage.

Fifth, keep in mind not every deal will qualify as a deal you want to purchase for your own portfolio or a deal that you could even flip to another investor.

What If I Need A License?

Some state require a license if certain types of mortgages are brokered (flipped to another investor). If you broker a note in a state that requires licensing and you do not have a license, you could face possible criminal sanctions as well as loss of any fees you earned. It is always easier to act as a “dealer” where the note

purchase agreement is signed to you and then you sell your rights to that agreement for a fee. There may be some cases where a dealer is viewed as a broker trying to hide a broker arrangement behind a dealer title. A dealer actually takes title to an asset (even though in some cases it might be in your name for only two seconds) and then reselling the asset to a 3rd party. The dealer profits from the sale of the asset, not from a fee or commission. You have two ways to do this: 1. The easiest way to not act a dealer is to simply assign all of your rights in your

contract with the note seller to the investor. You use a note purchase agreement between you and the seller. You then assign the Note Purchase Agreement over to the investor for a fee. You get your fee up front, which is not part f the closing of the mortgage by the third party investor. You are still selling an asset (your rights in the contract to purchase the defaulted mortgage for a specified price).

2. You use a simultaneous closing. Two documents are required: a. Note Purchase Agreement from the note seller to you. b. Note Purchase Agreement from you to the investor.

Make sure the price you sell to the investor is higher than what you have agreed to pay the note seller. This process is legal and fairly common. You need to make sure you can perform and have a clear title on the mortgage rights that you are selling to the investor. As an example you agree to buy a mortgage from Jill. Bob is an investor who is looking for a good rate of return on a defaulted mortgage. At the closing table Bob has his funds wired from his bank to the title company. The title company holds all of the documents and funds. The title company will cut a check


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to Jill for the purchase of her defaulted mortgage. The title company will then take out their fees for performing this service and will then cut a check to you for the balance. As part of the title company’s fees they will make sure all of the documents are properly recorded. A broker does not take title to any assets. The broker brings a buyer and seller together. The buyer will buy the asset (mortgage) directly from the seller. A broker makes his money from a fee at closing for his services. There are also two ways to broker a note: 1. The note purchase agreement is assigned to your investor who closes on the

note and pays you a fee at the closing table. 2. You act as an agent for the investor by arranging for the original note purchase

agreement to be signed by the note seller and the investor only.

NOTE We like to act as a dealer and do a simultaneous closing. This helps prevent any issues of us brokering a deal in a state that has licensing requirements.

When in doubt contact your attorney to ensure that you are in full compliance with all applicable laws for your state.


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POWER NEGOTIATING TECHNIQUES

There are several relatively easy answers to get

around these objections.

1. Ask trial “closing questions” to get their

opinions and responses.

• How does this sound to you?

• What do you think of this feature?

• Which of these offers do you like best?

• What information will you need to make a decision?

• Other than yourself, who will be in on the decision?

• How do you feel this will answer your cash needs?

3. Restate how the benefits of your offer will help them solve their problem.

4. Closing Statements/techniques

• “Puppy Dog Close”—This is based on the idea that once the prospect “takes the puppy home,” he/she will have a hard time returning it to the shop, even if he/she knows they are perfectly free to do so. Offer to send them a couple of different offers that they can think over and you will call them back.

• “The Blank Order Close”—“Let’s look at the offer details to see

what you need to provide in order to move in.” • “The Ben Franklin Close”—This close is a classic technique to

use when someone cannot, will not, or doesn’t know how to make up his mind. The Ben Franklin Close is a method to compare the pros and cons of making a decision to sell a mortgage that is in default. Make a list “T”-chart with all the reasons to sell on the left and the reasons not to sell on the right. Which list is Longer?

• “The Alternative Choice Close”—This close is based on the

concept that the note seller not need to make a decision of yes or no, but a selection of what, where, when, or how. For example, in making an offer, offer would you like to sell all of your mortgage or just a part of the mortgage.


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• “The Tie Down Close”—This is a conversational closing

technique, whereby you help the note seller reach a decision by reinforcing positives that he/she brings up during a conversation.

• “The Sharp Angle Close”—This is a direct closing technique that

should be used only when you are very sure that you have a good chance at getting a yes from the note seller. For example, “Can you do $40,000 instead of $39,000?” You might say: “I don’t know that answer without speaking to my financial partner, but we could come up to $40,000 would we have a deal?”

• “The Secondary Close”—This close involves asking your note

seller a question that assumes he has already made up his mind to go with your offer. For example: “Mrs. Jones, would you like to complete the sale this Friday, or would you rather wait until after the weekend?”

• “The Similar Situation Close”—The effectiveness of this close is

based on the fact that most people are interested in what their peers have said and done. In this close you literally tell a story about someone that was in a similar situation, and what they did. For example, tell a story about another note seller and how the note seller felt before and after they sold their defaulted mortgage.

• “The Summary Question or ‘Is It?’ Close”—The purpose of this

close is to identify and overcome any “hidden” objections. If you can tell your prospect is hesitating but are not sure just why, you can begin with this probing technique. For example, “Mrs. Jones, I can tell you haven’t quite made up your mind, tell me is it the amount of cash you receive you are not sure about?” Mrs. Jones tells you that the price is just fine. Go into the Tie Down Close. Continue to probe. “Well if you are happy with the price for your defaulted note, is it the time frame it takes to go to closing?” You are told that it is the time frame that is making her hesitate. You have successfully drawn out what was bothering your note seller, and can now answer her objection, which is really very easy to overcome. From here you can move on to the final objection close.

• “The Final Objection Close”—Once it has been identified, one of

the best ways to deal with a hidden objection is to make it the final objection, using the following steps:

1) Ask again: “What is it about the price that concerns you?”

“Could you expand upon that please?”


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2) Restate the objection. Empathize, understand and

reinforce the validity of the objection. This lets your prospect know that you really care.

3) Confirm that it is really the only thing standing in their

way. 4) Question the objection again. The more you get her to

pick their objection apart, the less important and monstrous it becomes. Explain to the prospect that the amount you are offering her gets her a guaranteed amount of cash now without any of the headaches and costs associated with doing it on her own. This becomes apparent when you outline, on paper, the cost of the missed monthly payments, hiring an attorney, foreclosure, repair of the house, selling the house in a down market, and her peace of mind. Most note sellers don’t consider all the expenses involved in recovering money on a defaulted mortgage. By having you show them the cost breakdown they are able to see that your cash offer is really the best solution.

5) Confirm that they agree the costs are comparable. “That

resolves the issue about cost, doesn’t it?” 6) Close the agreement using the blank order close.

• “The Think It Over Close”—This is a multi-step closing technique

to use when a note seller comes back to you with the old line, I’ll have to think it over.” Here is a sample sequence you can follow:

1) “Well I’m glad you want to think it over Mrs. Jones, for that

means our cash offer for your defaulted mortgage is a serious contender for getting you the cash you need doesn’t it?”

2) “To clarify my own thinking, what is it about our offer that

you need to think over, is it our time frame?” Note: it’s very important that you do not pause in the middle of this sentence, so that she does not have the opportunity to come up with her own answer right now. This is the “Summary Question Close”.


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3) Once you get through the summary close you can take what’s really bothering them and turn it into the final objection close.

• “The Lost Sale Close”—Sometimes when all seems lost, there is still one last way. When all else fails, try an apology. (I know this one is tough on the ego.) Say, “You know, Mrs. Jones, I really owe you an apology. It concerns me as a professional, that I have failed to communicate effectively what a truly great opportunity we provide note sellers who own mortgages that are in default, especially since what you have told me about your needs makes it sound like we would be a perfect match.” Sometimes this apology opens a new line of communication whereby you can re-present the sales points and re-tackle the negatives and still close the prospect.


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THE POWER OF JUDGMENT LIENS

No course on defaulted paper would be complete unless it covered a major

source of delinquent debt. Judgments and judgment liens fall into this category.

Judgments can often yield double or triple the return of a defaulted mortgage.

Invest In Judgments and Judgment Liens

The term “bad paper” refers specifically to an area called “bad-debts.” Now

before you jump to any conclusions, let me state that we are going to be very

specific on what types of debts to invest in, what to avoid, and how to reduce your

risk to almost zero. Bad debts can include such things as:

Defaulted mortgages

judgments

judgment liens

tax liens

mechanic liens

defaulted student loans

bank charge-offs and more

For the purpose of this course we are going to narrow our focus to judgment

liens, a very profitable part of the business. If you are at all like us when we were

getting started, the word JUDGMENT probably doesn’t mean a thing. If you already

know what they are, then you are ahead of the game. Don’t worry, it is very simple. Let

us explain…


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The first thing anyone needs to do before investing is to understand what it is

s/he is investing in. Let me briefly explain what a judgment and a judgment lien is

and how they can provide you with above average returns on your investments. A

judgment occurs when one person takes another to court and the court awards the

winner a judgment against the loser. A judgment lien occurs when the judgment is

attached to the debtor’s real estate.

Let’s look at how, and why, a judgment is created. I will use the following

example to illustrate.

Example:

John gave his friend Mary $1,500 as a temporary loan so that she could move into a new apartment. John wanted to keep the whole arrangement business-like and therefore drafted a promissory note in the amount of $1,500, which Mary signed, thereby agreeing that she did owe John the money. As part of the agreement, Mary was supposed to pay John back the $1,500 over a one year time period at an interest rate of 10%. The promissory note stated that Mary should make 12 equal payments of $131.87. Both parties agreed to the terms and Mary received her money.

Mary moved into her new apartment but unfortunately, two weeks later she ran into some financial problems. When Mary’s first payment to John came due, she was unable (or possibly unwilling) to make the payment. John called Mary to try to collect the payments, but she was not available.

Finally, after several months, John decided to take Mary to small claims

court to try and get his money back. At the court hearing John presented the promissory note to the judge that showed he was owed the money. The judge asked Mary if she owed the money and she said that she did but has been unable to pay for several reasons.

The judge ruled in John’s favor and awarded him a judgment in the

amount of $1,500 at 10% interest until the judgment is paid. John is happy thinking he is going to get his money, and goes home. Unfortunately for John, Mary still can’t or won’t pay the judgment, and John not knowing what else he can do, only holds a piece of paper that says he is legally owed $1,500.


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The above example is usually the end of the story. The judgment creditor

(John/Plaintiff) has a piece of paper that is essentially worthless unless he can find a

way to get the judgment debtor (Mary/Defendant) to pay the money she owes.

Here is where you come in. John’s judgment has been sitting in his office unpaid

for three years and he has pretty much forgotten about it. While researching

judgments at the courthouse, you find John’s judgment and decide to write him a

letter. In your letter you offer to collect the judgment on John’s behalf. John, seeing

that it will cost him nothing up front, agrees to allow you to collect on his judgment.

He is happy to allow you to collect something that he thought was worthless. You

now proceed to collect John’s judgment using techniques outlined in this special

report.

NOTE

There are other reasons a judgment is obtained:

Legal services that were not paid Contractors not being paid Automobile accidents Rent/damages Medical/dental bills Promissory notes that were not paid Car leases that were not completed Property damage

Essentially, a judgment can occur if one person/business sues another in court and wins. A judgment is obtained and the loser can be legally forced to pay.

Now let us also mention what a lien is and how it comes about. A lien is a

judgment that has been recorded by the court and attaches against a debtor’s

personal property (car, jewelry, boat, etc.) real estate or business property (accounts

receivables, equipment, etc.).


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Let us give you another example. You buy a new car and take out a car loan to

pay for it. The bank that lent you the money places a lien against the car. In the

event that you do not pay your loan, the bank is entitled to come in and reposes the

car and sell it in order to recover the amount of money remaining on the loan.

A similar situation happens with a judgment. The judgment is not paid off and you

want to collect on it. In order to do that you might place a lien on the debtor’s

automobile or real estate and force a sale to recover the amount of money that is

owed on the judgment. To sum it up, a lien changes the judgment against the debtor

into a judgment against the debtor’s property, which is subject to that lien. The lien

will not get you any money right away. What it does is secure you as a creditor

when the property is sold or refinanced. In order to sell or refinance the debtor must

pay you off first. I will cover these and other procedures later.

We want to stop right now to explain a couple of terms so that we are all on the

same sheet of music. We need you to understand the difference between a

judgment, a lien and a judgment lien. We will be using these terms throughout the

remainder of this book.

Judgment: A legal document stating that a debt is owed from one

party in a lawsuit to another party. The judgment will specify the

amount of the award, attorney fees (if applicable) and the date on

which interest on the unpaid balance begins.

Lien: A concrete legal assertion that you have a claim of a specific

value against certain property.

Judgment Lien: A judgment lien is when you take a copy of the

judgment and record the judgment in land records (the same place

people record mortgages and deeds.) By recording the judgment in


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land records you now place a lien on all property owned by the debtor

within that county.

Could you collect on judgments immediately? Sure, but let’s keep it simple. We

are not talking about having you go into the collection business. We are talking

about you buying judgments at a discount for exceptional yields, and in most cases

letting them sit attached to the debtor’s real estate.

Before we go any further let us describe the mindset of the creditor and why they

would sell you their judgment lien for pennies on the dollar. If you want to purchase

a judgment you definitely do not want to pay the full value of the judgment. If you do

pay full price, you can’t make any money. You need to be compensated for buying a

judgment that time has proven (to the creditor only) is unlikely to pay off to the

judgment creditor. You also need to be compensated for your “future” efforts.

You should negotiate to purchase the judgment for around five to 15 cents on the

dollar. So, for a $5,000 judgment, you would offer between $250 and $750. In most

cases the judgment lien is already several years old. The judgment creditor believes

they hold a judgment that is not collectable since the debtor has not paid it off. You

might ask yourself why will the creditor sell the judgment rather than collecting the

judgment themselves. There are several reasons:

• Many creditors do not know how to recover money on the judgment.

• Many creditors are also not aware that a judgment recorded in land records

will attach to the debtor’s property.

• Many creditors look at your offer as a guaranteed amount of cash now (which

they can spend immediately) rather than the worthless document the creditor

thinks they have.

• The creditor has not received any payments from the debtor since the

judgment was awarded

• Most creditors are surprised to find out that they could even sell their

judgments.


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Purchasing judgments that are attached to real estate allow you to create a

superior portfolio of defaulted paper assets that are not subject to the fluctuations of

interest rates ad the stock market. You buy the paper asset and let it sit in your

portfolio. When the debtor eventually sells or refinances their home you get paid at

full value. In order for the debtor to give clear title to a new buyer of his property, or

to obtain a clear title in the event of refinancing, she/he must pay off the judgment.

Most homeowners on average will stay in a house for 5-7 years before they sell or

refinance. During the 5-7 years the judgment will be gaining interest at the full face

value.

Did you know that you do not have to buy

judgment liens at their full value?

By buying the judgment at a large discount you increase the yield on your

investment.

Example:

You are in the courthouse researching for defaulted mortgage information and

run across a 1996 judgment attached to a house with a principal balance of

$10,500. Your purchase price was $1,000 or 9.7%. You purchased the judgment

with the intent to hold onto it. The judgment gained interest at the rate of 10% per

year of the principal value or $1,050. You get a payoff offer in 2002.


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$10,500 Principal Balance

$6,300 Interest accrued for 6

years

$16,800 Total Debt

In 2002 you received a phone call from the attorney representing the debtor. The

attorney informed you that the debtor was selling his house, but unfortunately there

was not enough equity to pay you off in full. He wanted to know if you would take a

discount to settle the debt. The debt at this point was valued at $16,800. The most

that was available to pay off this debt was $12,000. After reviewing the closing

documents you agreed to settle for $12,000.

Your net result is that you had a pure profit of $11,000, which was a 1,200%

return on your investment.

Your result is that you received $12,000 on a $1,000 investment after 6 years.

You made a 1,200% return on your investment and can now use the payoff funds to

purchase even more liens or defaulted mortgages.

You might be wondering, what if the debtor never contacted us or would not

agree to settle, and the judgment remained in our portfolio for two more years until

he decided to sell the property? This is where things start to get really interesting.

Let’s look at what some of the possibilities are:

1. You buy the judgment for $1,000. The debtor does not pay off the debt for

four more years (total of 10 years.) While you are waiting for the judgment to

be paid the judgment is earning interest of 10% per year. (Judgments gain

simple interest only-there is no compounding.)


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What most people do not realize is that the debt is gaining interest at the full

original amount of the judgment, not the discounted amount that you paid the

creditor when you bought the judgment. Therefore, the judgment is gaining

interest at the rate of $1,050 per year or $2.88 per day. If you receive interest

income of $1,050 on an investment of $1,000 your

rate of return exceeds 100% per year. So if the

debtor sells the house after 10 years and pays off

the judgment (let’s assume the judgment is paid at

full value plus interest) in the amount of $10,500

(principal), plus $10,500 (10 years of interest), for a

total of $21,000. Wouldn’t you say you have a very

good return on our investment?

Your investment is protected by the real property owned by the debtor. Over

time the debtor will continue to make his mortgage payment, and with each

mortgage payment the equity in the property increases, thereby increasing

your protection in the property. Also by waiting and not having to take steps

towards an immediate pay-off, we are able to defer taxes on the income until

several years in the future.

2. Let’s assume the debtor waits two more years before selling his home. And

let’s say that the housing market has not been so good and the price of the

debtor’s home has remained stagnant. The debtor contacts you to pay off the

debt, but he wants to pay the debt at a discount. Should you settle at a

discount? Some questions that you should consider before agreeing to

discount are:

a. Is the debtor selling his property?

b. Is the property being refinanced?

c. Is there not enough equity in the property for full payoff?


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d. Will the debtor pay off the judgment immediately? By paying the

judgment immediately we mean within 2-3 weeks. You will want to

make sure that the debtor is not “shopping” to see what kind of

discount you will take, turn around and sell the house several months

later and then pay you at the discounted price. Another way of saying

this is that if you take a discount now, you want to be paid now and not

some time in the future.

Keep in mind you can list Judgments and Judgment Liens on our FREE

website listing service and make a referral fee. We know of companies that

pay a referral fee as much as $2,000 for a $10,000 judgment lien.

How The System Works

The system of investing in defaulted paper is very straightforward. You can use

multiple techniques to find the judgment liens. To simplify this process we are going

to cover the following steps:

1. Finding the paper

2. Screening the paper

3. Purchasing the paper

4. Calculating your profit when you get paid

Optional steps to take into account are how you want to purchase your

investments. You should consider:

1. Personal assets versus tax-deferred investments

2. Purchasing the paper as an individual or through another entity


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How To Find Your Paper

Let me describe how easy it is to find judgments and what the future holds.

There are 14 different ways to locate judgments. One of the easiest methods to

locate judgment liens is doing some very simple research at your local courthouse

Land Records Department (you can also buy mailing lists of judgment liens). First

off, let us say that any courthouse research does not have to be done by you. You

can hire anyone to do the research; family members, college students or people

looking for part time jobs.

There are companies in most areas as

well as on the internet that can provide

you with lists of judgments

Each courthouse contains the same information. The process

you use to access the records is sometimes a little different, but

you are always looking for the same information. The easiest

way to understand the ins and outs of a courthouse is to just

ask for help. Normally, at the entrance to the land records

department (this is where the court recorded mortgages, deeds,

tax liens and judgment liens are kept) is an information desk.

You could easily spend a couple of years in one courthouse and never be able to

research all of the judgments available to pursue. With this in mind, it is easy to see

that the judgment business is waiting for someone like you to make BIG money.

There are so many

judgments to choose from!


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On average, there are 350,000 judgments in every single county in the United

States! And that is going back only seven years. There is one county in Illinois that has

14 million judgments, and Orange county California has over 3,000,000 judgments.

And the best news is that this is a renewable resource. On average, in every county

in America there are 50,000 new judgments recorded each year. In Montgomery and

Fairfax counties, just outside of Washington, D.C., there are over 100,000 judgments

filed each year!


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LOCATING JUDGMENTS/ACCESS OPTIONS

1. Subscribe to listing services for judgments-usually a legal newspaper in your

area. You can find out the names of the paper from the clerks at the courthouse. 2. Internet searching (see using the Internet to find deals section). 3. Advertise in the paper (under money to lend, capital wanted, personals or

miscellaneous)- "CASH NOW For Your Unpaid $ Judgment." "CASH FOR JUDGMENTS - If you have an uncollected judgment, we may buy it for cash. Call today."

4. Send letters to businesses from the Yellow Pages. I have found postcards to be

very effective and they are cheaper than letters. Send to the accounts receivable department or to the CFO of the company.

5. Check for on-line access methods - call court and see if you can get on-line.

Check www.notesforsale.com for helpful tips. 6. Go to land records and look up information on liens. 7. Mortgage Brokers. People applying to buy a house sometimes have judgments

against them and can't qualify for a loan. You can collect these judgments very easily.

8. Probate/Bankruptcy Records. These can be an easy source of judgments that

are attached to real estate. You normally will not have to do any collection to be paid on these debts.

9. Mailing Lists. We can provide you with a company that can give you an

unlimited number of judgments where the debtors own property. Think of the research time you will save. Call our office for details.

http://www.notesforsale.com/


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How To Screen Your Investments

When looking for judgment liens you need some key information. At a minimum

you should obtain the following:

1. Debtor’s name

2. Debtor’s address

3. Amount of the judgment

4. Date of the judgment

5. Interest rate on the judgment

All of this information can be obtained right from a copy of the judgment itself.

Before you consider buying a judgment you need to determine if the debtor actually

owns real estate that will act as security for your investment.

When looking at the judgment document notice the debtor’s address. Let us

assume that the debtor’s name is John Q. Debtor who lives at 123 Main Street,

Anywhere, USA. You can contact the local tax assessor’s office (contact the tax

assessor in the same town as the debtor’s city) and ask them who owns the property

at 123 Main Street. If the tax assessor tells you the owners name is John Q. Debtor

you have a hit. It is that simple.

If you have a hit (the debtor owns the property that was listed on the judgment)

all you need to do now is contact the creditor and attempt to purchase it.

When evaluating a judgment lien for purchase you will find that some are against

individuals and some are against a business. When trying to determine which is the

better purchase you should consider the following:


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Person-to-Person

A person-to person judgment is when an individual sues and wins a judgment

against another individual. I believe that a person-to person judgment is the very

best type of judgment to purchase. When you send your offer letter to the judgment

creditor you will have the most success with getting them to sell their judgments to

you. The best types of person-to-person judgments to collect are:

• Child/Spousal (wife or husband) support

• Past due rent

• Auto accidents

• Property damage

• Services that have not been completed

• Personal loans

• Legal fees

Business-to-Person (Business)

Business-to-person judgments are the next best to pursue. A business-to-person

judgment is where a business, such as “ABC Towing,” sues a person or an individual

who is doing business as a sole proprietor with a business name (this is known as a

d.b.a. doing business as.) When analyzing these types of judgments make sure that

the judgment is against a person as well as his company. If the judgment is against

both the individual and his company, you can attach property owned by both the

person and the business.

Business-to-Business

A business-to-business judgment is where one company sues another company

in court and wins a judgment. This usually involves amounts over $5,000. Not all


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You can pay the creditor whatever

you feel the judgment is worth. Keep in mind that the less you pay for the asset (the

judgment is a defaulted paper asset with the property as

collateral) the lower your risk. I

typically pay 5 cents to 15 cents

on the dollar.

businesses will own property. You will have a higher hit rate if you stick with person-

to-person judgment liens.

How To Buy The Paper

Buying a judgment lien like most all investments is a

process. You find the asset, negotiate the purchase,

and hold it in your portfolio until some future date. The

nice part about buying judgment liens is that you could

(if you choose to) push through the payoff of the

judgment anytime you want. The court system has

specific procedures that allow you to collect on the

judgment.

We also buy foreclosure properties when a good

opportunity presents itself. If we are going through the

trouble of doing research on a particular property we try

to find as many different ways to make money from the property as possible. For

example:

In doing our research on a particular property, we noticed that the property

had a first trust and two judgments against it. We contacted the owner of the

judgments and we agreed to purchase a $6,200 ($8150 with back interest)

judgment lien for $2,300 or 28% of the judgment’s full value. We purchased

this judgment three days before the judgment debtor’s property was

scheduled for auction.

Our research showed that the property was worth $275,000, but only had

debt of $108,000 (first trust), another judgment for $1,200 and the judgment

we purchased. Our real purpose was to buy the real estate at auction, at a

discount of course. Our reasoning was that when the property went to


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auction, even if we were not the high bidder, at least the judgment would be

paid off before the judgment debtor would receive any net sale proceeds. As

it so happened, we were not the high bidder on the property. The property

sold for $195,000. We received $8,150 from the sale proceeds of the auction.

Our net profit was $5,850!

You should always evaluate the debtor’s property before you purchase a

judgment lien. Therefore, it is important to determine the amount of equity in a

property. The more equity in a property the more you can afford to pay for the

judgment lien. With more equity you have extra protection (insurance) that the

debtor will continue to make his mortgage payments rather than let his home go into

foreclosure in an effort to avoid paying off your judgment lien.

To determine the equity in a property you first add up all of the debts. This

includes a first mortgage, second and third mortgage and all other liens listed

against the property. This also includes the lien you are considering for purchase.

(You can ask the court clerk in the records area of your courthouse for assistance in

determining the debts attached to the property.) You then determine the fair market

value (FMV) of the property. Determining the FMV is as simple as calling a local real

estate agent and asking them at what dollar amount the homes like your debtors are

currently selling.

If you have a property with a 1st mortgage of $60,000 and a 2nd mortgage of

$20,000 and a judgment lien of $10,000, you have a total debt of $90,000. You

contact a real estate agent who tells you homes in the debtor’s area are selling

around $100,000. You take the $90,000 and divide it by the $100,000 for a debt-to-

value ration of 90%. The formula looks like this:


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We like to have a least 10% or more equity in the property before we consider

purchasing the judgment lien. Our reasoning is that if the debtor has some of his

hard earned money in the property the likelihood of him not making his mortgage

payments is very low.

Once you have been paid on your judgment lien you need to release the lien from

the debtor’s property. You do this by filing a “Notice of Satisfaction” (name varies by

state.) This can all be done by mail and does not require a personal appearance in

court. As always, please consult your own legal council for specific procedures for

your state.


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GLOSSARY OF TERMS FOR JUDGMENTS

The following glossary defines various terms that are used throughout this book.

Use the glossary as a reference guide when reading through the special report to

become familiar with the language of the judgment business.

Appraised Value: An opinion of the value of a property at a given time, based on

facts regarding the location, improvements, etc., of the property and surroundings.

Bank Charge-off: A debt, such as credit cards, auto loans and personal loans that

has been written off by the lending institution as uncollectable.

Default Judgment: Judgment entered in a lawsuit when a defendant has failed to

enter a plea or otherwise defend himself.

Equity: The difference between the market value of the real property and any liens

on the property.

Judgment: A legal document stating that a debt is owed from one party in a lawsuit

to another party. The judgment will specify the amount of the award, attorney fees (if

applicable), and the date on which interest on the unpaid balance begins.

Judgment Creditor: Any person or business, which owns a judgment that has not

been paid. Also called the plaintiff or creditor.

Judgment Debtor: Any person or business against whom a judgment has been

obtained and who has not paid the amount of money owed to the judgment creditor.

Also called the defendant or debtor.


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Levy: When a law enforcement officer (Sheriff, Marshall) or registered process

server acts under a Writ of Execution to obtain property or cash belonging to the

judgment debtor for the purpose of satisfying the judgment.

Levying Officer: Usually the Sheriff or Marshall who is responsible for performing

levies. This person will actually travel to the bank or employer to perform a

garnishment.

Lien: A concrete legal assertion that you have a claim of a specific value against

certain property.

Mechanics Lien: A claim created by a contractor or subcontractor when a builder

or homeowner fails to make payment for work done in building or repairing a

property. State laws govern these liens, but they can have priority over previously

recorded liens. The holder of a mortgage or deed of trust cannot foreclose until

mechanics liens have been satisfied.

Registered Process Server: An individual or someone who works for a company

that makes a business out of serving legal documents.

Tax Lien: Lien for nonpayment of taxes.

Writ of Execution: A directive from the court to a levying officer within that court’s

jurisdiction. The Writ of Execution permits the levying officer to serve a levy on the

judgment debtor’s property based on instructions that judgment creditor has given to

the levying officer.


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TITLE HOLDING TRUST

Protect Your Assets

This section is not meant to be all-inclusive about asset protection. Our goal is to

give you a general idea about how to hold title to real estate or to mortgages. If you have ever heard the phrase “an ounce of prevention is worth a pound of cure” then please read the following information very carefully. What I am about to cover is just an overview of some techniques that you could use to protect yourself against unnecessary lawsuits or problems. Overview

It's somewhat surprising that most people, even those with a fair amount of real estate experience, don't appreciate the nuances involved in holding title to real property or to mortgages and deeds of trust. The most common presumption people have is that it's best if their title is in their name. But like most presumptions, that's about the worst choice one could make.

The reason is that things happen to people (lawsuits, tax liens, judgments, divorces, death, etc.) that can instantly cloud the title to whatever they hold in their names, making it impossible to sell or refinance until their title is cleared of such impediments. The problem is ever more severe when multiple parties, especially non-related investors, are joined together on a title. The Alternative

Don't put the title in your or another person’s name. For years real estate pros have deftly sidestepped title calamities by vesting their properties in a legal, virgin, non-living entity (such as a corporation, a limited partnership, or a title holding trust).

Nowadays though, many of them are switching to the use of the non-taxed title holding trust.

Keeping the title to your property clear of any clouds is so important, that even the use of a taxable corporation to hold it is preferable to keeping it in your name. The benefit of a legal entity is that a legal entity won't suddenly disappear, die, or


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become incompetent overnight. And note that control of a corporate entity takes the form of privately transferable personal property (i.e. shares of stock, partnership units, beneficial interests, etc.) whereas the transfer of title to real property is publicly recorded for the entire world to see and investigate. "Lawsuit Proof" The Titles To Your Properties and Mortgages

Create a legal, artificial association for each property you now own and deed your title over to it. Don't worry; you'll still be able to transfer the ownership/control of that entity back and forth privately. The absolute best entity for the task is the title holding trust or land trust because it's the most private, cheapest, easiest and fastest to legally create.

Title companies regularly accept the title holding trust format because it was originated by one of the largest title companies of all time, Chicago Title & Trust Company, and because it's a time-tested device that's been used to hold title to property (especially large investment properties) since 1891.

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