Quote from @Jay Hinrichs:
Quote from @Don Konipol:
Quote from @Chris Seveney:
Quote from @Ken M.:
I'm not making this up. WSJ is.
I started out buying pre-foreclosures and have made a lot of money buying them. But, now it requires training to stay out of trouble.
"Why do housing prices keep climbing despite higher interest rates? The federal government has allowed borrowers to take out bigger mortgages than they can afford. To prevent foreclosures, it’s bailing them out when they miss payments. Behold another subprime housing bubble.
The problems began when the Obama administration eased underwriting standards by enabling more home buyers whose debt payments exceed 43% of income to qualify for government-backed loans. Such borrowers are risky because they might not be able to make payments if their income drops or expenses rise."
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"As home prices climbed, the Federal Housing Administration insured more loans to financially stretched borrowers with as little as 3.5% down. No skin off lenders' backs if borrowers later defaulted, since the mortgages were backed by the government.
In 2007, 35% of new FHA borrowers had debt-to-income ratios above 43%. By 2020, 54% did. As housing prices and inflation surged, borrowers became more stretched. The FHA kept insuring mortgages to borrowers who were increasingly leveraged. About 64% of FHA borrowers last year exceeded the 43% threshold.
The FHA loan portfolio is far riskier than it was before the 2008 housing crisis.
Institute's Ed Pinto and Tobias Peter estimate that 79% of FHA first-time borrowers have a month or less in financial reserves—not enough to make mortgage payments if their household expenses rise"
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Oh, did anybody mention we are experiencing inflation? These people are going to start getting foreclosure notices.
We just acquired $5M of defaulted loans that will be REO's. I always tell investors they should bea note investors best friend for off market deals - of course the ones that do reach out to us are wholesalers trying to lowball the hell out of the deal thinking we are idiots but we are typically very sophisticated and no the numbers very well including the ARV, what it will take to get it repaired as well as rental rates.
In both residential and most commercial markets there are THREE prices; the wholesalers (flippers) price, the investors price and the users price. Most people don’t think of commercial property as having a “users” price, but I will provide an example below.
some number of years ago I was forced to foreclose on an older office building that had been converted to a combo office / living units. This type of property had no obvious buyer, but to generate interest I listed on Loopnet with the proposal of 20% down with owner financing of the balance.
As expected, I received very lowball offers from numerous wholesalers, all offering low prices, wide “weasel” clauses, no REAL earnest money (“ my attorney will hold my personal check”, etc.) and 120 -180 days closes. In addition I received two low, but reasonable offers from investors, who had plans to rent out the facility. While considering which of these two offers I would pursue, I received a call from a broker saying he had a church client that would like to make an offer and would use the facilities for offices associated with its non profit divisions and the bedrooms for spousal abuse victims shelter. We negotiated a deal that allowed the church a low enough down payment to keep enough funds in reserve to make needed improvements/repairs. To satisfy my collateral requirements the church put up as additional collateral a lot they owned in the same general area. The price paid was about 30% higher than the investors had offered.
The church refinanced the subject property and paid the note off in just over three years. As part of the payoff, I accepted the title to the empty lot that was additional collateral for the loan, and leased it back to the church for parking at a 12% 3N annual return. This went on an additional 4 years before the church exercised its option to purchase the lot back from me for 40% above what I paid.
For sellers you will almost always receive a higher price from a user than from an investor, and from an investor than from a wholesaler.
People who sell their houses to the ibuyers, usually at 20% below market because they’re attracted to the fast close, no hassle, no Realtor aspect remind me of the people who trade their car in at a 40% “hit” when the initial tires wear out at 30,000 miles, or the people who pay 19.8% interest in their credit card rather than get a 8% consumer loan because they’re attracted want to avoid the hassle. Then they want to get into real estate but have no capital to invest.
Don as it relates to SFR mortgages I think someone like Chris is going to get more bites at the apple.. those chasing NOD's I think will find that many of the folks will not transact as they will be able to do workouts with the lender.. so even though you may have 1 mil NODS being filed I suspect maybe 10% to 20% of those will filter down to the one off investor thinking they are going to score a sub to deal.. and probably much less than the numbers I stated.
There will always be defaults as we know.. But it is a different ball game compared to GFC and pre GFC when lenders and service rs did not offer workouts like they do now.. Or by law a borrower is entitled to sit down with a decision maker of thier bank or Service r before the foreclosure can go forward.. Of course many just duck and dont take advantage of it etc etc.
@Chris Seveney Chris would know better than me about how to deal with owner occ in the upfront stage.. and the right to have a meeting.. And maybe that law changed since it was enacted in 2011 or so.. or Maybe it was just an Oregon law.. ??
Many of these will go through a forbearance or if they cannot work it out, they will head to foreclosure? I get a lot of pushback on this from people telling me I do not know what I am talking about but lets put a real world common sense (which is not so common) situation:
You bought a house for $250k, put 10% down and now that house is worth $350k. So your mortgage is around $220k but its worth $350k. You got caught up in credit cards, insurance, escrow etc and were spending too much money thinking money would keep flowing. You also have a rate of 4% mortgage and a payment of $1500 all in.
You are behind on your mortgage and credit cards, your credit is 580 and your house is a 3 bed 1 bath home for you and your two kids. Now this is not every situation but its pretty common.
Do you:
1. Sell sub-to let someone else take over, move out and try and find a place to rent with awful credit?
2. Sell, take the money and get a rental but you cannot afford a new home
3. Let the lender foreclose, then hope you can find a rental with your awful credit
4. File bankruptcy which buys you atleast six months, restructures your mortgage and credit card debts into something that you could probably afford?
5. Lender works out a trial payment plan and loan mod.
Well you can choose what you think, we have historical data over the past 2-3 years on this and unless the borrower has died, option #3 almost never occurs (1 in 10), option #4 and option #5 take up the other 90% from what we have seen. This is what we do as a buyer of defaulted loans, so these are not made up numbers.
