Uncle Sam is not looking to build up a fine real estate portfolio. Nor is he interested in flipping properties like hotcakes. Nevertheless, the U.S. government is taking ownership of a growing number of foreclosed properties that secured government-guaranteed loans gone bad.
And with stepped-up efforts by politicians to alleviate the pain of swelling foreclosures, it’s likely that both national and local governments will end up holding the bag on even more repossessed properties.
All this translates into potential opportunities for real estate investors and bargain homebuyers, who can mine government-owned foreclosures to find discounted property. But there are also some obstacles to purchasing property from the government, and prospective buyers should be aware of these potential pitfalls before they make any offers to Uncle Sam.
Given today’s lackluster economic climate, real estate investors and buyers who can locate and purchase government-owned foreclosures have a tremendous opportunity to find good deals.
Many government foreclosures can be bought at bargain prices because the government is motivated to sell and get someone back in the home. In addition, the government entity selling the property may be willing to pick up some of the closing costs, a practice that is not common for bank-owned foreclosure purchases.
Because many of the risky loans falling into foreclosure were taken out on new homes purchased in the last few years, many government-owned foreclosures are relatively new homes that may require little or no rehab. That was the case for Texas investor William Elliot, who purchased a foreclosed home owned by the Federal Housing Administration (FHA) in 2005.
“Didn’t have to do a thing, just cleaned the carpets,” he said, noting he was able to quickly rent the property to a young couple who is still in the house nearly three years later.
According to Andrew J. Waite, publisher of Personal Real Estate Investor magazine, the biggest obstacle for investors looking to purchase government-owned real estate is that all the best properties get scooped up by professionals specializing in that marketplace long before the rest of the investor community gets to pick through the leftovers.
“There are very sophisticated people working in that space,” Waite said. “A lot of wholesale operators are getting into that space and cleaning it out.”
Another obstacle for real estate investors is that the federal government’s goal is to promote the American Dream of homeownership by owner-occupants. While some government agencies are more than willing to work with anyone who wants to help them get the real estate off their books, others put up hurdles to investors in particular and will only sell to them as a last resort if no one else qualifies to buy a particular home.
Of course, this owner-occupant bias is an advantage to prospective buyers looking to purchase a government-owned property as their primary residence.
The U.S. Department of Housing and Urban Development (HUD) is a prime example of the federal government owning homes it doesn’t want. Under the auspices of HUD, the FHA insures loans used to originally finance the purchase of property. If a borrower defaults on one of these loans, the government has to make good on its promise and may end up taking ownership of the property.
When a borrower does default on an FHA-insured loan, HUD steps in, pays off the originating mortgage holder and then takes back the property. Thus, the federal government is now a reluctant property owner who wants to dispose of that property as quickly as possible.
Interested buyers must submit a bid through a HUD-approved real estate agent or broker during the listing period. Listing prices are set through an independent appraisal. During the listing period (which lasts 10 days) HUD reviews the submitted bids and accepts the highest realistic bid.
HUD, as a cabinet level agency of the federal government, has a mandate to promote home ownership in this country. Thus, the agency is obliged to look at bids from prospective owner-occupiers first. If none of them work out, then HUD will entertain bids from the public at large — including investors.
As an approved FHA lender, Ray Newton of Automated Finance in Calabasas, Calif., applauded the temporary raising of FHA loan limits to cover home purchases in the higher-priced areas of the country. Newton has seen more HUD homes up for sale in auction settings recently.
Still, on the positive side, an investor who acquires a HUD home may possibly have his broker’s commission and some or all of the closing costs paid for by HUD, so long as those costs were included as part of the investor’s offer when presented to the agency.
To get more details on purchasing HUD homes, go to the agency’s website at www.hud.gov.
Like HUD, the U.S. Department of Veterans Affairs (VA) is not a lender but an insurer of loans made by other lenders against defaulting borrowers. The difference here is while borrowers under the FHA program must meet certain income and other criteria to qualify, under the VA loan program the original borrower must be a veteran.
If the original veteran borrower defaults on the loan anyone can purchase a VA home and possibly even assume the existing loan — even if he or she is not a veteran.
Since the homes as originally sold to veterans are often highly leveraged, the VA sometimes has difficulty selling off its standing inventory of foreclosures. So, the agency offers the properties at a discount, a significant benefit to investors looking to pick up properties at bargain prices.
Although listed at below market value, VA homes are sold “AS IS”, meaning a professional property inspection is highly recommended before pursuing any VA property. Many VA properties are located near military bases.
Ocwen Financial offers financing for both veterans and non-veterans looking to purchase a VA foreclosure. Known as the VA Vendee Financing Program, the benefits include:
- No down payment for owner occupants
- 5 percent down payments for non-owner occupants (investors)
- No appraisal fees
- Competitive fixed rate mortgages
If there is a down side to purchasing VA homes, it’s that there isn’t a huge supply of them available, according to Newton.
California investor and trainer Bruce Norris warns that the particular market and the timing are essential for any investor to be aware of when considering the opportunities available with government-owned foreclosures.
“The only government loans that would have foreclosure opportunities would be FHA and VA,” said Norris. “FHA and VA didn’t do a lot of loans during the last cycle. They were replaced by the subprime loans. They won’t really create a crop of foreclosures until the people who use [them] in 2007 end up having problems in 2010.”
In states such as California, Norris expects FHA and VA loans to generate very few foreclosure deals over the next few years. If anywhere, he believes the best deals will most likely be in states with lower prices than California.
Fannie Mae and Freddie Mac
The Federal National Mortgage Association (better known as Fannie Mae) and the Federal Home Mortgage Corp. (Freddie Mac) are the two shareholder-owned Government Sponsored Enterprises (GSEs) that are now under government conservatorship, but are not government agencies like HUD and the VA.
Both Fannie Mae and Freddie Mac buy mortgages from lenders, securitize them, and then sell them on the secondary mortgage market. This is turn provides a constant source of mortgage capital to member lenders who then fund more home loans to sell to the GSEs.
Both Fannie Mae and Freddie Mac are primarily in the mortgage business, not the home owning business. That said, when the mortgages they buy from lenders go bad, the enterprises have no choice but to foreclose on the defaulting homeowner. Thus, both Fannie Mae and Freddie Mac have homes to sell.
“Freddie Mac has a ton of [foreclosures],” said Newton. “I remember first starting off they had about 20 homes. Now, just for California alone, they have close to 30 pages with 20 homes each.”
Since they are not government agencies, however, Freddie Mac and Fannie Mae have shareholders to answer to the same as any other corporation when it comes to dealing with the sale of assets (in this case real property). The primary goal is to get the foreclosed properties off of their books.
Government-owned foreclosures can be good bargain-buying opportunities as long as you employ the overall principles of prudent investing: research, patience, market familiarity and timing.