Investors defaulting to make money

Editor's note: Reposted with permission from TheRealDeal.com. Click here to view original post.

By ALEX ULAM

For most homeowners, foreclosure is like a fatal illness that starts with losing control of their finances and ends with a sickening feeling when the bank finally seizes the property. Post-foreclosure, a homeowner's credit rating gets trashed and he can be in financial purgatory for years, making it nearly impossible to buy or rent property.

But while foreclosure typically spells disaster for homeowners, for some New York City investors it may actually be a good business decision.

Indeed, foreclosure doesn't have to be a money-losing proposition, especially for the small-time investor who borrowed money to buy townhouses or condominiums, according to Augustine Diji, a Manhattan-based lawyer who helps investors drag out the foreclosure process for as long as possible.

A depreciating real estate market and adjustable-rate mortgage resets have changed the equation for many of Diji's clients, who include a tenured college professor as well as a restaurant owner. Instead of making mortgage payments, these investors are voluntarily choosing to go into default, sometimes before they are in dire straits financially, and pocketing all the rental income they can.

It is not just investors who are walking away from their financial obligations.

The crash in real estate values is prompting a significant number of property owners in general to make "strategic" decisions to default on their mortgages, according to a recent study by the University of Chicago's Booth School of Business and Northwestern University's Kellogg School of Management. The study found that 26 percent of mortgage defaults were by homeowners who had money to continue making payments, but had chosen to not to.

But investors have much less incentive to hang onto their properties.

For many investors with properties that are about to be underwater, it doesn't make sense to continue making mortgage payments, said Diji, who is generally able to buy his clients an extra year in foreclosure before the banks finally seize the property.

"The smart people say this is a great way of getting equity from a property," he said. "Because you cannot refinance it, you can never sell it, it is depreciating, and it is going to be upside-down at some point -- so you just take the cash flow and let the bank eat the loss."

While low-income homebuyers in New York City dominate the foreclosure rolls, many well-heeled investors in condos and small multi-unit rental buildings are joining their ranks. Lis pendens, or preliminary foreclosure notices, were filed on 194 non-owner-occupied condos in the five boroughs in the first two quarters of 2009. That was 23 percent of the total citywide lis pendens, according to PropertyShark.

For townhouses, there were 806 lis pendens notices filed for non-owner-occupied two- to four-family dwellings in the first two quarters of 2009, 14 percent of the total citywide. ...CONTINUED

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