Virtually all of today’s home sales and mortgage refinance statistics are extremely positive, primarily due to the record-low home mortgage interest rates. Yet, home mortgage foreclosures statistics are also high in many communities, despite a robust national home sales market.
But just a few weeks ago, HUD (U.S. Department of Housing and Urban Development) held a nationwide auction of more than 4,000 of its FHA-foreclosed houses. Why the disparity in near-record home sales and refinancings coupled with huge numbers of foreclosures? There are many reasons.
WHAT CAUSES HOME FORECLOSURES? As a long-time investor in houses at various stages of the foreclosure process, I’ve learned there are many reasons why some homeowners stop paying their mortgages.
Statistically, less than 1 percent of homes go through all or part of the foreclosure process each year. But the result is thousands of houses and condos are lost by their owners due to foreclosure.
The primary causes of residential foreclosures include divorce, unemployment, death or serious illness in the family, drug and alcohol addictions, mental problems, and local economic conditions.
Whatever the cause of the mortgage default, somebody is going to profit. If you didn’t cause the homeowner’s problem, the person who benefits might as well be you.
THE THREE WAYS TO PROFIT FROM FORECLOSURES. To profit from the foreclosure procedure, it is necessary to understand how the process works. There are three basic opportunities to profit from residential foreclosures:
1–THE LENDER FILES A JUDICIAL LAWSUIT OR RECORDS A NOTICE OF DEFAULT. Although exact procedures vary in each state, the first step in the foreclosure on a mortgage, deed of trust, mechanics’ lien, income tax lien, judgment lien, or homeowner’s association lien is to file a judicial lawsuit or record a notice of default.
This action (a) gives public notice of the start of the foreclosure, and (b) provides a foreclosure buyer with their first profit opportunity. It also gives the defaulting homeowner time to sell the home or cure the default and avoid loss of the home by foreclosure.
During the reinstatement period, which can be as short as 21 days in Texas, or as long as six to 12 months in some states, the homeowner can resolve the problem such as by refinancing or selling the property.
This reinstatement period creates the first profit opportunity for buyers who contact the defaulting homeowners to see if the property can be purchased, often at a bargain price. However, buyers should understand they will purchase “subject to” all existing encumbrances on the property.
For example, suppose a mortgage lender is foreclosing on a first mortgage because the payments haven’t been made for several months. A buyer who purchases during this reinstatement period buys “subject to” the first mortgage and any junior liens such as a second mortgage, mechanics’ lien, income tax lien, judgment lien, and unpaid property taxes.
The benefit of buying during the reinstatement period is some homeowners will sign a quit claim deed to the buyer and walk away for a payment of just a few thousand dollars. The buyer then takes over the existing encumbrances.
Another benefit is the buyer can make their purchase offer contingent on a title report to verify the exact amounts of any junior encumbrances. Still another buyer benefit is the opportunity to inspect the property, something that is usually not available during the next foreclosure purchase profit opportunity.
2 – THE FORECLOSURE SALE AUCTION WIPES OUT MOST JUNIOR LIENS. The second step in the foreclosure process which creates a second opportunity for buyers is the actual foreclosure sale auction. Exact procedures vary by locality, depending on whether the auction is a judicial sale or a private sale, such as a trustee’s auction.
The sale might be conducted by a judge, sheriff, court referee, or independent trustee. If there are no bidders at the auction sale, the foreclosing lender or lienholder usually submits a “credit bid” for the amount owed, plus costs and legal fees or other foreclosure charges, and obtains title to the property.
Successful bidders at foreclosure sales often obtain incredible bargains far below the market value of the property. Other times they overpay, later discovering the property is in bad condition or the displaced homeowners “trashed” the property by stripping it. However, sometimes the home is in excellent condition. To illustrate, I recall buying a foreclosed three-bedroom house, which only needed minor cosmetic fix-up work and paint costing a few thousand dollars.
When bidding at a foreclosure auction, be extremely careful. For example, I’ve heard bidders make untrue remarks in an attempt to mislead other bidders, such as “We’re bidding on a second mortgage aren’t we?” when we other bidders thought we were bidding on a first mortgage foreclosure.
A major advantage of buying at the foreclosure auction is any junior loans and encumbrances are wiped out. To illustrate, if the sale is on a first mortgage, the second mortgage, a home equity loan, mechanics’ lien and judgment lien would be wiped out. For this reason, it is often profitable to buy at the foreclosure auction rather than from the defaulting homeowner during the reinstatement period.
But a major disadvantage of buying at the foreclosure auction is cash is required. Sorry, this is one place your Visa, MasterCard or American Express card are not welcome. Some foreclosure auctions require immediate cash but others give the successful high bidder anywhere from 24 hours up to 30 days to pay the cash.
3 – BUY AFTER THE FORECLOSURE AUCTION. But you’re not out of luck if you don’t have enough cash to buy at the foreclosure sale auction. A surprisingly large number of foreclosure properties do not sell at their foreclosure sales. That means the foreclosing lender takes over the property.
Most foreclosing lenders do not want to own foreclosed properties, as shown by the recent gigantic HUD nationwide sale of its foreclosed properties. Lenders earn their profits from renting money, not from owning foreclosed homes.
However, a few lenders earn huge profits from their foreclosures, but they are the exception rather than the rule.
Personally, I have had success purchasing foreclosed properties from lenders by immediately after the unsuccessful foreclosure auction sending an overnight Federal Express letter to the lender’s president, enclosing my purchase offer to purchase for just slightly more than the amount of the foreclosed loan.
Of course, I know my letter never reached the lender’s president. But a FedEx overnight letter almost always receives immediate attention and is delivered to the appropriate person in charge of the lender’s REO (real estate owned). If my offer, which includes a substantial deposit check, isn’t accepted, at least I usually receive a polite phone call or a counteroffer from the foreclosing lender.
A big advantage of buying from some foreclosing lenders is they often offer excellent mortgage easy financing to quickly get rid of a property they don’t want to own. If the property is in especially bad condition, in my accompanying letter I include photos and say, “By the way, are you aware of the horrible condition of this property and the probable code violations?”
My offer to take the residence off the lender’s hands, including eviction of the foreclosed homeowners, usually receives instant attention. By the way, I’ve found the defaulting homeowners often want to continue occupying the home as tenants so eviction often isn’t necessary.
HOW TO LOCATE LOCAL FORECLOSURE BARGAINS. Exact procedures for locating homes in the three stages of foreclosure vary by community. Many cities and counties have local subscription publications which list these properties. There are also Internet subscription sources.
Ask local real estate attorneys, title insurance, and real estate brokers for the best foreclosure list sources in your area. The best Internet website I’ve found is www.foreclosures.com. It provides a wealth of state-by-state foreclosure laws, plus foreclosure lists and advice for most states. My special report, “How to Profit from Foreclosures and Other Bargain Distress Properties,” is available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.