I ruffled through the New York Times Sunday cartoon section last weekend and came across a funny that had 4 houses in a row on a quiet street with the caption reading ?Haunted Houses.? All the lights were out. The only action on the street was 3 trick-or-treaters stunned in amazement at the signs pitched in each yard ? all four signs read ?Foreclosed.?
Everyone at my table let out a quick chuckle, but there was also genuine concern for the millions that are projected to lose their homes to foreclosure this year. Many of us will look at the headlines and shake our heads either in empathy or in realistic acceptance of shifting markets: In this case the sub-prime loan fallout coupled with a corresponding oversupply of houses on the market that led real estate to a screeching halt by August. But how many of us read these headlines and see opportunity?
THE FALLOUT ? THE SELLER?S MIND
At a local level the fallout translates to payments that are excessive for many borrowers who are thus defaulting on their loans. Add in the big business investors (Merrill Lynch anyone?) that purchased high risk sub-prime mortgage-backed securities and you have a credit nightmare. To be fair, many of these borrowers were advised to walk into properties that were more than they could handle ? the finance version of being given a dessert cart and the borrowers acting with eyes bigger than one?s stomach.
Many jumped in because they could. Lenders first, and then Brokers by default, were offering the following potpourri of loan options: 100% financing to poor credit borrowers with recent bankruptcies and inconsistent payment histories; the famous NINJA loans where the client didn?t have to proof income, employment or really any repayment capability whatsoever; and my favorite - the infamous borrowers being allowed to state ridiculous incomes to get into houses twice their actual ability to pay. Fast-forward a year and many borrowers understand their grandparent?s advice of: ?read the fine print and tread a bit more conservatively.?
There was also a round of bad luck. The oversupply of houses didn?t help these borrowers who, in earnest, tried to sell their properties and get out. In some markets where a property could be sold in 2 months only a year ago, sellers were now whistling on their vacant front porches, waiting for just ONE nibble after 9 months on the market. This is where many sellers entered payment-default-land, which is the temporary vacation spot for borrowers needing a break from scrounging together every penny they have to make the mortgage payment. Borrowers eat cotton candy and ride the carousel for a few months until they get the ?notice? in the mail. They read the notice and the lights in the park go out as things get very quiet. They have been transported to the dark world of pre-foreclosure.
THE
OPPORTUNITY ? THE BUYER?S MIND
Herein lays the opportunity for investors. Many of us are used to the traditional manner of purchasing a property ? see a sign, get a realtor, sign a contract. However, now is the time to be skimming foreclosure short-lists for purchase opportunities. This is as simple as contacting a local title company on your own or having your mortgage broker on your investment team working with you to review properties. Most companies release a report on a weekly basis.
Why is skimming pre-foreclosure listings such a great opportunity? Here?s the win-win scenario: You walk into a property valued much higher than the purchase price you negotiate in response to sellers anxious to walk away from what is becoming a narrow road to foreclosure. Many of these sellers simply want to walk away and wash their hands of the mess.
In many cases, you can negotiate a short sale on these properties going around the seller and working directly with the lien holder. You negotiate an amount that the lien holder (usually mortgage companies) are willing to accept, which is generally less then what would be contractually required to satisfy the liens on the property. This facilitates a pre-foreclosure sale and keeps everyone from a full foreclosure ? a process that is time intensive and expensive.
There are many ways to reap the rewards of negotiating a pre-foreclosure purchase. But the initial result is you acquire a property below market value and the sellers, who have walked a long road to pre-foreclosure status, can turn back toward town and start over. If you take the opportunity now, the Haunted House caption on the cartoon changes to ?Smart Investors Know When to Buy? and all the yard signs now read ?Sold?.
- Jen Schatz, Mortgage Planner and Freelance Writer - October 29th, 2007
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