The unpleasant business of foreclosure has become big business these days: big, scary business, and certainly not for the delicate of heart.
Rick Sharga, Vice President of the foreclosure monitor called RealtyTrac, keeps an unblinking eye on the subject. In the process, he is uncovering data that is surprising him – and us – more than ever before. He and his team are attempting to make sense of the senselessness that has triggered the biggest foreclosure tally in the history of the American Dream.
RealtyTrac, based in Irvine, California, is one of the few companies to actually collect foreclosure information full time. Their data is considered by individual investors, home buyers, and industry analysts who want to find – and do some serious scrutiny on — foreclosure properties across America.
Here, Sharga gives us the 411 on foreclosure, including why a foreclosure investment is more than just a discounted property, when to steer clear of a foreclosure, and why we all had better fasten our seatbelts until at least 2012.
I guess you are busier than ever these days?
Even we didn’t see this particular tsunami hitting as fast and as hard and as long as it has. We’re at five years in a row now where we’ve set new records for overall foreclosure activity and for bank repossession. It’s just unprecedented historically.
Do you have any idea about where the foreclosure crisis is headed?
Unfortunately, we are very likely to set yet another record this year, in 2011. We think that the number of bank repossessions could go up by as much as 20% this year, and overall foreclosure activity will probably go up by a similar amount.
I guess the good news is that there is a light at the end of the tunnel, and the numbers, based on our prediction, should finally start to get a little bit better in 2012.
So it’s the dark before the dawn?
2011 promises to be a pretty bad year in the real-estate market in general and foreclosures in particular.
How should we sit tight and wait for 2012?
If you are a homeowner right now, if you don’t have to sell, the message is: don’t sell. There is a glut of inventory already on the market and coming at distressed prices, which is going to keep home prices low at least for the next twelve months — and then only a gradual return from there.
If you are an investor, this is pretty much open season right now. There are about 300,000 bank properties already on the market, and there are 700,000 that are on their books, not yet on the market. There are a million properties in foreclosure, and another 5 million homeowners are seriously delinquent on their loans. So the opportunities for purchasing foreclosed homes or executing a short sale as an investor have probably never been greater than they are today. Home prices being as depressed as they are, and interest rates being as low as they are, the affordability is unbelievable.
However, having said that, being an investor doesn’t just mean getting a good deal on a house. It means knowing what you are going to do with it in order to turn it into a profitable business opportunity. You have to know before going in if you are going to be buying a property and renting it out for a few years for possible cash flow, or if you are going to buy it at a deep discount and sell it off on a wholesale basis to another investor, or if you are going to fix it up and sell it to a homebuyer.
So it’s about knowing what your plan is and having a reasonable degree of confidence in your ability to execute that plan. That’s the key to successful investing in a market like the one we’re in today.
How do you think all of this is changing the real estate industry?
I think, fundamentally, we’ve seen a shift in two ways in the real estate industry.
In the first place, right now about a third of all residential sales are foreclosure properties, which is just an unbelievable number. Usually, that percentage is in the low single digits, below 5% in most years. 60% of homebuyers are actively looking for foreclosure properties. So if you are a real-estate professional, and if you’re not playing in distressed properties as part of your business, I guess you are missing enormous opportunities, and probably disqualifying yourself from working with 60% of the homebuyers. Not all of them wind up buying these properties, but they are all interested.
So one fundamental shift is you have a much higher visibility and desirability for foreclosure properties among buyers than you’ve ever had historically. It’s like a new category of real estate for people to consider.
The other fundamental shift is because of all the foreclosure activity, because of the nonsense with banks, a lot of people aren’t as anxious to buy a home, as had been the case as recently as three or four years ago. The luster of home ownership has truly diminished a little bit over the last few years, and the real fear for people watching the real estate comeback over the next few years is whether those buyers will actually materialize. People are actually wondering if the risk is worth the reward of purchasing that property in a lot of cases, and how safe it is to own a home.
So there is some consumer psychology that has shifted over the last few years that might actually take longer to repair than the more practical, if you will, problems that have been uncovered with foreclosures.
Do you think this is the end of The American Dream as we know it?
I don’t think so. I do believe that it’s an intrinsic part of the psyche of what makes America somewhat unique. I think people still would like their own little plot of land and a house to sit on it. But I think for the majority of people now entering the market, they’re going to look much more carefully before they leap.
Also, I think we’re dealing with a hangover from another shift that took place when it came to homeownership a few years ago. And that was that people stopped looking at homes as a place to park their cars and started looking at them as a place to park their money. So instead of being a homestead, a place where you are going to raise your family and live for the next thirty years, it became a place where you try to make a 30% profit in ten years, or five years. The degree to which the average home buyer comes back to the home as a place to live as opposed to a home as an investment will sort of get us back into that American Dream phase.
Has the current state of the business affected how you gather data?
In my career, I’ve been involved in I can’t tell you how many vertical industries. I’m not a lifetime real-estate person. I actually came out of technology marketing. And I’ve never seen an industry where the data was messier, or the systems more archaic, than the real estate mortgage industries. All you have to do is read headlines pretty much every day about something else that went wrong with the banks’ paperwork, although that’s not a huge surprise.
Getting into the business, we had some ideas about how to go about collecting this data and the degree to which it might be automated. It turns out that what we really have to do in order to collect this data accurately and quickly is that we send out abstractors, [that is,]professional data aggregators into county courthouses and sheriff’s offices and county recorders offices in about 2200 counties across the country, 92% of the households. And we physically collect the data and aggregate it that way.
Less than 6% of all foreclosure records are actually on-line across the country. It’s a very archaic process. At some point, the systems will start to catch up with technology that’s already on the market elsewhere, but it’s been a real mess and that’s one of the real reasons that there are so few people trying to do this, honestly.
Are there any red flags or trends that you are seeing bubbling under the radar that we don’t quite know about yet?
Some of the issues going on with the banks could be problematic, not always in terms of the real-estate market, sometimes in terms of the banking industry. The issue of what is being called “put backs” right now could get a lot messier for the banks. This is where the bank has sold off mortgage-backed securities and other financial products, which included mortgage documents. The people who bought these securities are now asking the banks to buy them back at full face value because there was something wrong with the documentation. Bank of America has settled for, I think, over $2 billion with one of the government entities, Fannie Mae, I believe. That could be just the tip of the iceberg. So that could be a problem for the banks. It wouldn’t have a big immediate impact on the real-estate market, although it could slow down the availability of mortgage funds.
Related to that is there is a court case in Massachusetts where two lenders were found not to have had legal standings to pursue a foreclosure, because you couldn’t really prove that you owned the notes. And that goes the way the whole industry has been assigning and transferring mortgage documentation around. So that’s another one that’s probably worth watching that could be really messy, not just for the foreclosure part of the industry, but for mortgages in general: a lender’s inability to prove that they actually own that note.
Has there been any statistic or data that personally blew your mind in the last few months or so?
I think when we crossed the million-bank-repossession threshold for the first time this year. A million homeowners had their homes repossessed by the banks in one year. I get a little jaded by the numbers, because I’m swimming in them all the time, but that’s one that really did pop out.
There are others that are just a little bit mind-boggling, but we’re kind of getting used to them here. For example, if you lived in Las Vegas in 2010, one out of every nine households got a foreclosure notice. So that means that if you’re in a crowd with eight of your friends, one of you is in foreclosure. The scale of this problem is just extraordinary.
Have you any advice for investing in a foreclosure property?
I can tell you the two biggest mistakes people make when buying a foreclosure property. The first is to underestimate what it is going to cost to repair the property. And that’s true whether they are going to resell it, rent it out, or live in it. What we encourage people to do who don’t do this on a full-time basis is to befriend a contractor. Bring that person along to take a look at the property, to get a real good idea of what it’s really going to take to bring the property back to where you need it. So if you save 20% on the purchase of a foreclosure home and it’s going to cost you 30% of that price to fix it up, I’m not sure that it was quite the deal that you had in mind.
The other is that people, ironically enough, tend to overvalue some of these foreclosure properties. We’ve seen people get involved in bidding wars on bank-owned properties that have hit the bottom of the market.
People also look at the percentage discounts since the previous sale. If you look at some of these harder hit areas, like the Central Valley of California, or Arizona, Florida, Michigan, or Ohio, that discount could look enormous. You could be looking at a thirty or forty per cent drop from the last purchase price. What you have to keep in mind is that all the homes around that foreclosure property have also had similar drops in value. So you’re going to need to have an even more dramatic discount on those properties, so you have to be careful on the pricing.
The final one is that if you are just starting out in investing or buying these properties, we always advise people not to start at the sheriff’s sale or the trustee sale. You’re not getting the kind of discounts on those properties today that you did traditionally. You’re actually better off buying the bank-owned property from a price standpoint. Most times, traditional financing isn’t available. You have to pay cash at those auctions. And you very seldom get to inspect those properties before you buy them, which means that you’re assuming all the risks. If there happens to be a crack in the foundation or it’s built on a toxic dump site that you don’t know about, that’s your problem. So those auction sales and sheriff sales and trustee sales are really not for the uninitiated. You really need to know what you are doing if you are going to purchase in one of those situations.
Is there anything of note that you want to mention regarding foreclosure laws, as they differ from state to state?
Foreclosures are not regulated by the Federal government. That’s one of the reasons why the government has had such a hard time getting its arms around this problem. Each state has its own foreclosure laws, as does Washington, D.C. So you’re really looking at 51 different sets of state laws across the country, and they do vary. The timelines [for foreclosure]vary from 21 days in Texas to 455 days in New York. In states like New York, it goes through the court system. In states like California and Nevada, they do not. And those laws tend to be changing as the foreclosure crisis continues, because the state legislators are trying to do something to try to keep homeowners in their homes and prevent foreclosures. This is not a bad part of the market to also have a friend who is a real-estate attorney, who can keep you up to speed on what’s going on.
Where it really comes into play for an individual who is buying these properties, as a place to live in or as an investment property: redemption laws. When you buy a foreclosure property at auction, the original homeowner has a certain period of time to buy the property back from you for whatever your winning bid was.
For some states there is no redemption law. For some states, there is a law where you can get the homeowner to waive their redemption rights by paying them something. In other states, it’s illegal to do a redemption waiver. So those are the kind of things you have to pay attention to and get an education on before you get involved in purchasing a property. But by the time a bank has a property on the market or if you’re dealing with a short sale, it’s very much like a traditional real-estate transaction and there are less of those sort of things to worry about.
Anything new that RealtyTrac is working on?
We’ve recently started to incorporate a rating on the properties in the database. This is so people can get an idea if the property represents a good or average or fair or bad deal. We’re really the only site that has integrated two million MLS records into our foreclosure database, so people can find the foreclosures for sale right now.
We’re doing more things to try to connect potential foreclosure purchasers with real estate professionals who can help them execute the transactions. There is always something going on, and if people can take a free seven-day trial just to see, I’d encourage them to do so.
To find out more about RealtyTrac, go to realtytrac.com