Foreclosure Property: Deal or No Deal?

Did you know that searches for foreclosed homes are up 325% from 2006, according to Google Trends? Everyday, you see print advertisements, infomercials, and radio commercials promoting the latest and greatest cash generating foreclosure "SYSTEM", or "Call now for the super secret Foreclosure List!" or "This is a public announcement, the government and private banks are selling foreclosed homes for a real bargain. If your last name begins with A-O you may call today for your list of foreclosures...." These companies know that there is a lot of interest and curiosity about foreclosure properties. So in response to popular request, I have decided to do a series of four articles about the myths and realities of buying this class of property and some suggestions on how to invest, maximize profits, and most importantly what to expect in these types of endeavors.


When a client tells me, "I'm interested in foreclosure property." I interpret this request as "I want to find a really good deal." Keep in mind that not every foreclosure property is a good deal. And not every good deal is a foreclosure property. The two best deals that I ever put together for my buyer clients were not bank owned property at all. So be sure to communicate to your agent what your goals are. Afterall, any agent can slap together a list of bank-owned or REO property and 75% of it will be crap. So be clear and you won't waste your time. In the first series of this article I will reveal how to find foreclosure property available for purchase and what to expect in a purchasing environment in the Rochester, NY market.


Sadly, it seems that companies try to profit off of making foreclosure property seem very elusive or secret. i.e. "Call for the list!" The first thing these websites or call centers will do is ask for your credit card information for a free trial of their services and count on you to forget cancelling after the trial period is over. What kind of business model is that? There is no such thing as a super secret foreclosure list anyway! Mortgage defaults are publicly available information. How much more less secret can you get than that? This article will inform you how to locate foreclosure property, either by preforeclosure auction, REO (Bank Owned Property) / HUD (Government owned property), or short sale (which I will define later.)

Featured above is an example of one of those ridiculous ads I mentioned in the previous paragraph

All pre-foreclosures must be advertised in print to the public for a certain amount of weeks before it is scheduled for auction on the Monroe County Court House Steps in downtown Rochester. Where can you find these public announcements? Well you can look in the classifieds section of the Democrat and Chronicle or towards the last few pages of the Rochester Business Journal. The announcement will have a heading "NOTICE OF SALE." The notice will have the auction date, location (Monroe County Court House Steps), and the bank's attorney. The layout of these ads can be pretty annoying to search through because they have a smattering of mundane legal drivel. So the best and most consolidated layout for finding pre-foreclosure auctions is using The Daily Record newspaper. The Daily Record publishes all of the upcoming preforeclosure auctions on Monday in a simple, easy to read format. If you wish to not incur the cost of subscribing to the Record, you can visit your local public library and see if they carry it.

I am not going to go into all of the ins and outs of the auction process, but I will give you some very good points to consider while exploring this method of locating these properties: (You can certainly contact me if you specific questions that I do not address.)

1. Be prepared to pay cash at the auction. If you are contingent on getting a mortgage, then this is not the method for you. But don't worry, there are other ways that you can mortgage foreclosure property. I will address it later on in the article.





2. You will not see the inside of the property before you take possession. Would you ever buy a house without inspecting the interior? Would you ever buy a car without checking out what's under the hood? What if it has pest infestation? What if the floor plan is funky? Cracked foundation? Mold? Leaking oil tank? What if the homeowners in default are still squatting there? This is precisely why buying auction property is so risky.





3. When you buy at auction, you inherit all of the leins attached to the property. Since the former home owners were irresponsible enough to not pay their mortgage, imagine how irresposible they could have been with all of the other aspects of their finances. You may be liable for paying back taxes, unpaid property taxes, mechanics liens (unpaid contractors), the list goes on and on. So if you can stomach not seeing the inside of the property before buying it, make sure you get a title search done to make sure what leins exist before you bid. If you buy a property that was unpaid real estate taxes at auction, you will be responsible for paying them back, no matter how much they are. If you don't, you will be subject to tax foreclosure.

Discouraged at what you just read? Well don't be. The three points illustrated above do not apply in these next two forms of foreclosure; REO/HUD. REO, or bank-owned property is clear of all leins, you can inspect the inside, and in some circumstances is a mortgagable property if it isn't beaten up too bad. If it has major mechanical issues, it may not be mortgagable unless you have a situation which warrants a 203(k) Rehab Mortgage. Visit http://www.hud.gov/offices/hsg/sfh/203k/sfh203kc.cfm for more information.

REO/HUD property is always listed by a real estate broker who cooperates with any and all licensed real estate brokers in the Greater Rochester Association of Realtors. So your agent is best at finding foreclosure property or other good deals on the market. Remember: "Not all foreclosure property is a good deal." Worthwhile REO/HUD property goes very fast, so if you or your agent finds a property that you are interested in, be ready to put pen to paper and write an offer immediately.

Also, be prepared for the fact that you may have to bid over asking price for very good deals. You may scowl at this and ask, "Over asking price? I thought that this was the most horrible real estate market since the Great Depression and the economy is in shambles." Don't be fooled by the national media machine. Rochester is a great market to be in right now. In fact Forbes magazine reported Rochester, NY in the top 25 US Real Estate markets. Take a look: http://www.forbes.com/2009/01/07/housing-cities-realestate-forbeslife-cx_do_0107realestatestrong.html

On the same hand, what do you think happened to the stock market, corporate bonds, mortgage backed securites, and commoditties? Trillions of dollars of wealth has left these assetts and inundated zero risk assetts like Treasuries and FDIC insured bank accounts. This is precisely why you are getting dittely in interest on your savings accounts. Institutions and individuals have been rocked so hard by what's happened in these markets that they have flown to liquidity AKA cash. Insurance companies have been reporting dissappointing quarters recently because they have nearly all of their investments in cash, which is yielding in the inflation adjusted negative percentages.

The point I am trying to make is that many individual investors have pulled their money out of the stock market and are looking to invest it in hard real estate assets. Think about a Rochestarian with their entire life savings in a checking account! This is what you may have to contend with. So do not fool yourself into thinking that you are the only one in a position to buy undervalued foreclosure property. You have to count on the fact that there is competition. Furthermore, do not take the bank's word as set in stone. Just because the bank "accepts" your offer doesn't mean they cannot rescind their verbal acceptance. It's not a deal unless you get written acceptance.

The third method of buying foreclosure property is through short sale. Short sale is actually not foreclosure in the technical sense, but it is similar. A short sale takes place, when a seller has full title to their property, however the market value is less than what is owed on the property. This is what the media refers to as "underwater homeowners." (Don't you love the overtly negative descriptive language the media uses?) For example, it is very possible that a house that is worth $80,000 has a mortgage balance that is $100,000. You may ask, "If the Rochester market is so relatively strong, how could someone's home value plummet so fast?" It has less to do with plummetting value and more to do with former loosey goosey appraisal guidelines and out of control second mortgages. During the mortgage boom period, home equity loans, lines of credit, and refinances were not only used to make home improvements. These borrowers used the proceeds from these debt products to send their kids to college, buy a sports car, go on a luxurious family vacation, pay for a wedding, consolidate credit card bills, TO PAY THEIR FIRST MORTGAGE, the list goes on and on. These are overleveraged homeowners who cannot come up with the money to pay off existing mortgage balances upon the sale of their house.

So in this event, the home seller's agent lists their house on the market for its fair market value and make the sale subject to short sale approval. This means that any offer must be reviewed by the seller (who doesn't care what the property sells for since thay are "under water") AND their bank. The bank must approve any offer because they must forgive the deficiency (difference in selling price and mortgage balance.) Short sales can render very good deals for buyers. Very often the bank will take less money for the property because it will prevent them from going into the very lengthy and expensive foreclosure process. How expensive, you may ask? On average, foreclosure costs the lending institution up to 40% of the principal balance in a normal market. This is not to say you can look forward to getting 40% off of the asking price in a short sale, but you get the idea.

Now let me offer what you should expect in a short sale situation:

1. Normally, when you submit an offer on a REO/HUD property, you can expect to hear a response (whether the bank or owner of record rejects, counters, or accepts your offer), within a day or two at most. In the case of a short sale, the bank reviews offers by committee and it could take weeks before you hear anything about the status of your offer. So have patience. Short sales are definitely not for those who have a tight time frame to work with.




2. Short sale properties in relatively good condition are not going to sell at the fire sale prices that you might expect. At best, you will most likely get the house at 90% of market value in the Rochester area. Not bad if you intend to hold the property for a significant period of time, but not so worthwhile if you intend to "flip" the property right away.




3. Keep in mind that a bank could reject an offer, even if it has been made for full asking price. Many times when brokers put a property on the market that is advertised "Subject to Bank Approval", they may not always have full cooperation for the bank. They may have not even talked to any bank representatives!

Have you ever seen the popular TV shows "Flip This House" or "Flipping Out?" Those shows about really good looking people buying an old house, fixing it up in two weeks, and selling it for windfall profits? Next weeks article will be about "flipping" as an investment strategy in buying foreclosure property. After that, the last two articles will teach you the two most profitable and financially rewarding real estate investment strategies. So stay tuned next Wednesday for Foreclosure Property: Deal or No Deal? PART 2.