Shockingly low real estate deals are now getting a second look from sellers and lenders

Foreclosures in the country have surpassed more than a million homes. Combine that with people simply trying to sell their home for whatever reason and there are overstocked homes in many markets. While this level is high, it falls within many historical changes from the past. The point of this discussion is to point out the incredible buyer’s market that exists in many areas of the country.

Arbitrage in financial markets takes advantage of price differentials between more than one market. Money is made by taking advantage of the differences. In real estate, with the benefit of trained certified property managers and the like, there is the potential to invest in areas that are depressed and have good value in the future. Like examining the finances of a company so that the same type of game can be arranged with investment situations across the country. Yields in the 25+ percent range over, say, a two-year period should be factored in when making bids, even considering the increase in these places outside of one’s backyard. However, it would be better to find deals in the backyard, as there is a lack that one must look elsewhere. In an example of buying a rental condo in a tourist area that has abundant inventory and many foreclosures, forcing prices down, an investment game may be possible. If a rental condo is listed at $300,000.00 and you have an existing $280,000.00 mortgage with a pending foreclosure putting pressure on the owner, this could be a deal worth considering. ARM homeowners with accelerated payments and/or other pressures have come to affect homeowners in a bind. Many of these condo rental properties with on-site rental offices generate decent cash flow. On some beachfront properties, gross rents will approach $30,000 or more per year. When trying to negotiate with a lender with a foreclosure action in hand, it’s best to have your own financing or cash to bring to the table. That lender will not reduce the (mortgage) price if they are asked to hold the mortgage. In this example, a proposed “short sale” would be tested as a possible action. In this case, the owner receives nothing. The owner may keep a foreclosure nick on his credit, but that’s about it. The lender, on the other hand, will be offered an offer in the $240,000 range IF the yield is calculated. The lender takes a hit of over $40,000 in the deal with additional costs for legal fees, prior payments, late fees, etc. in addition to the “short” arrangement. This is a great success for the lender. However, REO properties must be liquidated. If the lender foreclosed and stayed in the condo for another six months and took another hit at the time of sale, the proposed $40,000+ hit starts to look pretty good.

An investor needs to determine the condition of the market in one or two years. The economy is still strong, employment is strong, so it’s a question of what will happen in the market in the future. If that analysis turns out positive, then one would continue on the track. An external force on these beachfront condominium properties will come into play when the dollar possibly falls against the euro or the pound. Those buyers entering the market with stronger currencies will view these situations as solid buying opportunities and prices may move higher again. A real estate agent needs to market to these buyers immediately. Plus, with stronger currencies abroad, vacationing in these beachfront condos can seem almost cheap for sure. Within a few years, rents could increase and demand could increase for these specific properties that can be rented out when owners are not using them. Naturally, there’s no guarantee that this will play out exactly that way, but it’s an educated base of analysis on the currently available facts. When depreciation, interest deductions and other factors are factored into the equation, a $40,000 “short” may not be enough. Maybe it will take a little longer. In either case, an investor’s numbers need to be shared with the lender to bolster the “short sale” case and give a little cover to the exercise specialist signing the deal. The lender will have various BPOs (broker pricing opinions) of the value as well as various AVMs (automated value models) to further lock in the value. However, if things haven’t moved with, say, six months of market exposure, then the lender may be forced to pull the plug.

Just like when the accelerated depreciation cap was removed in the 1986 Tax Code, properties are left to stand on their own. Limited partnerships and REITs were offered with low leverage (50% LTV) to realize any type of cash flow. In this case, a highly leveraged mortgage would ensure negative cash flow. Therefore, the return on investment will be calculated in a low leverage situation. 25% more return then would be possible. Each case must be reversed prior to bidding. If there have been multiple price reductions during the listing period with offers to pay all closing costs and such, then this will prompt further investigation. To save a lot of time, the question was phased as: “To save both of us a lot of time, I’m looking to buy at a deep discount from a motivated seller or a lender who will consider a deep short sale.” I am very liquid in cash and can close quickly. Is there any chance of reaching an agreement on this property?”

This excess property will not be here forever. It took a few years to absorb the Savings and Loan fiasco and the significant write-offs that took place, but it was absorbed and many made money. The original homeowner who is in an over-leveraged mortgage situation may have caused the initial foreclosure situation. High leverage kills when the underlying financing is an adjustable rate mortgage in a rising interest rate market. Cash flow disappears. The bleeding begins.

It is not a place for the faint of heart. Just like arbitrageurs in the financial markets, you need a strong will, liquid cash and a good sense of the current market and the future market and how it will all play out. The climate for a play is here and now in some specific areas. Over 1,000,000 foreclosures, a glut of market listings, a falling dollar that makes situational buying attractive to foreign borrowers make it a gamble now. “Knock Knock.” “Who’s there?” “Deal” “Deal with whom?”
“To negotiate or not to negotiate, that is the question”

dale rogers

All rights reserved. The article may be reprinted as long as the content remains intact, unchanged, and all links remain active.