The Myth About Foreclosures

(An excerpt from the book "The Reality of Real Estate Investing")

It seems that foreclosures have always been and always will be around. It is a part of society's human nature. As long as there are people experiencing ups and downs in their lives, there will be people not paying their mortgage and facing foreclosure.
What exactly is a foreclosure?
It is the legal means by which a lender using Real Estate as collateral may upon delinquency or nonpayment take away or have ownership of the property transferred to himself and away from the borrower.

This, of course, then gives the lender the right to sell the Real Estate and keep the proceeds -- all the proceeds, even when there is substantial value above and beyond the debt. The profit gained is not always just monetary. Any personal property left behind with the Real Estate goes to the new owner as well. See Case in Point # 1 Harlem Ave.

There is an undeniable negative connotation in the minds of some individuals when you mention "Investing in Foreclosures." They picture you throwing a nice family of a husband, wife, and children out into the streets during the dead of winter. That scenario could not be further from the truth. I have had ownership of up to 32 properties at one time, and made deals on several hundred other properties. From a vacant lot to a 76-unit apartment building. I have never been faced with that scenario.

Reasons for Foreclosure

The first thing to understand is that every deal, every situation, is different. From my experience the number one reason for foreclosure is divorce.

Divorce. See Case in Point # 3 Forestville. One spouse leaves the other, and with the loss of that spouse's income the remaining spouse can no longer pay the mortgage. Sensible people will, of course, recognize the reality of the circumstances and either take a boarder or sell before losing the house. However, having human weaknesses as some of us do, especially when emotions are involved in the equation, the spouse with the house sometimes wants to show the other that he/she can hold on to the house. Or, he/she feels the other should pay the mortgage, and therefore refuses to do so, even if he/she has the money. You would think that when they have equity in their home, they would reason with one another enough to at least sell their home and split the equity. However, this is not the case when emotional contempt plays a role. Neither one wants to see the other get anything. Eventually, they both get nothing.

My mentor used to tell a story about a friend of his who saw an ad for a Cadillac for sale for $25.00. He thought it must have been a typing mistake, but even $2500.00 was a good price. He dialed the number, and a woman answered. He mentioned the ad and that it said $25.00. She said, "That's right." He chuckled and asked, "Does it have tires? Does it have an engine?" She assured him it ran perfectly well. He made an appointment, went over, and bought it. Before leaving, he could not help but to ask, "Why did you sell me this Cadillac for only $25.00?" She said, "My husband recently died after 35 years of marriage. It turned out that he had a mistress and in his will he left her the Cadillac or the proceeds from the sale of the Cadillac!"

Infidelity probably plays a big role in foreclosure situations. Addictions play a major role, also. People in foreclosure are in emotional turmoil! They are on an emotional roller coaster with ups and downs. There are many more reasons why people go into foreclosure.

These include but are not limited to:

Alcoholism and Drugs: Substance abuse and addiction seem to distort a person's sense of reality and logical thinking. These people are in a state of denial probably about every area of their lives -- not just the foreclosure on their home. I have tried talking with these people to help them avoid an eviction, offering cash and other help, and consulting with other extended family members. See Case in Point # 12, Evergreen Park, and # 15 Dickens, and # 21 Avers.

Death: People die and stop paying their mortgage. I have bought several homes where the previous owner had died. Now, logical thinking would dictate that the heirs would take care of the problem. Most of the time that is probably so. However, I bought one where the heirs could not agree on anything, especially who would be responsible to pay the mortgage. See Case in Point # 8, 11, 12, and 18. Sometimes heirs just do not exist, or they live out of state and are unable to deal with it, even when there is much equity to be had. See Case in Point # 18, Desplaines.

Death of a spouse sometimes paralyzes the remaining spouse from taking care of their bills, especially if the deceased spouse always took care of it, or if there is no family or good friends around to get involved in helping out. See Case in Point # 12, Evergreen Park. There have been times when I actually helped people save their homes or equity or counseled them on their scenario and what to do and only was compensated by knowing I helped someone. See Case in Point # 22, Midlothian. I truly believe that we are not put on this earth to see through one another, but to see one another through.

Job Loss: Personally, in my early days when I was married with one child and I found myself between jobs and out of money. I resorted to doing what I did as a teenager. I knocked on doors to mow or rake yards or perform odd jobs for money to survive on. However, some people just become paralyzed unless they can find a job equal to what they had or better. They just spiral down until someone kicks them in the butt or they hit bottom.

Gambling: As I write this I am currently taking possession of a nice split level home in Alsip, Illinois. One of my lender clients recently got the deed on it. I talked with an adult daughter of the man and woman -- her parents -- who lost the home. Both are doctors making an excellent income. Their problem? The lure -- casino river boats. These floating dens of iniquity are a scourge on society. I realize some people may think that a harsh statement. However, when you seriously think about it, casinos only exist for being able to prey on the weak. If that was not so, they would not be in business. See Case in Point # 22, Midlothian.

Medical Problems: Some people lack the ability to acquire, or just do not want to pay for, adequate insurance. When a major medical problem arises, they pour all their financial resources into taking care of their loved one - even the mortgage payments. They rationalize, "I'll catch it up later." See Case in Point # 6, Hickory Hills.

Running from the Law or in Jail: It is hard to keep up payments when someone is on the run or incarcerated. See Case in Point # 1, Harlem, and #20, Wentworth.

Job Transfer: People transfer and cannot keep up two payments. See Case in Point # 24, Sauk Village.

Business Loss: Some people believe working real hard and putting everything they have into their business, including their mortgage payments, will make it a success. Sometimes it works! Other times it does not.

Addictions: I have heard stories from one spouse about how the other spouse was spending their mortgage payments on cocaine.

The list goes on and on, but I think you get the point by now.

Communicating with the Occupant

I always approach the occupants as a middleman person -- a manager for the new owner/investor. It seems to be an easier approach; people are less intimidated. It also is wise to remember that the occupants emotions may be sensitive. Use a low aggressive approach; you will get more cooperation with honey than you will with vinegar.

Sometimes the occupant is not the owner at all; she is a tenant who has been paying rent for the last 12+ months. Once in a while the occupant is a contract for Deed buyer. Which means she gave the owner a down payment and the owner financed the balance. Then the contract buyer was making his monthly mortgage payment to the owner, but the owner was not making his monthly mortgage payment to the bank/mortgage company. Either the buyer did not use an attorney, or he was incompetent in protecting the buyer against this occurrence.

It has always been a part of my procedure to communicate with the occupant to make the transition as smooth as possible and to make an effort to help them with a new beginning. Sometimes this involves keeping them on as tenants, paying their first month's rent and security deposit, or just giving them $100 - $500 for the keys and possession. The most important point to remember about all this is that an ex-owner has developed a very bad habit of not paying anything for many months for their home. I saw one case where it had been 5 years. There was a bankruptcy involved, and the mortgage had been sold in a bulk sale slowing up the process. You never give them anything until they give you keys and possession. Otherwise, something will always come up to prevent them from moving. The house or apartment they had lined up is not ready; they could not get a truck; the dog died; etc.

Consider the Alternative

If the bank or another investor gets the property, they may not show sympathy or compassion. They may not even care about trying to make the transition a smooth one for the occupant. Some do not want to bother themselves with talking to the occupant; they just let the sheriff go out and put them on the street. Worse yet, some may take advantage of them by scamming what little money they have away from them. I have heard about a scam many times from those who have already been taken advantage of during all phases of the foreclosure process. A so-called investor tells the people that he can get the occupants financing to save their home. He charges a $200 - $1000 application fee up front. Of course, the desperate people pay it. Then they never hear from that person again. The good Lord in his wisdom will see to it that these scam artists get their just reward some day!

The bottom line is that I know that problems with people losing their homes to foreclosure exist. Someone is going to profit from it, and it might as well be someone like me who is going to take an unavoidable negative situation for someone else and take the most positive action available and sometimes even be compensated for the effort. That is certainly reasonable, and the people are better off because of my involvement.

There are some situations where I actually help people save their homes by doing some counseling with them, and I make nothing on it. Sometimes its just a matter of lifting a heavy burden from their shoulders by answering their questions about how the whole foreclosure process works. There are other situations where I assist people with refinancing or selling their homes to save their equity. It all depends on the circumstances. See Case in Point # 22, Midlothian.

Do not make the mistake of thinking that you need to know it all before you start approaching people. If you think this way, you will never buy anything. This book will provide you the necessary foundation, and it will familiarize you with the procedures and techniques. What to actually say, questions to ask. However, for the knowledge to really sink in, you just need to get out there and start the process. That is where the real learning takes place. Just Do It!