For thousands of homeowners across the country saddled with adjustable-rate mortgages, 2008 promises to be a financially challenging year as interest rates begin re-setting thereby drastically increasing monthly mortgage payments.

It is this problematic course of events in the residential market that has seen the number of foreclosures skyrocket over the past several months, with even greater increases expected in the New Year and beyond.

However, there is some hope for homeowners despite the dreary forecast of what’s to come, and as in any turbulent market, there is opportunity for investors who are willing to take some risks.

If you currently own a home that is, or soon will be, in foreclosure you have one favorable bargaining chip that should bring some level of comfort: Banks (and other lenders) don’t want to take properties back from borrowers. Why? There are two simple answers. 1.) The foreclosure process is very expensive for the lender and 2.) Banks/lenders are grossly undermanned and are not equipped to deal with the deluge of foreclosures that shall soon occur.

Recent published reports from industry insiders suggest that one very large bank, that shall remain nameless in this article, incurs an average cost of $60,000.00 in connection with initiating a residential foreclosure. That dollar amount includes property maintenance, attorneys’ fees, taxes, pay-offs to junior lien holders, etc. From a business standpoint, most lenders realize that it is wise to try and negotiate a payment plan, including some debt forbearance, with the homeowner rather than incur the expense of a foreclosure action.

Lenders lack manpower to deal with the volume of foreclosures set to take place in 2008. As a result, although most states allow the lender to initiate a foreclosure action once the borrower is delinquent 30 days on the mortgage payments, the national average before lenders take action is 7 months. Lenders just don’t have the personnel to deal with the volume in a speedier fashion.

This should be encouraging news to homeowners who have fallen behind in their payments. Many lenders are willing to recognize your financial woes (sudden unemployment, disability) and work out a payment arrangement that addresses your mortgage arrears. However, borrowers need to be proactive. Instead of avoiding your bank’s phone calls, take the initiative to communicate with your lender. It is important to be honest about your current and future financial status. Often times, the lender will accept a re-payment and/or forbearance plan that you would have never thought acceptable. Remember, foreclosures cost lenders a lot of money!

If you are an investor, then a residential market that is rife with foreclosures or soon-to-be foreclosures may represent a tremendous opportunity. Pre-foreclosures, which are often referred to as “short-sales”, allow an investor to purchase a property for an amount that is below what is owed to the bank. Although these types of transactions require specific documentation and lender approval, they may benefit both a purchaser and seller.

In a pre-foreclosure situation, the seller, who is delinquent in mortgage payments, has an opportunity to preserve (or at least reduce the damage to) his/her credit rating by avoiding a full-scale foreclosure proceeding. The buyer, often times an astute investor, may end up purchasing the property at a favorable price. Although this sounds very appealing to all parties, there are some pitfalls. Sometimes the debt forgiveness can result in income to the seller that must be reported to the IRS on a 1099 form. It can also take as long as 60 days to receive lender approval for a pre-foreclosure sale–such a long time period could affect a potential buyer’s interest-rate lock. Finally, most lenders impose strict requirements for a pre-foreclosure sale that must be met in order for the deal to close.

Whether you are a homeowner facing a foreclosure or an investor waiting to capitalize on a depressed market, there are options that will allow many to survive, and even thrive, despite the turmoil that many have predicted as 2007 comes to a close.

Welcome to Our Blog!
Welcome to the Real Estate Dispatch from BiggerPockets.com. Our blog brings together experts in various fields of real estate with the goal of keeping our readers informed and up to speed. Whether you're a real estate professional (lender, Realtor, banker, etc), investor (landlord, flipper, wholesaler, etc.), or simply a consumer, renter or homeowner interested in the world of real estate, this blog is the place for you to get involved!

You can subscribe to our RSS feed, get blog updates by email, join our free mailing list, or best of all, join our social network along with 25,000 others interested in real estate education, dealmaking, networking, and marketing.

Tags: bank-REO, distressed, foreclosure, lender, loan, mortgage, preforeclosure, REO, short sale

I was reading a post by one of my favorite real estate bloggers, Pat Kitano, about how bloggers seem to be ignoring the foreclosure business, and I was a bit surprised. It seems that many of the other blogs out there have decided to play down the problem or feel that there isn’t a problem at all.

As a site that is foremost focused on investors, we see this from both sides. While it is very unfortunate that people are losing their homes in record numbers, the investment community is chomping at the bit, waiting for the record number of foreclosures to continue. This reality, where people can’t keep up with rising payments is taking a bite out of not only the US Economy, but also the global economy as well. As Russ Amy put it, we all need to “write about it” (the problem), because it isn’t going to just go away!

Homeowners & Investors
- Want to find out how foreclosures work? Read about The Foreclosure Process

Homeowners
- We set up a Foreclosure Help Forum for people to get advice when they find themselves behind payments or in other mortgage trouble. Some of the tips given to the folks who have already begun to participate on this forum have been fantastic and quite helpful!

Investors
- Here are some advantages of buying bank owned properties aka. REOs
- Looking for pre-foreclosures? Here’s a great article detailing your 3 shots at getting them, and here’s another that talks about where to find foreclosures.

Think Foreclosures aren’t a Major Problem?

Lets look at some recent news to see if you’re right . . .

- According to Marketwatch, “Home prices are falling everywhere.”
For the national Case-Shiller home price index, prices fell 1.7% in the third quarter compared with the second quarter, and were down a record 4.5% in the past year. It was the largest quarter-to-quarter price decline in the 20 years covered by the index.
This can directly be attributed to the sub-prime blowout and resulting foreclosure massacre that has been taking place around the country. While real estate is a local issue, primarily, this and other signs prove that we are facing a national real estate situation here as well.

- Yahoo Finance has a piece that details how “Even average homeowners feel rising mortgage floodwaters”:
With property values dropping in many areas of the country, a growing number of homeowners — particularly those who bought their house in the last five years — are looking at the prospect of being “underwater” on the mortgage. That’s when the value of the home is less than the amount remaining on the loan used to buy it. So while the nation has been focused on a record-high rate of foreclosures, the tide has been rising on a lot of people who simply had bad timing.
Clearly, not just those who are being foreclosed on are feeling the heat. With lenders practically giving away loans to anyone with or without the ability to pay them off each month, we’ve slowly built our own grave. The government watched as this happened and encouraged it so the White House could tout a strong and growing economy - not so strong now, eh?

- Even the always positive National Association of Realtors (NAR) seems to finally be facing reality after releasing a new report that details how home sales declined in 46 states in the 3rd quarter.

Is there any good news in the Housing Market?

It looks like Mortgage rates have dropped to a 6 month low, and whispers of another drop in interest rates have boosted the stock market over 300 points today (pre-close).

Tags: bank-REO, default, Economy, foreclosure, Foreclosures, housing, NAR, realtor, REO

First off, let me clear up one thing that continues to confuse the masses…

There is a difference between “Pre-Foreclosure” and “Foreclosure.”

I am sure all of you have seen the advertising on various sites. “See a list of foreclosures in your area!” Over 90% of the time, they are technically a foreclosure but really they are what are known as an “R.E.O.” or Real Estate Owned. What that means is that a particular property has gone through the legal process of a lender foreclosing on a property. If a property does not get purchased by a 3rd party investor at the foreclosure auction, the lender becomes the new owner. If the loan was not FHA or VA, the property goes to the R.E.O. department of the lender that foreclosed. The majority of those properties are then listed on MLS by a Realtor that has been retained by the lender.

THAT…Is what most of those advertisements are talking about when they offer lists of foreclosure properties.

A “Pre-Foreclosure” is a property that is still legally owned by the individual(s) that the mortgage was given to. The pre-foreclosure market is one of the more difficult areas of investment real estate to get into and succeed with.

The “3 shots” I refer to in the title are actually chances that an investor has to obtain ownership of the property before it becomes an REO.

How many of you reading this has always thought that the only way to obtain a pre-foreclosure was to pay cash at the auction? That is one of the three ways. It is also the most dangerous of the three. Why? Because in this scenario, the winning bidder is required to pay the balance right then & there… With Cash (please check the laws of the state you are interested in bidding at to make sure of the procedure as all states have similar but different methods). Not literally cash mind you but certified funds.

Most people who buy at the auction have not had the opportunity to see the inside of the house. They are playing a game of Hit or Miss with themselves. If an investor pays more than $0.70 on the dollar at the auction, two out of three will end up losing money.

Why don’t we ever hear about those people? That is easy to answer. Because when an investor loses money after buying at the auction, they generally don’t show up to bid on another. Bidding and buying houses at the foreclosure auctions is not what I would call entry level investing. It takes skill, savvy, lots of cash and more times than not…Luck.

Buying at the auction is to me, the last ditch effort to obtain a house that is in pre-foreclosure.

The other two shots an investor has at buying a pre-foreclosure is going directly to the owner of the house and asking if they are interested in selling. The strategies and methods one can use to do that is the subject of one of my four-hour classes. In other words, there is a lot involved in how to contact an owner of a pre-foreclosure. It is a difficult task and unfortunately most investors approach them with a business attitude when really they need to be approached more from a personal standpoint. Think about it. Yes, real estate investing is a business about buying and selling distressed real estate. But who is it that lives in these houses? It’s people. In my opinion, when it gets right down to it, this is a business about people. People…Who are attached to their homes.

Wait! You can’t tell me that EVERYONE is attached to their home or that everyone is emotional about their home. That is correct, I can’t. This leads me to the 3rd shot at obtaining a pre-foreclosure.

The 3rd shot or, method I am talking about is one market that is largely forgotten by most investors or not even known about. That would be the “Abandoned Pre-Foreclosure.” It is also the subject of one of my other classes that I wrote and teach. “How to Find Abandoned and Distressed Properties.”

The entire Country is buzzing because of the record number of foreclosures. Most of the public and even most of the real estate investors don’t know that approximately 15% of ALL pre-foreclosures are actually abandoned! To put it into simple terms, out of every 100 houses that are in pre-foreclosure, 15 of them are abandoned. That is an incredible statistic. (Source: Foreclosure Listing Service, Inc. Addison, Texas)

Why is this a great market to pursue? There are a few reasons.

1. It takes the personal or emotional element out of the equation. When someone leaves their home, it becomes just a house to them. There is a huge difference between a home and a house to someone living in it.
2. Once the owner of the abandoned house is located, they are generally very easy to deal with. These owners can be approached with a business mindset versus a personal one.
3. They have left! What do they expect? The point I am making here is when an owner has left, they know the house will be foreclosed sooner or later. When I reach one of these owners, it is rare that I have to compensate them with more than $500. That is $500 more than they were going to get if the house went to the auction and back to the lender. Besides, if I buy the house directly from them, it prevents a foreclosure from being added to their credit report AND it shows as a paid mortgage. That is an attractive proposition to an owner no matter what. At the same time, it is always better to buy directly from the owner than have to roll the dice bidding against others at the auction.
4. A lot of the times you are able to see the inside so if you can’t locate the owner, now you can go to the auction knowing more facts than anyone else bidding. You will know exactly what repairs are needed and are able to attend the auction with a realistic budget for all the repairs, etc. Knowledge is power.
5. No Eviction! In some states it can take months to legally evict a tenant. What scares me even more is any tenant can cause thousands and thousands of dollars of damage in minutes. I don’t understand the mentality of a person that destroys property because they are being kicked out. But it does happen. So obviously when you buy an abandoned house either from the owner or at the auction, there is no eviction. That opens up a lot more opportunity for deciding what to do with the property. Keep it and rehab it? Flip it as a wholesaler? Etc.

There are more advantages than the five listed but those are the main ones.

To recap the 3 shots at buying a pre-foreclosure:

1. Obtain a pre-foreclosure list and contact the owner(s) directly. The best bet is to buy the house from the owner versus having to bid on the house at the auction.
2. Pursue the abandoned pre-foreclosures. They represent the best chance at buying a pre-foreclosure. If you can’t locate the owner, then over 90% of the time those properties will go to the auction. Just because a house is posted for foreclosure, does not mean it will reach the auction. The homeowner can reinstate the loan, they can file bankruptcy, they can sell the house, etc.
3. Bid and buy at the auction. Only now the investors that have also done 1 & 2 stand a much better chance of landing a good deal at the auction because they are simply more educated on both the property and the people that own it.

Disclaimer: As stated in the article, every state has different laws concerning foreclosure. I am not an attorney nor do I condone anyone pursuing any foreclosure property based upon the information provided. The methods listed are ones that I have personal experience with in the state of Texas. Please consult an attorney with specific knowledge in the state you are interested in pursuing a foreclosure property.

Tags: buying-foreclosures, distressed-property, find-foreclosures, Foreclosures, pre-foreclosures, real-estate-owned, REO

A new member to our real estate forums recently inquired about putting offers in on REO (Real Estate Owned) Properties. The property he was looking at was listed with an agent for 388,000. Upon doing some research, he found that the home had a 83,000 balance on the original mortgage. In making an offer, he thought that the balance on the mortgage might have some relation to what he should offer (it does not), and wanted to know if the property could sell for somewhere around $100,000.

Another member, who has worked closely with REOs posted a very informative response to this question, that I thought worth sharing with you:

I’m a former REO Asset Manager for Ocwen and EMC Mortgage companies. I currently manage/sale REO properties as an agent.

First off, an asset manager’s job is to sell the property for market value or higher, within 60 to 90 days.

Second; Banks can’t hold investment properties? They often rent out their REOs for profit. And even when they’re not rented, it’s not uncommon for an asset manager to have a few properties in his/her portflolio for more than a year.

Dreaming? Yes you are dreaming.
If it were so easy to walk in on $300,000 in equity, the other 10,000 investors in your area would be all over it. That will drive up the price if nothing else will. Besides, the sun will stop burning before a bank would sell a property for under $100,000 with a $300,000 appraisal.

PROBLEMS didn’t stop others from bidding at the auction? THE BANK DID..
The bank has valuations (BPOs and Appraisals) that tell them what the property is worth. Their attorney bids up to their pre-set amount. THE BANK COULD CARE LESS ABOUT THE $83,000 BALANCE IF THEY HAVE AN APPRAISAL AND BPO THAT TELLS THEM THAT THE PROPERTY IS WORTH $380,000. Do you think the bank has a problem with making a $300,000 profit?

WHERE DOES THIS STUFF COME FROM?

MOST IMPORTANT
Having worked as an asset manager for 2 major REO players; I nor the other 100 asset managers that I worked with, ever looked at the previous mortgage balance. Simply put, it had no bearing on what we listed it for, and ultimately sold it for. Also, most of the outsourced asset management firms don’t even have access to these numbers, not that it would matter anyway.

And stop sending the Garbage along with your offers. We know about the property’s condition. And since you want to buy it, we especially don’t care about exaggerated assessments of the property. Simply put, we throw them in the trash without ever reading them. As an agent, I let everyone know that such items will not be forwarded to the asset manager. (Showing feedback is welcomed, but that stops at the offer phase)

Bottom line, Asset Managers have to make decisions within seconds, not minutes or hours. Most handle large portfolios and don’t have time to “investigate”. This is why they have systems and procedures. A property goes on the market for a certain price; offers can be accepted or countered within a pre-set limit; and price reductions will occur at pre-set limits and times. That’s it.

Will

I’m glad that Will was willing to share all of that information with everyone, as I think it gives some people a change to see what things look like from the other side of the business.

What do you think?

Tags: asset-manager, bank-REO, buy-REO, foreclosure, mortgage, offer-REO, real estate, real estate investing, real-estate-owned, REO, REO-agent, REO-broker

Auctioneer Hudson & Marshall of Texas Inc. announced today that they will be holding an auction to market over 300 REO (Real Estate Owned) homes in the Detroit area on Saturday, January 20 and Sunday January 21, 2007 at 1:00pm at the Hyatt Regency Dearborn.

All properties are sold “as is” and interested buyers are encouraged to visit all properties beforehand. Buyers can view an entire listing of properties online at http://www.hudsonandmarshall.com. Winning bidders will be required to write a check for 5% of the purchase price or $2,500, whichever is greater.

Do you feel the froth of investors closing in on the Motor City in a few weeks? The great thing about this auction is that the auctioneer will be allowing potential buyers to scoop up properties prior to the auction through their website, which also lists full details on the properties.

Note: The valuations on these properties range from around $5,000 to over $300,000

Tags: dearborn-michigan, distressed-homes, foreclosure, foreclosure-auction, income property, real estate, real estate investing, real-estate-auction, real-estate-deals, REO

What is a Foreclosure?

A foreclosure occurs when a property owner cannot make principal and/or interest payments on his/her loan, typically leading to the property being seized and sold.

How does a foreclosure occur?

The foreclosure process is not very difficult to understand. There are several stages during which the homeowner has an opportunity to bring the loan current and avoid foreclosure.

After about three to six months of missed payments, the lender orders a trustee to record a Notice of Default (NOD). At the County Recorder’s Office. This puts the borrower on notice that he or she is facing foreclosure and starts a reinstatement period that typically runs until five days before the home is auctioned off.

If the default isn’t corrected (the loan must be brought current) within three months, a foreclosure sale date is established. The homeowner will receive a Notice of Sale, and this notice will also be posted on the property. In addition, the Notice of Sale is recorded at the County Recorder’s Office in the county where the property is located. Finally, this Notice of Sale is also published in newspapers local to the county in question over a three-week period.

The foreclosure Trustee Sale typically occurs on the steps of the county courthouse in which the property is located. The time and location of this sale are designated in the Notice of Sale. At the Trustee Sale, the property is auctioned in public to the highest bidder, who must pay the high bid price in cash, typically with a deposit up front and the remainder within 24 hours. The winner of the auction will then receive the trustee’s deed to the property.

What Happens at the Foreclosure Auction?

At auction, an opening bid on the property is set by the foreclosing lender. This opening bid is usually equal to the outstanding loan balance, interest accrued, and any additional fees and attorney fees associated with the Trustee Sale. If there are no bids higher than the opening bid, the property will be purchased by the attorney conducting the sale, for the lender.

If this occurs, and the opening bid is not met, the property is deemed a REO or Real Estate Owned. This typically occurs because many of the properties up for sale at foreclosure auctions are worth less than the total amount owed to the bank or lender.

When you purchase property at a foreclosure sale, all junior liens other than property taxes are wiped out. Priority of liens is determined by the date of recording. When you purchase a REO aka. Bank REO, you will typically receive the property with a clean title.

Learn How to Avoid Foreclosure from HUD.

Discuss Foreclosures at our:

• General Foreclosure Talk Forum

• REO Forum

Find Foreclosed Properties:

• Bank REO Listings
• Pre-Foreclosures
• Government Foreclosures
• Asset Management REO

Tags: auction, bank, default, foreclosure, interest, lien, mortgage, NOD, noticeofsale, principal, REO, sale, trustee