Bozur
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Post by Bozur on Jun 21, 2008 22:13:18 GMT -5
Real Estate Smart Ways To Profit From Foreclosures Matt Woolsey, 06.18.08, 11:00 AM ET
With 700,000 bank-owned homes on the market, and another one million in some state of foreclosure, according to RealtyTrac, an Irvine, Calif., provider of foreclosure listings, you might be tempted to add a distressed property to your portfolio.
Beware. Buying a home in foreclosure is not for the meek. Those with an appetite for risk, however, will find the tumultuous market stocked with plenty of investment opportunities.
These may include the sale of brand new luxury homes in an upscale Nashville community for half their marked value or a bank giving away a foreclosed property in a poor Detroit neighborhood for back maintenance.
But this complex arena is teeming with professionals. Private equity juggernaut Blackstone Group (nyse: BX ) alone this year raised an $11 billion war chest to chase distressed properties, and large homebuilders looking to recapitalize, like Centex (nyse: CTX) and Lennar (nyse: LEN ), unloaded over $1.5 billion in homes to vulture funds between December 2007 and April 2008, for between 30 and 40 cents on the dollar.
Whether you're looking to flip a home, buy into a neighborhood you couldn't otherwise afford or planning to rent the home, you, like these big companies, must have heaps of cash on hand.
There are properties that can be turned within a few months, but the overall market is still slow. Even if you have a renter lined up or have enough money for a 10% to 20% down payment, you should be ready to weather a depressed market for another two or three years.
Go to the county assessor's office and study recent sales for price-per-square foot and time spent on market to determine what sort of price you can expect at resale. Be conservative. If you are renting, calculate a capitalization rate, and subtract 10% or more of the annual yield for maintenance and depreciation. Make sure that your endeavor is still profitable if you incur two to three years of carrying costs and depreciation.
It's also crucial to remember that bad loans that plagued speculators and unprepared borrowers don't simply disappear when distressed owners sell their properties. Unless the property goes through foreclosure auction and becomes bank-owned, outstanding liens and fees are simply transferred to the new owner. If you plan to buy out of pre-foreclosure, make sure the property has a clean title; otherwise you'll just be trading places with the distressed homeowner.
In such situations, outstanding fees, second liens and the like aren't automatically washed away. It isn't always the case that pre-foreclosure homes lack clear title, but once a home goes into the auction on the courthouse steps and is bought back by the bank, it is clear of all the bad loans that got the original owner into trouble. Making sure a home has clean title is a critical first step to a sound investment.
Click here to see how one buyer is turning foreclosed properties into cash.
It's also important to note that you make money on a foreclosure the moment you buy the home. You can make a good return if you're selling in a sinking market, for example, by unloading a home at 70 cents on the dollar, if you bought it for 50 cents on the dollar. In heavily hit foreclosure areas, banks are juggling so many properties that offers on distressed homes, out-of-business homebuilders' developments and excess inventory are being entertained at under-listing prices.
What's housing like in your neighborhood? Weigh in. Post your thoughts in the Readers Comment section below.
Just don't get attached. As in any market, falling in love with a home--and overpaying--is a surefire way to lose money in a highly risky one.
When you've located an appealing property, order a new appraisal and study foreclosure patterns in the neighborhood. You'll also want to explore creative financing options to defer costs.
However you do the math, the most important thing to keep in mind is that the investment has to be worthwhile--even if you can't sell the home at your desired price for two or three years and the current housing market deteriorates a further 10% to 20%.
If that's a model you can live with, it might be time for a subscription to a foreclosure listing service. www.forbes.com/
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Bozur
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Post by Bozur on Jun 21, 2008 22:16:59 GMT -5
In Depth: Smart Ways To Profit From Foreclosures
Bidding
If you're planning on reselling the property, keep in mind that holding costs, transaction costs, marketing costs and a depreciating market are all in play. (The depreciating market is a particular concern since it's unknown how close the market is to bottom.) Your bid needs to reflect all of these costs. Pre-foreclosure sellers tend to be in denial until the 11th hour, but banks are willing to knock anything between 25% and 50% off the outstanding loan's value, which makes negotiating with them in the bidding process easier.
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Pay Attention to Foreclosure Concentration
Neighborhoods overrun with foreclosures are the most likely to suffer further depreciation. It can be particularly tempting to buy homes out of foreclosure in these areas, because they offer the steepest discounts. If you insist on buying into such a market, make sure you can still make money in the market if it dips a further 10% to 15% over the coming year. Check the neighborhood by walking around and by checking foreclosure-listing services like RealtyTrac.
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Be Aware of Appraisal Timing
Part of the reason that some homeowners owe more on their homes than they're worth is because the appraised value does not reflect the true market value. This scenario is common in boom markets--and especially the case with homes appraised before the market took its biggest hit in August.
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Bank Rate Financing
If you have a good credit score and are buying a bank-owned home, many banks will offer you below-market rate loans. Unlike paying down with points, this doesn't cost anything in fees, and it gives you the ability to spend more for a home: Since present dollars are more valuable than future dollars, the real value of the loan, over its life, will be less.
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Rental Market
Unless you're a savvy local landlord with considerable experience in single-family home rentals, it's probably a bad idea to expect to rent a foreclosure property with a positive cash flow; current rental yields will depress in a market affected by foreclosed homes. Besides, if you're working in a market ripe with foreclosures, there are hundreds of other investors with the same idea.
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Have Cash on Hand
There are properties that can be turned within a few months, but the overall market is still slow. Even if you have a renter lined up or have enough money for a 10% to 20% down payment you should be ready to weather a depressed market for another two or three years. Make sure that your endeavor is still profitable if you incur two to three years of carrying costs and depreciation.
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Research Comps
A trip to your local assessor's office is mandatory if you're thinking about buying a home out of bank-owned status, or pre-foreclosure. Check every house on the block with a focus on recent sales, with a focus on price-per-square foot. This is the best way to establish what sort of deal you're going to get on the home, should you try to sell it in the current market.
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Control Emotions
If you're looking at buying a home out of foreclosure--either as an investor or simply a home buyer--you cannot fall in love with a house. If, in the process of buying the home, you're competing with other buyers, or if a bank is stubborn and won't offer a sharp reduction, it isn't worth coming up to meet the asking price.
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Neighborhood Quality
In this market, potential buyers have the ability to be extremely discriminating and are going to expect good neighborhoods at a discount. This means that buying in areas that were once considered up-and-comers or that lack good schools, parks or other amenities will not bring much more than low-ball offers. Even in high-end neighborhoods, homes are sitting--at discount--on the market for long spells of time.
--------------- www.forbes.com/
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Bozur
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Post by Bozur on Jun 21, 2008 22:22:28 GMT -5
Foreclosure Scams Lurking In Your Area
Matt Woolsey 05.23.08, 4:00 PM ET
By This Author By Matt Woolsey
Related Quotes FNM 23.81 - 1.19 FRE 21.82 - 1.83 Delinquent homeowners looking to break free from default notices are getting tricked by brokers promising to save them from foreclosure, only to make off with thousands in fees or what home equity is left.
Take rent-to-buy scams. In cases like these, a fraudulent rescue company convinces a homeowner to sign over the title while building equity as a renter. The homeowner avoids foreclosure but risks being evicted by the very firm that promised to save his home.
The situation is bad enough in Florida, one of the nation's foreclosure capitals, that State Attorney General Bill McCollum has filed suit against National Foreclosure Management, a mediation company, for allegedly defrauding troubled homeowners; fraudulent rescue companies in Illinois have been increasingly penalized, while in Massachusetts the for-profit practice of foreclosure rescue transactions has been banned.
It's no wonder such scams are surfacing. In April, there were 243,353 foreclosure filings, according to RealtyTrac, an Encino, Calif.-based broker of foreclosed and bank-owned properties. That's 2% of the nation's homes, and the highest monthly figure since RealtyTrac started compiling data in January 2005. While this has damaged home values in many markets, areas of California, Florida, Nevada and Arizona are among the hardest hit.
With rising foreclosures threatening homeowners, rescue brokers prey on subprime or adjustable rate borrowers because many facing foreclosure are overextended and desperately looking for a way out of their mortgages.
"A lot of people did not have the necessary reserves or backup plans," says Marki Lemons, who specializes in foreclosure properties for Rubloff, a Chicago real estate firm. "No one anticipated that the market would change overnight like this."
Bad-News Bailouts
Low-level schemes involve those who pose as mediation specialists or counselors promising to rescue homes from foreclosure. Naturally, they work for a fee. While they might not charge an excessive amount of money, between $300 and $6,670, according to the Illinois state's attorney's office, the Federal Trade Commission says that once homeowners pay that first check, these so-called specialists disappear.
It hurts to lose a few hundred dollars, or even a thousand, but the wilier schemes involve surrendering the title.
The most basic involves pushing on homeowners' phony documents that appear to be a new mortgage application. These are known as rescue loans which, if correctly represented, give a homeowner the cash to stave off a foreclosure. Instead, these false documents turn over the title.
A more sophisticated version of this scam involves a rent-to-buy provision. Here, a mediator matches a distressed homeowner with a management company that takes over the property while giving the homeowner the ability to become a long-term renter, with his rent paying down the mortgage.
The premise here is that the management company has great credit and can refinance at a better rate, which they will do for a fee. This arrangement is attractive to a delinquent homeowner because the months-long foreclosure process is a black mark on a credit report.
"By the time a delinquent loan goes into the foreclosure process, borrowers typically are behind many months in payments, and the debt has grown with late fees and other charges," says Peggy Twohig, associate director of the Division of Financial Practices at the Federal Trade Commission. "Because of the late payments, the borrowers' credit histories have deteriorated."
Of course, once the title is surrendered, the fraudster makes off with what equity the homeowner has built. Even worse, if the title has been surrendered and the new owner falls into foreclosure, the original homeowner will be evicted because they no longer possess a legal claim on the property.
How is the credit crunch affecting you? Weigh in. Add your thoughts to the Readers Comments section below.
An inability to understand government assistance programs adds to consumer confusion. Government-sponsored enterprises like Freddie Mac (nyse: FRE - news - people ) and Fannie Mae (nyse: FNM - news - people ), the Government National Mortgage Association or Ginnie Mae, and the Federal Housing Administration offer programs, including increased loan limits, refinancing aid programs or mortgage insurance programs, meant to help the embattled homeowner and lift sagging real estate markets. But because many homeowners don't know how to apply for these programs, they fall prey to scammers who claim to be able to help them.
Instead, says Twohig, distressed homeowners are best served by negotiating directly with their lender and to keep in mind that since no one can guarantee a solution, anyone who makes promises to that effect should be viewed with suspicion.
"In all of these scenarios, consumers typically believe that the promise to 'stop' foreclosure and 'save your home' means a permanent solution that will allow them to keep their homes and save their equity," she says. "Yet they still end up losing their homes." www.forbes.com/
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Bozur
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Post by Bozur on Jun 21, 2008 22:25:24 GMT -5
In Pictures: Foreclosure Scams Lurking In Your Neighborhood Don't Believe TV Ads
Fraudsters running rescue operations like to advertise with promises of saving homeowners from foreclosure. The Federal Trade Commission (FTC) says that most of these claims violate federal law, because it's a guarantee that cannot be met. The FTC has counted over 200 of these false marketing campaigns in which a 1% interest rate is promised. Homeowners signing on later discover that this is a payment rate, or that they have been offered a quickly expiring incentive.
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The Bait And Switch
One of the simpler yet more effective scams is presenting a distressed homeowner with what looks like an application for a new mortgage or refinancing, but is in fact title transfer papers. Once these are signed, the homeowner loses his claim on the home and whatever equity was in it.
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Upfront Fees
Many so-called mediators insist on upfront fees, which they say are for locating rescue funding. In fact, once homeowners hand over their money, they never see the would-be negotiators again. The Illinois state's attorney office estimates that these fees can be as little as $300 and go to as much as $6,670.
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Bankruptcy Filings
Some frauds will promise to resolve credit problems by working with a homeowner's lender. In a way they do accomplish this, but it's not in the homeowner's best interest. After they pocket whatever fee the homeowner pays them, they'll file a bankruptcy case, which homeowners are lead to believe will save their home.
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Rent-To-Buy
When interest rates reset and payments rise, overburdened homeowners stretch to find a way to stay in their homes. Some turn to rent-to-buy schemes, in which fraudsters offer to buy the property with a provision that the homeowner will pay rent while building equity. However, once the title is handed off, the homeowner can be locked out or forced to leave, since they no longer possess a legal claim on the home.
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Refinancing Schemes
Because the foreclosure process wrecks homeowner credit, refinancing or second mortgages are difficult to obtain. Some fraudulent rescue funds promise to bail out distressed homeowners by secure outside funding with their higher credit score. This happens once the homeowner hands over title of the home.
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Lone Operators
One of the best ways to know if you're dealing with an illegitimate operation, besides its demanding upfront fees, is whether it promises to be a jack-of-all-trades that can handle the responsibilities that would otherwise fall to your credit counselor, lawyer and lender. The more someone insulates a homeowner from the foreclosure process, the easier it is for them to pull off criminal malfeasance.
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Don't Fear The Lender
Many people turn to foreclosure mediators because they're intimidated by the prospect of calling their lender. Keep in mind here that given the scope of the current foreclosure crisis, every bank has dealt with thousands of foreclosure cases and that it's in the bank's interest to resolve or restructure problematic payment schedules. With the help of a credit counselor and a real estate attorney, you're more likely to stay in your home than with a so-called mediation specialist who promises to save it. ------------- www.forbes.com/
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