Skyrocketing Foreclosures- Buying by Investors
It's a fact that the number of real estate foreclosures is
skyrocketing. All over the US Real estate investors are buying
foreclosure homes and homes in preforeclosure at firesale
prices. A quick scan of the legal part of your newspaper will
reveal the large list of properties scheduled for the
foreclosure auction. Statistics indicate that over 1% of the
today's homeowners will be behind on their payments or this
year will face mortgage default and foreclosure. Just think,
almost every neighborhood in this country will have 2-3
homeowners not being able to make their house payments. So it's
not surprising that some savvy homebuyers with cash, and real
estate investors make low offers for buying foreclosures and
preforeclosure homes.
Lenders Lure Homebuyers and Pay the Consequences
This is bad news for the homeowners and bad news for the banks
and institutional lenders who are looking at billions of
dollars of loans that they're not getting interest payments
for. It is of course, great news for investors buying
foreclosures, because when the supply is high, the prices go
down. Banks are even taking less that what they're owed for the
loan by accepting short sales offered by investors and at
foreclosure auctions (for more information on short sales see
resource box).
So why is this happening? Here's 3 acronyms that tell the
story:
ARM 's - Adjustable Rate Mortgage
HELOC's - Home Equity Line of Credit
80/20 - 80/20 no down payment loan
ARM 's are the chief culprit. Those who are not familiar with
these types of mortgages, the way they work is that when the
loan is first issued there is a very low (below market)
interest rate. Then after a set period (from 1 - 10 years), the
interest rate adjusts upward as much as 2% based on an interest
index. The rate then adjusts annually by as much as 2% until
the cap is reached which can be 10-12%, although caps can be in
the 12-16% range.
However, this apparent good fortune for the new home purchasers
was often just a foreclosure waiting to happen. A day of
reckoning was coming, and these homeowners would have no idea
what hit them.
Here's an example of what started happening and is continuing
to happen today. Let's say Jim & Sue Tenants have a fairly low
income of about $2000/month. A general lending rule of thumb is
that your mortgage monthly debt should be no more than 30% of
your gross income. So based on this, Jim & Sue could afford a
%HOUSE% monthly debt of about $650/mo.
Now let's say they could get an ARM with a 1% starting
percentage value and a cap of 12%. They could qualify for a
$200,000 loan with monthly debts of $643/mo. And let's also
suppose the lender does not escrow the taxes or insurance.
Typical taxes & insurance let's estimate to be about $2400 or
$200/month. (By the way, the following scenario will play out
the same, no matter what the starting percentage is).
Jim & Sue move into their new home, purchase a bunch of
furniture on their credit cards, a new TV, and stereo, and some
window treatments, etc. After about 6 months Sue gets pregnant.
The tax bill comes due in September, and Jim and Sue are in a
bit of shock. They haven't been putting away money for taxes,
and it takes most of their meager savings to pay the bill.
Payment Trouble Leads to Unavoidable Foreclosure Default
Then around November, the mortgage company sends them a letter
informing them that the value is adjusting upward by 2% and
their monthly debt starting January will be $843 per month-a
$200 increase. With their credit card debt, a new baby on the
way and monthly living expenses, they're really living on the
edge. When their next tax bill comes due-Jim decides the county
is just going to have to wait for it's money. (In reality what
will happen is that the county will put a lien for back taxes
on the property and sell that lien at a tax sale auction. The
real estate investors purchasing the tax lien or tax
certificate (in many states) will eventually have the right to
foreclose if they're not paid the back taxes and interest.
Essentially buying the foreclosure for the cost of the tax
lien!).
Then in November of that year, they get another letter
informing them of another increase in their interest value-this
time to 5% (still pretty low), and this raises their monthly
mortgage monthly debt to $1074/mo - a $230 increase!
Now, Jim & Sue are in over their heads. Come January, they send
in the old monthly debt amount. The bank doesn't accept it and
considers them in default. They think they only owe the
difference-in fact, the bank considers it as if they hadn't
made any monthly debt at all. After several months, they get a
foreclosure warning letter.
At this point Jim and Sue may consider selling their %HOUSE%.
If they live in a rapidly appreciating market, they may be able
to get out by the skin of their teeth. In most areas, after only
a year or 2, most homes have not appreciated enough to sell
quickly. With a realtor commission and accepting a discount
from the purchaser, they'd have to come out of pocket to go
through with the sale-money they don't have.
So depending on their state, unless an investor steps in,
buying the foreclosure by negotiating a short sale with the
lender, the property will be sold at auction on the courthouse
steps according to state foreclosure laws.
In the next part, I'll discuss the insidious nature of Home
Equity Loans for the unwary borrower.
SUMMARY
The rate of foreclosures is at an all time high, and many real
estate investors are buying foreclosures, looking for big
discounts by negotiating short sales with lenders and buying
foreclosures at the courthouse steps. The reason for the high
rate of foreclosures are lending practices such as ARM's
(adjustable rate mortgages), HELOC's (Home Equity Lines of
Credit) and 80/20 (nothing down loans) that allow home buyers
to borrow more than they can afford. In part I, how ARM's
create this problem is analyzed. In parts 2 and 3, the
consequences of home equity loans, and no money down loans are
analyzed.
KEYWORDS
Foreclosure buying, real estate investor, investing, short
sales
About The Author: Learn how to create wealth by buying
preforeclosures & foreclosures and get big discounts with short
sales- http://www.investor wealth.com/ foreclosure. Payoff Your
Home Mortgage in 7 Years-
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