Investing in preforeclosures
Buying foreclosures has replaced stock investing in some circles
as the hot topic of after-hours conversation. Those who succumbed to the siren
song of tech stocks in the late 1990s now seem equally intrigued by the return
potential on distressed properties.
A good place to find these cash-flush
speculators is at foreclosure auctions, according to longtime Tampa,
Fla., property investor Tom Lucier. What these newbies don't realize
is that by the time a property reaches the auction block, it's probably
worthless as a short-term investment.
"You've got a lot of interest in foreclosures
because of all the stock-market refugees who left the market after
1999. They've come into real estate, they're buying without a clue,
and most of them are overpaying. As a result, you've got a real
estate market that's on steroids. In some markets, it's unbelievable."
Yes, Virginia, there is gold in those foreclosures.
The trick is to find the distressed property in preforeclosure,
before the hammer comes down.
What is preforeclosure? It's that period between
when the lender files a foreclosure lawsuit or notice of default
in the public records and the date the property is to be sold at
public auction or trustee's sale. The average time it takes to foreclose
on a property varies widely by state, from 90 days to 10 months.
It takes some research to find preforeclosures and
a good deal of persistence and diplomacy to convince an already-distressed
homeowner that you're part of the solution, not the problem.
But once you've scaled the short learning curve, the
sky's the limit, according to Bill Bronchick, Denver attorney and
author of "Flipping
Properties: Generating Instant Cash Profit in Real Estate."
"It's simple, but it's not easy. It has
a higher learning curve than the stock market, but there is a directly proportional
measure between experience and results. In the stock market, people can do it
for years and still be bad at it. In real estate, the more you do it, the less
risky it gets," he says.
Lucier, who passed along his 20 years of preforeclosure
buying experience in "The
Pre-Foreclosure Property Investor's Kit," estimates you
could supplement your day job to the tune of $60,000 a year doing
preforeclosures on the side.
"Your only chance to buy someone's equity at
50 percent or less is to deal directly with the owner in foreclosure
prior to the property being sold," he says. "That's you're
only hope. It's hard work, though. Damn hard."
As an investor, you'd be hard-pressed to find a market with a brighter
future than foreclosures. Just as homeownership is at an all-time
high, so, too, are the number of delinquencies. Delinquent loans,
or homes in the preforeclosure process, currently hover around 480,000
nationwide, roughly 1.12 percent of the 42 million new loans, according
to Doug Duncan, chief economist of the Mortgage Bankers Association,
which oversees the quarterly Delinquency Survey.
the current record numbers of delinquencies were fueled in part by the recession,
the continuing export of manufacturing jobs combined with the explosive growth
of subprime lending all but guarantee that foreclosures will remain at current
levels or even increase in the coming years.
And where there's
a growth market, there's also a feeding frenzy of ready investors.
Realtor data and other data have shown that the share of home purchases being
done by investors has risen," says Duncan. "Not all those investor homes
are bought out of foreclosure, but certainly some are. Everyone would agree that
it's happening, but to measure the exact degree is difficult."
You can buy a foreclosure at three stages in the process: preforeclosure,
at public auction, and postforeclosure, at which point the property
has been foreclosed upon and taken back by the lender (these orphans
are known in the business as "REO" for "real estate
Courthouse auctions are fraught with risk: Bidders
are generally not allowed to inspect the property (often occupied
by hostile tenants), the property or title may not be insurable,
and in 11 states, the prior owner, sublien holders, or even the
Internal Revenue Service may redeem the property within a set period.
All sales are final, terms are fixed (no negotiating), and the competitive
bidding in today's market leaves little room to profit.