How to Help a Homeowner Understand Their Foreclosure Options

Every real estate investor knows that the success of our businesses depends on our ability to find motivated sellers who are willing to sell us their houses for less than retail price. With the recent housing downturn, it seemed like practically every market in America was flooded with short sales and distressed homeowners. Now that the housing market is recovering, one of the questions I get asked regularly is whether there are still short sale deals available? The answer is yes! You can check out the latest foreclosure trends on RealtyTrac.com. You might be surprised at how many sellers are still behind on their mortgage payments. For example, in Florida, 1 in every 425 homes is in foreclosure. In Nevada, 1 in every 555 homes is in foreclosure. And even in a state like New Jersey, 1 in every 594 houses is in foreclosure. The bottom line is that foreclosure deals are still everywhere. That’s why it’s so important that you understand how to speak to a distressed seller about their options. You might be the very best chance they have at starting over without suffering from a foreclosure on their record and a severely damaged credit rating.

When a distressed homeowner first talks to us about their property, they might not even be considering selling it. At that point, they know that they’re facing foreclosure, but they likely don’t know what their options are. As a real estate investor, our job is to help them understand all their options, which no one else may have taken the time to do.

That brings me to another important point. As an ethical real estate investor, our goal is always to help a seller find a solution that’s best for them. Sometimes that might mean selling their house to us, but other times it won’t. By helping them understand their foreclosure options, you can provide them with valuable information and a way out of their situation that enables them to start over, which might end up being a win-win scenario for you both.

Let’s discuss their possible options:

1. Keeping the House Through a Loan Modification

If a homeowner is adamant that they want to try to keep their house, talk to them about how loan modifications and foreclosure avoidance plans work. By staying in direct contact with their lender and working out a refinancing or payback plan, they may be able to avoid foreclosure and eviction.

The homeowner should be aware, though, that these modifications and plans come with very strict rules. A single late or short payment can result in almost immediate foreclosure. Often, lenders see loan modifications as a homeowner’s second chance. If a homeowner falls on hard times again, the lender is not going to be very understanding and is unlikely to offer them a second loan modification.

If the homeowner believes that they can get out of their financial rut and stick to regular monthly payments, a loan modification might be the right step. If you’re talking with them about this, be sure to let them know that you may be able to help them if, at any point, they decide that they want to sell their home and get out from under the burden of their mortgage.

If a homeowner wants to work with the bank through their loan modification process, don’t assume that that’s the end of it. This process is lengthy and highly stressful, and there’s always a significant chance that the bank won’t approve the modification. I recommend that you stay in touch with the seller throughout the process in case they aren’t approved and you end up being their only hope to avoid foreclosure.

2. Walking Away or Declaring Bankruptcy

If the homeowner is not in a position to modify their loan and avoid foreclosure, they have other options. Of course, not all of those options are attractive, but you should still discuss them and help the homeowner understand where they stand. Among these less-than-ideal options are the choice to just walk away from the property entirely or to declare bankruptcy to avoid foreclosure.

We’ve seen a lot of homeowners take one or the other of these options since 2008, when the housing bubble burst. People often feel completely overwhelmed and cannot pay their mortgages or refinance them, so they just move out and let the bank do what it will with their home.

If you’re talking with a homeowner who’s considering one of these routes, be sure to discuss the consequences of each. For example, if they’re thinking of just walking away, talk with them about how much debt they have, how much the bank can sell their house for, and what their potential financial liability will be if the house sells for less than they owe.

If they’re considering bankruptcy, they should know the difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy. In the case of a Chapter 7 bankruptcy, the goal is to discharge outstanding debts, while the goal with a Chapter 13 bankruptcy is to reorganize debts to work out repayment plans.

Both of these types of bankruptcy can buy time, but neither is a guarantee to avoid foreclosure. If the homeowner believes they’ll be able to start paying again once they’ve reorganized or discharged their other debts, filing for bankruptcy may be the best option. However, in many cases, their home may be used to pay off debts, and so bankruptcy might be a terrible idea if they’re trying to keep their house.

3. Short Sale

Unfortunately, keeping the house and staying in good standing with their lenders is often not an option for homeowners in distress. In this case, loan modification isn’t an option, and they cannot expect to get favorable results from walking away or filing for bankruptcy. Both of these actions have some very devastating consequences on a person’s credit, and the homeowner should know this before proceeding with either.

Fortunately, though, there’s another option. Here’s where you can show homeowners how you can help them. Homeowners can often avoid foreclosure and the credit nightmare that comes with it through a short sale.

When you speak with a homeowner who’s in financial trouble, talk with them about the option to short sell their house. Explain that, if their mortgage company agrees, they may be able to sell the house to you for less than the amount they owe on it. This absolves them of any obligation to continue paying on the house, and it satisfies their mortgage lender, as well.

Help Them See the Best Option

Look at these options from a homeowner’s point of view. Which looks the best? Walking away or filing for bankruptcy are certainly last resorts. For a homeowner who qualifies for a loan modification, though, keeping their house might seem like the most favorable option. But what if they find themselves in financial trouble again?

Many homeowners aren’t aware that being able to sell you the house via a short sale is even an option. If you lay out all of the routes available to them, you might be surprised at how many will choose to get your help so that they can move on with their lives without a huge hit to their credit score.

About the Author: Mike Baird was the star of the hit TV show Flip Men that received great acclaim on Spike TV. He has personally flipped over 1,000 houses and is known as the expert on real estate investment. Along with his partner, Greg Herlean, Mike leads Property Bank Education, a national workshop series for aspiring investors. His passion for the real estate business is unequalled and he lives to motivate, inspire, and assist others.

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