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Why the internet has expanded the foreclosures market

Like a scene from a 1930’s black and white movie you can imagine a “bird-dog” sidling up to the sharp suited property investor at the bar. He touches the rim of his Trilby in a sign of greeting and respect. “There’s a foreclosure going down on 55th and Lexington, I thought you might be interested?” The investor takes a deep draw on his Cuban cigar, “What’s the situation?” he drawls. “The old man is ill, can’t work so they can’t meet the loan payments. They’re ready to moonlight.” The investor smiles at the “bird-dog”, “Thanks. If it goes through you’ll get the usual $100 finder’s fee, OK?”

That’s basically how foreclosures used to be discovered. People scouring the County Records and keeping an ear to the ground would sell information to their contacts in return for a nominal fee. These days the “bird dogs” are behind a computer keypad. Their information is now available to a much broader audience and surprise, surprise the best information is never free; you’ll still be expected to pay a finders fee.

Foreclosures happen in many ways. Divorce, unemployment, illness and death can cause families to default on their mortgage payments. As their financial situation becomes progressively worse, they neglect the fabric of the house and it begins to deteriorate with an inevitable effect on its market value. When the time comes for the lender to seize the property, it may not be fit to market conventionally so the houses generally go to auction.

For the past twenty years or so, the US Government has been encouraging home ownership for all and various agencies have been set up to insure preferential mortgage loans made to people on marginal incomes. When these properties are foreclosed, the agencies like the Department of Housing and Urban Development (HUD) reimburse the lender and take over the title of the properties. The properties are then auctioned off, with first option being given to owner-occupiers.

These auctions are sealed bid, electronic auctions conducted country-wide through a network of registered real-estate brokers and the property information is advertised on the world-wide web for all to see.

Although the government agencies have information that is constantly updated and is normally as current as it can be, this does not apply to all websites dealing with foreclosures. Many of the free sites do not get revenue in the way that the old “bird-dogs” did. They are merely looking to attract visitors to their sites to benefit from advertising agreements. The data on these sites is of dubious quality. As a general rule, the more you pay for your information, the better it will be.

In the foreclosure market, you need to be one step ahead of the crowd but on the internet that crowd is pretty large and they might be just as well-informed as you are. Not everyone will be willing to pay a registration fee for high quality, detailed and up-to-date information about foreclosures so it’s a good investment. “Bird-dog” is alive and well and still making a living out of information.

Why buying an ugly foreclosure makes sense.

There are few people who have not heard of the foreclosure market in house-buying. Legend tells of fantastical deals being uncovered where houses needing only a coat of paint have been bought directly from lenders for a few dollars and are then resold a matter of weeks later for $100,000. This may or may not be the truth but the reality of the foreclosure market today means that profit margins of this magnitude are unlikely to be found.

Foreclosures – hard work pays off

Buying foreclosed properties is about as far from shopping at a real-estate agent as you can get. There are no attractive external and internal photographs to help you imagine your new lifestyle and the data about room sizes and facilities will be sparse. There is a great deal of background research to do by yourself and you need to train your eye to understand the physical problems that may need to be rectified in a “distressed” property.

“Distressed” property

“Distressed” is a term used in the market to describe a property that has been neglected, where basic maintenance has been overlooked sometimes causing serious deterioration to the structure of the house. Home-owners who are defaulting on their mortgage are often severely pre-occupied with their situation. They are focusing on surviving and home maintenance is a very low priority for them. In addition, the prospect of being evicted from your home at some time in the future makes you reluctant to invest time or money in an asset that may cease to be yours next week, next month or next year.

Some foreclosed homes will require very little work to bring them back to their true market value. The lenders who have taken over the title to these properties are well aware of this and they are unlikely to discount the selling price much below market valuation. It is in their interests to sell the houses for as much as they can get in order to offset their costs and expenses.

Pretty does not spell profit

The real money is to be made in foreclosure properties that are the ugly ducklings. Outwardly they will be totally unappealing to the paint and filler renovators. They will see too much dilapidation to tackle and may lack the imagination to see beyond the damaged roof, broken guttering, the smashed windows and the graffiti scrawled across the walls. However an educated eye can understand that repair and remodeling need not be expensive and the sidewalk appeal can be improved immeasurably in a reasonably short period of time.

Even in the foreclosure market where bidding on a property should be a measured and unemotional activity, you will find far too much romanticism and competition for the pretty properties that are actually a poor investment. They might be turned round quickly but they are unlikely to make a substantial return for time and effort. The badly proportioned, poorly situated and downright hideous houses often go unsold at auction.

Where the best deals are made

This is the prudent investor’s opportunity to approach the lender directly after the auction and make an offer close to the original owner’s equity value. If you have researched the property thoroughly, you’ll know pretty much what the lender is expecting to recoup from the sale of the house. Lenders do not want to hang on to underperforming assets for any longer than they have to and they might even help you with financing at preferential rates just to get the ugly duckling off their books.

Are foreclosures really more bang for your buck?

We were all first-time home-buyers once. Can you remember the dream that you had about your first home? Can you remember the reality when you sat in front of the real-estate agent and he laughed when you told him what you were looking for and the amount you were willing to pay? Times don’t change much but the options are changing all the time. What were well kept secrets about the bargains to be found are now becoming public knowledge. The American dream of owning a home of your own that is larger than a broom cupboard is a reality.

The foreclosure market is now an open book to first time buyers as well as long-toothed investors. This is a way to acquire real bargains, sometimes at incredible prices well below market value. All you need is a bucket-load of energy and the skill (or savings) to transform what is termed a “distressed” property into your dream home. The best bargains are the result of neglect, poor maintenance and vandalism. Substantial repair and remodeling may be necessary to bring the properties up to standard but isn’t that what being young and vigorous is all about?

It is true that, now and again, properties can be got for almost half their normal selling price although the average discount is a lot less, say 5% to 10%. Foreclosures are the product of defaulters on their mortgage payments. The inevitable seizure of property has happened and the lender has to realize the best value he can get to offset his costs and his expenses. Although it is a tragic situation for the original owner, someone must benefit from situation and there is no reason why it can’t be you.

The information is readily available on the internet and it is growing year-on-year. You can home in on your chosen neighborhood by zip code and browse through the details online. Comprehensive contact information is provided to allow you to take the next step towards acquiring your dream home for the best price.

Government agencies like the US Department of Housing and Urban Development (HUD) provide a clearing house for foreclosure properties biased towards owner-occupiers rather than developers, landlords and investors. They provide attractive financing options and a sealed-bid electronic bidding system through a country-wide network of registered real-estate brokers that gives everyone an even playing field. Banks also deal in foreclosures although they call them real estate owned (REO) properties. As well as offering the properties at well below market value, banks may also offer low loan costs, financing with no points and no prepayment penalties on the REO home you buy from them.

To a first-time buyer $10,000 can mean the difference between the cost of a shoe box and living in luxury so the foreclosure market, even at its worst has a strong appeal. As you look more closely at foreclosures, you’ll see that there are even more possibilities available, some carrying more risk but with even greater payback. This is a market where fortune favors the brave and there is the potential to get considerably more bang for your buck!

Is there such a thing as a safe deal in foreclosures?

Risks abound in the foreclosure market. Not only are the buildings themselves sometimes a bit shaky, the processes that have been set up to sell them can also produce some shaky results. Some options are safer than others, however but the discounts may not be what they were.

Foreclosure properties are basically properties that have been seized from borrowers when they have defaulted on their loan. It sounds like a brutal act but in this economic climate, lenders don’t really need any more foreclosures and they will give defaulters copious rope before they act. The resulting effect on the borrower and his or her family is that they generally lose faith in their ability to make the loan current and lose interest in maintaining or repairing the property as, they tell themselves, it is no longer theirs. This leads to what is called a “distressed” property which would probably be unsellable on the open market however there is a burgeoning market specifically for foreclosure properties; a little bit like the Klondike Gold Rush.

Apocryphal stories of houses being bought for a dollar and sold for $100,000 have attracted the attention of hordes of amateur real-estate investors. In the real world there may be the odd house sold for 30% to 40% below the market valuation but most sell just 5% below market, such is the buying frenzy at auction.

Finding a safe deal in the unusual foreclosure landscape is only possible through good old fashioned hard work and persistence. In theory you can buy the property at any time and from anyone in the chain from the original owner through the lender, the Marshall’s Office, real-estate agents, or one of the many Government Agencies like HUD whose job it is to mop up foreclosures and regularize their distribution to the needy.

Buying from the original owner before the foreclosure process is completed can produce some genuine benefits for everyone concerned. The original owner gets to keep his credit record and maybe gets a proportion of the equity in his pocket, the lender gets the loan current and has one less foreclosure to deal with and you get the house for around the price of the owner’s equity. It sounds amicable but there can be real problems with the condition of the title to the property, especially if the original owner was mortgaged twice over and delinquent on property taxes too.

If you opt to buy at auction you may end up paying over the odds for a not-very-good property and let’s face it the competition is getting stiff and the risks of losing to a crazy high bid are quite real.

No, the safest option is to build a relationship with the lender. Get to know the people who are handling the foreclosure process and make your offer to them. Use your influence to convince them that selling to you is their best option and they may actually end up helping you out with preferential financing terms just to get the property off their books.

When pestering can pay off in foreclosures

Purchasing foreclosure properties is not for the faint hearted or the work-shy. To get a really positive result you need to be in the mood to research your subject thoroughly and get to know all of the players. This is a situation where persistence can pay off handsomely.

Where a homeowner falls behind on mortgage payments and, because of his or her financial predicament, can’t get back on track again the lender will start foreclosure proceedings against the borrower. The property does not actually become a foreclosure until the title has been transferred to the lender. At this point the lender has the security in his hands but he would much rather have the money in the bank.

As soon as foreclosure is triggered, a notice of default will be filed. This is the first indication to potential buyers that a bargain may be on the market. However such news is not posted on the internet for all to access. The information is held locally and can only be accessed by people who have made it their business to be included in the loop. Frequent visits to the County Records Office or tenaciously acquiring copies of the local legal newsletters will provide clues that can then be developed into purchasing projects.

The first task is to educate yourself about the condition of the title. It may be encumbered by liens such as unpaid property taxes. This will drive up your purchase price since whoever acquires title to the property will be liable to these liens. Research is also required into recent values for similar properties in the same neighborhood and, importantly, actual sales prices rather than asking prices.

Buying directly from the lender is probably the safest option for buyers new to foreclosures. Banks tend to take back foreclosures from the auction and sell them through real-estate agents, however pestering the bank loan officer with a low offer to avoid real-estate fees has been known to get results. Homes in good repair and in good neighborhoods will rarely be discounted by much, if at all. The real bargains are to be found in the run-down neighborhoods where the property has been left to deteriorate over a period of time. This, of course, carries the burden of repairing and remodeling but, if the math is right and there is a market for resale, it may just be the right property.

If you get to know the bank’s Asset Manager or REO Officer you’ll know that he or she will periodically report underperforming assets. A large chunk of real estate that’s not selling is an underperforming asset and, if your timing and your offer is right, you could make them look good and get your property at a reasonable price.

There may be even more deals to broker with the bank. They may be able to finance the property at a below-market rate to assist the purchase or they may accept a smaller down-payment and they might just waive the appraisal fee because it has already been done once.

Dealing directly with the lender could also pay bonuses in that they may offer title insurance which is arguably one of the biggest risks in the foreclosure process.

When is the right time to buy a foreclosure?

Because foreclosure sales are usually structured to give no one person an advantage over anyone else and whether they are open auctions or sealed bid auctions, it seems that timing, other than placing your highest bid at the right time, is immaterial. Of course this is only true if you accept the conventional process for buying foreclosures. There are other techniques where timing is everything.

The foreclosure process is actually quite a long one if you consider that it starts when a home-owner begins to default on mortgage or loan payments. The reasons vary but divorce, illness, unemployment and death in the family can all trigger problems. To begin with, lenders will provide some leeway but after three or four months they will lose patience and begin making legal noises about foreclosure. It is at this point that information becomes available about “distressed” properties. Large metropolitan areas will have legal newsletters and newspapers that will list foreclosure cases that are being prosecuted. In smaller communities, the county recorder’s office holds the list of information that you need so badly.

Borrowers who are in default are rarely in a position to talk about selling up until the wolf is at the door. This could be several months into the legal process, so your database has got to work really well for you.

This is where your timing has to be well measured. It is important that you strike up a relationship with the owner of the distressed property. If you approach him or her too early, they may reject you out of hand, believing that a miracle will save them. If you approach too late, you may run out of time to assess the property and complete your transaction.

This method of buying property is neither illegal nor is it immoral. Quite the reverse; you are actually achieving gains for all three parties. The borrower can release themselves from a potentially damaging situation that will sit on his or her credit record for some time. The lender really does not need the pain of going through the foreclosure process and would much rather have the loan made current. You will potentially pick up a real discount bargain that you can turn around and sell for a healthy profit.

This type of buying has been called pre-foreclosure purchasing but, in reality, there is nothing to stop the owner from selling the property at any time, so long as they own the title. The only downside for you is that, if there are any junior or subordinate liens on the title; second mortgages, loans secured using the property or back taxes, you will become liable for these, so before you part with any money to buy the owner’s equity share, make sure you understand what they call encumbrances on the title. This is not as daunting as it sounds because it actually gives you a bargaining chip and you may be able to take over the title for a very small payment on the understanding that you will deal with the liens.

This approach will not always be successful because many homeowners become ostrich-like and believe that their situation is hopeless. They will refuse to deal with you and will lose their home and their credit-rating anyway. However you are free to bid at the foreclosure auction and win the property and title free of junior liens or, if the property is unsold, you can always approach the lender directly and make an offer close to the equity value.

As with most things in life, timing is everything in the purchase of foreclosed properties.

Foreclosure buying checklist

Buying foreclosures can look very complex compared with conventional house-buying but there is no reason why someone with limited knowledge of the process can’t take advantage of this prime source of bargain properties.

1. Prepare to act quickly

Foreclosures are generally the result of the previous home-owner defaulting on their mortgage or loan payments. The lender, having given the borrower a substantial period to make their loan current and up-to-date, will have had no other course of action other than to seize the property and put it on the open market in order to recoup their losses. The lender needs to convert the property into cash as quickly as possible and so they will ask for bids to be made sometimes in a sealed bid auction and sometimes in an open auction but always in a very short period of time.

Although successful buyers will probably be given up to thirty days to organize financing it is prudent to make sure that you have either ready cash available for the purchase or agreement in principle for a mortgage or loan.

Additionally you should make sure that you qualify to bid on the property. This may be as simple as registering but could involve earnest money and other paperwork being completed in advance of the auction.

2. Draw up a specification

House-buying can be a very emotional activity. It can be difficult to walk away from a deal that is going sour or from a property that you have fallen in love with. If you take the precaution of drawing up a specification of the type of property that you are seeking, its size and location, the purpose to which you intend to put it; i.e. as a home or as an investment, your maximum budget for purchase and renovation and the profit you would like to achieve if you are reselling it can all act as a useful brake on your impulsion.

3. Draw up a long list

Use as many sources as you can to find appropriate foreclosures. Your local newspapers and local real-estate agents will have information about foreclosures and the internet is alive with websites, both free and pay sites, which have information about foreclosures across the country.

Select properties that appear to meet your criteria outlined in your specification and read the details carefully. Although sellers are expected to declare major problems in the sales details, they may use unclear language, so it’s worth picking up the phone if you are suspicious. This will allow you to reject inappropriate properties from your list and should leave you with one or more attractive propositions.

4. Get mobile.

Get in your car and go visit the properties on your reduced list. Train your eye to assess the condition of a property by what you see outside. You won’t always be able to get inside without permission but this first cursory inspection will help you to assess whether it’s worth considering a property for purchase.

5. Have a professional assessment carried out.

By this time you’ll be down to one or two properties that you want to get really serious about. It’s best to use the services of a professional or two who can assess (1) the amount of work necessary to bring the property back to full market value and (2) roughly what that market value would be. These two figures will begin to suggest what your maximum bid price should be.
Market value = all purchase costs (including bid) + refurb costs + profit

6. Bidding

At an open auction it is not always sensible to start with the lowest bid but neither should you wait until you have no room to maneuver near your maximum. Try and remain unemotional, judge how the bidding is going and join the bidding when it is nearing its close. If the bidding goes well beyond your maximum just walk away, auctions get crazy sometimes.

In a sealed bid auction, like HUD auctions, your initial bid may be rejected along with all others after 5 days purely because the net acceptable bid has not been reached. You may still rebid each day thereafter and, if you are tenacious you may benefit from a reduction in the level of an acceptable bid at the end of the 10 day auction period.

Keep your head and you’ll end up with a bargain. Lose your head and you could end up with a turkey and no profit.

Is the US SBA a good source of foreclosures?

The US Small Business Administration (SBA) manages loan programs to encourage business start-ups across the country. This involves them in a guaranty of up to 85% of the loans that applicants organize with lenders. Because a large proportion of new businesses fail in the first two years of operation, this leaves the SBA with a number of defaulters on loan payments and, as a result, all types of properties including land, business premises and family homes may be seized as part of the foreclosure process.

The SBA must sell these properties as rapidly as they can to realize the cash and put it back into the system for their mainstream operations; helping more new-start businesses. This means that the properties are price-tagged at a good discount below the market value, partly to ensure a sale and also to offset any problems associated with the property. For example a business may have failed because of a major chemical spillage which they could not afford to clean up. The chemical spill may still need to be dealt with before the property can be fully utilized. Any new owner would need to factor in the clean-up cost to decide whether the property was such a good deal after all.

As with any type of foreclosure, the previous owners may have suffered poor income for a period of time causing them to cut back on building maintenance. The distressed condition of the property can vary from simple decoration through to electrical, plumbing, drainage, heating and structural problems which have been allowed to deteriorate without remedy or repair. The property may also have been vacant for a period of time making it vulnerable to vandalism. This will inevitably mean that there will be remedial work necessary to bring the buildings back to a reasonable standard.

Foreclosed properties on the SBA website vary in number from month to month and it is not a vast resource but, being a Government Agency it has a duty to be transparent in its activities. What you see is what you get and the process is a straightforward one. The SBA has local offices in every state and the property will sometimes be sold directly by the office or through a local real-estate broker.

SBA foreclosure properties will, in most cases be free of unpaid taxes as the SBA will have paid these to redeem the property. However any interest and penalties due on the taxes will not have been cleared because of the different status of liens on a property title.

The SBA is just one of a number of government agencies that deal with foreclosed properties. Others to check out are the Department of Housing and Urban Development (HUD), the Federal National Mortgage Association (Fannie Mae), the Federal Deposit Insurance Corporation (FDIC) and the Department of Veteran Affairs (VA). The rules vary from agency to agency. In some departments potential owner-occupiers are given priority over investors, however in all cases, almost anyone can make a sealed bid for a foreclosed property and a judgment will be made whether the bid is appropriate and acceptable.

Will the title of a foreclosure always be free from liens?

Foreclosure property sales are becoming increasingly attractive to homebuyers and to investors alike. The potential to pick up a bargain at between 50% and 90% of market value is enough to encourage normally sober and sensible people to step out onto a limb. However, by their very nature, foreclosure properties are rarely simple purchases and there can be a problem with liens on the title.

Foreclosed properties come about because the previous homeowner has defaulted on his or her payments on the mortgage. Although lenders are reluctant to foreclose in the current economic climate, there will come a time when the property will be seized and resold to offset costs and expenses. When people get into financial straits in this way, the mortgage is often not the only problem area. The property may also have been used as security against other loans or financing vehicles.

Buyers are always advised to research outstanding liens and encumbrances on a title by using the services of a local title company. Liens are security interests placed upon a property and are classified as either senior liens or junior liens. A senior lien is the first claim put on a property and is usually the claim made by the first mortgaging organization. All other junior or subordinate liens should be paid off as part of the sales process. If they are not then the new purchaser does not have clear title to the property and should not be able to organize title insurance.

Common subordinate liens are unpaid property taxes which, if they continue to be unpaid can lead to Tax Foreclosure. Most foreclosure documentation will state whether the sale is free of all junior liens and will state that the title is clear and unclouded. If this is not the case, potential purchasers should seek clarification before proceeding.

Junior liens are rarely significant sums of money. That is to say they are more likely to be a few thousand than a few tens of thousands and can be easily recouped if the property has been bought for resale but failing to clear the title can cause unnecessary delay and disruption to the buying process. Because of wrinkles like this in the buying process of foreclosures it is not an activity for the faint hearted and capital light.

It pays to have a few thousand dollars worth of savings available to deal with these unexpected occurrences as it is possible that your financing arrangements may not be willing to incorporate lien settlements. Having said that, it is always worth asking all parties involved whether the junior liens can be eliminated. The US Department for Housing and Urban Development (HUD) make it their business to simplify the foreclosure purchasing process, especially for owner occupiers, and they will work hard to ensure that title for the property is clear and unclouded.

Foreclosed properties are almost guaranteed to have liens and clouded title because of the financial situation of the defaulting mortgagor. Some selling organizations will clear the title prior to auction and others may not. Know where you stand and make the title check a standard part of your research.

Is buying a pre-foreclosure a good idea?

Most people have heard about foreclosure properties where owners have defaulted on their mortgage payments and the lender has seized the property as security on what remains of the loan. These properties are then placed on the open market, often at a discount because of their condition and to attract a rapid conversion into cash. A pre-foreclosure is where the mortgagor who is in default and has been served with a notice to foreclose undertakes to sell the property himself or herself and use the proceeds to satisfy the debt.

If you can find pre-foreclosure sellers, the potential to win the sale is far greater than it would be if you were to bid for the same property at a foreclosures auction. The foreclosure auction process is very fair but it allows no scope for influence as it is, in effect, a sealed bid auction. Let’s be clear that influence here does not mean menace. There’s no quicker way to get yourself branded as an unscrupulous real-estate predator than to prey mercilessly on vulnerable homeowners in foreclosure. House-selling is like any other selling practice whether you are selling under duress or not; we all like to sell to people that we like and owners in foreclosure are no different. They would rather deal with a pleasant business-like person than some faceless organization.

Pre-foreclosure purchasing is less straightforward than foreclosure buying but it is not beyond the wit of most people. In effect what you are doing is buying the home owners share of the equity in the property, bringing the loan current by settling the delinquent payments and assuming the mortgage loan. Of course there are legal fees and the issue of any liens that may be on the title and perhaps more detail to be considered but overall pre-foreclosure buying is a better outcome for all parties. The previous owner has an undamaged credit record, the lender has one less distasteful foreclosure to deal with and the new buyer takes possession of a property that will require minimum fixing up as it has not been left vacant to deteriorate or to be vandalized.

Pre-foreclosure investing cannot be done on the cheap, however. At the lower end of the market it requires a modicum of capital, say a few thousand in savings, a reasonable credit score and an annual income in excess of $50,000. If you are planning to get involved higher up in the marketplace, you’ll need more savings and a better annual income to assume the loans on reasonable terms.

Finding appropriate pre-foreclosures is the key to the whole process and it is becoming easier with the internet. Even in pre-internet days you would be expected to pay a few hundred dollars finders fee to the sharp eyed bird-dog who passed you the information, so don’t be amazed that finders fees are still expected. Educate yourself about the pre-foreclosure buying process; there are some well written books on the subject that can help but the rules will vary from state to state, so make sure your background work is thorough.

Turning a pre-foreclosure round for resale should be far more rapid than for most foreclosures, so you’ll see the fruits of your labors very quickly