While there are many situations where people did all the wrong things when it came to their real estate investments, here are some examples of  investors that simply invested their hard earned money, following all of the rules set before them at the time. These were not speculators or experienced corporations that where throwing their money around. They did full-doc loans with serious downpayments and invested in positive cash flow properties. They did what any RESPONSIBLE investor would have done.

So what happened?

The government screwed up the economy. – They let sub-prime mortgages and speculators take control.

The government changed the rules. – Fannie Mae changed their lending rules even for people already in the game.

The government put a band-aid on the problem that didn’t stick. – They said the bailout packages would solve the problem – it hasn’t.

The banks took advantage of the situation. – They rewarded their executives for bad decisions.

The banks refused to stop the hemorrhaging. – They took major losses instead of small ones by not working with homeowners and investors.

The investors in this story did everything right. They cannot be blamed for the situation they are in now. Especially when they asked for help before their problems started and offered less costly solutions to their lenders afterward.

We have lost a bunch of banks now, along with tons of jbos. Those banks and jobs might still be around if they had only been willing to work with homeowners.

As Jackie mentions, this may be the same-old, same-old, but consider the fact that most of the market’s problems were because the investors were not following these rules. And not just the inexperienced investors. How about some of the biggest. In fact, read the story about the John Hancock Tower in Boston.

Cash flow comes in many forms. For someone like Jackie, who may be investing in foreclosures, the same holds true. If you are buying heavily discounted properties or taking them over “subject-to”, I’m sure you are not financing at 100% and then hoping they appreciate for big gains down the road. More than likely you are flipping them for a quick profit or turning them into income through rental, lease-to-own or seller financing. Any time you can generate income from your real estate investments on an ongoing and consistent basis, you are creating cash flow. Remember, Cash Flow is King!

What I would like to caution against, is thinking that you are going to make a profit buying discounted real estate with the hopes that the market could turn around “sometime in the future” for future profit. We have no way of knowing when the market will recover and it could be years. During that time, your cash is tied up, doing nothing. If you finance the purchase it is even worse because you lose money every month. Maybe you even put in a renter but it doesn’t cover the cost of holding the property. This is negative cash flow.

Now, if you purchase to generate real cash flow, it doesn’t matter how long the market takes to recover. You are making money today AND in the future.

Thanks for the comment Jackie.

You can contact a loss mitigation company or a loss mitigation counselor who specializes in handling cases similar to yours. They can act as a bridge between you and the lender and try to sort things out so that your home does not slide out of your hands. However, they will first have to be given the details of your mortgage agreement before they can proceed.

The key word here is money, since if the bank has already rejected your revised repayment plan or is not confident of your ability to repay the loan, then unless you come up with the money, even your loss mitigation company or counselor might find it difficult to convince the bank to rethink stopping the foreclosure process, which they would have put into motion. If you have arranged for the money, then you can inform your counselor or the loss mitigation company and they could now talk to the bank to agree to alternative plans in repaying the balance amount of your loan.

Alternatives could be in the form of smaller monthly installments spread over a longer period, so as to make it a bit easy for you to repay the entire loan back to your lender. Your lender might be open to alternate plans since he too might not want the home to go into foreclosure, where he could suffer a significant loss, not to mention the tedious paperwork that would be involved in repossessing the home from you and selling it to a new owner.

In the case you are unable to come up with a concrete plan to arrange for some fresh finance on a long term basis to repay your outstanding loan, then there could be very little that your counselor or the loss mitigation company could do to help you out. In that case you should try to ensure that you get the most value out of your home before the bank sells your home off. If you can manage to find a buyer on your own then you can try to convince your lender to go in for a short payoff or a deed in lieu of foreclosure so that you can at least get a decent deal on your home.

The loss mitigation company or counselor can guide you as per your rights as a borrower in this deal-gone-bad, but they are not magicians and their job is to first get convinced about your ability to pay back the loan amount under revised terms before they can convince your lender to do the same. You will need to pay them for their services and if you do not have any money at all or do not have any plan for raising any finance in the future to pay off your outstanding loan then it would indeed be very difficult to save your home.

So try and talk to some of these companies or counselors before losing all hope. Since you will have to pay their fees at closing and that too if the loss mitigation company or counselor has helped you to solve your problem, then in case you do not see any other way out of your current dilemma, then you should take a shot.

Initiation of the foreclosure process by your lender is not the end of the world. By availing the services of an experienced loss mitigation company or a mitigation counselor, you might learn of other alternatives, which could help you hold onto your home as well as pacify your lender and convince him to agree to an alternate repayment plan.

For example, there may be a home loan borrower who owes $350,000 against an existing first mortgage. He may have fallen behind on his repayments and may be facing the possibility of a foreclosure. For effecting a short sale you directly make an offer to the lender/bank for say $270,000. In many cases the bank may agree for such a discount, as the costs involved if the property goes to auction may make them lose a lot more money than what they would lose if they accept the discount related to your offer. It also saves them from a lot of related problems. Plain and simple, it makes business sense for them.

As things stand at present the rate of foreclosures is high. This is the time to take advantage of this situation and make a good chunk of money for yourself. However, from an investment angle, you can get the maximum benefits only if you do not restrict yourself to a single deal. The higher number of deals, the greater the overall returns. If you decide in favor of such an investment strategy, it becomes essential for you to formulate exit strategies even before you make an offer to a lender for a short sale so that once you clinch the deal, you can quickly flip over the property to another buyer for a handsome profit and move on to making your short sale offer for the next deal. In real estate jargon this is known as wholesaling.

There are a number of things that you need to determine before you make your offer for a short sale in line with your exit strategy. The right approach would be to first research the price that the property can fetch if sold in the market. Usually in case of a short sale the market price of the property is less than the total amount payable against the mortgage. This means you must make your short sale offer by crafting a suitable discount on the market price, after giving due consideration to the total cost of acquisition of the property.

Another thing you need to consider is the time required to dispose the property and your expected profit margin. This has a direct relationship to the time and amount of your investment. When you intend to invest for a lesser duration, you may have to settle for lower profits. In such a case you can try to locate a buyer immediately after you get your acceptance letter for the short sale from the lender and later sell outright to the new buyer. The property may need repairs, which will lower the market price, as the new buyer will need to get the repairs done. Conversely, if you are ready to invest more for a longer duration and hold the property to get it repaired on your own before selling it off you may get a much higher price. You may even want to retain the property for rental income and also continue to hold it for price appreciation before you sell it to another buyer.

Your overall profit margins are going to depend on several such factors, therefore, for being a successful investor you must formulate suitable exit strategies in line with your individual situation and liking before you even step in to the real estate investment arena.

Everyone benefits, since the homeowner gets to walk away from his home without paying the amount and the bank is happy to avoid the long drawn process of re-possessing and auctioning the property through a foreclosure. You stand to gain a property much below market rate and on which you can make a decent profit even in-spite of the market dropping. The key is to get the homeowner to agree to your proposal, so you will have to do some research yourself before attempting a short sale takeover of any property.

First identify properties for sale due to foreclosure that are advertised in local newspapers. Check out the going rates for those properties in that area and calculate the maximum amount you are willing to pay for that property. Then contact the person in the foreclosure or short sale or loss mitigation department of the bank, introduce yourself, and send them all details in writing to include the owner’s signed consent. Make the bank a fair offer and be a bit flexible in case you realize that the property has good potential. Be aware that others too could be interested in that property so plan your moves accordingly. You can even buy properties that have been rented out to tenants. That way your cash flow can start the minute you acquire that property. Once you have the property in hand, it is a matter time until you find the right buyer. Therefore, it is important to know if there is a market for the property you are considering.

If you are trying it out for the first time, hire an experienced short sale broker to guide you through the first few deals. You might earn less money but gain more knowledge on how the system works. Since most of these homes are lived in, you will also need to keep in mind the repair bills to be paid before selling them off. So, arrange a team of an attorney, an accountant, a contractor and a good lender. If you have a ready buyer for that property, then that is much better. You might not earn the same in all your deals but as long as you keep making healthy profits, concentrate on your average earnings.

Even though the short sale route looks very simple, it is imperative that all things right from homeowner to bank to buyer fall into place as soon as possible so you flip the property quickly. Thus short sales have tremendous potential especially in the current market scenario since once the economy recovers and money starts flowing again, there might not be many such deals left in the market.

Essentially, a short sale means that you buy a house whose owner is unable to make mortgage payments and is on the verge of losing his home, while at the same time convincing his bank to accept a payment, which is less than the mortgage amount. This move could work since the homeowner can now be free of making future mortgage payments on the house, which he is not in a position to do anyway. The bank would rather dispose off the property than repossess it and put it up for auction through foreclosure, which could be a time-consuming and costly process.

Once you have identified the property that you like, then the next thing to do is to meet the owner. You will need to be sensitive to the seller’s financial situation and problem. You should then be able to provide a solution to his problem and while talking with him you should be precise and clear so that there is no misunderstanding between you.

Once the seller is convinced, you should get his willingness to sell in writing, as evidence for the bank. Get details of the lender so you can approach them with your offer. You will need to be flexible while dealing with the lender since they might not accept your offer immediately. Show your seriousness about purchasing the property while raising the offer and convincing them to come down a little. Once your deal is approved, get everything in writing. Also get an assurance from the lender that they will not pursue the seller for any difference of payment since what you will be paying the lender could be much less than what was owed by the seller.

Persistence is very important in this matter as you might not be able to convince every seller or bank every time you are interested in a property. Carry on nevertheless since due to the present economic condition there are many homes up for short sale. You will need a good attorney, tax consultant and in some cases even a good contractor to take care of the physical and legal well being of your property once you have purchased it. A good broker would also be very helpful in case you are new to such dealings. Once you get the hang of things then you will soon be able to find out immediately whether the property, its owner and its lender can all merge together to provide you with a quick and painless deal.

The conditions are right for you to try your hand at short sale real estate investing and the rewards could be quite high once you gain experience in these types of deals.