Scoping Out Properties in Special Markets

Acquiring Properties in Probate

When someone who owns some stuff dies, the stuff often goes into probate, where the courts decide what happens to it. Because a house divided cannot stand, probate often results in selling a house to turn it into liquid assets (cash), which the court can more readily use to pay off outstanding debts, taxes, and administration fees. The court divides any remaining crumbs among the beneficiaries of the estate.

In the following sections, I step you through the process of finding and buying properties in probate.

Finding probate properties

The first step in acquiring probate properties is finding properties in probate. Tap the following sources for leads:

Probate attorneys: The best way to discover properties in probate is to contact probate attorneys. They handle estates, and they want to get paid, so they need the services of real estate investors like you to help them liquidate properties. Be sure to ask for references and check those references to find reputable attorneys.
County probate courts: Another great option is to visit your county’s probate court to search for probate cases that have active real estate. When you find active real estate, you can then work on contacting the personal representative, the attorney who represents the estate, and even other heirs of the estate.

Some clerks working behind the counters can be tough and you may catch them on a bad day when they’re unwilling to help. I like to send clerks bagels, flowers, doughnuts, and so on. If you can build good rapport with your clerks, your future trips to the courthouse will be much smoother.
Classifieds: Check the classifieds in your local newspaper for announcements of probate sales.
County clerk’s office: Your county clerk’s office should have information about probate hearings and estate sales. See if you can get on a mailing list to receive this information via e-mail.
Obituaries: To get a jump on other investors, check the obituaries to find out about recently deceased residents in your area, and then skip to the next section to begin your research. If property tax records are public and online in your area, you can search the tax record database for the person’s name to find any properties that person may have owned.

By submitting a Freedom of Information Act (FOIA) request, you can actually retrieve lists of those who have died in a particular county in any given month or year.
Auctioneers: Check the auctions category in the phone book for auctioneers who specialize in estate sales. (You can usually get a property for a lower price by purchasing it before it ends up on the auction block, where bidders can drive up the price.)
Legal news: With foreclosure notices on legal news sites, if the bank is aware that the person has passed away, instead of foreclosing on Bob Smith (the person), they foreclose on the estate of Bob Smith.
Legal notices: When a probate case is opened, law requires that it be advertised to the public in order to give notice to the creditors of the estate so that they have a chance to turn in any claims they have against the property. Finding these legal notices can take some digging in smaller counties.
Vacant houses: Sometimes, finding probate estates is as simple as driving around neighborhoods. If you see a vacant home, and the city has posted a notice on its front door, that’s a huge flag that the person who owned that property probably passed away.

Add the names and contact information of helpful probate attorneys and others to your contacts list and keep in touch with them so that when good deals cross their desks, you’re the first person they call.

Digging up a death certificate for more info

Death certificates can be a great resource for finding out more about the property owner. A death certificate includes information about a person’s background, family, age, and more. Laws vary by state; in Michigan, anyone can obtain a death certificate from the clerk of the county in which the person died. Visit the county clerk’s office or visit its web page to find information regarding who can obtain a death certificate, and the process and cost involved. You may be able to download a request form online, complete the form, and send it to the county clerk’s office with payment.

If you can’t track down the death certificate, try performing an Internet search for the person’s name followed by “obituary” and search the obituary sections of local newspaper websites for the person’s name. (Often, newspaper obituaries are not indexed by Internet search engines, so you have to perform your search on the newspaper’s website.) That may lead you to the funeral home, where you can find out which county issued the death certificate. You can then head down to the Register of Deeds office for that county to obtain additional information regarding ownership of the property.

Finding out who can sell the property

After you find a probate property, you need to figure out who’s authorized to sell it. Head down to the Register of Deeds in the county in which the property is located and look up the deed for the property, as I explain in Chapter 10. The deed should indicate who’s authorized to sell the property or at least provide you with a lead on how to find that individual. What you do next depends on what you find out from the deed:

If the only person who owns interest in the property is deceased, then only that person’s estate can sell the property. If the estate is open, search the probate court’s records to find out who’s managing the estate (or the name of that person’s attorney). The estate will be on record at the county probate court, usually in the county where the individual lived. Go online and find the probate court’s website. The court may have an online search tool you can use to look up the case to get contact information; otherwise just call the court and ask. Don’t be afraid to call any attorney who’s involved; the attorney is usually willing to discuss the matter and can give important details on what’s required to purchase the property, the condition of the property, title issues, and the names of the various parties involved.
If the deed shows that the property is owned by a trust, only the trustee of that trust can sell the property. Locating this individual (usually a child of the deceased) may be quite a challenge. Again, the attorney involved is a great resource. Often, the deed transferring the interest to the trust contains contact information for the estate-planning attorney who drafted the trust. Call the attorney for information on who the trustee is and say that you’d like to make an offer on the property. Be sure to ask questions regarding who has the authority to sell, whether the person is interested in selling, and what obligations are owed on the property.

If you can’t track down the person authorized to sell the property, check the death certificate; it may contain the name of the informant (usually a close relative) who provided information about the deceased person to the funeral home so the death certificate could be completed. If that doesn’t get you anywhere, visit www.zabasearch.com or www.ancestry.com and use the site’s search tools to locate and obtain contact information for the next of kin.

Contacting next of kin

Don’t feel uncomfortable contacting the relatives of a deceased individual regarding their real estate. In most cases, these relatives will welcome your interest, and there’s nothing wrong with asking. Find out who’s in charge of selling the property and what the various people who have a stake in the property want out of the sale. By engaging in conversation, you can usually obtain a sense of how eager everyone is to sell.

The more heirs to the estate there are, the better for you, because each heir needs to give up less for you to get a bargain on the property. For example, if you want to buy a $150,000 property for $100,000 and you’re dealing with only one heir, that heir has to give up $50,000 in agreeing to the deal. However, if five heirs are involved, each stands to receive $20,000 and has to give up only $10,000. Negotiating a discount from multiple people is easier than doing so with a couple, such as a husband and wife.

Keeping tabs on overbids

Probate sales can be a little tricky, especially in states that allow overbids. An overbid occurs when the property sells to the highest bidder at an auction and then another investor bids higher than the winning bid. The overbid typically must exceed the winning bid by 5 percent or more, so someone can’t just bid an extra dollar and take the property from you. Still, if you’re bidding on a probate property, overbids are a concern. If you’re in a state that allows overbids (ask a probate attorney), don’t assume the sale is final just because you were the high bidder at the auction. Keep tabs on the property until the sale is final.

Probate overbids differ from foreclosure overbids. In foreclosure, an overbid is an amount paid for a property over and above what’s required to pay off any and all liens on that property. In probate, an overbid is a bid in excess of the original winning bid by the required amount.

Scooping Up Bargains in Bankruptcy

Dealing in bankruptcies can be extremely complicated — even more so than trying to acquire a foreclosure property. In most cases, you can’t simply deal with the homeowner or bid at an auction. You have to work with the homeowners’ attorney or the court-appointed trustee, who’s committed to selling the property for fair market value or at least a reasonably decent price. Even if you obtain the attorney’s or trustee’s approval, creditors may oppose the sale of the property in court.

In the following sections, I reveal tips and tricks to improve your odds of success in finding and buying bankruptcy properties.

Acquiring bankruptcy properties can be a royal pain, which is exactly why most real estate investors avoid them like the plague. If you’re a novice investor, I suggest you do the same. However, because so many investors steer clear of properties in bankruptcy, the opportunities are more plentiful for anyone who can learn the ropes. Just make sure you have an attorney who specializes in bankruptcy in your corner.

If you do decide to work in the bankruptcy arena, develop a strong knowledge of how bankruptcy works in your area and don’t go it alone — hire an experienced bankruptcy attorney to guide you and prevent you from making costly mistakes. To find the best bankruptcy attorney, go to a trustee firm. Meet with whoever assists the trustee and helps with the firm’s real estate ventures. All law firms across the country are looking for more business, so you should have no trouble finding a qualified bankruptcy attorney who’s willing to work for you.

Brushing up on bankruptcy laws

Filing for bankruptcy stops everything … or in legal parlance, it stays everything. It stops foreclosure (only temporarily). It freezes the bill collectors in their tracks. It transforms the bankruptcy filer’s loose collection of assets into an estate, from which nothing can move until the bankruptcy courts and trustee can resolve disputes.

In the following sections, I explain the differences among the main types of bankruptcy you’re likely to encounter. Consult an attorney who specializes in bankruptcy for specific rules that apply to bankruptcies in your area. Pay close attention to any rules governing what you’re permitted and forbidden to do as an investor.

Selling assets through Chapter 7 bankruptcy

Homeowners filing for Chapter 7 bankruptcy hand over control of all of their assets to a court-appointed trustee. The court empowers the trustee to liquidate the assets in order to pay any claims against the estate, including back taxes, unpaid mortgages, and credit-card debt.

When you’re negotiating for the purchase of a home that’s part of a Chapter 7 bankruptcy, you deal with a court-appointed trustee. You may present your offer to the homeowners, but that offer must state that it’s subject to the trustee’s approval.

Restructuring debt through Chapter 13 bankruptcy

In Chapter 13 bankruptcy, people seek to restructure their debt — that’s a fancy way of saying that they work out some sort of deal with the people to whom they owe money (the creditors). Restructuring may include selling some assets, including the bankruptcy filer’s home, assuming they own a home.

When you’re negotiating for the purchase of a home that’s part of a Chapter 13 bankruptcy, you deal with the homeowner’s attorney and must present your offer to the attorney.

Cramming down debt in a Chapter 11 bankruptcy

Chapter 11 is more of a business bankruptcy. Unlike Chapter 7 bankruptcy, which requires a business to cease its operations, under Chapter 11, the court allows the debtor to continue doing business as debtor in possession subject to court oversight and jurisdiction.

High-net-worth and high-income companies use Chapter 11 to restructure their debt and come up with a plan to pay their creditors. If a plan can be brokered, the company gets a fresh start and is allowed to pay its outstanding debts in monthly installments. The court may also allow the debtor to cram down the debt; if the debtor owes more on an asset than it’s currently worth, the court may reduce the outstanding balance to the amount the asset is worth. Cram downs help reduce the total debt owed.

Knowing when to purchase

Knowing when to purchase a property is often the key to acquiring it. Following are the various stages in the bankruptcy process, along with some tips on how to more effectively position yourself at each stage:

Debtor in possession stage: Upon filing for bankruptcy, the homeowners remain in possession of the property and can accept offers and negotiate the sale. The bankruptcy attorney or court-appointed trustee, however, is legally obligated to notify the creditors, and they must approve the sale. At this stage, you’re unlikely to obtain the property for a price significantly below market value.
Liquidation stage: At the liquidation stage, control of the property is transferred to the trustee. Unless the judge objects, the trustee is in control of the property and chooses the most attractive offer. This is usually the best time to make your move. Although a creditor can object at this point, the trustee has the power to overrule the objection. Of course, the trustee also has the power to reject your offer and hand the property over to one of the creditors. Dealing with the creditors is often your key to acquiring the property at this stage.
Post liquidation: If one of the creditors buys or is given the property during the liquidation stage, you may be able to purchase the property from the creditor. This is another excellent opportunity to purchase the property, especially if you’ve established a solid relationship with the creditor.

Never contact the homeowners before consulting an attorney who’s well versed in bankruptcy law in your area. In some cases, you may be able to work out a deal that’s acceptable to both the homeowners and their creditors, but this is like tiptoeing through a minefield. If the homeowners perceive you as working on behalf of the lenders to circumvent their bankruptcy protection, they can have you hauled into court, and you’re likely to find yourself paying a hefty penalty.

Tracking down houses in bankruptcy

Bankruptcy is hush hush, because attorney-client privilege prohibits attorneys from sharing a client’s information with anyone, let alone publishing client information. In addition, free sites don’t publish personal bankruptcies except in certain cases when the bankruptcy is linked to a probate case. In other words, you’re unlikely to find out about a bankruptcy unless it’s linked to a celebrity or other high-profile individual. Your best chances of discovering houses in bankruptcy come from the following three sources:

Pacer.gov, a subscription service that provides public access to court electronic records (PACER)
Court-appointed bankruptcy trustees
Personal bankruptcy attorneys

Digging up additional info

Pacer.gov is also a great service for digging up valuable information about a property in bankruptcy, including the following golden nuggets:

Names of the people filing for bankruptcy
Whether the husband and wife filed jointly
Whether bankruptcy was filed under Chapter 7 or Chapter 13
The name of the trustee, if a trustee was appointed
Whether the house is included in the bankruptcy
The home’s stated value, if included in the filing
How much of the equity can be protected
The names of any creditors who’ve been contacted and whether any of the creditors filed an objection at the confirmation hearing
The acting attorney’s name and contact information
The schedule for proceedings
If the bankruptcy hasn’t been confirmed, when the property will be placed back on the foreclosure docket
Whether the lender has moved to lift the stay

Dealing with the gatekeepers

To acquire a property that ends up in bankruptcy court, you have to serve at least two masters — the bankruptcy attorney or trustee and the homeowners. You may also need to deal effectively with any creditors who have a stake in the sale of the property. In bankruptcy, the legal people are your main contacts, but if you were working with the homeowners prior to the date on which they filed for bankruptcy, you can leverage your relationship with them to influence the decisions. Following are suggestions on how to team up effectively with court-appointed trustees, personal-bankruptcy attorneys, homeowners, and creditors:

Bankruptcy trustees: In deed of trust states, the court appoints a trustee to settle the estate. Realize that this person has a court mandate to sell the property for as much money as possible in a relatively short period of time. As an investor, the best approach is to present a fair offer that gives you a sufficient profit and doesn’t turn the trustee against you. If your offer is laughable, you not only risk losing this property, but you also jeopardize any future relationship with the trustee.
Bankruptcy attorneys: How to negotiate effectively with a bankruptcy attorney depends on the attorney and the situation. If the attorney is pressuring the homeowners to sell quickly and put the bankruptcy behind them, all you may need to do is pitch your offer and hand over the cash. On the other hand, if the attorney knows how to play the legal system and is dedicated to serving the clients’ needs, and the clients want to stay in the home as long as possible, you’d better play nice with the attorney. A good bankruptcy attorney can keep her clients in the house for months or years while you’re footing the bill.
Homeowners: After the homeowners file for bankruptcy, you may not be able to deal with them directly. If you’re allowed to contact the homeowners, do so respectfully and keep their needs in mind. Always keep their attorney or the bankruptcy trustee in the loop. And never talk to the homeowners directly without your own attorney’s consent.
Creditors: Creditors often stand to lose the most from bankruptcy, so they may be willing to team up with you to help you get the property while they recoup a portion of a bad loan. Find out what they’re looking to get and seek ways to meet their needs while earning a decent profit for yourself.

The key to working with a trustee is to get the name of the attorney the trustee is working with and reach out to the attorney. The attorney helps the trustee make quick decisions. Even though the trustee wants to take your deal, he has to get it approved by the bankruptcy court. Approval is subject to higher and better offers. In Chapter 7 bankruptcy, the trustee attorney loves for potential buyers to come forward because his compensation is tied to the amount of money he gets for his clients — the unsecured creditors. It’s a win-win because the trustee attorney has nothing to lose but a lot to gain by working with you.

In Chapter 11 bankruptcy, you deal with a debtor in possession. This person has an obligation to run the business in a manner that benefits the creditors and the business. If the debtor-in-possession’s plan isn’t confirmed, everything is subject to the court’s approval. If the plan is confirmed, then the debtor in possession can make the decisions.

In Chapter 13 bankruptcy, the homeowners/debtors decide what to do with an asset subject to court approval. You negotiate with the homeowners and their attorney, but the deal is subject to court approval. For example, if the homeowners receive $20,000 from the sale of the home, they can use that money to restructure their debt, prepay the debt they owe, or combine the two strategies. What they choose to do, however, must be consistent with the court-approved plan for paying off the debt.

Planning for delays

You may inadvertently encounter properties in bankruptcy, especially if you’re investing in foreclosures. If you buy a foreclosure property at auction, the homeowners file for bankruptcy, and the court grants a stay, you may be stuck holding a house and paying the bills while the homeowners remain in possession well past the expiration of the redemption period.

In the worst-case scenario, your profit is limited to the interest you charge the homeowners on the purchase price you paid. If the homeowners manage to redeem the property, they must pay you the purchase price plus interest and reimburse you for any property taxes and homeowner’s insurance you paid out of pocket.

To sweeten the deal and increase your profit on the property, often the best approach is to pitch a deal to the homeowners’ attorney or the bankruptcy trustee. Following are a couple of suggestions on deals that the homeowners and the court may find appealing:

Offer to lease the property to the homeowners. The homeowners and the courts typically want to avoid a situation in which the homeowners are evicted and have no place to live. By offering to lease the property to the homeowners for a fixed period of time, you demonstrate your sensitivity to their needs and give them extra time to find new living arrangements.
Structure a buy-back deal. To avoid a long bankruptcy delay, consider selling the property back to the homeowners at a profit that’s perhaps less than what you had hoped for. Why would the homeowners be willing to buy back the house? Because challenging the sale can be costly in both time and money. If the attorney involved can see the benefit of a sure deal that will cost less in the long run, she may be willing to accept it, particularly if accepting the offer ensures she’ll get paid. A sure deal looks pretty good next to the alternative — a lengthy and expensive courtroom battle.

Finding Government-Owned Properties

The government often plays a supporting role in the real estate business. It insures or secures loans, and when homeowners default on those loans, the government has to step in, foreclose on the property, and then sell it to recover some or all of its loss. When citizens fail to pay their taxes, the government may seize the homeowner’s real estate to cover the bill. Law-enforcement agencies often get in the act by seizing homes of convicted drug dealers and other criminals.

Nobody likes to think of the government kicking people out of their homes, but that’s a tragic reality that some homeowners face when they experience a significant financial setback, commit a serious crime, or make poor financial decisions.

Anyone with enough money or financing can purchase these homes, either through designated real estate agents or by bidding on the properties at auction. To begin your hunt for government-owned properties, check out the following leads:

HUD homes: First-time buyers often finance their homes through the federal government, primarily by way of loans insured by the Federal Housing Administration (FHA). When the property owner fails to make mortgage payments, the FHA initiates a foreclosure, which commonly results in the agency taking possession of the house and reselling it through a real estate agent registered with the Department of Housing and Urban Development (HUD). The only catch, and it’s a biggie, is that HUD almost always sells homes “owner-occupied,” meaning you have to commit to living in the home for at least 12 months before selling it. (After the 12 months, you can sell to anyone you choose, including someone who doesn’t plan on living in the home.) Investors who say they’ll live in these homes but then don’t are committing fraud and can end up behind bars. To find HUD homes, contact a local HUD-approved real estate agent or visit www.hudhomestore.com to search for and bid on properties.

The one exception to having to live in a HUD home for 12 months before selling it is that if the home doesn’t sell owner-occupied in a certain number of days, HUD may open the sale to investors, who are then permitted to sell it without having to hold it for 12 months.
VA repos: When a homeowner defaults on a Department of Veterans Affairs (VA) loan, the VA repossesses the property and places it back on the market. To find VA repos, contact a VA-registered real estate agent in your area or visit HomeSales.gov.
Freddie Mac homes: Freddie Mac, the nickname of the Federal Home Loan Mortgage Corporation (FHLMC), is a government-sponsored organization that promotes homeownership by making mortgage loans affordable, especially to first-time homeowners. You can search for Freddie Mac homes at HomeSteps (www.homesteps.com) or by contacting a local real estate agent who lists Freddie Mac homes.
Fannie Mae homes: Fannie Mae, the Federal National Mortgage Association (FNMA), is Freddie Mac’s older sister, and it does pretty much the same thing as Freddie Mac — it promotes homeownership by making affordable mortgage loans available. To search Fannie Mae’s listing of real estate owned (REO or bank-owned) properties, visit HomePath.com, where you can also bid on properties.
FDIC properties: The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures savings deposits at member banks. When a bank fails, the FDIC acquires any properties the bank owns and puts those properties up for sale. It’s sort of like foreclosing on the bank. You can check out what the FDIC has to offer by visiting www.fdic.gov/buying/owned, but don’t expect to find a huge selection.
IRS seizures: When a home goes into foreclosure, the IRS usually releases any lien it has on the property. Occasionally, however, the IRS redeems the property to sell it and recover lost tax revenue. To find out about properties that the IRS has for sale and obtain information about upcoming auctions, visit www.treasury.gov/auctions/irs, scroll down the page, and click Real Estate. Just don’t expect to find much real estate for sale.
DOT properties: The Department of Transportation (DOT) commonly purchases real estate when building or widening roads or making other improvements to the infrastructure. If the property isn’t destroyed during the construction project, DOT puts it up for sale. Contact your state’s DOT for leads on properties it may currently have for sale. It may list the property with a particular broker, post notices in specific legal publications, or offer them for sale online.
Treasury auctions: The U.S. Department of the Treasury conducts about 300 auctions each year to sell property it seizes as a result of violations of federal laws it enforces or for the nonpayment of federal taxes. Visit www.treasury.gov and search for “property for sale” to find a link to the Treasury Auctions page.
USDA real estate for sale: The U.S. Department of Agriculture lists properties it has for sale at www.resales.usda.gov. This site displays links to single-family and multi-family properties along with any farms or ranches the USDA has in inventory. Simply click the link and follow the trail of maps to your state and county to find out whether any USDA properties are for sale in your neighborhood.
U.S. GSA property disposals: The U.S. General Services Administration often lists government-owned properties that you can’t find anywhere else. Visit disposal.gsa.gov and use the Property Search tool near the bottom of the home page to look for available properties. This site provides access to information about properties owned and for sale by the federal government, such as land and buildings made available by military base closings or U.S. Marshals Service property seizures.
City/county land banks: Some cities or towns have abandoned properties for sale at bargain-basement prices. For example, the Indy Land Bank has teamed up with the non-profit Renew Indianapolis to help investors find, acquire, and renovate run-down inner-city properties. The group even has a website with a map of properties for sale. Search online for “land bank” followed by the name of your town, city, or county and the name of your state to see what it has to offer.

If you stumble upon what looks like a great deal, make an offer subject to a satisfactory home inspection. Delaying your offer until you can have the home inspected opens the possibility that another buyer will swoop in and buy the property. By making your offer subject to a satisfactory home inspection, you can get your offer in and then back out if the property needs a lot of work. Present your offer, but make sure it has a good contingency clause you can use for an emergency exit.