Why buy foreclosure and distress properties? You, being a very smart, intelligent, above-average person, probably already know the correct answer ? to earn a profit! That means you want to acquire real estate at a below market value purchase price so you can either resell for a quick profit (called "flipping") or you want to hold for long-term use (perhaps as your home) or for investment profits.

Foreclosures and other distress properties are not just houses ? you will find condominiums, apartment buildings, commercial properties, farms, and vacant land too. Because most foreclosures are single-family houses and condos, throughout this special report I will refer to "houses" but please be aware all types of properties can become foreclosures and distress properties. To illustrate, a few months ago I inspected a $12 million estate on 20 acres in Woodside, California which is being sold by the U.S. Bankruptcy Court.

Whatever your motive for buying a foreclosure or distress property (and then repeating over and over on many other properties), I hope you want to earn a profit. If profit is not your motive, then ou might be reading the wrong special report. If you just want a nice, easy property purchase with no work involved,  Please contact us your local realtors.But you are not one of the masses (or you wouldn´t be smart enough to read this special report!). When you finish reading these pages, you will understand more than 90% of the lawyers in your town know about foreclosures! I realize that´s shocking, but it´s the truth. Unless you talk with a real estate attorney in your community, he or she probably knows little or nothing about how to profit from foreclosure and other distress properties. Let´s get started.

Pay wholesale, not retail. Everybody loves to buy at wholesale prices. Look at the huge success of Costco, Wal-Mart, Target, and other discount chains. When I was a little boy, I still remember flying with my dad to Lansing, Michigan to pick up our new Oldsmobile at the factory. He purchased the car wholesale through my Uncle Erford who was a GM dealer. In our house we had an off-brand Blackstone washer and dryer (manufactured by Whirlpool), purchased at wholesale through Uncle Erford´s hardware store. I learned at that early age "paying wholesale price is much better than paying full retail price." Maybe that´s how I got so interested in buying wholesale discounted real estate at bargain prices.

In real estate, the best way to buy at wholesale price is to purchase foreclosures and other distress properties. The asking prices you see in the local MLS (multiple listing service) and on the Internet  are retail, not wholesale prices. If you buy at a foreclosure sale, unless you get carried away by "auction fever" competitive bidding, you should be buying at least 20% to 30% below full market value. Yes, I´ve seen bidders overpay at foreclosure auctions, but that´s another story.

The biggest drawback of buying foreclosures. Let´s expose the secret right up front ? the biggest drawback of buying foreclosures is it takes W-O-R-K. There. I said it and I feel much better! But it´s easy work.

Hardly a week goes by when I don´t receive an e-mail or letter asking "How can we buy a bargain foreclosure house?" In this special report, we´ll review the basics and then go on to "advanced stuff."

The real work of buying foreclosures is tracking them, from the day the lender decides the borrower isn´t going to make the mortgage payments (usually after two monthly payments are missed; typically about 45 days) until the property either goes to foreclosure auction sale, the borrower sells the property to pay off the defaulted mortgage, the borrower refinances, or somehow gets the property out of the foreclosure cycle.

Tracking foreclosures is like a detective game ? first you have to find the "suspects" (usually not too hard; I´ll show you how), then you have to determine if it´s wise to do business with the suspects, and, if not, then you have to pick a better alternative strategy. That´s what makes buying foreclosures almost fun ? it´s a challenge!

EXAMPLE: I know a local multi-millionaire "foreclosure detective" subscriber to this newsletter, now in his 70s, who tracked a foreclosure suspect property for over two years before he successfully purchased the super-bargain property after it was released by the bankruptcy court from the "automatic stay" and the foreclosure sale was finally held. By then, he was the only detective left and the only bidder at the lender´s foreclosure auction.

Ever since I bought my first foreclosure property over 30 years ago, I have been amazed at how many property owners get themselves into foreclosure and risk losing their properties when, in 98 out of 100 situations, that equity could be salvaged. I´ve bought at all stages of foreclosure, from the so-called "pre-foreclosure," to the actual foreclosure auction, and to the after-sale "real estate owned" (REO) lender´s situation.

Which is the best time to buy? The answer depends on the specific situation ? each foreclosure circumstance is different. No two are exactly alike. I´ve bought foreclosed houses which were in immaculate condition. I´ve also bought foreclosed houses which were in awful condition. One was a boarded-up "drug house." The only thing they all had in common was I bought them for a wholesale, below-market purchase price.

LET´S BRIEFLY REVIEW THE FORECLOSURE FUNDAMENTALS. Even if you are a foreclosure know-it-all, there is no harm in reviewing the foreclosure fundamentals.

What causes real estate foreclosures? The most frequent causes of foreclosure (meaning a borrower is in default on his mortgage obligation to the lender who is secured by a recorded mortgage or deed of trust against the property) are divorce, unemployment, drugs, alcohol, death or serious illness in the family, disputes between co-owners, local economic conditions, mental problems, and greed.

To put it bluntly, the foreclosed owners I´ve encountered usually aren´t thinking straight. Yes, life sometimes deals us unexpected blows. But smart borrowers react rationally and make the best decisions under the circumstances. However, many property owners who are in default just bury their heads in the sand, doing nothing, and eventually lose their property and their equity. Although I´ve never been in default on my mortgages, if it did happen I would do my best to salvage at least some equity.

EXAMPLE: I recently read in the news about two co-owners of a New Orleans bed and breakfast place who decided to sell, take what they could get for their relatively undamaged property, and move on with their lives by relocating elsewhere. They reasoned their tourist-oriented business wouldn´t recover fast enough so they could afford the stiff mortgage payments on their building. So they wisely decided to cut their losses and sell the property to preserve at least part of their equity and avoid ruining their credit. Unfortunately, not all realty owners facing foreclosure think so clearly!

Isn´t it wrong to profit from the misfortune of the property owner? No! As the foreclosure property buyer, in most cases you will be helping the owner salvage at least some of their equity. Sometimes, there is no equity (equity is defined as the difference between the amount owed and secured by the property, and the market value of that property). Occasionally, more is owed against the property than it is worth. We´ll discuss how to profit from even those properties, such as a "short sale" or discounting the existing encumbrances.

Someone profits from every foreclosure and distress property ? that person might as well be YOU! As long as you didn´t cause the property owner´s problems, you might as well benefit from them. There is nothing unethical, illegal, or immoral about acquiring foreclosure property at a below-market price to compensate for your risk. In fact, you will be benefiting yourself and the community by taking the property from weak ownership to strong ownership.

Although we´re concentrating on foreclosures, in your quest you will probably also encounter "distress property," as I have. Such distress property can sometimes offer a greater profit opportunity because you´re not under the time pressure of the lender´s foreclosure schedule. Incidentally, it is often the property owner who is "distressed" and the property often offers fantastic profit potential.

Well-known examples include Donald Trump´s acquisitions of the run-down Commodore Hotel at New York City´s Grand Central Station (which he renovated into today´s Grand Hyatt Hotel on 42 nd Street) and the 40 Wall Street office building (which was once the tallest building in the world). Trump bought this huge office building for only $1 million, renegotiated the land lease, and renovated it into today´s Trump Building. You can read the fascinating stories of those and many other troubled properties in the great book Trump Strategies for Real Estate by George H. Ross (John Wiley and Sons, Hoboken, NJ, 2005).

HOW FORECLOSURES WORK. Exact foreclosure procedures are different in each state. Sometimes, there are also local differences too. But the general foreclosure procedures are very similar, whether the lender is foreclosing on a mortgage or a deed of trust. However, foreclosure on liens, such as mechanics´ liens, judgment liens, and unpaid property tax liens are much different. That´s beyond the scope of this brief report but you might want to look into the lien foreclosure procedures in your state if that interests you.

EXAMPLE: I once had a young man in my college real estate law class who specialized in buying at condominium lien assessment foreclosure sales. He told us why buying at these auction sales for usually small amounts was so profitable. But he also shared some of the pitfalls, especially when the condominium documents weren´t properly recorded.

To learn the exact mortgage or deed of trust foreclosure details in your state and local jurisdiction, I highly recommend buying one hour of time from your town´s best real estate attorney. It will cost you $100 to $300 for the hour, but that discussion will save you thousands of dollars of wasted efforts. Be sure to write out in advance all your foreclosure questions to ask the attorney so you won´t waste a minute of valuable time. Another advantage is you will be getting acquainted with a local real estate attorney whose services you might want to use in the future.

1- FORECLOSING LENDER RECORDS A NOTICE OF DEFAULT OR FILES A JUDICIAL LAWSUIT (LIS PENDENS) AGAINST THE DEFAULTING BORROWER AND THE PROPERTY. This is the moment the public officially learns the borrower is in default on their loan secured by the property. Until the information becomes public, lenders are not supposed to discuss the borrower´s default with anyone else (but some loan officers have been known to "leak" this information to potential buyers who might prevent the situation from becoming a foreclosure on the lender´s books).

If the security for the loan is a recorded mortgage, the mortgagee (lender) usually brings a judicial lawsuit, often called a lis pendens, against the mortgagor (borrower) in local court. The court will hold a hearing at which the borrower can raise any defenses (there usually are no defenses to a mortgage default; the borrower just failed to make the mortgage payments!). Then the judge will order the property auctioned to the highest bidder.

Depending on state law and local custom, the court-supervised judicial sale might be conducted by the sheriff, a marshal, a court referee, county official, or even the judge. The foreclosing lender (mortgagee) usually opens the bidding at the amount owed, plus foreclosure costs. This is called a "credit bid" because the lender obviously doesn´t have to pay out any cash.

I understand a few states, such as Connecticut and New Hampshire, still follow the old "strict foreclosure" common law rules whereby when the lender obtains a court foreclosure judgment, the lender then automatically takes title without any public auction.

After the mortgage judicial foreclosure sale, most states have a "redemption period" during which the defaulting borrower can buy the property back from the high bidder for the amount of that bid, plus costs. This redemption period ranges from a few days to as long as 12 months in Alabama. Please note in some states a mortgage which contains a "power of sale" clause can be foreclosed, if the lender wishes, like a deed of trust at a non-judicial trustee´s sale (which most lenders prefer because of the speed).

If the security for the loan is a recorded deed of trust, the lender´s first foreclosure step is to record a Notice of Default in the county where the property is located. To be technically correct, the lender´s trustee actually files the notice of default. The trustee might be an attorney, title company, escrow company, lender´s subsidiary trustee corporation, or a trust deed service company. If the borrower (called the trustor) does not pay off or reinstate the deed of trust, the property will be sold at a private, non-judicial trustee´s sale. The lender (called the beneficiary or "bene") will usually open the bidding with a credit bid at the amount owed on the loan, plus foreclosure costs.

However, if the property isn´t worth the amount of the lender´s loan balance, and if the lender doesn´t want to wind up owning the property, I´ve seen lenders bid less than the amount owed. Personally, I´ve done this myself where I was the foreclosing lender and I didn´t want to acquire the title. Instead, I preferred to take a tax loss to offset some otherwise taxable capital gains.

Whether the property is sold at a court judicial sale, or at a nonjudicial trustee´s sale, any junior liens are wiped out at the judicial or non-judicial sale. Time of recording, not the amount, determines priority.

EXAMPLE: Suppose a house is worth $300,000. It has a $125,000 first loan which is in default, a $50,000 second loan which is current and not in default, a $10,000 third loan in default, a $20,000 mechanics´ lien, and the IRS has recorded a $7,500 tax lien for unpaid income taxes. After the first lender´s foreclosure sale on that $125,000 loan, the second and third loans, plus the mechanics´ lien, will be wiped out. However, any sales proceeds exceeding the amount owed to the first lender, including foreclosure costs, will go to the second lender, third lender, mechanics´ lien holder, and the IRS, in that order. But if a junior lender, such as the lender on that $10,000 third loan which is in default holds the foreclosure sale, the successful high bidder purchases "subject to" any senior liens, such as that $125,000 first loan and the $50,000 second loan (but the $20,000 mechanics´ lien will be wiped out because it is junior to the loan being foreclosed).

If there is a recorded IRS lien against the property owner, and if the IRS is properly notified by the lender in advance of the foreclosure sale at least 30 days before the sale, an IRS tax lien will be wiped out after its automatic 120-day redemption period. That means the IRS can redeem by paying the high bidder the amount he or she paid. Then the IRS takes title to the property free of the wiped out junior liens. If the IRS does not redeem within 120 days, then its tax lien is wiped out as to that property only (it still applies to other real estate and other assets the defaulting taxpayer owns in that county). However, if the IRS was not properly notified by the foreclosing lender at least 30 days in advance of the foreclosure sale, the IRS lien remains on the property and the high bidder at the foreclosure sale becomes liable for its payment. For this reason, bidders at foreclosure auctions should be sure the IRS was correctly notified by the lender (or trustee) of the sale.

2 -THE PRE-FORECLOSURE REINSTATEMENT PERIOD. Between the time the lender files either a judicial foreclosure lawsuit against the defaulting borrower, or a Notice of Default (NOD), the borrower can usually reinstate the loan by paying the missing payments plus costs. However, some loans cannot be reinstated, such as when the borrower failed to pay a balloon payment, meaning the mortgage balance must be paid in full.

This time period is known as the "pre-foreclosure period" or "reinstatement period." During this time before the foreclosure sale, the borrower can (a) reinstate the loan by curing or paying the default (such as by borrowing on a second or third loan secured by the property), (b) refinancing with another lender (today, there are many "sub-prime lenders" who are eager to refinance even a borrower who is in default), (c) sell the property to pay off the defaulted loan and probably walk away with cash from the property equity, or (d) do nothing and lose the property with its equity at the lender´s foreclosure auction.

During this pre-foreclosure reinstatement period, prospective foreclosure buyers often contact the defaulting borrower to either purchase the property or loan the borrower the money needed to cure the default (secured by a junior mortgage or deed of trust on the property). More about this opportunity later.

3 - THE JUDICIAL SALE OR THE NON-JUDICIAL TRUSTEE´S SALE. At this point, the borrower loses title to the property. An advantage of buying at the foreclosure sale is any junior loans (with the exception of IRS liens, as explained earlier) are wiped out. This can be very important if the property is over-encumbered for more than it is worth. If the high bidder at the sale pays more than the amount owed to the foreclosing lender, plus the amount(s) owed to any junior lenders and lienholders, the excess amount goes to the defaulting borrower. However, any wiped-out junior lender usually has a short redemption period after the foreclosure sale, depending on state law. Some professionals specialize in acquiring these "sold out" junior lender redemption rights.

EXAMPLE: Years ago, I was the foreclosing lender on a $21,000 third deed of trust. There was lots of equity in the house. The defaulting borrowers should have sold it to pay off their lenders and walk away with plenty of cash. Instead, they made the bad mistake of filing Chapter 13 bankruptcy reorganization (as many defaulting homeowners do). The bankruptcy "automatic stay" delayed my nonjudicial trustee´s sale about six months. All the homeowners gained was time! When the homeowners failed to pay the defaulted payments to me, my bankruptcy attorney got the bankruptcy judge to release the property from the bankruptcy automatic stay so I could hold my trustee´s foreclosure sale. There were about 10 bidders at the auction (including some of our local "40 thieves" who are full-time professional foreclosure sale bidders). I opened the bidding with a "credit bid" (no cash required because I was the foreclosing lender) of $21,000 owed to me (including the legal fees for my bankruptcy attorney). The bidding was hot and heavy. I got my $21,000, and the successful high bidder bought "subject to" the first and second loans (which were also in default). But there was about $40,000 excess cash leftover which went to the defaulting homeowners. That´s probably more cash than they ever had before. But they could have netted more cash from their equity if they had sold the house instead of foolishly filing Chapter 13 bankruptcy.

4 - IF NO BIDDERS SHOWED UP AT THE FORECLOSURE AUCTION, THE FORECLOSING LENDER RECEIVES THE TITLE. At many foreclosure sales, no bidders show up. Then the foreclosing lender receives the title, free and clear of any junior liens which are wiped out.

There are several major reasons no bidders show up, such as (a) the foreclosed loan amount is too high for bidders to raise in cash and (b) the property isn´t worth the amount of the loan being foreclosed (plus any senior loans which are taken "subject to" by the high bidder).

Personally, this is my favorite time to buy because there is little or no competition and the property can be inspected before purchase from the foreclosing lender. But there are special techniques for buying after the auction if you want to purchase at a bargain below-market price. When the foreclosing lender gains title, it becomes REO (real estate owned) in the lender´s portfolio. Most lenders don´t want REO property and will try to get rid of it as fast as possible.

HOW TO FIND, TRACK, AND BUY FORECLOSURE PROPERTIES. Before discussing the profit opportunities at each stage of the foreclosure procedure, we need to learn how to find, track and buy foreclosure properties. Of course, you could visit the local court house every day, or at least once a week, to check on new foreclosure recordings. But that would be a huge waste of your valuable time! In most cities and counties there is a local legal newspaper or private foreclosure publication. Some are highly reliable and include all the foreclosure listings. Others are unreliable.

Another great source of foreclosure information is Team Thayer. With access to lists from Title companies constantly being received we can be a great assett to you if you are interested specifically in foreclosures.

After you narrow down where you want to track foreclosures, using one of the sources above or a local foreclosure information publication (ask local title insurance officers are real estate attorneys if your area has such a resource), I recommend tracking all local foreclosures which interest you. Even if you don´t want to buy a foreclosure in a particular neighborhood, if you refer it to a fellow investor he or she might agree to pay you a finder´s fee just for making the referral phone call.

Here is the essential tracking information I developed and refined a few years ago. You may want to enter it into your computer database. I found Filemaker software worked well for me, but there are many other databases available at local computer stores, such as Comp USA. Please don´t become bogged down tracking, as I did. Instead of contacting owners and lenders, I spent too much time entering the foreclosure details into my computer. Adapt this information form for your state and locality. I found it´s best to keep a three-ring binder with one property per page. That way, there´s lots of room to make notes, such as when you contacted the property owner. Never throw your "suspect file" pages away because the same properties tend to reappear over and over.

PROPERTY ADDRESS AND CITY__________________________________________

ORIGINAL LOAN AMOUNT $_________________ NOW DUE $_________________

ORIGINAL BORROWER & CURRENT ADDRESS____________________________

CURRENT OWNER & ADDRESS___________________________________________

DEFAULT RECORDED __/__/2006 REINSTATEMENT PERIOD ENDS __/___/2006

LENDER & INFO________________________________________________________

TRUSTEE/ATTORNEY & INFO____________________________________________

SALE DATE ___/___/2006 OPENING BID $___________ TIME____ PLACE_______

ENTRY DATE/FILE #_____________________________________________________

COMMENTS:

PROFIT OPPORTUNITY #1 ? BUY DIRECT FROM THE DEFAULTING BORROWER DURING THE PRE-FORECLOSURE REINSTATEMENT PERIOD. Finding the defaulting borrower can be a major challenge because many don´t live in the property which is in foreclosure. I used to send letters to these folks, but the response rate was very low. Then I learned why. One day I visited a house where the owner had phoned me about my offer to loan him funds to cure the default. As I sat down on the sofa and looked at his coffee table full of unopened letters, mostly from lenders wanting to refinance, or from bankruptcy attorneys, he explained he was too depressed to open them.

That´s why I switched to sending postcards instead of sealed letters. For just 24 cents your postcard is almost sure to be read. But DON´T say "Sorry to hear you are in foreclosure. If you want to sell your home to avoid losing it, give me a call." A postcard like that is sure to get an angry response from the defaulting borrower who doesn´t want the mail carrier, spouse, and kids to know about the pending foreclosure.

A far better postcard approach is sending a sincere "I would like to buy a house in your neighborhood. Do you know of any owner who wants to sell direct and save the sales commission? Fast closing. Call Bob at 555-555-5555." Be sure to include your area code and your return address (not your home address, but a post office box works fine).

It is very important to include the magic words under your return address on the front of the postcard "Address Service Requested." Then, if the owner has moved but left a forwarding address with the local post office, your post card will be forwarded and you will receive the forwarding address. The extra cost to you is only 70 cents, paid when you receive the forwarding address.

Although the exact reinstatement period varies by state, it is typically three to six months before the foreclosure auction will be held to sell the property. Remember, in Texas it can be as short as 21 days! So don´t waste time. Contact the defaulting owner as soon as possible after the lender recorded either a lis pendens to start the foreclosure lawsuit or a Notice of Default. However, because of the "do not call" telephone registry rules and penalties, you might want to avoid phoning the defaulting borrower if you operate a real estate brokerage or foreclosure business.

Please understand only about 5% of homes in default ever go all the way to a foreclosure auction. The other 95% are sold, refinanced, or the owner borrows the money to cure the default. If the encumbrances on the home leave at least 25% equity, there is a good chance you can acquire that house before the foreclosure auction.

What is the least amount of cash you can take for your equity? During the pre-foreclosure reinstatement period, you should have two goals: (a) meet the defaulting borrower at the home so you can inspect it and (b) either buy the house before the sale or wait until the auction to buy (especially if the house has too many loans and not enough equity).

It took me a long time to learn to ask (presuming I want to buy the house) " What is the least amount of cash you can take for your equity?" I used to ask "How much do you want for your house?" Wrong question! Also, never use the word "home." When a defaulting borrower is selling, it has become a "house."

EXAMPLE: I learned this technique from one of my College of San Mateo law students. The evening we discussed foreclosures, Hiram told us how he bought a house in foreclosure for just $500 cash. He said the house was worth about $150,000 and had a $72,000 first mortgage which was in default. When he knocked on the front door, in his "uniform" of overalls and sloppy flannel shirt, he politely asked if the lady might be interested in selling her house. Then he asked her what was the least amount of cash she would take for her equity. She replied "Oh, it will probably cost me about $500 to move back to Louisiana." Hiram quickly agreed $500 was a fair price for her equity. He also agreed to pay the title insurance and other transfer costs. Hiram just happened to have the purchase forms in his old car parked nearby. Six days later, Hiram and the seller met at a nearby title insurance office, exchanged the deed for the $500, and parted as friends. It was win-win for both, especially Hiram who made sure there were no undisclosed encumbrances on that house and obtained title insurance on his purchase.

Watch out for California´s Five-Day Right of Rescission Law. If you are buying an owner-occupied one-to-four unit residential property in California, be sure your purchase offer is on a form giving the seller a five-day written right of rescission and you do not pay the seller even $1 deposit money during those five days. Hiram told us how he uses this five-day period to his advantage to have his title insurer check for any undisclosed liens the seller might have forgotten to disclose. Then, on the sixth day after the sales agreement was signed, meet the seller to receive the deed and pay the agreed cash (which is usually a lot more than $500 by the way!). I´ve bought pre-foreclosure houses for $5,000 to over $20,000 cash paid to the defaulting owners.

Don´t give the defaulting borrower an option to buy the house back. When buying during the pre-foreclosure reinstatement period, do NOT give the defaulting borrower an option to buy the house back. In several states, including California, that will be considered to be a loan, rather than a property sale. Personally, I´ve rented back to the defaulting borrower without any problems, but some of my colleagues say that is not a good policy.

PROFIT OPPORTUNITY #2 ? BUY FOR CASH AT THE FORECLOSURE SALE. If the house isn´t sold or refinanced during the pre-foreclosure reinstatement period, it will go to either a court judicial sale or a non-judicial trustee´s sale. This can be a superb profit opportunity to buy at the foreclosure auction to wipe out the junior loans and liens (except IRS liens, as explained earlier). However, if there are unpaid property taxes, they are never wiped out.

EXAMPLE: Suppose you are considering buying a house worth $350,000. It has a $150,000 defaulted first mortgage which is going to foreclosure sale, a $50,000 second mortgage, a $35,000 mechanics´ lien, and unpaid property taxes of $3,000. The lender´s opening bid will be $150,000, plus costs. If you bid $150,001 and there are no other bidders, you just bought a tremendous bargain subject only to the $3,000 unpaid property taxes. The $50,000 second mortgage and the $35,000 mechanics´ liens were wiped out by the foreclosure sale on the senior loan.

Drawbacks of buying at the foreclosure sale: (1) Cash is required, either at the sale or shortly thereafter (for safety, bring cashier´s checks payable to yourself that you can endorse over to the foreclosing officer as he directs); (2) You probably won´t be able to get title insurance on your title until six months or more after the sale (so the title insurer can check for any irregularities in the conduct of the sale); (3) Unless you tried negotiating with the defaulting borrower before the sale, you probably won´t be able to inspect the house before the auction; (4) The foreclosing lender makes no warranties or representations (you might think you are bidding on a foreclosed first loan but there is a prior recorded loan so you´re really bidding on a foreclosed second loan); and (5) If you buy "subject to" a senior loan which will become your obligation to take over payments, that lender could refuse to let you take over payments (although most lenders are only too happy to have a stronger buyer taking title).

Advantages of buying at the foreclosure sale: (1) Any junior loans and liens are wiped out; (2) If there is a senior loan, you can probably take over its payments without having to get new financing (but be prepared to refinance if necessary), and (3) You may get an incredible below market value bargain.

PROFIT OPPORTUNITY #3 ? BUY AFTER THE FORECLOSURE SALE FROM EITHER (A) THE HIGH BIDDER OR (B) THE FORECLOSING LENDER IF THERE WERE NO BIDDERS. This is my personal favorite time during the foreclosure process to buy. All the emotion is gone. The defaulting borrower is out of the negotiation picture (although you might have to evict him as part of your after-sale negotiations with either the lender or the high bidder).

I´ve bought both from the highest bidder and from the foreclosing lender when there were no bidders. If you offer the high bidder a modest profit, he or she is often only too happy to make a quick sale to you without having to pay any real estate sales commission.

The same principle applies when you buy from the foreclosing lender who got title to the property because no bidders showed up. If it is a local "buyer´s market," ask the foreclosing lender to finance your purchase with a low cash down payment, such as 10% down with 90% mortgage financing and no PMI (private mortgage insurance). Most institutional foreclosing lenders want to get rid of that REO as fast as possible to cut their losses. Also, remind the foreclosing lender there will be no sales commission on a direct sale to you.

My favorite technique for buying from the foreclosing lender is to send a Federal Express overnight letter to the lender´s president or top REO (real estate owned) official if you know his or her name. Offer to purchase the property for the amount of the lender´s opening credit bid at the foreclosure sale.

TIME IS OF THE ESSENCE! The reason is you want to prevent the lender from listing the REO house for sale with a local real estate broker because then the asking price will be marked up to full market value. Include a short, very polite letter explaining why the lender should sell to you and finance your purchase to quickly turn a bad loan into a new profitable loan. If you have good credit, include a copy of your credit report and FICO (Fair, Isaac Corporation) credit score (you can obtain a three-in-one credit report from all three national credit bureaus for about $45 at that website). If your FICO score isn´t at least 680, don´t bring up this FICO score topic.

Be sure to make your offer on a purchase contract form used in your area. Also attach a deposit check for at least $1,000 ($5,000 or $10,000 would be better), payable to whomever you want to handle the closing settlement, such as a title or escrow company, real estate settlement attorney, bank, or other closing agent used in your community. Include your phone number, e-mail address, fax number, and mailing address. You should receive a response within a few days either accepting your offer or making a counteroffer. If the property is in bad shape, be sure to say something like "Incidentally, have you seen this property lately? It looks pretty bad." If possible, include a photo or two showing the house looking its worst!

HOW TO FINANCE YOUR FORECLOSURE PURCHASES. Each foreclosure situation is different. You might discover you won´t need much cash, such as when Hiram bought that house for only $500 plus closing costs. However, such a very low cash situation is unusual.

If you plan to bid at the foreclosure auction sale, you will need cash or quick access to cash, such as from your home equity credit line or an investment partner. If you own other real estate, such as your residence, you can probably obtain a home equity loan on that property to provide working capital. Frankly, like most investors, I´ve purchased my best foreclosure bargains when I didn´t have much cash available so I then became very creative with the financing.

Sometimes I borrowed hundreds of thousands of dollars, unsecured, from individuals who trusted me. They always got their money back with handsome profits. In fact, one lender phones me once or twice a year to ask "How about borrowing a couple hundred thousand dollars?" But his terms have become too steep for me. As you become serious about investing in foreclosure properties, you will soon establish financial contacts like that. However, don´t over-extend yourself financially.