The Hidden World of Pre-Foreclosure (AKA. Non-performing notes)

Zillow's pre-foreclosure lists

You have probably heard that money is made when you buy not when you sell in real estate. 

This is truer today than ever. By the time a foreclosure reaches the open market (MLS) it has most likely been traded behind the scenes more than a few times.

Therefore, the end buyer is only seeing the real estate market not the mortgage note market that exists. They are paying retail prices in a highly competitive sellers’ market. This is where investors lose money when the market corrects itself.

The world of pre-foreclosures and non-performing notes are more prevalent than you may realize. For example, if you go to Zillow and look at the search menu under listing type. There you will see under potential listings, a pre-foreclosure tab. The pre-foreclosures outnumber listings sometimes three to one.

Scary? Possibly, however all this information means is that the borrower has missed a few payments. The bank has sent a public notice to the borrower and Zillow has aggregated that data from public search sites. Its not the way to find available opportunities. In fact, it’s a way to get in trouble with the Consumers Protection Agencies. If you don’t own the mortgage (IE. Bank) than you can not contact someone about there mortgage.

Key Point:

What happens with these properties and borrowers? The banks attempt to work things out with the borrower and if that happens they sell the mortgage at a discount. The banks prefer to not foreclose on homes under $150,000 since the cost of rehab and foreclosure could outweigh the benefit. Banks want to keep the money flowing (velocity of capital). They lose too much time and effort working on lower value homes.

There is money in the crumbs the banks have left over!

In response to the mortgage crisis, over the last 10 years a network of downline services and institutional investors have emerged to quickly dispatch non-performing loans provided by Federal Housing Administration (FHA), banks and private sellers. In this new market, both non-performing and performing loans are actively traded and discounted from the institutional investor down to the individual investor.

Where we have learned to invest is in this new mortgage note market. In this market we can purchase pre-foreclosure properties at 30-40% cents on the dollar. There is less competition and more exist strategies than the typical find, fix, and flip.