Foreclosure filings against homeowners have increased dramatically in the last few months.
In some areas, this increase is 30-40% higher than it was last year. Experts say that foreclosures have doubled over the last three years in many places.
Homeowners have struggled to cope with high prices, rising interest rates, and mortgages that are adjusting. This is the fallout.
Over the past few years, mortgage lenders devised many new loans to help buyers afford homes. "1.00% MORTGAGES!!" "$800/MO FOR A $300,000 HOME!!"
Buyers came out in record numbers. 100% financing and record-low interest rates helped some people who previously could not afford homes, become homeowners, and that helped stimulate the most incredible real estate explosion on record.
In Nevada, where I live, nearly 62% of all mortgages are interest-only and ARMs. We are second only to California. However, today interest rates are higher. Combine this with a soft real estate market and you now have a squeeze on homeowners who are struggling to make the higher payments on adjustable-rate mortgages or are forced to refinance their loans to attempt to lower their payments.
For example: Let's say you did 80% financing on a $300,000 home in 2004 and you did a 3 Year ARM at 5.000% with a margin of 2.75%. Your mortgage payment was $1250 per month. It was tight but you figured you could afford it.
When that loan adjusts this year (margin + current index) you could be facing an adjustment to 8.000%. This would increase your payment to $2000 per month. You cannot afford your home any longer.
Sure, you can refinance it and maybe only increase your payment by $100-$200 per month from the $1250 but what if life circumstances have changed? Like your credit is not as good? You may have a lot of equity so you are still OK, but what happens in a slower market where you are not gaining much? Or you have removed all of your equity through a credit line? Or your home has depreciated since that purchase? The slower real estate market compounds the problem.
In recent years, homeowners with risky mortgages could take advantage of the rising value of their homes by refinancing at lower rates. Or by selling.
With housing prices stabilizing or decreasing, the refinancing option is not available. With a vastly inflated inventory of houses on the market and a 30% sales decline from last year, selling is not as viable an option. Quite simply, rising interest rates and decreasing home values spell disaster.
In 2003, when the market was on fire, the amount of 30 day delinquencies was half what it is today. Foreclosures are much more common today and many experts believe they are going to increase substantially in the coming years.
OK, so what does this mean to you and your buyers? OPPORTUNITY!!!!
Buying a property out of the foreclosure market is one of the best opportunities available in all of real estate. However, it is not easy and takes a lot of work.
It's not unusual to save from 10 to 30 percent of the market value on a foreclosure property if you know where to look.
However, don't be lured into thinking this is a get-rich quick scheme. Most foreclosed properties sell for less than 5% off market value. The key is research, preparation, patience and persistence.
Experts say that the investors who do best in the foreclosure market spend 30 - 40 hours per week working it.
There are many internet websites like http://www.realtytrac.com that detail these properties and you can also get a list of properties going into default from the marketing rep at your preferred title company.
There are many different stages to the foreclosure process but two are most important to you.
The first is notice-of-default (NOD). This is when the lender notifies the borrower that a default has occurred and that legal actions COULD proceed. This is very early in the process. Once you get an NOD you probably have a few months to cure the default before you are actually foreclosed on. This is the best place for you as an investor to try and get the property with the best possible discount.
The next is notice of trustee sale (NTS). This is much more serious. This means the lender has set a date to sell your home at a public auction. As an investor, you will have to bid against the competition.
The margins here are much tighter and you need to have much more knowledge about the property, its value, and its potential before moving forward. The investing window of opportunity opens the day the Lis Pendens, the notice that a legal action is pending, is filed. The window closes the day the property is sold at auction.
The time between these two events enables an investor to work with the homeowner and lender to create a workout strategy or a purchase of the property from the homeowner before the sale date.
The amount of time the window remains open depends solely on state and local laws, as well as the behavior of the property owner. Most states sell properties within 90-120 days from the first notice of default.
There are many books and internet sites that tell you how the many different ways to buy pre and bank-owned foreclosure properties. For the purpose of this newsletter, let's stick with the most profitable method. The pre-foreclosure.
Let's examine the best way to try and get you or your client a home at a serious discount.
Here is what you need to do:
Get pre-qualified for a loan so that you can act quickly if you find a property.
Find out what properties are in default through one of the websites like realtytrac.com or through your preferred title company.
Evaluate these properties and narrow your selections based on most possible return.
Contact the homeowner. Inspect the property thoroughly and the default loan documents.
Determine the homeowner's needs...does he need quick cash or to simply get out?
Know all of the liens on the property and the payoffs that a purchase will require.
Calculate your selling price and the potential profit based on current market conditions.
Negotiate with the lender, the owner and any lien holders.
Close the deal, repair as necessary and sell for profit!!
This is much easier said then done. Keep in mind, the homeowner is being slammed with letters from the bank, attorneys, and bill collectors. Some may even be showing up at his door.
You are not alone in this idea. There are other investors like you contacting him as well. You all have three ways to contact him. In person, by mail or by phone.
You have to understand, many people being foreclosed on become upset with the amount of negative contact so they are not in a very responsive position to listen to what you have to say.
It's best to start with mailings. Let the homeowner know that you are interested in his financial problem, you have a solution and as a real estate investor, you specialize in homes in his area. Let the homeowner know in your mailing that you can help him stop this foreclosure, possibly still save his credit, and maybe even get him some additional cash.
Be creative and different with the mailing! A former client of mine used to send a $50 bill to each pre-foreclosure property owner with a simple note that basically said, "I care about what you are going through. Please find $50 to help out. When you call me to thank me, let's discuss some ways I can help further." It was expensive, but brilliant and it worked! I shared this with a 27-year-old investor I work with and he has been having success doing the same thing.
After you send this first letter out, don't be overly aggressive. Give the borrower a few weeks and then follow up by mail or phone. As you get closer to the auction date, stress the urgency. Always stress that you want to help.
Always be courteous and understanding. This person is facing one of the most difficult financial challenges of their life and they are being completely overwhelmed by attorneys and creditors. You need to be the "savior," not another person hounding him.
All you want to do for now is get a meeting to determine if he is even a candidate for your assistance. When you get your meeting, make sure the homeowner has all of his loan, mortgage and insurance documents available, as well as the foreclosure notices.
You need to carefully review these to determine profit potential. If you are going to make an offer on the property, you must have the loan, ownership, and debt or lien information. You must also assess the condition of the property.
Combined with the market value and the default amount, you have all the ingredients necessary to formulate your offer. Some investors in foreclosures even make the very courageous move of visiting the property in person without an appointment. One of my investor clients firmly believes in going door-to-door.
However, you have to be prepared as you may end up meeting with an angry homeowner who doesn't appreciate you showing up at his door. Be polite and leave if you are asked to. Never, under any circumstance, snoop around, inspect or generally trespass unlawfully on somebody's property. You are there to be a "savior," not a snoop.
When you finally get your meeting, you need to quickly assess the needs of the homeowner. Is he looking to save his credit? Is he looking for cash? Does he just want to be bailed out? Is he on the verge of bankruptcy? Is there something else he fears? Does he want to stay in the home on a rent-back basis until he can get his feet on the ground?
If you meet his needs, he will be much more receptive to your offer.
Inspect the property with the homeowner as you were a home inspector. Use an inspection checklist and record your information and estimated costs of repair.
Many owners of homes that go into foreclosure have been struggling financially for a while before they give up. This likely means the house has not received needed repairs or general maintenance for a while. Experts say to NEVER make an offer at this point or give the homeowner any money.
If you like the property and think you want it, make an appointment to meet with him again, go home, crunch the numbers, analyze all of the liens and payoffs, and come back with your offer. Make sure you factor in all closing costs before determining this price.
These homeowners are not as likely as savvy as you. They are also very skeptical. Changing the offer once made because you made a calculation error will not come across as a simple mistake. It will likely kill your deal.
Make sure you carefully review all liens on the property that have been filed. You will also want to ask the homeowner if there are any other liens that may "pop" up later.
If you want to be taken seriously as a buyer, you must be realistic when preparing an offer. Homeowners, regardless of their situation, aren't likely to give properties away. They know the value of their home on the open market and will likely lose it before making a deal where they feel ripped off.
Experts say the typical offer is 80% or less of market-value.
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