System for acquiring foreclosure properties

[Todd Ebach]

To all you experts out on Bigger Pockets, I wanted to get your opinion on an acquisition strategy that I have been contemplating. I know this is a little long but I wanted to get every detail. I would like to know if: 1) anyone is currently doing this; 2) if you all think it would work and 3) did I adequately cover all the potential risks? Here are the steps:

• 1)Locate properties that are in foreclosure and foreclosure sale is eminent.
• 2)Approach the homeowner and explain that they will be losing their property within the next 30-60 days and then will be evicted from the property.
• 3)Explain to the homeowner that I am an investor and would be willing to pay them ($?????) amount cash to do the following:

• a)Execute a quit claim deed conveying title to me.
• b)Execute a specific power of attorney giving me authority to execute any documents related to the property, the loan or insurance on their behalf.
• c)Provide a letter to the bank giving me authority to discuss the loan with them and list my company as the new management company.
• d)Immediately vacate the property.

• 4)As they walk out the door with the last load in their hands, I will receive the required documents and pay them the money promised and have the property rekeyed.
• 5)In order to avoid triggering the due on sale clause, I will not record the deed and will simply place it in my safety deposit box.
• 6)I contact the bank, obtain reinstatement figures and reinstate the loan.
• 7)I also place a second mortgage on the property in the amount of the reinstatement plus what I paid the homeowner.

Outcome at this point

Win, win, win

Homeowner – Wins because they avoid having a foreclosure on their record and receives cash to start a new life.

Bank – Wins because their non-performing loan started performing again and has an individual who will keep the loan current.

Me – I now have control over a property with equity that I can turn around and flip. I live in a non-judicial state so foreclosures are very quick. If I tried to go out and obtain a loan prior to the foreclosure sale, it just wouldn’t happen. So I could avoid the whole bank loan hassle and achieve the same result.

Potential risks

Triggering due on sale clause

Since title will not change hands until the quit claim deed is recorded, there would be no due on sale triggered.

Insurance on the property:

Usually the way the bank finds out about a transfer of title is when the new owner transfers the insurance into their name. However remember, there is no transfer of title at this point since the deed has not been recorded.

So do I need to be concerned about insurance?

Most likely the insurance will be escrowed. It has been my experience that the first mortgage holder (the bank) will make sure that in the event of damage, the property will be repaired to its original condition so they can protect their collateral. So I am not that concerned about it. However, I will take 2 additional steps to protect myself.

• 1)Since I filed a 2nd mortgage against the property, I can list myself as an additional lien holder on the insurance policy. (I am acting as an additional lender, not an owner.) So if the house burned down to the ground, I, as a 2nd mortgage holder would receive proceeds from the policy.
• 2)I had the homeowner sign a power of attorney allowing me to sign on his behalf any document relating to the property or loan. If an insurance check is made out to the homeowner, I have authority to sign it on his behalf.

Someone sues the previous owner and they file a lien against the property.

Since title to the property is still in their name, someone could place a judgment against them and attach it to the property. Further, the homeowner could go get another loan against the property, using the property as collateral.

Solution: That is another reason I filed a 2nd against the property so if a lien holder ever did attach a lien against the property, I would be in 2nd position and they would be in 3rd position, so if I had to, I could just foreclose them out. Further, it is very unlikely that the homeowner would be able to obtain a loan since they just came out of foreclosure.

Previous homeowner moves back into the property in the middle of the night

Since I do not have title to the property, this could present a problem because I could not evict them until I recorded the deed convey title to me. However, it this case, I guess I would just record the deed and start eviction, hoping that the bank would not call the loan due.

I worked in mortgage banking, specializing in Loss Mitigation and Foreclosures for over 20 years and have never seen a mortgage company call a loan due as a result of the due on sale clause. However, that was many years ago and things could have changed.

One last note:

Obviously I would ensure that there is adequate equity in the property when I acquire it to make the numbers work and also I would run a title report prior to doing the deal to make sure I am aware of all liens against the property.

Please let me know your thoughts.