Pre-Foreclosure Sales: Walk, Then Run

January 1, 2006

A practitioner working the pre-foreclosure market needs to be part tortoise and part hare. To find a deal that satisfies both sides of the transaction, you must be patient and diligent. Investors and homebuyers looking for a home at a below-market price have specific criteria for what they want and will wait until they find it. Sellers also tend to move slowly, often trying to resolve their financial problems before agreeing to a sale.

Your role as the hare comes in when the deal starts to gel. Then you must move quickly, not only to keep the competition at bay but also to forestall foreclosure proceedings.

“It would be difficult to succeed in the pre-foreclosure area without dedicating yourself to it,” says Sean Ryan, a practitioner with The Miller-Ryan Team at TNG Real Estate Consultants LLC in Brea, Calif.

But “if you’re willing to do the work, it’s a good market and a great way to build customer relationships,” says Ryan, manager of TNG’s foreclosure division, who oversees 14 licensed salespeople. “There’ll always be people who thought they could afford to buy a home and then discovered they couldn’t.”

Building relationships

Traditionally, practitioners working the pre-foreclosure market have relied on the relationships they have with lenders, attorneys, and other related professionals who could alert them to opportunities. That process has become easier with the advent of online services such as Foreclosure.com or RealtyTrac.com, which offer practitioners and consumers searchable, subscription-based databases of delinquencies and foreclosures that are updated daily.

“The best opportunity for approaching people facing foreclosure is as soon as possible after they’ve entered the process,” says Ryan. He sometimes calls prospects on the phone, but prefers speaking with them face-to-face. “When I address homeowners for the first time, I don’t even bring up the foreclosure. I just approach them as a practitioner looking to buy real estate [for a client] in their area.”

What’s the foreclosure outlook?

About 4 percent of the 40 million loans on one- to four-unit residential properties in this country were delinquent in the second quarter of 2005, the most recent data available. The data, from the Mortgage Bankers Association’s National Delinquency Survey, shows 2.74 percent were 30 days past due; 0.76 percent, 60 days; and 0.85 percent, 90 days or more. Those percentages represent slight increases from the previous quarter, but what happens going forward depends on the economy.

“The prime driver for delinquencies and foreclosures is what’s happening with unemployment,” says Mike Fratantoni, senior director of single-family research and economics at the Washington, D.C.–based MBA. According to its three-year economic forecast released in October, the MBA expects the national unemployment rate to drop to 5 percent by the end of 2006 and to 4.9 percent by the end of next year.

Strong price appreciation seen in many markets also might help stabilize or lower delinquency rates. Homeowners facing foreclosure could take advantage of the rise in prices to sell their property and move into a more affordable residence.

An expected increase in interest rates, however, could push the delinquency rate higher. According to NAR’s economic outlook, interest rates, which were 5.8 percent for 30-year fixed mortgages and 4.5 percent for one-year adjustable-rate mortgages (ARMs) in the third quarter of 2005, were expected to climb to 6.7 percent and 5.2 percent, respectively, by the end of 2006.

Fratantoni also noted that the foreclosure rate for groups of loans taken out in a given time period tends to peak about three to five years after origination. That means loans closed between 2000 and 2002—a time of heavy financing and refinancing activity—would just be entering that period.

If you’re contemplating a focus on the pre-foreclosure market, practitioners who specialize in pre-foreclosures suggest you:

  • Concentrate on specific areas. Limit your focus to a manageable geographic base so that you can become familiar with property values and identify attractive deals quickly.
  • Be sensitive to the plight of sellers. Owners may be embarrassed or angry about the need to sell their home. So show that you can handle the situation delicately and in the best interest of everyone involved. For example, you can often get lenders to delay the foreclosure if they believe a solid deal is in the offing, says Carmen Bruton, salesperson with RE/MAX All Properties in New Lenox, Ill. “Banks would rather sell a property than foreclose,” she says. If the buyer is an investor, you might be able to work out a short-term rental for the sellers until they find a place to stay.
  • Understand buyer motivations, too. Many pre-foreclosure purchasers are investors who “have less emotional response to a transaction, so they’re willing to wait longer for the margin they’re expecting,” says TNG’s Ryan, who primarily works with buyers. He adds that buyers must show him they’re serious about a particular property, such as by agreeing to an all-cash offer, a nonrefundable deposit, or a shorter contingency period.
  • Assess the property’s condition. Once you establish a relationship with the owner, review any documents, such as pest or structural reports. Make a list of estimated repair costs, which can be either subtracted from the purchase offer or used to set a budget for seller-paid repairs.

With the patience to wait for the right deal and the ability to act fast once you find it, you may find pre-foreclosures to be a rewarding niche.

Chuck Paustian is a former REALTOR® Magazine senior editor.

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