The foreclosure market appears to be expanding with no signs of relief. The combination of overextended subprime holders and an ominous economic slowdown indicates that this is a trend likely to continue for at least the next year. With all the negative news blowing in the wind, should you venture into foreclosures now or wait for the market to bottom?
Foreclosures continue to make headlines across the United States. DataQuick foreclosure statistics showed the pace slowed slightly, with September foreclosures down 8% from 243,000 in August. The reason so many people write and talk about the figures is that they are more than double the rate of t2006, yet it indicates that there are many more to come.
Many people think of foreclosure investors as “bottom feeders” or hangers-on, taking advantage of other people’s misfortunes. Others see them as a necessary evil, or a safety net that will help adjust the market price and stabilize the real estate market. Whatever you think, someone needs to buy these properties. Just as the “vultures” have their place in the natural ecosystem; so too do foreclosure investors have a place to bring back some sanity and stability to a real estate market that had become a frenzy of overextended buyers driving ever higher prices in already overheated markets.
It seems that the expected recovery will consist of three stages.
1. The mortgage lending industry needs to clean up its act and stop making loans that are likely to result in defaults. This is already underway.
2. Delinquent loans must be resolved: If this means foreclosures, the sooner this process is completed, the sooner we can see signs of recovery. It seems that there are several more months of this phase.
3. Foreclosure investors can pick up bargains and then rent or resell the properties at market prices that fit the new homeowners’ credit profile, thus stabilizing the market. This also appears to be in the early stages, so there should be more profit opportunities in the coming months.
How much will prices drop? Is there really a bargain?
We have been studying data from various regions of the country. Data Quick and RealtyTrac are two main sources of this data. In our unscientific study found that discounts on distressed properties are currently in a range from 15% in Hawaii to over 40% in some markets (AL, OH, PA) with an average of 20-25% across the board . Of course, this raises two more pressing questions. How much further will prices fall before bottoming out? The answer is of course no one knows for sure, however most experts tell us they think the fund will be 7%-17% lower than current market prices. This is where you need to use your best judgment in each market and realize there are differences between neighborhoods, even in your area. The second question is natural. How do you find bargains in your area?
How to find a bargain
To locate foreclosures in your area, RealtyTrac is a good place to start. Their website lists foreclosures by zip code and stage of foreclosure, ranging from pre-foreclosure properties to bank-owned real estate. RealtyTrac is a web-based service that gives you the basic information you’ll need to locate distressed properties.
Many I’ve talked to report finding RealtyTrac’s data not entirely accurate. Let’s face it, the task of keeping up to date is enormous and the information entered into the county records is not always correct. With the plethora of new defaults being assembled, the job is next to impossible. Still, you can use this service to locate potential deals. RealtyTrac charges you $49.95 per month for their upgrades and they allow you a free seven-day test drive.
More bargain sources
REO bank properties.Banks and mortgage lenders are not really in the business of investing in real estate. In fact, they are really in the lending business and they want to charge interest on the loans and the fees they get for servicing and so on. But they must deal with the large number of non-performing loans. Unfortunately for banks, many are not allowed to keep these non-performing assets on their books. This creates opportunities for investors to buy problem properties from banks. Purpose, buyer beware; Do your homework and make sure you understand that you will be buying “as is” unless you can get the bank to fix the property before you take it over. You can find properties for sale on the banks’ own websites: Bank of America, Countrywide, and US Bank have some. We have found over 200 listings in California alone priced under $200,000. Carefully selected properties can create good capital and an advantage for savvy investors.
Local real estate brokers and agents.
Often the best source of information and access to buying and selling property in any area of the country is your local real estate agent. All good brokers have refined their network over time so you know what’s coming on the market before you can find out. If you develop some good contacts, they can act as your eyes and ears for finding the best deals.
Auctions.
Auctions are increasing in popularity. As banks and others accumulate unwanted real estate, they may want to “offload” their biggest problems through a mass method, such as an auction or portfolio sale. A real estate auction specialist can sell dozens, maybe even hundreds of properties covering a wide geographic area. He can find auctions listed in the newspaper or find auction houses in the yellow pages. Just be sure to do your homework, as this is not a shortcut to great deals. If you don’t have experience or an expert guide, you will probably have some expensive lessons in this field. There are many very sophisticated and financially capable players who play hardball with auction properties.
Foreclosure service companies.
Although banks may sell your “REO” (real estate property) directly to an investor, some will hire companies that specialize in distressed properties to take care of the details and hassles of marketing these properties. You can find them by looking in your local phone book or by talking to a few real estate agents in your area to find out who provides this service in your area. Title companies and escrow agents are also often aware of these services and can introduce you to them.
Sales of government property and from government-backed lenders.
Government agencies ranging from the FHA and VA to HUD, including the Department of Justice (ie drug-related seized homes) sell real estate, you can also find them online. Fannie Mae and Freddie Mac also operate information websites. Due diligence is the key to a smart investment here, but, in general, Fannie Mae tends to list more high street real estate values.
Build real estate wealth by being patient and polite.
Although foreclosure properties are often sold at a healthy discount, you will often find that these properties have many problems. After all, the people who lived in them usually go through quite difficult times that lead to the loss of their property. As a result, many will have neglected repairs and maintenance. In many cases, they will also have trashed the property on their way out, trashing the interior and even taking with them many appliances and fixtures that will need to be replaced to make these homes habitable. You should also be aware that the general trend of foreclosures in the immediate area may have an adverse effect on your ability to rent or resell for a profit; also causing the process to take longer. Be sure to check out comparable listings and the most recent sales in the area to see what the trends may be.
The bottom line.
Look for properties that will hold their current value and have the best chance of increasing in value. Buying good properties in nice neighborhoods will help you get the most out of your investment. The location, timing, and trend of the market remain important even if you’re buying well below perceived market value. When it comes time to resell, you need to make sure you have invested in an appreciated asset that is in demand in your local market.
If you want to access more information or analysis tools, do not hesitate to contact the author.
