Adjustable-rate mortgages with interest-only options have driven much of the buying activity over the last five years. With a slowing market, some owners may find that they owe more than their property is worth. In 2007, approximately 9 million adjustable-rate mortgages (ARMs) will readjust. Combined with a flattening or decrease in prices, many owners will be caught in the squeeze of having higher payments and no way to pay for them.
In 2001, only 2 percent of the ARMs were interest-only, while today more than 35 percent are of this type of loan. San Diego has the most dangerous track record in this respect. In 2006, a whopping 47 percent of the purchasers used an interest-only product. This means that these properties have no equity. Assuming a 6 percent commission and 2 percent in additional closing costs, sellers typically pay 8 percent to sell. On a $300,000 sale, the seller would have to come up with an additional $24,000 to close. If property values have decreased, the seller would have to come up with even more. In many cases, the owners simply do not have the resources to put any more money into keeping their home. As a result, expect foreclosure rates to continue to increase as the market flattens or declines. An increase in foreclosures translates into four different types of opportunities for the savvy agent.
Prospect properties in pre-foreclosure or default
First, it makes sense to help your past clients to avoid foreclosure if at all possible. To track properties that are in foreclosure, pre-foreclosure or bankruptcy, visit Foreclosure.com. This site tracks all the pertinent information that you will need to stay abreast of foreclosures in your area. Pay special attention to determine whether any of your past clients appear on this list. If so, it’s wise to contact them and see if there is a way to list the property and close it without having them go through foreclosure. Sometimes owners who are struggling are tempted to let the property go into default. Their thinking is that they can stay in the property at no cost while the lender forecloses. This allows them to pay down other bills or put some money away in savings. When it takes the lender a year or more to foreclose, this can be a substantial sum. This is a short-sighted solution that can cost the seller a tremendous amount of money over time. A foreclosure on their record means that they will probably be unable to buy another property. Also, they will pay more money for all of their consumer credit. This means higher bills on their credit cards, car payments and any other consumer debt that they may be carrying. This increase may be in place for up to 10 years. Encourage your past clients to see if they can work out a personal loan to pay the balance rather than incurring seven to 10 years of additional credit costs.
Turn foreclosure listings into an income stream
The second opportunity is to place foreclosure listings directly on your Web site. Foreclosure.com has an innovative program where they actually pay you for leads that you generate to their program. Unlike other portals that charge you to advertise, this new model may provide a glimpse of things to come. Foreclosure.com allows you to link to their database of more than 1 million properties that are in pre-foreclosure, foreclosure or bankruptcy. For each client who elects to receive this feed of current listings, you receive a 25 percent referral fee for each month the person participates. (Their current fee is $49 per month.)
Represent investors who purchase foreclosure properties
You may elect to represent buyers who would like to purchase foreclosure properties. This is no easy task. Be especially wary of representing buyers who lack the sophistication to close this type of sale. Like probate, if your buyer purchases the property at the foreclosure sale, your buyer is purchasing with no contingencies. This is strictly a “buyer beware” situation. On the other hand, many foreclosure buyers are sophisticated investors. They approach the sale based completely upon whether the property will “pencil.” This means the property must generate enough money from rental income for the purchase to make sense. These buyers are sometimes accused of being “bottom feeders” or “chiselers.” In most cases, they are simply following a formula. If the property makes sense, they will purchase it. If not, they will continue to look.
Develop REO business
The second opportunity is to go after “REO” business. (REO stands for “real estate owned,” i.e. property that has gone back to the lender and where the lender is the legal owner.) If you are representing a buyer at a foreclosure sale, it may be wiser to see if no one bids on the property. If there are no bids, the property is deeded back to the lender. Immediately following the sale, you can approach the lender with an offer. Oftentimes lenders are so happy to get the property off their books that they will provide new financing or provide money for repairs. This would not be the case if your buyer had purchased at the sale. Furthermore, you’re much more likely to earn a commission. If you purchase at the foreclosure sale, you will need to collect the commission through a buyer’s listing agreement.
Foreclosure properties are one of the hottest niches for 2007. Are you ready to take advantage of the opportunity?
Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of “Waging War on Real Estate’s Discounters” and “Who’s the Best Person to Sell My House?” Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.
