If a complanint has been filed in court suing the borrower on the remaining balance of the mortgage note including all foreclosure cost, the money lender has initiated a judicial foreclosure. Generally, notice to the borrower of the filed complaint must be served personally, by mail or public notice in a local newspaper. The lender will also record a “lis pendens” against the property with the county recorder for the purpose of notifying prospective purchasers or any other interested party that the property is in litigation.

In most states the borrower has thiry days to file a written response to the complaint. If the borrower fails to answer the complaint a default judgment can be entered against the borrower for the amount of money the lender has requested in the complaint. If the borrower answers the complaint within the time frame set by state law procedures are initiated that allows both the borrower and lender to be heard in court in front of a judge. Assuming the judge finds the debt valid a judgment will be entered in favor of the lender. A written judicial order will be issued authorizing the property to be sold (auctioned off to the highest bidder).

A non-judicial foreclosure is processed without the intervention of the court system. Depending on the state statues where the property is located a Notice of Default or Notice of Sale will be recorded at the county recorder and sent to the property owner. If the owner does not cure the default by bringing the mortgage payments current including the cost of foreclosure the lender can proceed with the sale of the property. State statues setforth the legal timeframe in which a sale can be held, as well as, the notice requirement to both the property owner and the public of the pending sale.

There are basically three types of cap rate calculations related to the potential value of income producing property. If you know two of the three variables you can calculate the third. They are:

1. Purchase price of the property
2. Expected rate of return
3. Net operating income (NOI)
Note: NOI excludes non-cash expenditures such as depreciation for
determining cash flow.

Let’s assume an eight unit apartment building with a sales price of $1,500,000 with net operating income of $120,000.

What is the rate of return on this investment?

$120,000 divided by $1,500,000 = 8% return.

If the investor by chance wanted an 8% return, What should investor be willing to pay for a building with net operating income of $120,000?

$120,000 divided by 8% = $1,500,000 max purchase price.

If you know the market rate of return (8%) and the sales price ($1,500,000), what should be the cash flow generated from the investment?

$1,500,000 multiplied by 8% = $120,000 annual cash flow.

Let’s assume the apartment building only generates $100,000 cash flow annually. What would be the maximum purchase price the investor should be willing to pay?

$100,000 divided by 8% = 1,250,000 max purchase price.

In this example the building would be over priced at $1,500,000 and would not probably be a good investment. The property appraiser utilizes the cap rate as one of their tools in establishing the market value of the property. You as an investor should also understand and apply the capitalization tools in analyzing the potential acquisition of income producing properties

There will be further due diligence by the lender during the process in requiring additional documentation. However, these 5 items will start the process and let you know up front whether the lender is interested.