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Posted almost 9 years ago

How To Buy Zombie Mortgage Properties

Normal 1438000805 Zombie

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!



Comments (17)

  1. Did she file for Chapter 13 or Chapter 7?  Technically, you probably need bankruptcy trustee approval or at least be able to show that  you notified the bankruptcy trustee of your intention.  I don't know very much about bankruptcy law. It is highly technical.  Aside from the bankruptcy wrinkle, you can just get a contract from her and do a short sale. I doubt you can do a subject to. 


  2. Hi Denise,  

    Here's the situation: a lady bought a house in the early 90's and then in 2013 she filed for bankruptcy and surrendered the house back to the lender (USDA), the lender has not taken possession of the house and the title is still in her name.

    Is there any way i could get the title from her and take over the loan (like sub2) or just pay her for the title? 

    I'm not sure what direction i should approach this from. 

    Thanks for any insight! 


  3. Eventually. Agencies maintain websites for sale of their seized properties.


  4. Denise, 

    Thank you for the quick response. I appreciate it. I'll look into the sites you provided. If it has been seized by either Fed or Local Government agency, will they sell the property? 

    Thank you. 


  5. Has the property changed hands? I'm guessing there is nothing in deed records, right?  Most likely, the government agency seized it.  If the agency was federal, then the best place to investigate is to sign up for pacer.gov  That is a portal for all federal lawsuits, including civil, criminal and bankruptcy. You can search on the owner's name, find the criminal case against him, and read all the court documents. If there was a seizure, it will be in that court file or one related to it. You must provide a credit card number to sign up. Searching is free. Looking at documents is, I think 8 cents per page. Maybe it's a little more now, I don't remember.  There is a maximum charge of $3 per document. So, if a document runs on for hundreds of pages (with the attachments) then you will be charged only $3. They bill once a quarter. If your bill is less than $15, they just let it ride until you get over that number.

    If the agency was a state agency, the best place to research is to contact the attorney general for New York and ask for assistance researching the file.

    Good luck!


  6. Thank you,  will look into it.


    1. Glad to provide some food for thought, @YvesMarie A.


      1. Hi Denise and thank you for the information. I have a question for you. There's a property on long Island I'd like to get my hands on, but it seems there might some issues with the owner. The property was under contract in 2011 as a short sale around the time the owner was indicted for embezzling money from a government entity. Any thoughts on how I might go about getting myself some information on this property?


  7. Fascinating! I didn't know these things happen.

    Great article!


    1. Thank you.

    2. Thank you.

  8. Check with a local attorney. I seem to recall from law school, a long time ago, that someone can't set aside an instrument because of a mistake, when an innocent 3rd party would be harmed as a result. Also, did you read the release instrument? There might have been two pieces of collateral and they released just one of them.


  9. Where are you, what state? In Alabama there is no legal responsibility to tell them the mortgage has been released.  People sell stuff at bargain prices all the time, when if they had full information, they might not. That's life. YOU run the risk that the release was in error and, if you buy the owner's rights, the bank might file a court petition to reform their release and undo it.


    1. That's a GREAT point.  Plus, possibility of other liens out there.  There's always risk.  I'm in Alabama.


  10. Thanks this is helpful.


  11. Denise, I've got a hypothetical situation that you'll be interested in here:  Let's say we find a property with a zombie mortgage and back taxes.  We find out it's vacant and that the current owner of record is no longer there.  Now let's say that the mortgage has been released for some reason (most likely because the bank doesn't want to deal with ownership of a lower income property).  Let's say we track down the current owner and let them know that they're still responsible.  Let's say they'd love to get it out of their name and would be happy to deed it to us for a small fee.  The question:  do we have any legal obligation to tell them that their mortgage has possibly been released?  Obviously the bank doesn't legally have to tell them that they've done so...


  12. Thank you, this is helpful!