Opportunity Comes In All Shapes and Sizes

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Topics: Foreclosures

     Changes that are going to be bad for a lot of people are going to be good for those who can exploit them. I must confess to being of two minds. On the one hand, I’d be blissfully happy if the current real estate party never came to an end. It has created fortunes for millions of people who would never have had any other way to rise into upper middle class comfort. Indeed, I’ll lament the vanishing of the extremely good times we’ve all enjoyed these past few years. On the other hand, tight credit promises a cornucopia of opportunity for those who buy foreclosures.

     Today, it‘s hard to imagine foreclosure sales where hundreds of properties are offered for sale with no bidders. One group of victims will be mortgage companies and banks. When confronting mounting inventories of foreclosed homes for which there will be no bidders they run the risk of being shut down or merged into other banks; with a resultant loss of jobs. I’ve seen bank’s entire mortgage loan departments shut down. In such situations, these lenders have become active sellers of their foreclosed property inventories at deeply discounted cash prices. The more desperate among them often offer extremely attractive terms to financially strong buyers; including long term financing with no down payment and zero interest.

     It is possible to buy from lenders who have taken property back at prices far below the opening bid they set at public sale. At one sale, the lender’s winning bid for a condo was $46,000. After the sale, in private, the banker agreed to a $15,000 price. The mortgage officer explained that other condo owners in the same project might stop making payments if they discovered that they could buy comparable foreclosed units at 30 cents on the dollar. Prices can be unbelievable. I bought a water-front condominium for $17,500. Using the cash values in a life insurance policy, I bought the loan on a soon-to-be-foreclosed 2700 square foot home in a waterfront community for $14,500 cash.

     Lenders who bundle their loans to collateralize securities which they sell into the stock market will find fewer investors when loan defaults and foreclosures rise. Lenders who can’t sell their loans will see profit margins shrink as defaults climb. Interest rates will creep up and credit markets tighten. This will damage those who rely upon institutional credit to buy or sell houses.

     Understanding the lenders’ limitations and being able to deal with them can create lots of profit for those who find ways to reach holders of defaulted loans. When times are good, many lenders aren’t willing to offer “Short-Sales” and loan discounting because it can force them to revalue their entire loan portfolio. But, as lenders load up on foreclosed homes because of a lack of bidders at the minimum bid levels, government mandated liquidations are going to increase. At the point that mortgage lenders come under government pressure to liquidate their real estate there is a remarkable adjustment in their attitudes. One such house on which $285,000 had been loaned, which the lender took back at a prior foreclosure sale, was liquidated for $90,000.

     In a tight credit market, recognizing a lenders’ precarious position and being able to deal with them in innovative ways can create more profit than buying from home owners or at foreclosure sales with less competition. Many lenders don’t want to go through the foreclosure process and will often agree to a “short sale” whereby they accept less than the loan balance in full payment; or they sell their defaulted notes for a fraction of their value.

     One way to capitalize on this market is to buy junior liens on foreclosed property and to either buy the property at discount and bring payments current, or to let it be foreclosed then bid the price up at foreclosure to include the full face value of your second lien. You’ll be using your Note to bid, while forcing the competition to bid with cash. You’ll more or less be buying your own money back, but, if the property is sold at a price in excess of your liens, all the discounted liens will be paid off. You’ll either wind up with the house or with an easy profit when your liens are paid off at full face value plus accrued interest.

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