I started out buying houses from people who were in default on their mortgages by giving them as little cash as possible, maybe assisting them in finding someplace move, and renting or selling their houses without using much cash at all. That approach didn't work, very well with lenders who had taken back houses in foreclosure, and who now wanted to liquidate them to rebuild cash reserves . . .
Lenders who have had a spate of foreclosures are reluctant to once more enter into the lions den with an impecunious would-be entrepreneur who is long on repayment promises and short on cash or collateral. I had to look elsewhere.
Rather than expect distressed lenders to take a chance by once again lending to what they deem to be a high-risk borrower, it's more productive to raise the cash in another area where lenders are more liberal; or to raise cash from small investors and bring it into the bank with you. Of course, without using any institutional credit the aggressive pre-foreclosure buyer can buy, fix, and sell the houses, and pay off any existing non-assumable loans, before the lenders become aware that the properties have changed hands.
Anyone who has labored in a job at modest wages for so-called financial security are going to be startled at their earnings when they start buying and selling foreclosed properties. Figure it out for yourself, if you could make a profit of $15,000 net profit per house, and flip a house every two months, your gross annual income would be $90,000.
If you can borrow the money to work with, do it. If you can find investors who will put up the money for a share of the profits, do it. If you have to rely solely upon your ability to find properties ahead of the competition and use negotiating skills to convince pre-foreclosed owners to hand over all or part of their equity for payment and liability relief, do it. Or, do any and all of the above. It's up to you to figure out where you fit in to this scenario: Here are some ideas:
1.) If you can demonstrate that you possess the skill required to generate decent yields either by flipping houses or fixing houses, you will discover an eager cadre of lenders among small, passive investors who will seek out your acquaintance
2.) The same thing holds true for those who can buy or “sandwich lease” houses in the pre-foreclosure markets; and who have the management skills to be able to hold them for the long term as income investments.
3.) Because institutional lenders are highly regulated, even in an environment where credit is plentiful for those with high credit scores, some real estate opportunities fall outside institutional lenders' underwriting requirements. Thus, there is ample opportunity for private lenders willing to undertake reasonable risks to provide “shared appreciation” financing for wheeler-dealers and longer term “participation loans” to those who buy houses as rentals.
4.) By having a ready market to sell into, wheeler-dealers and fixers who buy at wholesale can borrow at high yield rates on short term private investor loans and be assured of “take out” financing when they sell to owner-occupants at full retail mark-ups. The best source of financing remains institutional lenders who will provide permanent mortgage financing to those who buy homes at retail prices from real estate investors and speculators.
In spite of record credit card defaults and bankruptcies, lenders are still making mortgage loans on owner-occupied houses at up to 100% loan to value ratios to those with good credit and payment records. Institutional lenders are currently still approving 100% loans in selected zip codes for borrowers with high FICO scores; and 90% loans to owner occupants with less-than-perfect credit scores. They're also approving these same borrowers for home-equity loans exceeding 100% loan to value when the loan proceeds will be used to reduce credit card balances and short term consumer debt.
In the face of all of this activity; one wonders who the buyers are who are willing to pay full retail prices for houses within a few weeks of their sale at wholesale prices? See if you can see any opportunity in the following scenario: Buyers are buying because it has never been easier or cheaper for them to own a home, or to move up into a larger home. From the standpoint of a current home-owner who wants to move into a larger house, or into a better neighborhood and school district, today's low mortgage rates make it possible to move up several thousand dollars in value with little change in payments. Here's an example:
30 year $100,000 loan financed at 8%
Monthly P./I. Payment: $733.76 30 year
$130,000 loan financed at 6%
Monthly Payment: $779.42
Moving up into a house costing 30% more than the house they are renting only costs them $1.50 more per day.
This math isn't lost on those who have been locked out of the housing market as renters for years. With the ability to buy a home literally with nothing down, more and more tenants are buying the houses they've been living in. As a result, the supply of good rental homes has dwindled over the past few years. In the meantime, rents have continued to provide yields that are above those provided by mortgages. Here's another example:
$140,000 house:
If rented; monthly rent in many areas: $1200. per month.
$3600 to move in consisting of first month's rent, plus deposit equal to one months rent, plus last month's rent in advance.
In contrast, $140,000 house if purchased:
Monthly payments: $839.37 (plus taxes and insurance, repairs, association fees, etc. LESS personal income tax deductions for interest and taxes)
In other words, tenants can buy a home with less down payment than a rental deposit, anti pay for them with fixed mortgage payments that are less than the rent would be for the same quality home. I've never seen a house market where it was easier to sell a home to someone who wants to move up, or to a tenant.
Why are lenders willing to continue to make new loans on houses that have recently been foreclosed? The answer to this question lies in the unique aspect of today's market in which lenders can borrow at such low rates, and make such high “spreads” on mortgage loans that they are eager to take on the risk of being forced to foreclose from time to time.
One shouldn't lose sight of the fact that, even though home-owners and junior lien holders may be wiped out, at mast foreclosure sales first mortgage lenders are paid off in full. They are repaid all their legal costs and accrued interest. By recycling the sale proceeds into new loans as soon as possible, their bottom line profit hardly sees a dent.
When a person has sources of cash, whether from institutions or private investors, they can take a reasonable risk of having anon-assumable loan called by a lender, and proceed to buy houses financed with defaulted non-assumable loans. In the absence of any significance competition, they can proceed with impunity to acquire as many homes as possible, subject to these non-assumable loans. By using cash sparingly to induce occupants to sell their homes “subject to” their defaulted loans; and to perform essential and cosmetic repairs, fantastic yields can be obtained.
