How To Buy Zombie Mortgage Properties

Zombie mortgages need you. They want you. But, unlike "real" zombies, they are shy. You must do all the work and find THEM. Then, instead of them turning you into a zombie, you will turn them into living productive properties!

First, let's define our terms. A zombie mortgage property is one that has usually been abandoned by the owner, but not yet foreclosed upon by the lender. Sometimes years pass with no activity.  The property might be overgrown and truly abandoned, or a property management company might be cutting the grass and periodically posting notices with contact information.

Properties that seem to be abandoned usually have one of four explanations:

• The lender made a decision it was not worth the trouble to foreclose. Every lender has its own "secret numbers." For lender ABC, they might not foreclose on anything with an appraised value less than $20,000.  For lender XYZ, it might be $35,000.
  
• The property has dangerous "warts" and the lender does not want to foreclose. It could be reports of meth production or toxic waste. It could be a liability issue with a collapsed vinyl lined pool. It could be a casualty loss for which the lender received some insurance proceeds, and now the property is a ruined hulk not worth rehabbing, at least for the lender.
  
• The mortgage loan (called an "asset" by the lender) slipped between the cracks.  The bank does not know it owns that asset. 
  
• The loan is owned by a local or regional lender that will think about it later, because they are too busy with larger loans and high value properties.

Properties that seem to be maintained usually have one of four explanations

• The property has some type of legal problem and has been languishing in the "think about later" stack in legal.
  
• The property has large condo or homeowners association dues. The bank is not liable for those until after it forecloses. In most states, once the bank forecloses, it is liable for just a limited amount of prior dues.  For this particular type of property, contacting the association can usually provide you with valuable information.
  
• The lender would prefer to avoid foreclosing on the property, and is already working with the borrower to get some sort of short sale deal approved.
  
• Like cataracts, the property has not yet "ripened" into foreclosure.  Many loans owned by securitized trusts have servicing agreements in which the servicer (Bank of America, etc.) must continue sending money to the trust each month, even though the borrower has defaulted.  When the computer models say the total upfront expenses for payments to the trust, plus servicing fees, property management fees, taxes, insurance, etc will not be recouped after a foreclosure, THEN the servicing company usually pulls the plug and goes through with foreclosure.

How do you turn zombies into living and productive properties for yourself?

You will get NOWHERE by calling the lender or servicing company. They either can't tell you anything because of borrower privacy issues, or they can't tell you anything because their computers have inaccurate information.  I once had to argue with a bank about its prior foreclosure on a property. They insisted they had not foreclosed, but sold the loan to another bank.  Even after sending them a certified copy of their foreclosure deed, they preferred to believe their lying computers, instead of me.  I eventually found a work-around.

Do not waste time calling the phone number on the notices posted on a property. That is just the property management company. They can't tell you anything. Also, they don't want to tell you anything. If you buy the property, guess what? The income to the property management company stops.

First, check the real estate records. Has the bank foreclosed?  Do they still own the property? If so, they no longer have borrower privacy issues and can talk to you. Call the REO department to see if the property is in inventory and why it is not listed with an agent. Be persistent. They will tell you.  Keep asking for supervisors. Lower people will try to discourage you, but if you are adamant, they must provide you with the opportunity to speak to a supervisor.

Also, check the tax sale records.  True zombie mortgages have completely fallen off the computers. Which means the computer never cuts a check to pay the real estate taxes.  Depending on the tax sale laws in your state, your route to ownership might be through the tax sale process, not through the bank.

Next, check the bankruptcy records for the borrower. You do this through pacer.gov.  It is free to search, and 10 cents a page to view actual documents. There is a maximum charge of $3.00 per document. A one-page document will cost you 10 cents. A thousand-page document will cost you $3.00 You provide a credit card number when you sign up, and they bill your card once a quarter.  If the quarterly charges are less than $15, they don't bill you.

Sometimes, borrowers file for bankruptcy and a "hold" is put on the lender's computer for that mortgage.  Then, nothing happens and the hold is never taken off.  As an example, I found a property that was security for a reverse mortgage. The borrower moved out, which should have triggered maturity of the mortgage. She also filed for Chapter 13, and listed on her schedules that there were no past due payments on the mortgage, and no monthly payments. That was coded in the bank's computer as "no action necessary."  So, the bankruptcy hold stayed on the file, but no lawyer ever looked at the file to analyze what was going on, and then file a motion to lift stay to proceed with foreclosure. Zombie mortgage.

Whatever the reason, if the bank has not foreclosed and there has not been a tax sale, your route to that property is through the borrower.  Track them down, get an authorization letter from them, and try to negotiate a short sale.  How do you convince a borrower to work with you on this? After all, they think their ordeal is over, and they don't have to worry about the problem any longer.  Here is what you say:

• The bank will not forget about you forever. Eventually, this thing will rear its ugly head. Usually, that will be at the worst possible time for you. Wouldn't YOU rather control the timing?
  
• You've spent all this time rehabilitating your credit score. When this comes up again, it will crash your credit score again.  We can make it part of the short sale negotiations that they do not report a new hit on your credit score, because so much time has passed.
  
• If you still own this vacant property and someone is injured, guess who will get sued? Sure, you can probably get it thrown out of court after spending less than $10,000 in legal fees, but you won't have insurance for it. Can you afford the $10,000?
  
• If the bank has decided it does not want to fool with a foreclosure because the property is not worth enough, they will either sue the borrower, or sell the loan to a collection agency that will sue the borrower. They will take a judgment and garnish bank accounts and employers.  The borrower will probably file for bankruptcy to stop the bleeding. This can all be avoided with a short sale.
  
• If they try to buy a new home, but real estate records indicate they already own a home, they will not be able to obtain favorable mortgage terms and low interest rates.
  
• Their children might not quality for college scholarships, because a routine financial check will show the parents own a property that was not disclosed on the forms.

I hope this helps you. The zombie mortgage inventory is fairly large. Experts estimate that fully 20% of the defaulted mortgage loan inventory is in zombie mortgages.  Somewhere in that pile of zombies is the future love of your life!