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By detailing various negatives in the preceding discussion, I do not imply that you can't make money working with property owners facing foreclosure. You can. But only if you strictly prequalify the homeowners and the property. Before moving forward toward a workout, check its potential by answering the following eight questions:

1. Do the homeowners enjoy substantial equity in their property?

2. If necessary, is the lender likely to cooperate in a short sale?

3. Will the lender permit you to assume the mortgage? As an investor? As an owner-occupant? At what interest rate? If no assumption, will the lender waive the mortgage prepayment penalty (if any)?

4. Can you satisfy yourself through a title check or title insurance that the sellers can convey a marketable title, that is, a title free of consequential clouds (actual and potential)?

5. Do the homeowners truly want to avoid bankruptcy (or foreclosure) to alleviate their financial distress?

6. Would the property owners lose more economically in a bankruptcy than they would stand to gain? (As noted previously, bankrupts may emerge from bankruptcy with their unsecured debts extinguished and their most valuable assets [IRA, 401(k), home equity, life insurance cash value, furniture, clothing, car] preserved.)2

7. Can you firmly establish how much you must spend to repair, redecorate, and renovate the property?

8. Is the potential profit margin large enough to justify your investment of time, money, effort, and opportunity cost (i.e., the profits of other deals you pass up to invest in this one)? Use the following tally to help you answer this question:

Market value after improvements

$________

less

Acquisition price (cash, notes, assumed mortgages)

$________

Mortgage assumption fee

$________

Legal fees

$________

Back property taxes and assessments

$________

Back payments and late fees

$________

Closing costs

$________

Cost of improvements

$________

Holding costs until sold or rented

$________

Miscellaneous

$________

Time and effort (imputed value)

$________

Opportunity costs (imputed value)

$________

equals

Profit potential

$________

Do your answers to these eight questions fail to reveal any deal killers? Does the amount of profit potential look high enough to offset your risks? Yes? Then you've discovered what could prove to be a profitable transaction.

(Such a result can occur when the bankruptcy court permits debtors to complete a Section 7 filing. However, under the new law, the courts will force more debtors into partial (or complete) repayment plans under Section 13 of the bankruptcy code.)

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