Because the news is full of them and because folks still believe it’s possible to get something for nothing, there’s a huge interest in foreclosures. Unfortunately, most of it comes from amateurs who’ve never been involved with foreclosures or even investment real estate before.
The real foreclosure money, though, is being made by slick talkers selling expensive “secrets” on how to get foreclosure rich by next Tuesday. They can be dang convincing, too, but it just ain’t gonna happen like the claim.
I may not be as slick, but with a dose of reality, maybe I can be as convincing in the opposite direction, starting with what happens when payments aren’t made. That’s obvious, you say, the lender takes it back, but it’s not that simple.
First, the lender really, really does not want to foreclose, especially now, so will usually try to avoid it before finally pulling the trigger. By that time, as much as six months of payments, accrued interest and fees will have been added to the mortgage.
In Georgia, foreclosure is a fairly quick judicial process and doesn’t involve a court process, which is disclosed in a lot of expensive words when the sale is finalized and which the closing attorney often explains by saying, “You don’t pay, you don’t stay.”
After giving up on collecting payments, the lender’s attorney posts the required foreclosure advertising in the Valdosta Daily Times legal ads which run every Friday, with a few slopping over into Saturday’s paper. Lots of information in those ads, including the address, the full legal description, the name of the borrower, the lender, the date the mortgage originated, the law firm handling the foreclosure and often, the original amount of the loan.
The ads must run the four weeks leading up to the foreclosure auction, always held on the courthouse steps on the first Tuesday of the month following the four ads. Just a quick glance at legal ads will tell an experienced investor whether any properties being advertised are worth investigating. Most aren’t, more on that to follow.
Amateurs are told by the slick talkers – and often believe – that bidding $50,000 or $75,000 for a house with a $100,000 mortgage will actually give them a shot at owning the house that far under the mortgage amount.
Well, it doesn’t work that way, which should be obvious, given a little thought. Sure, the lender doesn’t want the house, but why would the lender take a huge guaranteed hit on the courthouse steps when the house can be sold at a price a LOT closer to the loan amount.
The lender may still take a hit, if the house is over-mortgaged, but most lenders will hire a Realtor to put the house on the market at whatever the market price is at the time. Many lenders have made some truly stupid loans lately, but they’re not stupid enough to give away money by selling the house for substantially less than it’s worth.
A homeowner with any equity isn’t likely to give away money, either. If he only owes $80,000 on a $100,000 house and can’t make the payments, he’ll probably quick-sell it for $90,000 to save half his $20,000 equity.
The way to make money with foreclosures is to improve the house enough to sell for a quick profit or to hold it longer as rental property. But then, that’s the way to make money with houses no matter how you buy them.
You always hear about the stock that tripled overnight or the house that was bought and sold quickly for a big profit…..but those stand out because they don’t happen often and foreclosure “steals” are just as rare. Just ask the small group of foreclosure vultures (no offense meant) standing around the courthouse steps the first Tuesday of the month waiting to bid on whatever’s worth buying.
Slick talkers make it sound like all you have to do is send money for their ‘secret’ and buy a foreclosure at half-price today, resell it tomorrow at full price and get rich. Those opportunities are rare, though, and if you find yourself bidding on a “steal” and the courthouse pros are still sitting on their hands, you might think about whether they know something you don’t. And if there’s a chance for a decent deal, they’re not gonna let you steal it, either.
It’s safer to work foreclosures either after the property has gone to the bank or before the foreclosure begins, although telling a homeowner at his front door that you know he’s not making payments and you want to steal his house before he loses it won’t make you his best buddy.
If you find yourself on the courthouse steps as top bidder, you’ll need certified funds immediately, unless the foreclosing attorney is local and knows you. If the previous owner is still in the house, not that unusual, you’ll also need the usual legal moves for eviction. It’s hard to inspect occupied houses before foreclosure and if the owner wasn’t making payments, he probably wasn’t maintaining the house, either, so there can be nasty surprises, when you take possession.
The previous owner might also be moving out as you’re bidding and decide the plumbing, lighting fixtures, water heater, carpet, cabinets and built-in appliances should move out with him.
If you’re interested in foreclosures, your homework is to read the legal ads in Friday’s paper, starting with when the loan was made. You’ll find most loans in foreclosure today will only be a few years old which mean they’re probably snake oil loans with artificially low payments which increased past the point of the owner’s ability to pay, plus a loan balance higher than the value of the house.
So the lender, as usual, bids the loan amount and very reluctantly takes the house back to the bank where they’ll probably discount the note for a quick sale. Just don’t ask for the same ridiculous loan terms they gave the previous owner.
Mike Hill has been in the real estate business in Valdosta since 1976 and is finally convinced there is no free lunch.