Prepayment Penalty

Loan Balance Interest Rate Annual Interest 6 Months Interest

$200,000 X 7%

$ 14,000 $ 7,000

A lender cannot legally enforce receiving a prepayment penalty as a result of a foreclosure sale.The problem for you as a real estate investor is that the prohibition on the lender receiving a prepayment penalty as a result of a foreclosure sale is lifted if you buy the owners equity in pre-foreclosure.

Whipsaw Effect A lender can have an owner/borrower or, in this case, you, an investor, caught between the due-on-sale clause and the prepayment penalty. As you attempt to help owners out of a foreclosure sit-uation,we have suggested you buy their equity. You may encounter what we call the whipsaw effect with the lender.

If you try to take over the owners existing loan subject-to and it is not a subject-to loan, the lender can call the loan all due and payable using the due-on-sale clause. If you tell the lender you are going to pay off the loan, and the loan is less than five years old and stipulates a prepayment penalty, you may get stuck paying the prepayment penalty!

You may prefer negotiating with the lender after you have put an agreement together with the owner. Some investors find it a waste of time to negotiate with the lender before they have put an agreement together with the owner. After they have gotten their ducks lined up with the lender, they have found that when they go back to the owner, they cannot reach an agreement to buy the owners equity.

Talking to the Lender

The earlier in the foreclosure process the lender is contacted, the better it is for the borrower. Sometimes a borrower will call the lender and say, I havent missed a payment yet, but I am afraid I am about to. Lenders

Negotiating after You Put the Agreement Together

agree that they want to know about a borrowers financial distress well ahead of the borrower missing that first loan payment.

As far as the lender is concerned, this is the perfect time for the owner in distress to call them. A spokeswoman for Fannie Mae puts it this way: Dont hide from your lender. If you contact your loan servicer, most of the time you will stay in your home. We will have more on Fannie Mae in Chapter 11.

After you receive an owners permission to talk to his or her lender, we suggest the following approach. Call the lender and identify yourself as a real estate investor who is working with the owner. Find out from the lender exactly where the owner is in the foreclosure process.

It has been our experience that half the time, some type of loan work-out plan is put together. The other half of the time, when a loan work-out plan is not put together, is where you have your opportunity to make Quick Cash in foreclosures.

You want to know two things from the lender: How much time will you have to flip the property? and How much money will it cost to delay the foreclosure sale?

Brain Trust

We want to give you a Brain Trust idea to keep in the back of your mind when you are negotiating with lenders. Ask them if they would consider selling the promissory or mortgage note to you. Of course, you would want to buy it for a substantial discount from the remaining balance on the note. After all, the note may be headed to foreclosure if it is not already in default.

If you do wind up buying the note from the lender, you now have two options. You can work out a deal with the owner for the equity, as before. Or you can proceed with the foreclosure as the lender. Just something to think about. If you want more on this, e-mail us at thetrustee@ hotmail.com.

In the next chapter we will get into FHA and VA foreclosures. In fact, the next chapter begins the first of three chapters on dealing with one or another entity of the federal government. The government wants to sell you its foreclosures. They are not good at being in the real estate ownership business.