Property Foreclosure: An Ideal Investment
by Stefan Rockhaus
When a person buys a home, he/she usually has to take a loan. The lenders, generally banks, keep the title to home collateral in this case. The ownership of the home is transferred to the lender when the person is unable to pay the dues and installments in time. This transfer of ownership to lender is called Foreclosure. Buying foreclosure has been compared to playing poker. As an investment, it has its own risks.
The lenders first determine if there are any junior liens as well. When they find any pending loans etc, they pay everything off so that they themselves have clear title to the property. Once this is done, the lender adds up all costs to the loan amount to be recovered, and then again resells the property so that they can recover the expenses and loan amount. This is an ideal time for investors to buy such property. Buying a property that has been foreclosed has many gains.
Benefits of acquiring foreclosed property from lenders:
The first and most prominent benefit is the fact that all properties bought from lenders will have clear titles and ownership rights, thereby saving you the trouble of doing any research.
Next is the fact that foreclosure is not for profit booking. When the lenders sell foreclosed property they want their money back, so they are ready to sell the property cheaper than what it could have fetched in open market under normal conditions.
How to buy foreclosed property:
The first step is to collect information. The best idea is to make a database specifically so that you will have separate data on all the properties and markets in clear sets. In addition, that way you will be aware of any specific laws that you may need to abide by while making an investment. The next step is to directly contact the foreclosure owners and start negotiating with them. If you have the address of property but not the name, online directories may help you find the relevant names.
As a beginner, buying foreclosure property on your own can be risky. Try to get help from an agent if you are trying to buy such property. They have all the required knowledge.
One risk is when buying foreclosed property at auction, sometimes they give just a week to deposit all the cash, and if you fail to do so, you may lose all your deposit. As you keep on investing and making money, you will gain experience about bad construction, poor soils, problems with septic systems etc. Background reading and relevant information is extremely important before you get into foreclosure investing. Foreclosure laws in your state, priority of liens, bidding at auctions, title insurance, and bankruptcy are some key areas where you should gain full knowledge. That way you will be able to make better and safer investments.
Property investment is not an easy game, and must be played only with caution and care. Some compassion for the person whose property is up for foreclosure is also essential.
Foreclosures are back
by Michael Pollick
From the magnetic sign on his car -- "We Buy Houses" -- to his Web site -- "FloridaHomeRescue.com" -- Jim Willig is not shy about what he does for a living. He buys homes from owners who have gotten themselves into a box.
And, say Willig and other practitioners in the region, business is picking up.
"People point the finger at us and call us vultures," said George Huhn, a Venice-based foreclosure specialist and Realtor. "We are actually a solution. We are not tying widows and orphans to the railroad track."
After three years of happy times and quick sales, real estate foreclosure is back. The U.S. real estate market has cooled, and foreclosure rates, while still manageable, are notching upward and are almost certain to head higher.
States that led the way with zooming prices -- Florida, Colorado, California -- are among the most vulnerable. In the first quarter, Florida had more foreclosures than No. 3 California and more than any state except Texas, reports RealtyTrac, an online marketplace for foreclosure properties. In May, the Sunshine State had the eighth-highest foreclosure rate nationally -- one for every 821 households.
In a RealtyTrac study of the top 100 metro areas, five Florida communities showed up in the top 20 hardest-hit list: Jacksonville at No. 7; Orlando, 21; Lakeland-Winter Haven, 23; Miami-Fort Lauderdale, 24; and West Palm Beach-Boca Raton, 28th.
Sarasota-Bradenton was 55th.
The distress isn't limited to Joe Six-Pack. Many pros and semi-pros are starting to wish they owned fewer homes than they do, especially if they bought recently.
For the distressed-property crowd, those lemons are becoming ripe for squeezing.
"This goes hand-in-hand with the softening housing market and rising interest rates," said Greg McBride of BankRate.com, which reports mortgage rates and other data from North Palm Beach. "This is probably just the beginning, and certainly not the end."
A market sliding toward distress
Willig got in the business four years ago, after leaving behind a Chicago bank marketing job to help an aging relative in Sarasota.
During big boom years 2004 and '05, Willig was only able to acquire one distressed property a year. So far in 2006, he has managed to buy two -- one in North Port and one in Port Charlotte, markets most experts agree are ripe for foreclosures.
Following his cookie-cutter approach, Willig picked up the Port Charlotte house, worth $170,000, for $120,000. A bank had provided the owners with a new loan for $185,000 and they were defaulting.
Willig fixed it up with paint, carpeting and trim -- $5,000 worth of labor -- and sold it for $170,000.
"That is real world," he said, referring to the labor and the price. "It is hard to do."
With the adjustable-rate mortgage factor coming to bear, many experts are predicting that "distressed property" is about to become a much more common term.
"The adjustable rate picture is the thing that causes us the most concern over the next year and a half," said Rick Sharga, RealtyTrac's marketing chief. "I've heard estimates from hundreds of millions to one trillion for the amount. They are all big numbers."
A typical example is a $300,000 adjustable-rate loan issued in 2003 under a marketing plan called a 3-1. The rate stays fixed at a low rate for the first three years, and then readjusts to match real-world rates every year for the life of the loan.
"Say the intro rate was 3.5 percent," Sharga said. "You're paying $1,300 a month for that loan. When that loan hits its anniversary date this year, you are going to be looking at $1,800 to $2,100.
"If all you've been getting is a 2 to 3 percent cost of living increase at your job, where are you going to get another $500 to $800?"
The resets are occurring against a backdrop of higher credit card rates and gas prices.
Litigation pending: how the game is played
After a homeowner misses two or three payments, his distress becomes public when the lender files a document with the courts warning that foreclosure proceedings are going to start.
When it becomes public, the property owner is often besieged with inquiries from people wanting their homes.
To make their deal stand out, some foreclosure practitioners will make a separate offer to the homeowner to win them over and provide them with some walking money. For example, $1,000 cash for the owners' used washer and dryer.
From the time of the first notice until the foreclosure sale, the property owner typically has a window of three to six months.
That is "where an investor could contact that homeowner and help them by stopping the foreclosure. Instead of losing it, they can sell it, and actually save that customer's credit," says Mike Kane, co-founder of Tampa's ForeclosuresDaily.com.
Without that, a judge eventually sets the date for an auction, where the property is sold on the courthouse steps to the highest bidder.
Some investors buy houses at auction, others make offers to property owners on the way to foreclosure.
Willig and his mentor, John Schaub, a Sarasota-based real estate guru who has taught people how to make money from distressed properties for decades, prefer the latter.
When he can, Willig uses form letters targeted to neighborhoods in which he is interested in buying to find foreclosures and more moderately distressed properties.
The gist: "If you know of anybody who is distressed, or divorcing, or interested in relocating, I'd be interested in talking with them," Willig said, adding that "distressed" does not just mean those whose properties are going to be sold out from under them.
"There's burned-out landlords. I get a lot of people who are trying to move on somewhere else and just want to sell their house quickly and go."
In return for getting a house at a bargain price, Willig points out that he is offering the property owner a solution to a problem: a quick closing and the chance for a scarred rather than mutilated credit record.
Schaub likes to cruise his own preferred neighborhoods, looking for overgrown yards or other signs of neglect. He jots down the address and looks up the owner's name on the property appraisers' Web sites. He is trying to avoid being part of the thundering herd charging a homeowner who has received his or her bank letter.
"I've had people call me. They know the letter is coming," Schaub said.
There are very few distressed properties in north Sarasota County, Schaub and others said. It is when they head south, into North Port and Port Charlotte, that the action picks up.
That fits in with the lack of sales in that region, sandwiched between Sarasota and Fort Myers.
In May, there were 1,441 homes listed in North Port, but only 80 -- or 5.5 percent -- sold, says Dave Hofer, who keeps statistics on the area for Re/Max Harbor Realty. In Port Charlotte things were worse: 1,543 listings and 72 sales, or 4.6 percent.
The area has provided fertile ground for buyers like Willig, who have hard-money lenders lined up waiting to give him a loan on a moment's notice. That allows Willig to promise a closing in as few as three days.
Willig's second recent deal was in North Port. It was a woman who had almost been foreclosed on last year and who went into bankruptcy to protect herself. She was being threatened a second time.
"She had five people a day banging on her door," Willig said, noting that the woman had a lot of equity in the house, but could not qualify for a new loan. "I think she walked away from the closing table with $40,000."
Fort Myers real estate broker Terry Hanabarger is working the distressed scene to his north through his CharlotteForeclosuresDaily.com.
He started four months ago after finding little to do in the slowing general real estate market. "You look for something that is working."
Hanabarger typically waits for the bank to buy the property, and then acquires it. Banks and investors call that kind of property "REO," short for "Real Estate Owned."
"We've been staying in the background and letting the bank do the bidding for us. I don't want my picture out there saying I took an 89-year-old lady's house. No way."
Outsourcing the problem loan
Down in Venice, George Huhn, the commercial real estate broker with an investor following, helped a couple of banks by taking over problem loans in 2001-02.
Now, banks are starting to call him again, asking him to relieve them of problem first mortgages they held onto, before they become foreclosure actions.
Huhn steps in and assumes the bank's position, with the bank assigning the note to him or his investors. Banks do it for two reasons.
"No.1, for reasons of negative publicity and image, the banks don't want to be involved in foreclosure actions."
Secondly, during the boom years, some lenders all but disbanded the departments performing the difficult work of foreclosure. "Now they are looking at some hard choices, and what they are electing to do is outsource, and that is where we come in," Huhn said.
Banks do not want the stigma of what are called non-performing assets staining their books, Huhn said.
"It drives shareholders and boards of directors absolutely insane. I guess it is human nature. You could go out and do 500 loans and if two of them go south on you, the powers that be are going to be screaming about the two."
So far, Huhn has picked off just a few loans, but he sees it as a growing business for the next few years.
Huhn has a circle of investors. He is harnessing the group's buying power to take over loans at a discount. Using an LLC as his investment vehicle, Huhn either negotiates a work-out plan with the borrower or takes the loan to court and demands a foreclosure.
"Each one is a little different," he said, noting that he might take the loan off the bank's hands for exactly what the bank is owed, or he may negotiate a discount. Much depends on equity in the property.
"Obviously if you've got a $200,000 note and your preliminary analysis on the property reveals the value is $300,000, you are just going to go ahead and take the loan at par value. But if the property is worth $300,000 and it is mortgaged for $275,000, you negotiate with the bank to buy it for less what than the loan amount is."
Even the pros and semi-pros in the Sarasota Real Estate Investors Association are feeling some distress these days. The group meets once a week for a chew-and-chat at the Oriental Buffet on Bee Ridge Road.
At one recent meeting, investor Peter Magnuson acknowledged the issue in a pep talk to the 75 or so members present.
"There's a little bit of blood in the streets," Magnuson said, explaining later what he had in mind: "I think that is the people who overcommitted themselves and are looking for a way to unwind what they got into."
"People who bought these pre-construction deals hoping to make big money on them and now they're stuck with them and it is eating them out of house and home.
"Those people have to get a solution."
Source: HeraldTribune.com July 07, 2006