The Truth About Pre-Foreclosures – Not the Bold Faced Lies You’ve Been Lead to Believe

Posted on February 23, 2015 by

Shaun McCloskeyHi, my name is Shaun McCloskey. I suggest you grab a cup of coffee, sit down and read this slowly and carefully.

I don’t say this often. I don’t say this lightly… and I rarely use a strong language, like “you MUST” get involved into some aspects of investing.

However, this time it’s warranted. Especially, if you realize the wealth building potential of our current market place and dream of making A LOT of money FAST.

Where We Are Now

What we have today in our foreclosure markets is BIGGER and more widespread than what we had during the collapse and ensuing Savings and Loans bailout of the late 80s and early 90s. If you remember that time period, you probably also remember the media portraying the economy as being “a down market” and the real estate industry was “doom and gloom.”

If you were investing during that time and knew how to play the game, however, you know how profitable that was. Real estate fortunes were made over 2-3 year period.

Once this period found it’s end the opportunity was gone. Real estate returned to its normal balanced state.

The MOST important aspect of what’s going on today is the UNUSUAL and unlikely forces that are getting involved to put pressure on lenders holding REOs (repossessed properties).

This hasn’t happened before. Not like this…

I’m sure you realize lenders don’t like to hold REOs on the books. Nothing new about that. It’s always been an unpleasant part that comes with the business of making real estate loans.

REOs, however, are usually kept to a small percentage of lenders loans. They just add a little bit to the inventory of houses in a particular local market.

What’s Different Today?

Well, the growing REO numbers are turning into a huge ABANDONED housing inventory and a NUISANCE for some of the communities where they’re growing in numbers.

After the houses are taken by lenders, they’re quickly becoming an attraction for crime, drugs, transients, infestation, trash, fire hazard, etc. Even firefighters are getting hurt in abandoned lender-owned houses.

There’s an ever growing number of lenders that simply don’t do the job of maintaining their vacant housing stock. With so many more defaults coming down the pipeline, they probably can’t afford it. Or they’re too busy with other fires they’re trying to put out.

As a result, we are seeing (all over the country) more and more lenders holding off on foreclosing on properties that should have been foreclosed on a long time ago. Right now investors THINK there’s a shortage of inventory, which is making them bid more for properties and fight with their competition – and that’s just not true. The truth is, there are still hundreds of thousands of people all across the country that are two and three years behind on payments and yet the bank has still not foreclosed on their properties. Why is this you ask?

Well, there’s a lot of reasons, but first and foremost, not foreclosing means there’s less bank owned inventory. This gives the appearance that there is a shortage of inventory even though there is no shortage. But it certainly looks that way, which means more investors come out of the woodwork thinking that the market is heating up again. These investors are now having to make 3-8 times the numbers of REO offers they were making just a year ago just to get one deal accepted.   When there is an appearance of low inventory, competition spikes and it gets harder for the average investor to know what to do to get deals.  Ask anyone with experience in real estate investing right now – they’ll tell you this is exactly what is happening today.

Here’s the truth though; It’s all a facade!!!!  

It’s fake! There is no shortage of inventory. But the banks want you to think there is!   If investors think there’s a shortage of inventory, they’ll offer more money, drive competition up, and create a sellers market. That’s exactly what the banks want! After all, they are the primary sellers in today’s market.

But that’s not the only reason we’re seeing what we’re seeing today.

Governments Are Putting MAJOR Pressure on Lenders

Local governments recognized that abandoned houses in such high numbers are costing them tens of millions of dollars in lost tax revenues. Decline in property values abandoned houses are causing for the rest of the area means less property tax revenues for local and state governments.

So what’s new?

The municipalities are now taking an unusually aggressive stand against lenders who have inventories of abandoned houses.

We’re not talking about just sending letters.

1. They’re filing lawsuits.

Can you imagine a municipality making it a POLICY for their legal staff to file a bundle of 50+ lawsuits EACH week against lenders mismanaging their REOs?

They’re already doing it!

2. They’re passing local ordinances that impose MONSTER-sized fines on lenders.

Can you imagine a fine in the amount of 10% of a property value? That’s steep, but it’s here already!

In the next few months there will more and more municipalities following these practices and putting pressure on lenders to deal with their REO stock.

What does it all mean to YOU as a real estate investor?

In the areas with lots of REOs where these measures are being taken by local governments, it will be VERY expensive and extremely undesirable to have REOs on the books.

What’s the best way to get rid of the REOs?

If you thought, “selling them fast at a discount”, you’re wrong.

The BEST way is NOT to have REOs in the first place. Once they foreclose, they own it and now they’re responsible for it.

So, a huge issue for any lender now becomes “what can we do so we don’t OWN it”.

The short answer to that is, keep the owner – THE OWNER of record. Basically, do anything possible to AVOID getting in a chain of title and becoming liable for
the property.

What are their options to accomplish this?

Option 1: Delay Foreclosure Sale

Amazingly, some lenders elect this option, even after the owner got behind and abandoned the house. They still don’t foreclose. They just “let it ride” hoping for a better outcome or solution later on.

Option 2: Re-Work The Loan

If the owner is still in the house, the lenders will bend over backwards to keep the loan going by modifying it through a Loss Mitigation process, as long as they can see that the owner can afford the payments.

Option 3: Get Rid Of The Note

They’ll try to get rid of the note. They’ll bundle the notes into a big portfolio and put them up for sale.

Option 4: Have Owner Sell It Before Foreclosure

They’ll try get the OWNER to SELL the darn thing and work with him and the BUYER to make it happen.

Does this spell Short Sale to you?? It certainly does to me.

What Lenders Are Already Doing

Obviously, they’re already doing all 4 of the above.

Let’s consider Option 1 (doing nothing). They’re waiting for something to happen. They clearly don’t want to go the foreclosure sale route. The problem is that this is rarely a solution to the problem at hand. In most cases, this simply delays the inevitable.

As far as Option #2 (keeping the loan going). Here’s what we know. A pretty sizable share of these defaults are happening because of the sub-prime ARMs (adjustable rate mortgages). The interest rate on the loan and the size of the monthly payments adjust to a LOT higher level a homeowner simply can’t afford. The truth is, most of these sub-prime borrowers were approved for loans that they should have never been approved for in the first place. Add to the fact that most of them didn’t put any money down when they bought the house and you have a recipe for foreclosures.

For the majority of these folks, staying in the house just isn’t an option.

Option #3 (selling the notes in a package) is probably lenders’ favorite. It’s the fastest. It allows them to solve the problem with the large number of bad loans at once.

The challenge, of course, is – in today’s credit crunch climate all lenders have been affected by defaults. There aren’t enough qualified institutional buyers to go after large non-performing portfolios and pay reasonable prices.

And, if they’re trying to steer clear of foreclosing and taking REOs in the first place, why would they want to buy non-performing notes?

So what’s their best case scenario in this situation?

It’s Option 4 (the owner selling the property at some point before the foreclosure sale). If this doesn’t happen, the lender will have to foreclose.

All of this tells me that Option 4, the Short Sale, will be a de-facto solution for a lender to deal with a large, if not the largest share of these bad loans.

Here’s what else we know already:

1. There will still be A LOT more defaults coming in the next 18-24 months than we see right now. Why you ask? It’s because a record number of loans are already in default.   The lenders have just not foreclosed yet.   Make no mistake about it though, the next wave is not just coming – it’s already here. The public just hasn’t been informed yet.

2. The lenders are already A LOT more motivated to take this Short Sale route, as opposed to foreclosing and dealing with the extra pressure of ownership headaches and liabilities, that the municipalities are taking to them.

3. As a result – we’re seeing lenders that MORE MOTIVATED THAN EVER to consider BIGGER discounts on short sales, just to make sure they don’t add another house to their REO housing stock.

I Have to Admit…

When I started doing short sales in 2003, most people didn’t even know what the term meant. A lot of lenders

But my reading of the information we have about current state of affairs in the lending industry, and how the states and local governments are getting involved, it’s a no brainer.

My advice today is – GET INVOLVED IN SHORT SALES!

My second advice is – LEARN TO DO THEM RIGHT. It’s not your regular purchase. With short sales not knowing what you’re doing is like flying blind. There’s a reason some people don’t like them – they don’t know how to do them, they don’t know the banks rules, and they don’t get the results you’re going to get after you learn how to do them right.

All I want for YOU is to LEARN this subject on a professional level. You can do if from any trainer of your choice, preferably someone reputable and knowledgeable. Search and find you own expert, if that’s what you prefer. You have my blessing.

By the time you learn and practice this skill on a few deals, it will become invaluable. The good news, you can learn all about this- and how to profit from it big time – from Shaun in just 90 minutes.

How are you going to do this? Join us at the next Atlanta REIA Meeting on Monday, March 2nd, 2015 and learn from the pro who’s done more than 300 transactions like the ones we’re talking about here.   We only bring in the best, and Shaun is the best.   So do whatever you have to do to be at this event! Call in sick, get a babysitter, do whatever it takes.   Yeah, it’s that important.

See you there!

Shaun McCloskey

Shaun McCloskey is a full time real estate investor located in St. Louis, MO specializing in short sales and pre-foreclosure property acquisition. He has successfully bought and sold over 300 properties since 2003 and loves the everyday thrills of the residential real estate business.

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