Simi Valley Homes - Ted Mackel

There are good investment decisions to be made in real estate, however, foreclosure proerties are not an automatic choice. There are major differences in the foreclosure market of the early 1990s compared to the foreclosure market today.

• Today, the market is not flooded with foreclosures.
  
• The majority of homes in foreclosure today had 100% financing so there is no equity at this point to negotiate over with the bank or seller.
  
• If the owners did not have enough money to pay the loans, then what is the likelyhood that they put any money into the property to maintain it, then just to give the property back to the bank in pristine condtion?
  
• If you purchase a foreclosure property, how much money will you need to repair and upgrade the property if you plan to keep the property? If you plan to flip the property how much more will you need for the costs to sell?
  

Considering the the above, it is easy to see that foreclosures are trickier than ever.

Looking at the option to flip, you will need to get the property far enough below market value to:

1. Repair and upgade the property
   
2. Cover carrying costs (i.e monthly payments, taxes, insurance and maintenance costs) until the property sells.
   
3. Pay the sales costs (i.e. escrow, termite, title insurance, commissions, etc.)
   

Let's look at pre-foreclosures. These are homes with a Notice of Default, notifying the owner that their home will be sold at Trustee sale if they do not cure the default. During this pre-foreclosure period you will have one of two options. If by chance the owner has equity in the property, you now have to try and negotiate with the seller to obtain a deep enough discount so you can meet the objectives in the list above. Finding owners in foreclosures with equity is very rare today. The second option is what you will most likely come across. This is a seller in foreclosure with no equity, which now you have to negotiate with the lender on this property for a short pay.

What is a short pay? A short pay is when there is more money owed against a property than what the property can be sold for. You are now in the position to try and get the lender to allow the seller to sell the property for less than they owe. This brings about a few issues that will greatly impact your success.

1. The banks are not bending over backward at this point to cooperate. The banks have been requiring sellers to take back an unsecured promissorry note for the difference of what they owe and what the property sells for. Where is the motivation for the seller in this situation? The seller's credit is already in shambles with multiple mortgage lates. The promissory note can be collected on in the future and if not paid, a judgement can be obtained. Lates on a promissory note combined with the lates from the mortgage and then a judgment would be far worse on the seller's credit than just letting the property go back to the lender. If the seller just walks away from the property they will have not have any more responsibility to repay the bank.
   
2. If the bank does not require an unsecured promissory note, then the seller will now have a tax liability for the difference in the sales price verses the amount owed on their property.
   

So where can you make money in the foreclosure market? If you have the money and banking connections to go to the Trustee sale and buy stright from the sale, then you will improve your chances. Otherwise there are other sectors that are unrelated to foreclosures and the subprime market that will hold good buys in this real estate market.