InvestorLoft Real Estate Investing Blog

The Key to Unlocking REO and Foreclosure Values

On a cozy side street in the suburbs outside of Chicago, a white house with black shutters and roof is tucked back on a side street of Naperville, Il. A neighborhood of homes built when luxury and coziness blended together in new subdivisions during the 1960s, Greenwich Court seems like a time capsule from better years.

But even this gem in the western reaches of Chicago’s urban sprawl hasn’t been immune to the current financial hardships. The homes are beautiful, well cared for with beautiful lots, but two of the eight along the lane have been touched by the housing bubble bust.

While one of the two foreclosed, the second had a Cinderella-like ending. David Field, business owner and managing broker for Home Field Realtors in Naperville, noticed the house when relocating back to Illinois from Seattle. “Every 15 to 20 days the price would drop again,” Field said. “I thought it was definitely going to be a short sale.” A four bedroom, 2,800 square-foot gem, Field decided he didn’t want to wait any longer. He arranged a showing with the listing broker, Jean-Paul Eskenazi.

A casualty of a drawn out divorce and on the market for over a year, the house was quickly headed towards foreclosure. The owners had relocated, the husband to France and the wife to Florida. With a notice of default filed with the Illinois courts, Field had 90 days to negotiate and keep the property out of foreclosure and out of the hands of the bank.

The Illinois courts give homeowners 90 days to bring mortgages up to date with back-owed payments, then three to seven months grace period for the mortgage balance to be paid in full. “David had to decide if he thought it was worth it to pay part of the old owners’ closing costs to get the house,” said Field’s lawyer, Mark Rodriguez. “In his mind, it was.” They liked the home and didn’t want to see it torn down by an investor for new construction.

“I wanted to make sure that everyone got the deal they wanted. And I knew, after being in the business for five years, I was going to have to negotiate (and) not give up,” Field said. A tidy $425,000 later, the home was his – at 22.7% under the starting list price.

While the property needed a number of repairs after a year of vacancy, the Fields are happy with their new home sweet home. “Our children have a good home to grow up in, and with a little bit of work it is a really beautiful house,” Field says. Looks like this Cinderella house found her Prince Charming.

Rental Property: The Time is Now

Real estate investors – get ready! There’s no better time than now to capitalize upon current market conditions and make your rental properties work for you. Tightened lending criteria dictates that many would-be buyers are likely to remain renters for an extended period of time. This means that a strategics acquisition of a rental property could potentially add value to your portfolio and give real credence to the power of the “buy and hold” strategy.

It’s a great time to work with your Realtor to explore the foreclosure/REO market. In many major metropolitan areas suck a Phoenix, Las Vegas and Denver, you can find both foreclosed and REO properties (single family homes and condos alike) in prime areas – many times newer construction and never occupied! In the case of condos, be sure to speak with the property manager (on-site in many cases) to explore average demogaphics and vacancy rates. You don’t necessarily want to buy a unit in a building where there’s a 60% vacancy rate and a ton of units just like your available. Rather, it’s the time to look for single family homes at steep discounts (maybe with a little TLC needed) and condos in areas close to colleges where you can take advantage of a steady student demographic.

Also consider condos and single family homes in areas that are adjacent to major business centers with convenient access to public transportation like light rail and bus lines. These tend to attract working professionals that are the ideal tennant – means to buy but cannot currently qualify, and thus, a candidate for a long-term renter.

The Treasury Secretary wants to drop mortgage rates to 4.5% in hopes of stimulating more buyers to come back into the market. Certain regions have had moratoriums placed on foreclosure proceedings for those who qualify.

Is it all truly necessary, however?

Is it the government’s responsibility to ensure that every home buyer can continue to pay their mortgage note or should we revert to a more Darwinistic approach and call it a weeding-out of natural selection proportions? 

Some say that if we don’t take strides to end the slide in housing prices then banks will never be able to stabilize and lending will remain out of whack. And on top of it all, unemployment numbers are surging and it’s likely we’ll see the foreclosure trend continue as the economy presents its inevitable challenges.

What say you, the real estate investor? Should the Fed step in to stabilize or should we adopt the “laissez-faire” mentality and let the natural selection process take its toll on the banks, mortgage lenders and homeowners as a whole?

It’s all over the news. You can’t flip channels without hearing about it. The housing market is in a spiraling decline. In a year wrought with mortgage bailouts, increasing foreclosure rates and inventory galore, what does this mean for the real estate investor?

It’s simple. While the foreclosure climate is unfortunate for those caught in its grasp, it offers a potentially favorable scenario for the liquid real estate investor.

Year-end means that banks want to get REO property off their books. This places YOU, the investor, in prime bargaining position. Have you read our article on Foreclosure Listings? If not, it’s an excellent primer and what you need to know and consider when looking at REO properties.

First and foremost, get your financing and purchase funds lined-up. If you’re ready to be aggressive with a bank on one of their properties, cash is king and the more you can bring to the table (100% if possible), the more favorable the bank will likely see your offer.

Our advice? Don’t turn off the news. Keep watching. As the panic thickens, the real estate investment community will find itself in a more and more beneficial position. It’s a well-known fact that you should buy low and sell high. Get in on the current real estate market lows and build yourself a robust portfolio. 

If you have ideas on strategies for foreclosures and foreclosure investing, we look forward to your comments below.