FORECLOSURE INVESTORS TAKE THE DEALS INSIDE
Foreclosure investors take the deals inside
By: Tom Fredrickson
Published: April 1, 2007 – 6:59 am
Until recently, investors could scoop up a foreclosed home at auction and pretty much be assured of flipping it for a substantial return. Things have changed.
Investors can’t get much of a discount to market prices now, as outstanding mortgages are close to the full value, and banks don’t want to let homes go at steep losses. And because housing prices are no longer soaring, buyers can’t count on a fast-rising market to provide a quick profit.
As a result, investors are using new methods to buy on the cheap or add value. The real action is taking place behind the scenes, in living rooms and offices.
Investors are buying houses before they even hit the courthouse. Their tactics include working with banks and homeowners on sales in which lenders accept less than full value for mortgages as well as buying homes directly from owners and adding units to enhance value. Some investors are switching to
Buying foreclosure properties from landlords, because a new state law makes it harder to purchase owner-occupied homes.
“There are as many ways to buy property as there are creative ideas in our minds,” says Barbara Karnes, founder of the Long Island Real Estate Investors Association.
Clearly, opportunities exist. The number of residential properties in foreclosure rose 15% in New York City last year, according to RealtyTrac Inc. The number of new defaults in January doubled from six months earlier, to 2,011, the firm’s data show.
Worries over disclosure law
Though such statistics pique many buyers’ interest, some people fear to tread in the market here. The new law, called the Home Equity Theft Prevention Act, is keeping some investors from approaching those who have fallen behind on their mortgage payments. It mandates that those purchasing from homeowners in default make extensive disclosures. Investors who fail to follow the requirements face the risk of their deeds being canceled for up to two years.
But those who can adhere to the disclosure rules are finding a growing number of deals. One such investor, Sabrina Kizzie, owner of SKL Properties of New York, sticks to the regulations and also insists that homeowners get their own attorneys.
Her proactive stance has led to a lot of business. So far this year, Ms. Kizzie has worked on 11 short sales, versus four in all of 2006. A short sale, which occurs when a homeowner gets the bank to accept less than the full loan balance, lets borrowers walk away without a foreclosure on their credit history.
“I am overwhelmed,” Ms. Kizzie says. She gets her business through referrals and the Internet, taking the rights to properties and flipping them. She says that banks typically forgive $35,000 to $100,000, which is the source of her profit.
This year, she has worked with Washington Mutual, which has an active subprime lending arm; subprime lender New Century, which may have to file bankruptcy because of bad loans; and Ocwen Financial, a subprime loan servicer that says it has conducted 20 short sales in the state in the past year.
Ms. Kizzie actually begins the process by trying to help people keep their houses. Homeowners pay her a fee that she refunds if the bank won’t agree to relax loan rates or terms. The borrower-friendly approach creates a pipeline of short sale business when lender forbearance is unavailable or insufficient.
In another strategy, many investors are buying single-family homes before they hit foreclosure auctions and building multifamily units. In Queens, a land rush of sorts is in effect from Long Island City to Jamaica as buyers seek parcels suitable for higher-density development.
Converting units
Kamal Siddiqui has made offers for several Queens properties in default with the hope of adding units. One is a single-family residence in Woodside that he plans to convert to a three-family. The 100-year-old frame house will require $200,000 worth of renovations.
“I used to make good money just purchasing single-family homes,” Mr. Siddiqui says. “Not anymore.”
Other investors still find it profitable to pound the pavement looking for defaulting landlords.
Manhattan investor Wesley Barney says he sends postcards to owners when court records indicate they are more than 90 days late on their mortgages, then knocks on 80 doors to find one deal. To avoid running afoul of the Home Equity Theft law, which applies only to buildings that are owner-occupied, Mr. Barney targets those that are not.
Landlords encounter trouble for many reasons, including divorce, nonpaying tenants or – mostly for rookie landlords – failure to maintain enough of a cash reserve.
“People think of landlords as being rich,” says Ms. Kizzie, who also represents landlords in short sales. “They’re just regular people who can also get into trouble.”
STRATEGIES FOR FORECLOSURE INVESTING
Use lis pendens filings – a bank’s public notification of late mortgages – to solicit sale to capture homeowner’s equity.
Buy an existing second lien on mortgage for less than full value, then buy out first mortgage holder.
Negotiate a short sale with bank, persuading it to release the mortgage for less than full value.
Acquire property at auction.
Purchase real estate owned property from bank. REO properties are those taken back by the bank at auction.
Comments? TFredrickson@crain.com
