Distressed Property Blog

In a blog entry a couple of weeks ago, I suggested you take your lead from the big boys when it comes to approaching real estate. Times are tough for real estate agents all over the country, but as James Hagerty, who has covered housing and economics for The Wall Street Journal since January 2004, pointed out last week brokers specializing in selling bank-owned properties are getting ahead . There is good advice to be found in Hagerty’s observation, and it is, simply stated, “Specialize.” While real estate professionals can certainly thrive in this environment, foreclosure investors also can do very well by specializing in bank-owned properties.

First some stats that fuel Hagerty’s article (“Foreclosure Agents Thrive While Others Struggle to Survive”):

• In 2007, sales of previously occupied homes nationwide were down (only 5.65 million, down 20% from 2005)
• Membership in the National Association of Realtors has dropped to 1.24 million (it was 1.37 million in October 2006)
• A First American CoreLogic study indicates that lender-owned homes account for roughly one out of nine homes listed for sale
• According to the Greater Las Vegas Association of Realtors, foreclosure-related transactions accounted for 52% of all sales in the Las Vegas last month

These are some pretty powerful numbers if you intend to specialize in investing in lender-owned or real estate owned (REO) properties. Do not be deluded, however. Specializing in this sector is far from the land of milk and honey. Specializing in bank-owned properties is hard work—if you are a professional REALTOR®, the commissions are generally lower, the hours are longer and, increasingly, there are risks associated with entering deserted neighborhoods where a majority of the homes are unoccupied. If you are not a professional, but instead a serious investor, there is plenty of legwork that goes into every successful return on an investment. Nonetheless, for real estate professionals specializing in REO properties, the work is steady and even increasing as many of their colleagues are looking for the exit sign. For foreclosure investors, there is A LOT of money to be made in this specialized aspect of foreclosure investing.

Last week, more than 2,000 so-called “default industry professionals” wrapped up the REOMAC conference in Indian Wells, California, where they talked shop over bad conference food and (I hope) free cocktails. REOMAC is a nonprofit trade association that serves the mortgage default industry “highlighting timely industry concerns affecting day-to-day operations, and evaluation of current and prospective legislative issues facing default professionals.” As Shelley Kaye, REOMAC president, says, “Our members are facing daily changes within the current real estate market.” What kind of changes? Well take a look at some of the offered sessions:

• “REO 101 – Basics of handling REO properties, including the valuations, utilities, cash-for-keys, and property maintenance”
• “Repairs and Rehab – Explore the ongoing question of whether REO properties should be repaired or rehabilitated and to what extent”
• “Managing the Surge: Default to Foreclosure – Learn how collection efforts have changed, the use of short sales, foreclosure time line management, the use of technology, communication, and how to deal with rescission jurisdictions”

Whether you are a “default industry professional” or not, you can see that these are the issues on which people in the know are increasingly focusing. Guess what? You should too. So let’s hit some quick tips and warnings for the foreclosure investor considering specializing in bank-owned/REO properties.

1. First off, remember that the job of a bank’s REO department is to sell property acquired through foreclosure. This gives you, the person considering investing in that REO property, an edge when you sit down at the negotiating table because you can assume (in most cases) that the bank does not want to spend any more money than absolutely necessary in capital reserves earmarked for REO properties. In addition, REO properties already on the bank’s books are a liability until such time as the property is sold. In other words, be confident—the bank really does want to sell you this property.
2. While the lender is what we might call a motivated seller, the sale of REO properties generally takes longer than other kinds of sales. Be patient and plan to be in it for the long haul. While you may get frustrated that your questions are not answered quickly by the individual with whom you are working in the bank’s REO department, realize that patience, persistence and knowledge will help you prevail at the end of the day.
3. Finally, be sure to identify the current market value of the REO property and compare that to the price the lender is asking. Conducting your own comprehensive market analysis will help you decide what price to offer. Keep in mind that the lender is often trying to recoup the outstanding balance on the loan, but if the market value in the area is lower, bring this knowledge to the negotiating table. Also be sure to inspect the property personally, as REO properties are generally sold “as is.”

Overall, if you want to specialize in this type of foreclosure investing, be patient and do your homework. Knowledge is power, and the lender will be most likely to accept an offer lower than what they are asking if you can demonstrate that your offer is fair. It’s not easy, but specializing in REO properties is perhaps the most lucrative aspect of the real estate world to currently be pursuing.

A friend of mine sent me an op-ed from the Boston Globe which asked the question:

“What do ethanol and the subprime mortgage meltdown have in common?”

While it might sound like I joke, I thought the answer was good food for thought.

“Each is a good reminder of that most powerful of unwritten decrees, the Law of Unintended Consequences–and of the all-too-frequent tendency of solutions imposed by the state to exacerbate the harms they were meant to solve.”

To read the whole op-ed by Globe columnist Jeff Jacoby, read How government makes things worse.

In the late 1980s, Colorado Springs, Colorado was frequently called the foreclosure capital of the world, which got me thinking about how those “Springians” are doing now. After calling a few business contacts and reading up on the local news, it seems the news is—like most places in the country—mixed. Actually, at times, it’s downright contradictory. For example, while some contend that the huge number of financially distressed properties in the area is having a massive impact on housing prices, others say the opposite is true. How can this be? I mean aren’t there facts? Data? Stats? This is crisis, but it’s not rocket science, or is it?

According to county records, upwards of 3,500 foreclosures occurred in Colorado Springs last year. This was a record (beating the 1988 number), and it seems logical to assume that the ramifications will be far-reaching. When all these foreclosed properties are put back on the market either by the lenders themselves or by foreclosure investors, what impact are they having? Answering this question may well be the key to understanding how the sub-prime debacle will continue to affect the Nation’s economy.

Let’s hear from the so-called experts on the ground:

Bill Hurt is the owner of ERA Shields Real Estate in Colorado Springs, and he said in a recent article, “Most of the sellers, and institutional sellers, are still attempting to get true value for the property. They’re not ‘firesaling.’ And the value is still there.”

Now let’s walk across town and ask Terry Pixley, who owns T.G. Pixley Inc. Pixley, a longtime Colorado Springs appraiser, says, “We’re already seeing an impact, especially [for homes] under $300,000. I’m sure it won’t be long that [homes] above $300,000 will be showing up…. It is driving down prices, there’s no question about that.”

So which is it? To get the real scoop, I usually find the homeowner knows best. These are the guys “in the trenches,” as it were, and their statements are rarely spun or candy-coated.

Colorado Springs homeowners intent on refinancing say they are certainly seeing (and feeling!) the effect of short sales and discounted properties. After all, it’s hard to borrow what some home owners think is a reasonable amount when appraisers are constantly lowering the prices of adjacent distressed properties. Of course when these homeowners looking to refinance can’t refinance, then their risk of foreclosure goes up, and the whole nasty cycle starts over.

This cycle is why many have called for the Government to bail out homeowners. In the same way that the Fed stepped in on behalf of Bear Stearns in order to avert a financial crisis that would certainly have devastated both Wall Street AND Main Street, the foreclosure cycle threatens both the Nation’s financial markets and Main Streets in communities across America. Unfortunately, the recent show of bi-partisan support for the little guy is less than overwhelming.

As I see it, the Government plans to send in Dr. Phil to make the Country feel better. While it’s nice that people feel better, do homeownership counseling programs really solve anything? Likewise, will more regulation over mortgage loan disclosure really work? While more regulation could be a good thing in terms of weeding out the bad eggs in the industry, the Government rarely tips the scales just the right way. My Bet is that OVERregulation will stifle some of the mortgage market and make it harder to qualify or underwrite a legitimate mortgage. Of course this will result in the opposite of the intended effect.

What we really need, in my opinion, is something that’s in the Senate measure. It’s a $7,000 tax credit for people who buy foreclosed homes or homes on which foreclosure has been filed. This is what we keep talking about here at the Distressed Properties Blog—it’s about investors helping distressed homeowners. It’s about people helping communities, not the Government. Granted, this tax credit would be the Government’s doing, but it would be a step to actually getting foreclosed properties off the market, stabilizing home costs and cleaning up neighborhoods.

I just got off the phone with someone who got burned while trying to cut corners when investing in a foreclosure. I could tell you a million horror stories like his, but I won’t. Instead, I offer this simple piece of advice:

Use a real estate professional experienced in foreclosure sales when investing in a foreclosure. Why? You wouldn’t take your car to a bike shop to get it fixed, would you? To fall back on a cliche, the devil’s in the details, and the details can be mighty complex when a foreclosure is involved. You need to get the paperwork done right, and you need it done right on the first time around. Trying to save a few bucks on the front end of the sale can lose you more than you care to know on the back end.

Be smart.

“This is as good a distressed environment as we’ve seen in a long time,” says John Grayken. He is the managing partner at Lone Star Funds, which is attempting to raise as much as $10 billion for an opportunity fund to purchase residential mortgages, office buildings and hotels. “It’s a race among a number of different lenders to play this,” said Grayken.

It was no April Fools’ joke when on Tuesday Blackstone Group LP announced that they had raised a record-breaking $10.9 billion for their opportunity fund. This is the company’s ninth property fund, bringing their capital dedicated to buying real estate to almost $28 billion.

Opportunity funds like Lone Star’s and Blackstone’s are looking for at least a 20% return on their investments by taking advantage of the fallout from the subprime mortgage debacle. While you may not have $28 billion to invest, the opportunity for profitable distressed property investing is at an all time high.

How do you find those opportunities? You might try one my company’s new sites—Houses.net—where you can find thousands of distressed properties right now. During the month of March, over 100,000 people visited Houses.net, where you can search through over 30,000 sellers who are waiting for an offer…any offer.

Houses.Net stands alone as the only source for buyers searching for homes below market value. This is not a listing or foreclosure subscription service. These are pre-foreclosed, distressed and auctioned properties which have not been available until now. And even though the site is still in its Beta release and there hasn’t been a lot of attention brought to it, we received over one million page views in the month of March. This says to me that a lot of people–buyers and sellers alike–have a sincere or vested interest in distressed properties.

As Congress returns to Washington after the spring recess, the Democrats will be challenging the following statement by President Bush:

“The temptation in Washington is to say that anything short of a massive government intervention in the housing market amounts to inaction. I strongly disagree with that sentiment. I believe there ought to be action, but I’m deeply concerned about law and regulation that will make it harder for the markets to recover.“

If the Democrats have their way, the Government will assist distressed borrowers with something close to $500 billion, but the Republicans claim such a “bail-out” only passes the buck to the taxpayers. All this as U.S. Treasury Secretary Henry Paulson unveils major reforms including giving the Federal Reserve more oversight power and creating Federal supervision or mortgages.

Given the turmoil, it’s hard to imagine what a win for distressed property owners looks like. Either the Government appears to have gone easy on financial institutions responsible for the current financial crisis or it appears too heavy-handed, stifling any chance of robust economic recovery with a stranglehold of regulation and oversight.

The bottom line is that it’s going to be a while before the average American is out of the woods—in fact, those woods are probably going to feel a lot like a darkening wilderness before the Government reaches some consensus. My advice? Take matters into your own hands.

You know the basics, otherwise you wouldn’t be here reading this. Distressed property owners: there are people out there who are in a position to help you long before Washington or a recovering economy tosses you a proverbial lifering. Foreclosure investors: There are people who need your help, and there is still an awful lot of profit to be made investing in distressed properties.

Like President Bush said, “I believe there ought to be action.” I just think that action is going to have to come from the people.

Charles Wheelan’s and Morris Kleiner’s Op-Ed piece in last Monday’s Wall Street Journal makes a good point related to my blog entry a few weeks ago about Treasury Secretary Henry Paulson Jr. announcement of plans to establish stringent national licensing standards for mortgage brokers. Like Wheelan and Kleiner argue in the Journal, I do not believe Paulson’s plans are a good idea. “National licensing standards would raise costs,” say Wheelan and Kleiner, “not quality.” I couldn’t agree more.

For more information, read We Don’t Need a Mortgage Guild by Wheelan and Kleiner.

You’ve seen the ads if you ever visit Craigslist.com—“Exclusive Foreclosure Listing Leads” or “Bank Owned, R.E.O., Short Sale, and Pre-Foreclosure Bargains in YOUR COUNTY HERE”. You’ve thought to yourself, “Isn’t that what that Duane guy at the Distressed Properties Blog is always talking about? Taking advantage of the sub-prime fiasco by investing in foreclosures or soon-to-be-foreclosures?”

First, I’m glad you’ve been reading the Blog and that you are a savvy investor looking to profit from the mortgage meltdown while helping distressed homeowners get their financial lives back in order. Second, and perhaps more important, however, I want to explicitly warn you about these foreclosure-listing services. While some may put you ahead of the curve, most are little more than somebody looking to make a quick dime without providing any real value to you, the potential customer.

The ad looks something like this perhaps:

“Bank Owned, R.E.O., Short Sale, and Pre-Foreclosure Bargains in YOUR COUNTY HERE.”

“Buyers or Investors, are you looking for real estate bargains? Look no further, FORECLOSURE LISTING COMPANY HERE can filter through the 4000+ distressed properties in YOUR COUNTY HERE and find that ‘Gem in the Rough’ or ‘Ready to Move In’ property.”

Then there is some contact information that will usually take you to a sales rep who will try to sell you the company’s foreclosure list.

Advertised foreclosure listings have always been available for a fee. Anywhere from $50 to several hundred dollars will buy you a list advertized as distressed properties, but some of these lists, especially given the current market situation, are really little more than a con. Be extra wary of the ones that advertise their listings as “exclusive leads.”

You have to ask yourself where the party selling the foreclosure listings obtained their list. More often than not, these are freely available lists (contact your county’s Register of Deeds office and ask where they publish foreclosure notices, for example) and far from exclusive.

Reports to the Better Business Bureau about companies selling exclusive foreclosure listings have skyrocketed recently. Don’t get suckered into a scam. Instead, my advice is to do your homework. Network effectively, scour the neighborhoods for distressed properties and properties “for sale by owner,” and seek out foreclosure notices. The leads you generate from these activities will most likely be far better than what you get from responding to that Craigslist ad that seems too good to be true.

Studies have shown that a properly staged home will sell, on average, in half the time for up to 10% more. While you can hire a professional stager, you can also do it yourself by following these simple tips:

1. Only One Chance to Make a First Impression

That’s right—the front of the home and, specifically, the front entrance are critical areas when staging your home for a showing. Spend a day focused on all those pesky landscaping chores like weeding and replanting, putting down new mulch and, of course, mowing the lawn. Make sure the front door is clean, clear of cobwebs and clutter from the porch. Polish the door knob and wash any glass. Be sure all outdoor lights are functioning and that a new door mat welcomes the potential buyer.

2. Make Room for the Sale

We all know that buying a home is often about space—people frequently want the most space (and the most functional space) they can get for the money. When staging your home, clear the counters of appliances like coffee pots and toaster ovens. Clear the bathrooms of cluttered toothbrush holders and hair paraphernalia. Empty closets so they appear cavernous. Clear desks and tables of piles of “stuff.” The more open you can make the space appear, the better chance you have of making a solid impression and selling your home.

3. Furnish Your Way to Financial Success

An empty house is not very appealing to buyers. It’s hard for them to envision themselves living in the space if it’s completely bare. Don’t go overboard, but do add some furniture to help buyers picture themselves in the house. A kitchen table with matching chairs, for instance, can be the perfect place for potential buyers to see themselves living in the home. Also fresh flowers can bring life into an empty home. Consider using furniture from your own home (assuming it’s tasteful and in good repair).

4. Set the Scene for a Sale

Like a play, you should attempt to appeal to other senses besides sight. Soothing, tasteful music in the background can add emotion to a sale. Open the windows if it is nice out so that the home breathes. Make sure there are no strange, strong or offensive odors. Imagine yourself as the stage manager just before the curtain goes up. What do you want the audience to see?

Either as a distressed homeowner or as a foreclosure investor, your goal is to sell the home for the most money in the least time. Following these simple staging techniques can go a long way to achieving that goal.

Today I want to offer a quick tip. My grandmother used to tell me that the most important things in life were the simplest—those things that are right in front of your face. This is one of those.

I wish I had a home for every time I have seen someone buy a foreclosure and not IMMEDIATELY a homeowner’s insurance policy for the property. It baffles my mind that people take on this kind of risk. We all know that foreclosure investing isn’t a spectator sport, and, as such, risk comes with the territory. But leaving yourself exposed this way is just asking for trouble.

Imagine all that could happen between when you purchase the property and when you take possession of the property, especially when a distressed homeowner is being forced out of his house. Protect yourself. Buy an insurance policy on every foreclosure in which you invest IMMEDIATELY.

It will make my grandmother happy.