How to Buy Foreclosed Real Estate

For a Fraction of Its Value

Theodore J Dallow, Don Ayer

• Publisher: Adams Media
• Year: 2008
• ISBN:
  9781440515521
• Topic: Business
• Subtopic: Real Estate
• Index: Business

As foreclosures increase, so do the odds of finding the home of your dreams! You can ride out the storm in the housing market and find great real estate at amazing values. Whether you're looking for a new home or an investment property, this step-by-step guide will show you how to find, buy, and finance foreclosed property. This new edition includes information on: -The current state of the housing market and the opportunities it offers
-How to find foreclosed property on the internet
-Short selling and other techniques for buying foreclosed real estate.You'll also learn how to:
-Research properties
-Get the best financing
-Manage investment properties
-Limit repair and remodeling costsReal estate experts Don Ayer and Dick Pas have revised Theodore J. Dallow's classic text and added invaluable new material in the process, making this the only guide you'll ever need to buying foreclosed property.

PART ONE
How Did We Get Here?

CHAPTER 1
If 75 Million People Lose, Say,
$35,000 Each, Is That a Good
Day at the Office?

THE FEDERAL GOVERNMENT estimates that there are 75 million single-family homes in the United States. For these homeowners, their home and other real estate holdings (typically a second home, a recreational property, or a small number of rental properties) constitute a significant portion of their net worth.

Equity in real estate is calculated according to the following formula: current market value, minus expenses of sale, minus debt against it (either purchase-money mortgages taken out to buy the property, or refinance loans or home equity loans). That equity can increase, stay flat, or decline. Remember those 75 million single-family homes? What happens to their value has huge implications, not only for the families that live in them but for the nation’s economy.

For example, if a good portion of those 75 million properties now have, say, an average market value of $35,000 less than in mid-2005, the height of the last boom (a working estimate of the decline in the value of American single-family homes since the beginning of the decline in the real estate market), any calculator needs many digits to compute the total impact.

Sad to say, many homeowners might be relieved to learn that their homes had suffered a decline in market value of “only” $35,000. Many homeowners have seen the value of their real estate tumble to far lower depths than this.

Common sense would suggest that along with such widespread drops in real estate values, U.S. consumers were curtailing their retail spending by a proportionate amount. Surprisingly, through mid-2007, the huge decline in real estate equity in many markets has failed to seriously curtail consumer spending, which has been remarkably strong in the face of these numbers. MasterCard, whose revenues are a significant measure of consumer spending, reported in mid-2007 that its first-quarter profits had soared by 70 percent, led by an almost 20 percent jump in the number of credit card and debit card transactions.

What has been going on? Do employment rates outweigh the impact of home values when the consumer decides whether or not to spend? Apparently so. It seems that consumers are adjusting to their changed circumstances, or at least had done so through mid-2007. Here’s why consumer spending initially remained so robust. The fact is that it’s hard to break previous spending patterns and habits, even if we want to. The majority of Americans spend a lot of time traveling in their cars, along American roadways lined on both sides with business establishments whose goal is to make them stop their cars, get out, and spend money without regard to their discretionary budgets.

Is it possible to make a discretionary real estate purchase when the conventional wisdom is that the local real estate market is flat or declining? Yes, but the large majority of people will not.

As economic beings, we are predominately creatures of habit, strongly influenced by conventional wisdom. If we understand that conventional wisdom can be self-fulfilling, we have very valuable information. By absorbing this and being aware of our own and others’ habits, we can help make our own best economic decisions.

CHAPTER 2
Moving on to Mortgage Lending

OLD WESTERN MOVIES and some holiday movie classics may leave the impression that foreclosure actions arise from greed, heartlessness, and even pure malevolence. These movies make colorful tales, but there can be plenty of other reasons that properties go into foreclosure.

These days, mortgages have become big business. In this nation’s retailing of everything from groceries to consumer electronics, appliances, home-improvement items, and gas for the car, the large firms now dominate. The same is true in the mortgage loan business. If you’re in the market for a mortgage loan, you will find that the large mortgage loan servicers dominate.

Usually the source of a consumer’s mortgage loan is a lender with a local office (such as a bank, savings bank, mortgage broker, mortgage banker, or credit union). The most aggressive lenders— that is, those most willing to lend—are mortgage brokers, who in recent years have made roughly two-thirds of all residential mortgage loans. Clearly, mortgage brokers have been leading the way in making loans to borrowers who were previously unqualified to acquire a home.

The vast majority of all these loans made by all lenders are now sold in the secondary market. And many of these mortgage loans are funded and purchased right “at the table” as the loan closes. This enables the local lender to have plenty of funds for the next borrower. Loans funded “at the table” use money from the next lender up the line so the local lender actually uses not even a dime of its own money.

Once mortgage loans have been made and sold, they are likewise “serviced.” That is, they are administered in all aspects, including collecting payments, paying taxes and insurance (for loans with escrow accounts created to hold the funds to pay those items), collecting late fees, and dealing with delinquent borrowers—up to and including referring for foreclosure and even administering foreclosure. These mortgage loan administration activities are done by or on behalf of institutional investors who are almost always in a town or city other than the one where the real estate is located.

Even loans made by the local office of a multi-office bank chain and serviced by that bank chain have in all probability been sold and are being serviced for the institutional loan owner according to its directives, procedures, and requirements, including delinquency, default, and foreclosure aspects. And in many cases, the foreclosure processing, legal work, and property sale are handled by specialist firms serving a number of institutional investors (though the institutional loan servicer or loan owner retains some or all of policy- or final decision-making control).

The widespread institutionalization of mortgage lending in recent decades was launched by Congress with its creation of the following government-sponsored entities (GSEs): the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Government National Mortgage Association (GNMA). These entities are known respectively as Fannie Mae, Freddie Mac, and Ginnie Mae. These GSEs were created to guarantee and purchase mortgage loans from local lenders so there would be sufficient funds for local lenders to continue lending in furtherance of the national goal of encouraging home ownership in the United States. Fannie Mae, Freddie Mac, and, to a lesser extent, Ginnie Mae have become household words because of the huge number of mortgages these entities purchase.

The GSEs play a huge role in providing liquidity (that is, plenty of funds) for mortgage lenders and borrowers. With their loan purchase requirements (or underwriting standards) and their automated loan-underwriting systems, the GSEs also play a huge role in establishing the borrower characteristics needed for approval of the loans they are purchasing. In the years before subprime or nonconforming loans were made on such a wide scale, a nonapproval by the underwriting system used by these entities meant the end of the road for a loan applicant at many local lenders. Some lenders still operate in that manner. However, the majority of lenders will now agree to lend if the GSE approval (agreement to guarantee/purchase a particular loan) is at a lower price to the lender (meaning the lender will charge the borrower a higher interest rate), or if another wholesale lender (such as a wholesale lender specializing in subprime loans) agrees to purchase that particular loan from the local lender. Local lenders very often require a favorable decision to purchase a particular loan before they will agree to “close that loan.”

The Good Old Days?

Prior to the creation of the GSEs, before the widespread availability of funds for mortgage lending, and predating Congress’s earlier creation of the Veterans Administration (VA) and Federal Housing Administration (FHA) low- or no-down-payment mortgage-loan guarantee programs, local lenders previously often had little or absolutely no money for mortgage lending. The Good Old Days of mortgage lending were hardly good in the eyes of most observers.

In the last decades of the nineteenth century and the first decades of the twentieth century, most buyers found that their home acquisition options were limited. They could chop logs or dig sod to build a house. They could pay cash for a house. Or they could hope they knew a banker who would agree to lend perhaps 50 percent of a home’s purchase price if the banker liked them and was willing to lend them some of the bank’s limited (often very limited) funds for a mortgage loan.

When all was said and done, about the only group that could be assured of mortgage loans was the group that played cards with the banker or the group whose spouses played cards with the banker’s spouse. Mortgage lending was almost that tight.

The government determined that more widespread home ownership was in the public policy and financial interests of the United States, and it created low- or no-down-payment mortgage-loan guarantee programs for the FHA and the VA. The FHA program was initiated in the 1930s. The VA loan program was authorized for World War II vets in 1946. At this time, the government also created the Freddie Mac, Fannie Mae, and Ginnie Mae entities. The purpose of these GSEs was to guarantee other (non-FHA and non-VA) mortgage loans and to purchase those loans from local lenders to further assure that mortgage funds were readily available throughout the country. The GSEs also gathered the mortgages they purchased from local lenders into bundles or pools, which institutional investors then bought as passive investments.

These investments were passive because other entities serviced the mortgage loans (collecting payments and so on), an arrangement that continues to this day. The GSEs are not technically government agencies, but their guarantees are treated in the marketplace as if they were.

This all means that any particular mortgage loan is most likely part of a pool or bundle of mortgage loans. It is owned as part of that group of loans—that “bundle or pool”—by a large financial institution or investor. That institution or investor could be a bank, life insurance company, pension fund, college endowment, or even one of the new investment funds or so called hedge funds.

Wall Street firms first acted as sales agents for the GSEs, another role they still perform. These Wall Street firms then became highly creative in the use of the mortgage loans. Increasingly, these bundles or pools of mortgage loans backed up or became the collateral (the asset) behind new “mortgage backed securities.” These new “mortgage-backed securities” became additional highly sophisticated offerings that appealed to institutional investors.

From the late 1990s through 2005, some of these investment options—dazzling in their complexity—fueled the rapidly expanding growth of subprime and nonconforming loan products available to lenders and borrowers at the local level. This also contributed to the run-up in real estate prices at that time.

Mortgage funds thus became increasingly available to an ever-expanding range of potential owner occupants and real estate investors. These mortgages were supplied by a mix of traditional and highly aggressive local lenders.

Even after the highly publicized subprime lender failures of early 2007 and the sharp subprime (nonconventional) loan contraction that followed, there were still more borrower opportunities for mortgage financing than was the case in all but a few years of the last century. Remember those card-playing days.

The principal characteristic of all recent mortgage lending is the involvement of large institutional investors at all stages of the loan process.

The point of all this background review is to help you understand that foreclosure and foreclosure option decisions are, in the huge majority of cases, made either by specialist firms or by specialist personnel of mortgage servicers working for or on behalf of large institutional investors.

It’s all business (still with significant, maybe more, opportunities), and you’ll need to be businesslike in any lender negotiation or sale after foreclosure in which you wish to be successful.

CHAPTER 3 Important Recent History

HOW DID WE GO from the Great Real Estate Boom that characterized the first half-decade of the twenty-first century to the Great Real Estate Bust that seems to have claimed the second half of the decade?

Let’s take a look. Understanding what happened in recent years is essential to our being able to know which way real estate values will run at any time in the future.

How far back did the run up to the Great Real Estate Fall reach? The answer to that question depends somewhat on how you count, and also which real estate market your are watching

In recent decades, the United States has weathered more than a handful of crises that could have tanked the economy and the real estate market with it, including these:

• The collapse of the savings-and-loan industry of ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• FOREWORD
• PART ONE: How Did We Get Here?
• PART TWO: How to Buy Foreclosed and Distressed Properties
• PART THREE: The Road Ahead
• APPENDIX A: Frequently Asked Questions
• APPENDIX B: Checklists
• APPENDIX C: Standard Buyer’s Agreement
• APPENDIX D: Glossary of Crucial Terms
• ABOUT THE AUTHORS