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 Bishop Realty

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As an investor, your primary focus will be on making deals and in order to make deals you need sellers. Bankruptcies and probate are a goldmine for locating good deals. Buying properties that are in bankruptcy or probate can be tricky and there are certain things that you should know before you get started.

BANKRUPTCY - GENERAL OVERVIEW There are two types of consumer bankruptcies, Chapter 7 and Chapter 13. Whenever a person files bankruptcy, all of his assets become property of the bankruptcy estate. At the time the bankruptcy petition is filed, the automatic stay goes into effect. The automatic stay prevents creditors from making any collection efforts, including phone calls, letters, foreclosure, and repossession, against the debtor. Regardless of whether a Chapter 7 or Chapter 13 is filed, a trustee will be assigned to the case. The trustee's role is to administer the estate and protect the interests of the unsecured creditors.

Chapter 7 is a debt liquidation plan. It allows a debtor to discharge all of his unsecured debts, with the exception of certain taxes, child support obligations, and student loans. The time from filing to discharge is relatively short, usually no more than 4 months or so. Under certain circumstances, buyers can retain property, such as a home or car, that is the security for a debt. In order to retain a home or car, the debtor must be current on his payments or bring the payments current immediately.

If a Chapter 7 debtor has a lot of equity in any property, including real estate, the Chapter 7 trustee has the option of claiming and selling the property. The net proceeds from the sale will be distributed on a pro rata basis to the debtor's unsecured creditors.

Chapter 13 is a debt reorganization plan. Generally, when a debtor who owns real estate and has fallen behind on his payments files Chapter 13, his goal is to save his property from foreclosure. Chapter 13 allows a debtor to repay the delinquency or arrearage on his mortgage overtime, but requires him to make all mortgage payments that come due after the bankruptcy filing on time. A debtor must propose a plan to repay the arrearage on any secured debts. The plan must also include a provision for the treatment of unsecured creditors, who under certain circumstances, may not receive anything. Most Chapter 13 cases last no more than five years.

The term "discharge" refers to the debtor's successful completion of the bankruptcy and release from any further obligation to the bankruptcy court. When a debtor receives a discharge, none of the creditors listed in the bankruptcy petition can pursue collection efforts against him. The debtor has effectively been discharged of those financial obligations.

BUYING FROM A SELLER WHO'S IN BANKRUPTCY There are a couple of sources for locating sellers who are in bankruptcy. The first is the county courthouse. Many times, the attorney representing the debtor in the bankruptcy will file a Notice of Bankruptcy in the real estate records of the county in which the debtor's real estate is located. Lender's will often file Notices of Default in the county records. So the county courthouse is a great place to start. Finally, establish a relationship with a few bankruptcy attorney's in your area. They may be willing to put their clients who want to sell their property in touch with you.

The bankruptcy clerk's office in the bankruptcy court in your area is also a good place to find sellers. These are public records, so you should have no problem gaining access to them.

There are various public records searches available online which are relatively inexpensive. However, you may have to have the property owner's first and last name and county of residence in order to complete a search.

Once you've identified a property owner who's in bankruptcy, you'll need to make contact with him. If he is interested in selling his property, there are a few things you must know before you put the property under contract.

First, because the property is an asset of the bankruptcy estate, the seller must get permission from the bankruptcy court to sell the property. The court's primary concern is that the sales price is reasonable. So, when making an offer, 10%-20% under market value might work, but 40% or more under market value probably won't.

You'll need to qualify the seller. You want to make sure that everyone who has an ownership interest in the property is on board with the sale. So, make sure to ask whether there are any other people on title. There are plenty of times when only one spouse files bankruptcy or when siblings may own a property together and one has filed bankruptcy.

Once the property is under contract, the seller or you, with the seller's written authorization, should contact his bankruptcy attorney and provide him with a copy of the contract. The attorney will have to file a motion with the court seeking permission to sell the property. Furthermore, the attorney will have to provide the trustee and all the debtor's creditors with a copy of the motion and they will have a certain period of time in which to object. If no objections are filed, the bankruptcy judge will sign an order authorizing the sale of the property.

Before closing, the trustee will expect to see a copy of the HUD. So make sure the closing attorney or title company knows the seller is in bankruptcy and provide him with a copy of the order granting the seller leave to sell the property. An experienced closing attorney will know exactly how to handle this situation.

Remind the seller that any net proceeds from the sale will be turned over by the title company or closing attorney to the bankruptcy trustee for disbursement to the unsecured creditors. If any proceeds remain after the trustee has paid the unsecured creditors and any administrative costs of the sale, the balance will be refunded to the seller.

If the seller wants to avoid having the net proceeds from the sale go to the trustee, he will have to dismiss the bankruptcy before moving forward with the sale. However, dismissing the case will put him back in the pre-bankruptcy status quo with his creditors. This means that all of his creditors can begin collection efforts against him, including foreclosure, repossession, lawsuits, and garnishments.

BUYING FROM THE BANKRUTPCY TRUSTEE There are many times when the bankruptcy trustee will exercise his right to claim and sell a property. This can happen when a property has a great deal of equity or if the debtor is deemed to have attempted to conceal the property from the trustee by conveying it to a third party immediately prior to filing his bankruptcy petition.

A bankruptcy trustee can sell the property of a bankruptcy debtor only after notice and hearing. The debtor, his creditors, and any other interested parties, such as co-owners who are not in bankruptcy, must be notified of the date and time of the hearing and have a right to appear at the hearing and give testimony. Many times, sales by trustees are made free and clear of all security deeds, liens, easements, or other encumbrances or interests of third parties other than the bankruptcy debtor.

To locate properties for sale by bankruptcy trustees, contact the trustees offices in your area. You can obtain the names and phone numbers of the trustees from the clerk of the bankruptcy court. The trustees will gladly tell you about any properties they have up for sale. If you identify a property in which you are interested, you can either make an offer to purchase or an option to purchase.

If you make an offer to purchase and the trustee accepts it, you will be responsible for coordinating the closing if you are paying cash for the property. So, you should contact a title company or closing attorney to handle the transaction. Once you provide the title company with the fully executed purchase and sale agreement, things will be handled in much the same way as any other closing. The title company will run a title search, prepare the closing documents and you will close. It is highly unlikely that the trustee will appear at the closing. The title company will fax, e-mail, or overnight the documents to the trustee for execution and he will return them to the title company for recording.

If you have obtained a loan to purchase the property, the lender will spearhead the closing process. And the scenario will be much the same as described above.

If you obtain an option to purchase from the trustee, you will have a specific time frame during which to exercise the option. In other words, the trustee will agree to give you a certain amount of time during which to purchase the property. If you fail to exercise the option during the allotted period, the trustee is free to sell the property to someone else.

To exercise the option, you should notify the trustee in writing of your intentions. Once you exercise the option, things will go much the same as described above regardless of whether you intend to pay cash or finance the transaction.

Be aware that assignments of contracts with the bankruptcy trustee may be difficult. Make sure to inform the trustee in advance of signing a contract for the purchase of a bankruptcy property if you intend to assign the contract.

PROBATE -- OVERVIEW When a person dies without a will, they are said to have died intestate. If a person dies with a will, they are said to have died testate.

Generally, when someone leaves a will, the will must be offered for probate within a reasonable time. The person who died is called a testator. The testator will have appointed an executor in the will and it is the executor's responsibility to carry out the wishes of the testator as set forth in the will.

When a person dies without a will, any real estate the person owns cannot be transferred until an administrator is appointed by the probate court to oversee the estate. The administrator is responsible for making sure that the heirs of the deceased receive any property to which they are entitled.

Executors and administrators have the discretion to sell any property of the estate if they believe doing so would serve the best interests of the heirs. However, depending on the breadth of their powers, they may have to receive permission from the probate court before a sale can be made. The proceeds from any sale belong to the heirs, not the executor or administrator.

Sometimes in prospecting for sellers, you may come across a property where the owner has died and a surviving spouse or child is trying to sell the property. If they have not gone through the administration or probate process, they have no legal right to sell the property. It is a good idea to establish a relationship with a good probate attorney to whom you can refer people in this situation.

PURCHASING ESTATE PROPERTIES Probate properties can be excellent investments because the owners are willing to sell them for as much as 70% below market value. Owners are willing to make these types of deals because they don't want to be responsible for mortgage payments, taxes, and repair and upkeep on the property.

It may sound morbid, but checking the obituaries is a great way to locate properties. Another way is to check the probate records at the county courthouse. Once you've scoured the obituaries and the probate records, simply take the names you've compiled and search through the real estate records to find the properties the deceased individuals owned. You can also form a relationship with a few probate attorneys who may be willing to put clients who want to sell a property they've inherited in touch with you.

Once the probate court authorizes the executor to represent the estate, the executor will receive letters testamentary. An administrator will receive letters of administration. So, when speaking with a seller regarding an estate property, always ask to see a copy of the letters testamentary or letters of administration. This would be a part of qualifying the seller. You want to make sure that the person representing the estate is a part of the transaction and signs off on the contract.

When the administrator or executor of the estate has been granted all the powers available under the probate laws of the state in which the property is located, he can contract for the sale of the property without getting permission from the probate court. So, your first step would be forwarding the contract to the closing attorney if you plan to pay cash for the property. The closing attorney would run title, prepare the documents, and schedule the closing. If you plan to finance the deal, your lender would forward a title order to the closing attorney or title company to get the closing process started.

There will be times when the letters testamentary or letters of administration limit the powers of the executor or administrator. In such cases, the representative of the estate may have to seek permission from the probate court before selling any property of the probate estate. So, make sure to get the name and phone number of the probate attorney along with written permission to speak with the attorney from the representative of the estate. You will need to provide the probate attorney with a copy of the contract. The probate attorney will then file the appropriate motion with the probate court. The testator's creditors, heirs, and any other interested parties will be given a certain amount of time to object to the sale. If no objections are filed, the probate judge will enter an order authorizing the sale of the property.

If you are paying cash for the property, you or the seller should provide the closing attorney or title company with a copy of the order from the probate court authorizing the sale. The closing attorney will run a title search and prepare the closing documents, and you will have a closing.

If you are financing the deal, your lender will coordinate the closing by placing a title order with the closing attorney or title company. Once the lender forwards the closing package to the closing attorney, the process is much the same as with any other closing.

DUE DILIGENCE Whether purchasing a bankruptcy property or a probate property, you must do your due diligence. Take the appropriate steps to protect yourself and your investment by placing a due diligence contingency of ten to fifteen days in your contracts. If for any reason, you become unable to close during the due diligence period, you can cancel the contract and your earnest money will be returned to you.

The following is an example of a good due diligence clause: Buyer shall have a period of ten days from the acceptance date of this contract to complete his due diligence. During the due diligence period, buyer shall finalize the financing for the transaction and shall have the right to conduct any inspections, including but not limited to a termite inspection, appraisal, home inspection, and radon inspection, completed on the property. Seller shall cooperate with buyer in his efforts to have the property inspected. At any time prior to the expiration of the due diligence period, buyer may cancel the contract have 100% of his earnest money deposit shall be returned to him.

? Know Your Market -- Knowing your market is essential to your success as a real estate investor. You must understand what types of properties buyers in your area are looking for and how much they are willing to pay for those properties.

? Comparables -- Before making an offer on a bankruptcy or probate property, check the comparables in the area. Begin in the same subdivision or neighborhood as the property you are interested in. Concentrate on properties that have sold within the past three to six months and are similar in square footage, acreage, number of bedrooms and bathrooms, condition, and amenities. ? Home Inspections -- Bankruptcy properties have a tendency to have more repairs issues because people with financial difficulties put off repairs in order to pay mortgages and other expenses. Probate properties, especially those whose owners were elderly or ill, may also have more repairs issues. Therefore, a home inspection is a critical part of the due diligence process. The purpose of a home inspection is to find out the condition of the property and all its systems. A certified home inspector is trained to identify any current or potential defects with the property. Generally, home inspections cost between $350-$500.

? Home Warranties - A home warranty will defray the cost to repair or replace the major systems of the property such as heating and air, appliances, plumbing, electrical, foundation, and roof. Generally, the cost of a home warranty runs between $250-$450.

? Estimating Repairs -- Estimating repair costs incorrectly can make the difference between making a profit on a deal and losing money on a deal. Unexpected or unanticipated repairs costs are no uncommon. To minimize the risk of unexpected repairs costs, avoid older properties. Older properties are more likely to have deferred maintenance which can jack up repair costs.

Additionally, always estimate high. In other words, pad your repair budget by 15%-20% in anticipation of unexpected repairs and deferred maintenance. This will significantly reduce the chances of costs overruns on your projects. ? Estimating After Repair Value (ARV) -- Another essential part of the due diligence process is estimating after repair value. Always estimate low when arriving at an ARV for a property. If you overestimate the after repair value, it may take you longer to sell. The longer it takes you to sell, the less money you will have to leverage your business.

? Title Insurance -- Title insurance is one of the most important investments you'll ever make. It's the cheapest insurance you'll ever buy and protects the most valuable asset most people will ever own. There are two types of title insurance, lender's coverage and owner's coverage. Lender's coverage is mandatory on most loans. Owner's coverage is always optional. Unfortunately, many people mistakenly believe that owner's title insurance is a waste of money. Owner's title insurance protects the buyer's title to the property; it protects a buyer in the event some claims an interest in the property or if there are any unpaid liens, judgments, or other encumbrances against the property. Anyone that has had any issue effecting their title to a piece of real estate who did not purchase owner's title insurance, will tell you how much they regret making that decision.

If a property owner's title is ever challenged or if he discovers liens on the property that should have been paid off at or before closing and he purchased owner's title insurance, the title insurance company will defend his interest in the property or pay off the liens and seek to recover the amount of the lien and its costs from whoever the lien was against. With title insurance, an owner will not incur any expenses in defending his title or dealing with unpaid liens.

CONTACTING BANKRUPTCY/PROBATE SELLERS Once you've identified properties you may be interested in, the next step is contacting the owners or in the case of probate, executor, administrator or heirs. You may want to call, send a postcard or letter, or even pay them a personal visit. Remember, people in bankruptcy or dealing with the loss of a loved one may be stressed out. So always be polite and empathetic.

When you make contact by phone or in person, you must establish a rapport and build trust. The best way to do this is by asking lots of open-ended questions. Open-ended questions are questions that require more than a "yes" or "no" answer. They naturally elicit a more detailed response from the person answering.

You want to get as much information about the prospect's situation and why he may want to sell so that you can feed that information back to them. By feeding the story back, you are building another layer of trust.

You should then let the prospect know that you have a solution and explain exactly what you have in mind. Make sure to explain that the deal can happen rather quickly and how you intend to finance it. If the prospect understands, especially in the case of probate properties, that he can have cash in his pocket within a fairly short period of time, it could be the catalyst for him to agree to sell the property to you.

You should stay in contact with the bankruptcy trustee, executor, or administrator regarding the progress of the transaction. Provide the seller with the contact information for the closing attorney or title company.

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