• Guarding yourself against foreclosure fraud
• Leasebacks, straw buyers and loan mitigation
• Researching companies offering help

As if it’s not enough of a devastating experience, homeowners facing foreclosure often end up the prey of ruthless criminals aiming to scam them out of their homes or equity. “Unfortunately, what we’re seeing is a lot more people who are trying to take advantage of the homeowner going through foreclosure,” says Carla Douglin, head of The Douglin Group and Douglin Foundation, a Maryland-based nonprofit firm that specializes in helping homeowners faced with foreclosure. Today’s exceptionally high number of delinquencies is keeping her tremendously busy.

She says it’s important that homeowners understand they can’t keep their delinquency status or foreclosure a secret. When a homeowner falls behind on mortgage payments, his name goes on a list that is available for sale. As a result, he begins to receive more and more mail from people offering a foreclosure service or to buy the home. “That’s when you really need to be very, very careful and [become aware] that there are con artists out there who are trying to steal your home or your equity,” Douglin cautions.

Even though this may be the most frightening financial hardship you’ll ever endure, it helps to approach foreclosure carefully, with eyes wide open. For starters, don’t sign anything you don’t understand. If the paperwork is complicated, written in a lot of legalese, seek expert help. “Any person coming to you with an offer, if legitimate, will allow you a few days to review it with an attorney or somebody who can say, ‘Yes this is a good idea, or no, this isn’t a good idea,’” Douglin says.

“The Foreclosure Workbook” (Xulon Press), by Douglin, lays out some of the most common foreclosure scams. Here are a few.

The leaseback opportunity

Although it can be legitimate, the leaseback opportunity is the most attractive scam to homeowners right now. Someone offers to bail you out of your financial troubles by buying your home and then allow you to rent it back. Often they will say that you will be able to buy your home back from them within a period of a couple of years. The new owner collects the rent and then simply waits for you to make even the slightest mistake, such as being late or even just paying a penny less than the agreed-upon rental fee. That’s when you find yourself evicted and without any opportunity to repurchase your home.

“They may keep you in the property, but they have every right to cash out the equity that’s in the property, so that when you do try to buy it back, say in two years, you’re buying it back at a much higher price than what you originally sold it for to them,” Douglin says.

Straw buyers

This is a modified leaseback scam (though not all straw buying is fraudulent) in which a scammer offers their good credit to refinance a new loan for your home and purchase it. The scammer requires you to be the co-borrower on the loan and then have you pay a flat fee out of the home’s equity during the refinance process.

You are told that you can live in the home rent-free. At the end of an agreed-upon time frame, the scammer gets off of the title, and you will buy back the home. (In other words, you will purchase and refinance it back, as the scammers did.) By that time, the scammers will have stripped the equity out of the home, making it unaffordable.

“What they have every right to do is pull the equity out of the house,” says Douglin. “Any money that’s open, any money that can be refinanced, any cash in your home, they have every right to it.”

Loan mitigation

Watch out for loan mitigation companies that are attempting to work with your bank to solve your foreclosure problem. Of course, not all of these companies are scamming homeowners, but the ones that do, work like this: The homeowner pays an initial upfront fee of several hundred dollars to have their case reviewed. The loan mitigation company claims it can help you and then typically charges a few thousand dollars more to get the process started. The owner is told the company will negotiate with the lender on their behalf.

“You pay the [money] and then you wait and wait,” Douglin says. “These people have not made one phone call to your mortgage company. They have not made any attempts to reach out to solve your situation with your lender. They took your money and they walked away.”

The bottom line is, don’t jump at the first solicitation of help. Investigate, research and call reputable resources to learn about the company or person you’re considering getting help from. You can contact the fraud-investigation unit of your state’s attorney general’s office to find out if they have any complaints on file against a particular person or business who offers foreclosure services. A phone call like that could save you from financial ruin.

• Checking utilities for working order
• Animals, pests and other unwelcome guests
• Damage due to “foreclosure rage”

A home inspector does not prepare or examine differently when going into a foreclosed home, yet there are certain issues that can arise that are unique to these properties. With the number of defaulted loans rising (a trend that will most likely continue into 2009), you may wish to look at a foreclosed property as either an investment or a good value for your new home. This will require you to pay attention to the following areas of concern.

Having utilities on for an inspection

Before you or an inspector examine a home, arrange for all the utilities – water, electrical and gas – to be functioning to determine how well they work. Once they are on, check to see that they are fully on. In one home, my client was told that there was low water pressure. I found that the water had not been turned on all of the way, because it revealed leaks in the faucets. In another home, breakers had been disabled to cover up an electrical problem.

Vandalism and theft

Look at foreclosures in Detroit, and you will quickly see why the city wants many torn down. The metals used in the mechanical systems have become quite valuable, so thieves have been gutting the homes to the point where they are no longer livable. In Houston, I have found air conditioning units with missing parts. Vacant homes are prime targets for thieves, but they also provide a club house for vandals. I found a hose bib and pipe that had been off, but replaced into the wall, so that water would flow into the wall. Most damage from these vandals involves broken windows, walls and doors.

Pests and mold

Rats, squirrels, possums, bats and termites want the same thing that we want: a nice quiet place to live. A vacant home can provide this for them. Many foreclosures will sit vacant for some time before they are purchased, so you may find an unwelcome guest or two. Look for signs of animal activity, such as chewed boards or droppings. Mold needs the right conditions to exist, which a well winterized home will not provide. However, if you smell a musty odor, you may want a mold inspection. Some odors may be from an empty toilet or sink trap. Traps hold water to prevent sewer gases from entering the house.

A work in progress

Some foreclosures are being repaired by the owner (whether a bank or investor) who has hired a general contractor. I have found some dangerous situations where contractors have left wires dangling or gas spigots on. With the utilities being turned on, a life-threatening situation may occur. Do not assume that the power is off if you see bare wires in the kitchen. An odor is given to natural gas to make it detectable. If you do smell gas, do not turn on any lights, and go outside if you want to use your cell phone to make an emergency call.

Foreclosure rage

This is not so common, but it can result in a little more work on your part in making the home look nice. There has been a trend by some owners to start damaging the home that they are leaving during the foreclosure proceedings. Holes in walls and doors where fists and feet went through are the most common example. Another is damaged wall sockets that people yanked plugs out of them. Sometimes you will find missing appliances or parts to the appliances. Sometimes it’s just a case of the owner having no money to make repairs, so little things went undone. You may find that you will have to cleanup after the previous owner, who may have left their personal effects behind.

These are the special concerns which you may encounter upon entering such a home. You should have a home inspector look over the property to know what it is that you are purchasing. You may have heard the term foreclosure inspector, but this is a person who examines the home for the lender, so you will not need such a specialist. They may not be able to help you anyway, because many simply focus on a home’s cosmetic problems and not its structural and mechanical concerns.

• Where to find foreclosed homes
• Buying direct from the homeowner
• Auctions, REOs and government sales

If you’re like most savvy investors, the thought of the sinking housing market has raised the question of whether now is the perfect time to buy, and if so, are foreclosures the best option?

The answer is yes, they can be, but you’d better understand the various steps and phases of foreclosures before you sink your cash into a foreclosed property.

“We’re kind of emphasizing buying foreclosures that are bank-owned, or through the bank, because a lot of the creative financing, easy financing techniques that people used to use to buy pre-foreclosures just aren’t there. So [buyers] kind of end up in the same position as the people who currently own the house in that [they] can’t get financing or can’t afford the financing that’s out there,” says Bobbi Dempsey, co-author of “The Complete Idiot’s Guide to Buying Foreclosures” (Alpha).

You can buy a distressed property when it’s in one of the following phases:

• Pre-foreclosure – the homeowner still has control of the property.
• Auction sale – you may be bidding against lenders.
• Real estate-owned (REO) – a lender-owned property.
• Government-owned – potentially a slower process with more paperwork.

Regardless of which phase you are attempting to purchase the property, how do you begin the process? There is a growing selection of foreclosed homes to choose from across the country, as today’s faltering housing market yields hundreds of thousands of these properties. . But maybe you’ve heard that buying foreclosures can be a long and risky process. It can be, especially if you don’t know the laws regarding foreclosures. Here’s a step-by-step guide to help acquaint you with the process.

Finding foreclosures

You don’t have to be a private investigator or born under a lucky star to find a foreclosure home. These days, they can be found in low-, middle- and high-income neighborhoods — no socio-economic level is immune.

Drive through neighborhoods and see foreclosure signs posted. So, too, are signs from hopeful investors who are vying for an opportunity to acquire a pre-foreclosure property at a good price from an anxious homeowner.

But that’s not the only way to find foreclosures. Building a network of contacts from traditional lending institutions, mortgage banks, real estate agents and residents living in areas where you hope to invest can lead to an ideal purchase.

Traditional lenders have lists of REO properties that are being sold by the bank. Contact lenders and get on their mailing list. Very often real estate agents work with banks to handle the REO properties. Befriending a savvy, experienced agent who specializes in REOs can help you learn about a foreclosure first.

Don’t rule out what can sometimes be the best place to search for foreclosures: the newspaper and Internet. Nearly all buyers start their search online. Homeowners, banks and real estate agents often post foreclosed properties for sale in both print and online. According to Dempsey, foreclosure sale ads from the U.S. Department of Veterans Affairs (VA) and the Federal Housing Administration (FHA) are posted in the newspaper on a regular schedule; her book advises readers to contact the classified manager at the paper for the schedule. Legal notices of default also run in newspapers.

Also, remember to check online public records, foreclosure listing services and perhaps the best source: the county courthouse. This is where all real estate transactions for a property in that county are recorded.

Eager to get started? Start searching now for foreclosures on HomeFinder.com by using the search function at the top of this page.

Pre-foreclosure: buying directly from the homeowner

You can make an offer to purchase a property when it’s in pre-foreclosure, when the lender agrees with the homeowner to accept less than the outstanding balance of a mortgage loan and avoid foreclosure. This usually translates into a discount for the buyer below the home’s market value.

This type of purchase, also known as a short sale, was recently all the rage. Investors sought out homeowners who were delinquent on their loans and attempted to negotiate a deal to bail them out of their financial debt by purchasing their home. Some buyers knocked on doors, made phone calls, sent e-mails or letters to distressed homeowners. However, Dempsey says letters aren’t as effective as they used to be. “A lot of those letters were from predatory lenders or people who were just out to scam them. I think that nowadays the homeowners tend to throw all that stuff away and ignore it more than they used to.”

Keep in mind that when the property enters pre-foreclosure, which is somewhat of a grace period, the owner has several months (up to six months in some states) to pay off the default amount.

Auction: get ready to bid

Auctions are typically conducted by a neutral third party such as a trustee or sheriff. And while buying a property at an auction can offer some high profits, it does have its drawbacks too.

“You’re taking it as is and if you buy it at an auction, you usually can’t even go in the house and see it,” cautions Dempsey.

These types of purchases can offer a lesson in frustration, seeing that auctions are frequently cancelled or postponed last minute. It’s also important to note that during this phase the lender cannot take advantage of the property owner in any way. Nor can the lender make a profit at the auction. When the property is sold to the highest bidder, the liens are paid and any overage is given to the homeowner — though typically, once the loans are paid, there is no money left for the homeowner.

One caveat: When you buy a property at an auction, be sure you have investigated the “right of redemption” law, which means homeowners can reclaim their property within a certain period of time if they pay all past-due amounts and applicable fees for the property. This time period varies from state to state.

Buying REO

REO, or real estate owned (by the lender), is the most popular method of buying a foreclosure, because it’s generally the easiest and safest way. However, when you purchase a lender-owned property, it can offer the least value and most competition. Understand that the lender acquired the distressed property at the auction, because no one bid higher than the default amount. Now that the lender owns the property, it can be sold for any price, even for a profit.

Government-owned properties

Buying foreclosures that are owned, maintained, and/or sold by the government can amount to more paper work and a potentially slower process.

“In the past, I’ve heard that some of the agencies move kind of slowly, and they don’t seem to have as much incentive to cut the price or grab a buyer. They seem to be willing to wait it out and wait for somebody who wants to pay what they want for the property,” says Dempsey.

Buying properties from the FHA, VA, Small Business Administration, Fannie Mae, Freddie Mac, IRS or others can save you money. Some of these agencies may assist with financing, but the IRS will not—you’ll have to pay full cash for the property.

Buying foreclosures can be a cost-saving and rewarding experience, but before you dive in, do your research and use the best experts in the field.