If You Want To Buy Foreclosures, This Is What You Need To Know

We got a great response from the write up on short sales, so naturally we need to educate you about the other side of the same coin: Foreclosures
Foreclosures are homes that have been "repossessed" by the banks for nonpayment of a mortgage. They tend to sell at less than market price for multiple reasons.
Why foreclosures sell for less:
1) The property has not been properly cared for or even vandalized by the former owners
2) The property has been sitting, without care, for months
3) Vandals and thieves have stolen valuable parts of the home, like copper wiring and plumbing, or have graffiti on the home, vagrants have or do still occupy the home, used the toilets without water services to flush, etc
4) The property may have been a failed business such as a half way house, sober living home, child care, boiler room, etc and odd alterations have been done
5) Massive amounts of unpermitted, improperly completed, and/or unfinished construction has been done
6) The banks who now own the property do not understand the local market for the home, and the employees of the bank do not have a vested interest in getting top dollar for the home
7) The Real Estate agents who sell these homes are inundated with work, are underpaid by the banks, and do not have a vested interest in getting top dollar for the home
8) The banks demand very specific terms of sale, will completely rewrite your offer, will not do ANY repairs/credits after agreeing to an offer, and have a take it or leave it attitude
With that said, why would you want to buy a foreclosure? The bank is effectively paying you for the work, permit compliance, management, and maintenance that they are not willing to do.
The way that they pay you is through a reduced purchase price, which may result you actually having equity in the home after the pricing downturn is over.
While foreclosures are a good source of investments, even better deals can possibly be found in traditionally marketed homes. Some homeowners will price their homes for sale at foreclosure prices. BUT, these homes do not have all of the drawbacks that I listed above. So, you can buy a turn-key home (one that does not need any work to live in or rent out) for a foreclosure price.
Both of these types of homes are great buying opportunities. For the investor who is shy about making repairs and renovations, buying traditionally marketed homes can be a much easier undertaking.

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What is a Short Sale and How Do You Profit From It?

I have had MANY people asking me, "What is a short sale?". To save everyone some time, here is a concise description of what a short sale is and what you need to know about them.
A short sale is ideally a "pre-foreclosure". This means that if the listing agent is educated, the property will be "distressed", the seller will have not been paying his mortgage, a Notice of Default has been filed on the property (NOD), and the seller should have a good reason why he has not been paying!
(on a side note, I have access you HUGE consistently updated lists of NODs, NOTs, and other preforeclosure info available, just ask)
Once the owner of the "distressed" property realizes that they may lose the property, they decide that they want to sell it before it goes to foreclosure.
The problems?
1: They owe more on the mortgage than the property is worth
2: Even a competitively priced property will not sell quickly in this market
The solutions?
1: Have a Realtor put the property up for sale at less than market value
2: Attract a large amount of attention and offers, usually above your very low asking price
3: Go to the bank whom you owe money to, show them the offers, and ask them to accept one and forgive the rest of the debt
The problems with the solutions?
1: Banks have a huge deluge of these types of offers coming in, and they may take months to respond to the offer, if they do at all
2: The seller gets to spend less time in control of the property in contrast to a foreclosure
An example:
You owe $100,000 on a home. In the recent downturn, the homes value slips to $50,000. You lose your job and cannot pay the mortgage. You call me and tell me your problem. I say, "I have the solution for you! Instead of letting the bank foreclose on you, let me sell your home first."
So we put the property on the market for $40,000. This is below market value, because we need to sell fast and you won't get any of the profit anyways. We show the home 30 times in 10 days, and get 10 offers. The highest offer is $45,000.
I submit a lower offer to the bank, one at the asking price of $40,000 because I don't want the bank to counter the $45,000 offer with a $50,000 price! The bank doesn't say anything to me, the listing agent. I call them, email them, hound them from all sides. Finally, 2 1/2 months later, the bank calls me and says they want to counter the $40,000 offer with $45,000.
I call the person who wrote the offer, but they already bought a house. So, I counter the $40,000 offer with $45,000. They decline because the price of the home has dipped to $40,000 during the time they were waiting, and we all just wasted 3 months of our lives trying to save the bank some money. By the way, the house gets foreclosed the next day.
How do you profit from it?
1: Write a full priced offer on every well priced short sale that you see.
2: Be patient
3: Do not become attached to the idea of owning ANY of these properties because the likelyhood that you will actually close escrow on one is exceedingly low
4: Be persistent by following up
5: Be patient
6: Submit piles of supporting documentation with your offer to verify your strength as a buyer such as your FICO score, proof of funds, preapproval letter, letters from relatives with back up funds, ect.
Realistically, short sales are not an easy way for anyone to make money. Not for the listing agent, not for the buyer, and certainly not for the seller. Everyone involved will feel short changed by the end of the transaction. You will have spent way too much of your own time looking at properties and writing offers by the time you close escrow.
In my own recent housing search, I wrote seven offers on short sales over six months ago. I still have not heard back on a single offer! In the end, all you are doing is saving the bank a couple of bucks which they apparently don't care enough about to respond promptly to your offers. Easier money is to be made with true foreclosures and traditionally marketed homes.

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THE Reasons Why You Should Buy California Real Estate Now (Part 1)

There is so much press out there talking about how the housing market is going to hell in a hand basket (I’m looking at you, socalbubble). Phrases like, “California Real Estate Market Continues to Crash” are being thrown around.

Image via WikipediaThat doesn’t even make sense! If you are going to call a pricing downturn a “crash” or a “popped bubble”, it should happen suddenly, right? This is simply not the case with our gradual, predictable, and cyclical Real Estate pricing adjustment that we are experiencing here in Southern California.

I contend that it is downright irresponsible for these authors and bloggers to try so hard to push this “bubble” concept on the public. The dotcom bubble was a true bubble, this is just predictability at its best. The people who stop listening to the nay sayers and start looking at the facts will profit.

Here is the stuff others aren’t telling you because it is fashionable to be negative and go along with the crowd. This is part 1 of a series without a defined ending. This is why you should be buying right now.

Foreclosures are an Opportunity, Not a Warning Sign

The vast majority of homes that are now facing foreclosure have been purchased within the last few years by speculative or uninformed buyers. This graph shows over 1,000 notices of default (NOD) that have been filed during the week of 10/22/2007 in Los Angeles County and the dates that the property was purchased.

As you can see, there is an obvious pattern here. There is a cluster of points at the end of 2004 all the way to the beginning of 2007. Each of these points is a piece of Real Estate that was purchased and now has a notice of default (NOD) filed against is by the lender on that property. All of these points represent a home that is behind on its payments to the bank.

These purchases were fueled by ever loosening lending standards from the banks and fraudulent activity from mortgage brokers.

Many borrowers got what I call “Frankenstein Loans”, because these loans should have never existed. Mortgage products like negative amortization loans allowed people who could not afford homes to buy despite the price barrier.

This is what allowed housing prices to extend past equilibrium into unsustainable territory. That was the time for you to sell, while money was cheap or free to borrow.

This is the situation that gives rise to opportunity. For those of us who didn’t ruin our credit, didn’t buy an overpriced piece of Real Estate, and saved up cash, now is the time for you to buy. Here is why:

This is a graph of those same notices of default (NOD), but now it displays the amount of money in default.

In fact, the vast majority of defaults are below $50,000! For this amount or less, you could gain ownership of one of these properties.

There is a vast body of writing on how to turn these “pre-foreclosures” to your advantage. I will not review them, but many of these systems work well. But be warned: Chasing foreclosures can be a full time job. Learning about them is another matter entirely.

For those of you who want to do the footwork, I will be posting free foreclosure and notice of default lists for download. Additionally, we will be releasing free software that will allow you to search and navigate through all of this information without downloading it.

Fortunately, there are many good deals available on foreclosed Real Estate available through traditionally marketed properties. These are called REOs. After a bank has foreclosed on a property, many times they will put that piece of Real Estate on the market with a Realtor. At least one lender I know reduces the price of the homes by 5% each month until it sells. It is a game of waiting and watching for the right deal.

Click Here to add your name to a list of interested buy-and-hold investors. Indicate where and how much you want to invest in your message.

Look for my next installment, part 2: The Real Estate Market Cycle and Irresistible Market Forces

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