Rising Subprime Foreclosures Profitable for Some Investors

Struggling with an oversupply of homes, a growing number of foreclosures and falling home prices, the housing market is ripe for investors like Andy Baker, who is buying distressed properties and renting them out at a profit. Baker — and his twin brother Chad — specialize in working with distressed homeowners in the early stages of foreclosure. In two years, they have purchased 20 foreclosure properties in the Nashville, Tenn., area. Baker said his business is booming, thanks in part to the recent surge in subprime foreclosures.


“We start our day by pulling the new pre-foreclosure data off the RealtyTrac site,” explained Andy, who started buying foreclosures in 2005. “Then, my brother and I split the leads and we start knocking on doors.”


The door-knocking campaign has paid big dividends for the Baker twins. The 28-year-old duo has amassed 14 single family homes and six multi-family units. Andy, who is a licensed real estate agent in Tennessee, saves the 3 percent commission on each transaction.


The Baker twins and other investors have found a booming niche working foreclosures while the standard real estate market is stagnant. For homeowners, Baker says, it’s a financial catastrophe. But investors can step in and save the homeowner from foreclosure while still purchasing a home below market value. Then they can rent it out or resell it at a profit.


Nowhere are foreclosures surging more than in Detroit, which documented the highest foreclosure rate among the nation’s 100 largest metropolitan areas in the first quarter of 2007. The volume of Detroit foreclosures is so large that prices have dropped more than 50 percent in some neighborhoods, according to Michael Bommarito, a real estate broker in Rochester Hills, Mich.


“In some areas, you can buy a home for the 1997 value,” he said. “We’ve lost 10 years of appreciation. Everybody is trying to figure out if we’ve bottomed out. I think we’re close.”


Bommarito — who has a growing business handling bank-owned foreclosures, also known as real estate owned, or REO properties — said Rust Belt states such as Michigan, Ohio and Indiana are struggling because of mass layoffs at the big three automakers, coupled with the subprime mortgage meltdown.


“The subprime market propelled the real estate economy in Detroit,” he said. “It kept home sales alive. Now, however, the majority of new homebuyers can’t afford a loan. And troubled borrowers are trapped in loans that they cannot afford. We’re very busy right now with foreclosure and short sales.”


“Probably 40 percent of the properties on the MLS in Detroit are bank-owned properties,” he continued. “Two years ago, there were none.”


With more than 430,000 foreclosure filings nationwide in the first quarter of 2007 — up 35 percent from a year ago — more homeowners are losing their homes to foreclosures because they can’t afford to pay the mortgage. And many are predicting a continued rise in foreclosures over the remainder of the year as lenders clamp down on what mortgages they approve.


Like the Baker brothers, investor Les Lazarus is busier than ever. Lazarus is currently working on selling10 foreclosure homes in various stages of repair. Unlike Andy and Chad Baker — who purchase and hold their foreclosure properties — Lazarus buys and flips foreclosures for a living.


“Before I bought my first foreclosure, I spent one year going to auctions,” said Lazarus, who started investing in foreclosures in 1998.


Lazarus, who now buys 10 to 20 foreclosures a year in Franklin, Tenn., fears that the shrinking subprime market will put a drag on sales. But he thinks that buyers will still find a way to finance their real estate.


“Buyers are finding it tougher to get financing,” Lazarus said. “Today it’s harder to sell my properties because all the subprime loans are going away. Mortgage companies are stricter now with their loans. It’s harder on the selling end. But our market here in the Nashville area is stable and growing.”


Because buying foreclosed properties at the auction is more risky, and negotiating with distressed homeowners is time-consuming, some foreclosure experts recommend buying bank-owned foreclosures.


Atlanta area foreclosure specialist Donna Burton, a real estate agent with ERA Buckhead Realty, said it’s a “buyer’s market” in the Peach state.


“The word is out. Atlanta is a good place to invest in. Investors are coming form everywhere — from California, New York even locally to buy foreclosures,” said Burton, who has 19 Atlanta REO foreclosure listings.


Jon Callaway, a Dallas agent with Keller Williams, predicted a rise in Dallas foreclosures in the coming months. Callaway has been working with investors from California, Nevada and Arizona who are scooping up Texas foreclosures.


Asked if the subprime fallout was slowing his business, Callaway said: “Absolutely not. Business is great. It’s not hurting me. Greed pushes crummy financing. Until the lending institutions make corrections, foreclosures will continue to rise.”


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