Find out what's going on in the world of investing. Regular posts by the Entrust experts. Visit now...
Get the latest from Entrust emailed right to you. Sign up now...
By: Ben Brazda
IRA Insights
After their honeymoon in the Florida Keys, Dennis and Sheryl Walker moved to Greeley, Colorado and soon purchased their first home with the help of a mortgage. Dennis sold used cars and Sheryl was on-call as a substitute teacher for the school district while she waited for a full-time opening. In spring of 2006, then they bought their home, the Walkers had a small down payment and they didn’t have a very good credit score but were excited to hear that they could qualify for a loan. Sure, the loan was an adjustable rate mortgage (ARM) but this gave them the opportunity to become homeowners for the first time.
The Walkers enjoyed their first summer and fall as homeowners and then were dumped on with snow from one of the longest and coldest winters Colorado had seen in years. Lacking an established clientele, Dennis’ sales fell and the teachers remained surprisingly healthy so Sheryl’s pay wasn’t enough to make up the difference.
They soon had to dip into their savings to cover the mortgage payments, and they were quickly running out of savings. Once all that snow had melted in late spring, the Walkers were behind on payments and after their third “When can we expect your payment?” letter, they received a notice that their rate was adjusting upwards as was their payment. A month later they got a letter notifying them of their default (violation of the loan agreement) and that foreclosure proceedings had begun.
Unfortunately, the Walkers’ story is not as rare as one would hope. Up until the recent sub-prime mortgage crash, many people like the Walkers were approved for loans for which they may not have been financially prepared. These loose and perhaps questionable lending practices played a large role in creating the current record-setting foreclosure market. This is bad news for homeowners like the Walkers, but to a savvy investor, this is opportunity knocking. The key to answering the knock is understanding how foreclosure works.
When a borrower defaults on a loan, the bank will foreclose on the property. In a foreclosure, the bank has the right to have the property sold to pay off the loan. This is not a good option for the borrowers and is not something that the bank wants either. Because of this, the borrowers typically have the following options to cure the debt prior to foreclosure:
An added benefit to using one of these options is that they avoid the legal process of a foreclosure. If a solution cannot be negotiated, the bank will take the required legal action against the borrowers and the property will be sold at auction.
The most common method of foreclosure is called a judicial sale. In this scenario the county clerk or other officer puts the property up for public auction and the bank places the first bid. At the auction, the property is sold to the highest bidder which, in some cases, ends up being the bank. The bank does not want to have to sell the property so they will frequently place a low initial bid to encourage other buyers to outbid them.
The proceeds from the sale go first to pay off the debt, then to other creditors and finally to the borrowers if anything is left. In cases where the proceeds are not enough to cover the debt, the bank can request a deficiency judgment against the borrowers which would give them access to their other assets.
To the ever-observant investor, there are quite a few investment opportunities here. The most obvious, of course, is attending the foreclosure auction. Other options may include negotiating with junior lien holders, negotiating a short-sale with the lender or working directly with the borrower. Because the foreclosure process is different in each state, the key to a successful foreclosure investment is intricate knowledge of the process and the players and knowing what each player wants and can realistically expect to get from the situation.
Lady Luck smiled down on Greeley, Colorado. After asking a few of their friends, the Walkers discovered that Mark, a friend for 25 years, had a dormant 401(k) account. Mark knew the Walkers well enough to know that they always land on their feet, so Mark saw this as a great investment. After working with Entrust and a title company, a Note and Deed of trust was drafted under terms the three of them had negotiated and before long the Walkers had re-financed with a loan from Mark’s IRA.
In any case, having cash ready to go in an IRA or 401(k) is the key to jumping on an opportunity such as a foreclosure. The first step is contacting your IRA administrator for details on getting an account established and funded. Step two is doing your homework and finding a real estate agent with foreclosure experience. Then, it’s up to you to find the investment and work with your IRA administrator to get the deal done.
*Special thanks goes to Gene Hayden for his help on this article.
Ben Brazda is the Manager of Asset Acquisitions for Entrust New Direction IRA located Lafayette, Colorado. You can contact him by email at bbrazda@ndira.com or by phone (877) 742-1270.
Remember that while Entrust provides excellent educational resources, we do not endorse or sell any investment products. The Entrust Group respects your privacy. Please read our Privacy Statement.
Attend seminars, workshops and classes on self-directed IRAs in your area.
site design, development & e-marketing by 
FUZE
