A full-page newspaper advertisement recently caught my attention: “FREE Workshop Reveals How to Buy Foreclosure Real Estate With No Money Down and No Credit.”  Listed among the many revelations to be divulged at this free workshop is: “Learn how to buy foreclosures direct from the bank with No money down, No credit, No W2’s, No tax returns, and No qualifying.”  The ad also proclaims: “Learn how, when you buy a house at a discounted price, you are automatically approved for the loan!” and “Learn how to buy properties 30%-50% below current market value.”  There’s an old adage: If it sounds too good to be true, it probably is. 

I’ve seen the pitch before.  Those attending the typical 3-hour workshop, normally held in a hotel conference hall seating a hundred persons or more, will not receive information on acquiring real estate, but rather a high pressure sales presentation to attend a training program on the subject.  Attendance at such programs, usually held over a weekend and priced in the $2,500 to $4,000 range, assures that attendees will “…learn to buy houses like the pro’s do,” and find themselves “on the Road to Riches.”

Before you shell out money for one of these training seminars in the expectation of “becoming financially independent before the year is out,” there are a few details you’ll want to know about the lucrative foreclosure market.   With but the rarest of exceptions, acceptable properties at reasonable prices situated in tolerable areas can no longer be acquired without cash or credit.  The bank repos presently flooding the market are the result of just such past abuse.  The calamity resulting from the subprime and Alt-A (liar loan) markets which flourished until early 2006 put an end to such shenanigans.  Those institutions not actually folding up shop are now forced to adhere to some semblance of accountability.  The likelihood a bank official might somehow permit you to purchase a house worth owning, at a fraction of its fair market value, with neither down payment nor satisfactory credit, is pure fantasy.

Now that you’re aware of the wrong way to acquire bank repos, perhaps you’d care to know how it’s actually done.  During 2008 I purchased and resold a number of them in Southern California.  Let me provide you with some details of two such transactions so you’ll get the hang of how it works. 

At a bank auction in December 2007, I offered $126,000 cash for a small house in San Bernardino on a ½-acre lot.  Though I submitted the top bid, the bank rejected the sale.  I thereafter negotiated with their REO Department and took title in February 2008 at a purchase price of $155,000.  Four months later, after sinking about $22,000 into renovation and holding costs, I found a buyer with $58,000 cash down payment.  At sales price of $219,900, I carried back a $161,900 first mortgage for five years at 8% and monthly payments of $1,079.33.  In all it was a welcome sale for the bank, an opportunity for my buyer, and a fair investment for me.  We all came out ahead.

My second purchase was a house in the Canyon Lake community of Riverside County, an area which experienced an unprecedented appreciation during the first half of the decade, only to see values subsequently plummet.   By 2008 the area seemed awash in vacant homes and “Bank Repo” signs.  I found a 2-story, 2,800 sq ft, 4-bedroom, 2½-bath house, with lake view.  The property history revealed a 2004 no-down-payment purchase for $950,000 followed by foreclosure in 2006.  I arranged, in April, an all-cash purchase for $295,000 from an out-of-state bank.  Be aware the replacement cost of the structure, irrespective of any land costs, exceeded my purchase price.  I spent less than $10,000 getting it into marketable shape, selling it in August for $335,000.  I found a buyer with $150,000 cash and once again carried back a mortgage for the balance: $185,000, 8% interest, monthly payments of $1,233.33 for 5 years.  In the aftermath, we might claim all parties involved managed to satisfy their needs, though the bank’s $655,000 mortgage loss cannot be viewed as anything but a disaster.  However their misfortune cannot be blamed on my lowball purchase; the bank’s wipeout occurred, for all practical purposes, before I ever arrived.

As you see, there’s an important principle involved in these transactions.  To arrange something workable requires a good chunk of dollars up front.  Note also, as institutional mortgage loans are still hard-come-by, refinancing yourself out of a tricky situation is uncertain at best.  Without that not-so-secret-ingredient . . . cash . . . you’re engaged mostly in pipe dreams.

Let’s now return to the original newspaper advertisement which touted the Free Workshop.  A closer inspection of the disclaimer at the bottom of the ad, which may require a magnifying glass to read, tells the story.  It reads: “[Named company] is a training company and individual performance depends upon the individual skills, time availability, and dedication of each student in the training program.  Testimonials included may not represent typical results.  Unique experiences and past performances do not guarantee future results.”  The wording is designed, of course, to shield the firm from charges of fraud, much the way tobacco companies include a health warning on each package of cigarettes. 

I’ll conclude with a final observation.  When any society undergoes a cataclysm, whether economic or otherwise, there will be persons who use the disruption for their advantage.  The loan modification specialists, currently creeping out from under rocks, are ripping off troubled debtors.  Unscrupulous attorneys are encouraging clients to file bankruptcy for no other reason than collection of legal fees.  Is it any wonder seminar organizers are coming out of the woodwork to prey on the gullible?  In any event, you now know how it works, so you can’t say you weren’t warned.