By Sally Herigstad
MSN Money
Make $500,000 in one year! Buy houses for pennies on the dollar! The business of buying foreclosures and pre-foreclosures has never been hotter. The experts will guide you every step of the way to help you get rich quick. Just take a seminar or buy a book and you'll be on easy street in no time.
With foreclosure filings reported on 291,000 U.S. properties in February, up 30% from a year ago, it's easy to entertain visions of buying cheap houses and flipping them for quick profits.
The only trouble is, it's not so simple. New realities are changing the foreclosure business, and the unwary investor can be left in the lurch.
Here's what's changed and what you might want to watch out for:
- There may be little or no equity on the table. Dana Mackey used to send 100 letters at a pop to distressed homeowners in the Agoura Hills, Calif., area. He would typically get about a 10% response. Of those, he would be able to work with several families either by carrying paper so they could stay in their homes or by purchasing the homes from them, and he'd make a good profit.
That doesn't work anymore. Most of the houses in trouble in his area are now "underwater" -- people owe more on their homes than the homes are worth. Many homes have $950,000 mortgages but are worth only $700,000 in today's market.
"Before, I was able to help them," says Mackey, of Prosperity4Kids. "Now, they're so far gone that there's nothing you can do. The banks don't want to negotiate. The banks don't want the property back, but they don't want to take the $250,000 hit right now either. And the market keeps dropping." Mackey has stopped sending the letters.
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- Foreclosures are becoming more emotionally and politically charged. Groups such as the Moratorium Now! Coalition are working to stop foreclosures and evictions nationwide. Frustrated with rising unemployment and foreclosures, the coalition's motto is "Bail out the people -- not the banks." Reading a few stories of families sleeping in trucks after being foreclosed on could make Scrooge cry. Few topics raise people's emotions as quickly as a classic battle between the haves and the have-nots.
You, as a buyer, may be an innocent bystander in this drama, but that might not keep you from having trouble taking possession of a home -- or keeping it. A sheriff in Chicago, for example, has told his deputies to stop evicting people from foreclosed properties because he believes some people, especially renters, have been evicted without proper notice. In February, the Association of Community Organizations for Reform Now, also known as ACORN, announced a campaign of civil disobedience designed to help families resist eviction and remain in their homes after foreclosure. (See "When foreclosure doesn't mean eviction.")
The homeowners likely won't make it easy on buyers either. "What people don't count on is the high emotional stakes involved with someone who is in the process of losing their home," says Craig Venezia, the author of "Buying a Second Home." They may have been fending off pre-foreclosure buyers, feel they were pushed into the loan or be emotionally drained by the prospect of losing so much. They don't exactly welcome your contact; sometimes, they're hostile.
- You've got more competition than ever. Once a homeowner receives a notice of default, the foreclosure process is public. Some homeowners report being contacted by as many as 65 people offering to "help" during the pre-foreclosure period. At an auction, it's no better. You register and get a bidder's card or paddle, but so do as many as 2,000 other people. "People think, 'If I get a foreclosure, I'll be the only one,'" says Larry Loftis, the author of "Successful Real Estate Investing in a Boom or Bust Market." You could skip auctions and look for REOs, or real-estate-owned properties, where the bank has already foreclosed and owns the home. But those are put on the Multiple Listing Service rolls along with every other property. There's really no way to get around the competition.
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Even before the current foreclosure boom and its fallout, buying foreclosures had major downsides. Here are nine more good reasons you may want to steer clear in any market:
- Some pre-foreclosure tactics are sleazy. There's a whole seminar market that teaches you how to find people who are about to lose their homes and pretend to be their white knight. The seminars teach you to pitch that, yes, Aunt Martha will lose the property, but she'll save her credit. You use complicated contracts and high-pressure and scare tactics, and misrepresent what the homes are worth. What you're hoping is that Aunt Martha has about 60 grand in equity. You take over her property, her loan -- and her equity. Loftis says, "It's deceitful and unethical, but that's what they teach."
- You can pay too much. Auctions are designed to create a buying frenzy. It's easy to get caught up and spend more than you'd planned. "People should not be misguided into thinking that the lenders just take a loss. Sometimes they do," says Venezia. "What I've seen is that more short-selling is happening, but it's still more of the exception than the rule." Remember, when a house sells for far less than both the market price and the mortgage, it makes the news exactly because that's not how it usually works.
- You don't get much time to do your research. Foreclosure auctions are a quick process, so when you find out a property is coming up for auction, you don't have much time to research it. If a property sells at auction, all liens are wiped clean, but you are liable for any property taxes. That could wipe out any savings. "You're going to know less about the property," says Venezia. There's no home inspection. Some of the houses are sold sight unseen. And if you're the winning bidder, it's yours -- there's no going back.
Continued: Profit can be elusive
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