Top Six Myths of Investing in Bankruptcy Real Estate

By: Caryn McKinney, Co-founder Post Bankruptcy Report

When most people hear the word “bankruptcy,” the first reactions are intimidation and avoidance.  The fact that it’s a legal process involving the Federal government pretty much explains both reactions.

From our informal surveys of many investor groups across the country, most real estate investors react precisely the same way … largely due to a lack of education and experience.

However, there are so many opportunities for real estate investors in the bankruptcy niche, that my partner, Mark Klee, and I have made it our personal specialty to remove the fear commonly associated with bankruptcies.

And when you consider the current economic climate, it’s only common sense to realize that even though the economy is in a recession, the bankruptcy market is exploding … heck, it’s downright ”recession-proof!”

Let’s address the some most common myths and misconceptions…

Myth #1: “Bankruptcies are too legally complicated for the average real estate investor…”

Truth: That’s ridiculous.

Do you need to be familiar with bankruptcy terminology and the general process of how a bankruptcy proceeds?   Sure.  Do you need to understand the basic differences between a Chapter 7 and a Chapter 13?  Of course.  Do you need to know the responsibilities and perspective of the Trustee?  You bet.

But you can easily learn all of these details and more by simply finding the right materials/seminar and being open to grasping a small pool of information.

Myth #2: “You can’t buy a house in a bankruptcy…”

Truth: Hogwash!  Sure you can!  It does require an extra step compared to buying a house that’s not in a bankruptcy, but it’s more than worth your effort.

The fact of the matter is it’s really a pretty simple process to get educated enough about the bankruptcy process and terminology to be able to speak intelligently with sellers.  And the paperwork required to purchase a home in a Chapter 7 or a Chapter 13 is also very basic.

  • The magic piece of paper you need from the Trustee in a Chapter 7 case is called a “Notice of Abandonment.”
  • If it’s a Chapter 13, you need to file a “Motion for the Sale of Real Estate.”

Myth #3: “Only attorneys can deal with the Bankruptcy Court or a Bankruptcy Trustee…”

Truth: No way!

The Court system is designed for “the people.”  It’s also where many attorneys earn their living.  If you’re filing for bankruptcy, we certainly recommend that you do so through an attorney, but if you’re just trying to purchase a home involved in bankruptcy, you can do it on your own.

Further, the Trustee is an officer of the court whose responsibility is to protect both creditors and debtors.  As a potential purchaser of a property under the control of a Trustee, you can certainly contact that Trustee and walk through the process.

Myth #4: “If there’s any equity in a house, the Court won’t allow me to buy it…”

Truth: Indeed, one of the Court’s responsibilities is to evaluate the debtor’s estate and see how as many creditors as possible can be paid.

But there’s a big difference between a house having enough equity for the Court/Trustee to want to go to the trouble to sell it and a house having enough equity for a real estate investor to find a good deal.

For example:

(a) The Court will have to factor in a Homestead Exemption payment to the debtor (a real estate investor doesn’t have to do that).

(b)  The Court will also have to factor in “yellow pages” prices for any necessary repairs (most investors have less expensive resources).

(c)  The Court will be selling the house through a full-service realtor, who will be charging a 6% or 7% commission, whereas an investor may use a “flat-fee” listing service or want to keep the house as a rental.

(d)  The Court doesn’t have the opportunity to negotiate a “short-sale” with the lender(s) and we all know that investors can make TONS of money in the “short-sale” market.

Myth #5: “There are no pretty houses in bankruptcy…”

Truth: People with nice, expensive houses get in financial trouble just like folks with more modest or “ugly” houses.  In fact, some of the biggest deals Mark and I have done have been with VERY nice houses in VERY nice neighborhoods!  We’ve each had the opportunity to do “short-sale” purchases on homes in the $300,000 – $500,000 range.

Myth #6: “There are no investing opportunities for houses in bankruptcy, because mortgage balances are too high…”

Truth: This issue was dealt with briefly in Myth #4, but there’s more to know.  In fact, because of the circumstances leading most debtors to file bankruptcy, there may be MORE opportunities in bankruptcies than elsewhere.  Five reasons for the many opportunities are:

(a) Most investors are afraid to deal with a bankruptcy or don’t know how. So there is less competition.  Where there’s less competition, there’s more opportunity!

(b) Speaking of opportunity – right now in 2009 the American Bankruptcy Institute projects bankruptcy filings will increase by 30-50% over 2008.  That translates into an estimated 1.4 million new bankruptcy filings in 2009.  In 2008 bankruptcies increased 30% over 2007.  How many niche markets do you know with this kind of year to year growth … or should we say explosion?

(c) We’ve heard all sorts of figures, but (conservatively) 70 – 80% of all Chapter 13 payment plans fail, which leads to extremely motivated sellers!

(d) Many debtors were facing foreclosure when they filed bankruptcy so when they realize they may not make it through the bankruptcy, they often realize they have run out of options and they MUST sell their house to avoid foreclosure.

(e) Mortgage companies that loaned money to these debtors have really been drug through the legal system – foreclosure, bankruptcy, then back to foreclosure. So, the mortgage companies can also be extremely motivated to negotiate a “short-sale” so they don’t end up owning the house via foreclosure.

These are just some of the many myths surrounding bankruptcies and the many unknown opportunities for real estate investors.  A little education can go a long way if you can see the incredible profits available in this niche market!

Caryn McKinneyAbout Caryn McKinney:

Caryn McKinney partnered with Mark Klee in 2002 to create  At the request of their subscribers and others, they have now developed quality training materials.  Their simplified and detailed information includes everything you need to know as a real estate investor wanting to purchase homes in the bankruptcy niche market.

Thoughts? Question? Comment!


JP Moses is a roughly-hewn man-child who first got into REI after reading Rich Dad, Poor Dad back in Y2K and went full time in 2002. He's tinkered in everything from landlording to short sales to rehabs to Realtoring to REOs to notes to owner financing, blah, blah, blah...Till he finally stuck his flag deep into wholesaling and has since flipped somewhere north of a couple hundred deals.

JP's not a “guru” but also doesn't think it's a bad word. Among his core values are authenticity, creativity, big honkin' value, general fun-ness and being unshaven. He's super proud to be chief blogger guy at and host of the free REIology podcast. He also thoroughly enjoys sharing his 53 best real estate investing forms with anyone who wants them. You should totally check that out. 🙂

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Frank Reply

Question: Are you able to buy a home through the bank with terms and will they rewrite the loan? Thank you !!

Jared Reply

I am a little unclear on who the “trustee” is.Is the court appointed officer a lawyer?

Jared Reply

What would you say that the banks are generally looking for, percentage wise, as an offer when they are in bankruptcy to satisfy the balance.

salmedo Reply

what do you do when the girlfriend of the seller says that she is his accountant and attempts to blow the option to purchase deal?

Got a big fish but girlfriend has her reel in too!

Fresh start Reply

I have sat in on a number of bankruptices in the Eastern part of the counry, downtown Norfolk, VA. Almost all Chapter 13 has property attatched. And I also noticed that the court appointed Trustee has an inside man that gets the inside SCOOP on these must be sold properties. Does the program you support have a much better INSIDE SCOOP for the newbies?

Mark Klee Reply

Not really sure what you mean by “inside scoop” but it is VERY RARE that a property is sold during a CH13 BK. As a matter of fact, over 80% of the people in CH13 eventually get “kicked out” and loose the protection of the BK court. This is where the REAL opportunity is for us as real estate investors.

Mark Klee Reply

Absolutely .. you are able to buy a home using terms. I don’t know what mean by “rewrite” the loan, but you will need to get financing just like any other property.

Mark Klee Reply

The trustee is a court appointed officer of the court that is assigned to each case by the BK court. They are “typically” lawyers that have their own separate practices and act as trustees on a part-time basis.

Mark Klee Reply

There is no set amount. It’s handled just like any short sale (assuming there is more owed on the house than it’s worth), the bank will run their numbers to determine what amount makes sense for them to accept. However, it IS more expensive for them to hold a house in BK than a typical short-sale.

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