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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.

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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."

The foreclosure boom
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.

Although 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.

"The 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."

Foreclosure basics
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 owned").

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.

-- Posted: June 16, 2005




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