The last time the US economy ground to a halt the big issue was foreclosures. This time around the story is likely to be very different. Preforeclosures – not foreclosures – will be a central focus for real estate investors and brokers.
The idea of foreclosure is well known. When a borrower does not make required mortgage payments the lender has the right to sell the property to repay the debt. It sounds pretty simple and straight-forward but that’s hardly the case. There are a variety of steps required before a borrower can be foreclosed, if a borrower can be foreclosed at all.
- “Federal law,” explains NOLO.com, “generally prohibits the servicer from making the ‘first notice or filing’ to start a judicial foreclosure or nonjudicial foreclosure until a borrower’s mortgage loan obligation is more than 120 days delinquent.”
- Lenders may not have the right to foreclose even when payments are missed! For example, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, lenders and servicers generally cannot foreclose financing that involves Fannie Mae, Freddie Mac, the FHA, VA, and the USDA. State and local moratoriums may also apply.
- The federal eviction moratorium is now set to expire on February 28th. However, moratorium deadlines can be extended. In 2020, for example, foreclosure moratoriums were pushed back four times. Additional extensions in 2021 would not be surprising.
- Even if a lender goes through all the steps required to have a foreclosure it can take a long time to complete the process. Thirty days here, 45 days there, and time begins to add up. In some states before the moratoriums, it routinely took more than a year to complete a foreclosure – and sometimes much more.
- Some jurisdictions have a right of redemption that can allow an owner to take back a property within a brief time after a foreclosure.
Not surprisingly, a lot of “foreclosed” properties are never sold at auction. Some loans are brought current by borrowers while others are sold before a foreclosure can take place.
“The foreclosure system can be divided into two phases,” said Rick Sharga, Executive Vice President with RealtyTrac. “There is the formal foreclosure auction itself and then everything before the actual foreclosure, which can be thought of as the preforeclosure period.”
The preforeclosure period is where things become interesting. It’s the Wild West of the foreclosure process, a time to wheel and deal.
The preforeclosure market exists because the foreclosure process is set up to assure that borrowers get as much time as possible to prevent a foreclosure. There’s lots of public notice and the auction process itself is entirely transparent. Sounds good, but in reality borrower safeguards are minimal.
If the Smiths lose their jobs and can no longer pay the mortgage their property will be put up for sale in a foreclosure auction. In a situation where they owe $100,000 and the property has a fair market value of $300,000 the lender will bid $100,000 or so to assure that the financing is repaid. If the bidding goes to $150,000 then – after repaying the debt, legal fees, taxes, and auction costs – there may be money leftover for the borrower. Or maybe not.
What about the rest of the borrower’s equity? It disappears into the mists of the foreclosure process.
Savvy borrowers understand that the foreclosure process is ultimately designed to primarily protect lenders and tax collectors. For this reason owners want to get as much from the property as possible before its distressed nature becomes public, something that can be seen with foreclosure filings such as default notices, scheduled auctions, and bank repossessions.
In the strong local markets we see today – the National Association of Realtors said that November existing home prices were 14.5% higher than a year ago – distressed sellers may be able to get full market value for their homes by selling at the first signs of trouble. Those who delay may face a different fate. Once swept into the visible foreclosure process a distressed property will be stigmatized, its value prone to decline, and owners who are likely to face significant credit score reductions.
How to find preforeclosure listings?
The most basic way to find preforeclosures is to say on a neighborhood Facebook page that you’re interested in buying a local home. Not a preforeclosure, not a distressed property, but just a home nearby. If you get a response you can then begin to examine public records to see if any notices have been filed.
In the era of social media people often give away bargaining information. Jones might mention such things as the loss of a job, other financial concerns, a divorce, the house is too big or small, or a need to relocate can all be clues regarding the need to sell.
Another approach is to work with real estate brokers and attorneys who handle such properties. Their benefit comes from brokerage fees and legal work that arises from a transaction. If you want to flip a property they can benefit from both the purchase and the re-sale. They can be aware of properties that might be available before being formally listed on a local MLS, shown as coming soon, or announced in legal notices.
Rather than hit-or-miss gossip and scuttlebutt, a more organized approach is to get data culled from the 155 million property records held by RealtyTrac. For instance, at this writing it has identified 25,432 preforeclosures in Florida, 85,899 in New York, and 5,324 in California.
Next, pick a county. In Florida, for instance, there were 403 pre-foreclosed homes in Escambia County (Pensacola and nearby areas) when we looked. Now you can see individual properties, outstanding loan balances, and estimated values.
“The RealtyTrac system uses Big Data and artificial intelligence to produce targeted information of value to investors and real estate brokers,” said Sharga. “It’s a way to get a lot of local intelligence that has been organized by such factors as foreclosure status, price, equity, loan-to-value, and even ‘hot opportunities.'”
At the start of 2021 the foreclosure market is limited because of state, federal, and local moratoriums. The preforeclosure market – a market powered by distressed owners who want to sell before foreclosure becomes a real possibility – is not. It can represent an attractive combination of discounted prices in the midst of markets with strong demand. This does not mean every transaction is a guaranteed winner, that profits are assured, or that risk is not real, but it does suggest that interesting opportunities are out there.
“The gross profit on the typical home flip nationwide (the difference between the median sales price and the median paid by investors) rose in the third quarter of 2020 to $73,766 — the highest amount since at least 2000,” says ATTOM Data Solutions, RealtyTrac’s corporate parent. “That amount was up from $69,000 in the second quarter of 2020 and from $61,800 in the third quarter of last year.”