Wheelin' and Dealin'
REAL ESTATE by Mark Gordon | Managing Editor
Buying and selling foreclosed properties is the Next Big Thing in real estate. Cash and knowledge - along with a risk-adverse stomach - are essential to doing it right.
Memo to investors, entrepreneurs or anyone looking to simply make a quick few bucks in the growing niche industry of buying and selling foreclosed property: In addition to the promise of potential profits - marked against major risks - be prepared to get paid in stories.
One veteran foreclosed property buyer, Sarasota-based John Schaub, tells of the time he bought a property on tony Bird Key, near downtown Sarasota. He bought the home from the lender, who had just completed the process of evicting the former owners after they were late on multiple payments.
When Schaub arrived at the house it was empty. Not just of the former owners, but all its contents, right down to the toilets, light fixtures and front bushes.
Other stories will bring tears. Mark Wilson, who runs a Palm Harbor-based foreclosed property-buying business, tells of how he recently sat across a kitchen table from a couple in their Land O' Lakes home; the owners were several months behind in their payments and Wilson was offering them a token cash payment to take over the mortgage.
It was the ultimate business conflict for Wilson: Keeping a deal on a 'just-business' level when it involves an emotional investment, such as a home. The couple cried, in between hemming and hawing, but ultimately signed over the home.
Up and down the Gulf Coast, there are similar stories of hardship and hard times from the small but growing group of entrepreneurs and investors dealing full-time in buying homes in the foreclosure process for potential resale. In the Sunshine State, it's a fragmented and mostly unregulated business, save for a few recently passed Florida statues.
And the industry is only poised to become more competitive over the next few years, as the housing market continues to slump and more homeowners fall behind on payments. Foreclosuersdaily.com, a Largo-based company that tracks filings in Florida and North Carolina, reports some startling increases in foreclosed property growth over the past year: Hillsborough County is up 84%; Pinellas County is up 91%; the Sarasota-Manatee market is up 188%; Lee County is up 337%; and Charlotte County is up 37%.
The field has several entry points, and many ways of succeeding - and failing. And while each broker seems to have their own methods, there is no consensus on exactly which of three possible business models is the best.
The most popular buying method in the Gulf Coast is during what's known as the pre-foreclosure stage, which is the time when the lender or the bank is giving advance notice to the borrowers that they are behind on payments. That process normally runs form about three to six months and is called Lis Pendens, the Latin term used in courts nationwide for pending litigation.
The second opportunity to buy a foreclosed home is at the actual auction, which is commonly referred to as buying a property "on the courthouse steps," industry lingo for the auction that takes place right after the foreclosure is official. That method is common, but also the most competitive, buyers say, as the process combines veterans with amateurs.
What's more, the auction process can be a minefield of buried information that can severely impact the re-sale price, such as hidden liens on the property or lack of title insurance.
Finally, a small number of brokers prefer to wait until the bank or some other establishment has actually foreclosed on the house and then buy it from that entity.
Risk and reward
The main difference between the three methods, brokers and others within the industry say, is risk. Buying from the occupants of the house, in any of the pre-foreclosure stages, involves the greater risk. Questions such as will the occupants renege on a deal - a somewhat common experience, or as in the case of Schaub, will they take the contents of the home with them when they go?
The bank route is safer, albeit more costly. Banks and other lenders tend to have an overly optimistic view of what the house is worth and what it can sell for, and that drives up the selling price.
Mike Kane, president and co-founder of foreclosuresdaily.com, says buying from the bank isn't a good strategy, as it limits the potential profit and just about kills the reasons for being in the business in the first place, which he says is to help people get out of a bad financial situation while simultaneously setting yourself up for some future profit. Buying foreclosed homes is "an opportunity to buy a property at a wholesale price instead of a retail price," Kane says, "if done properly."
Schaub, though, says the comfort of dealing with a bank is better in the long-term, although he's bought in the pre-foreclosure stage before and says he would do it again, depending on the circumstances. Still, "if I'm dealing with a banker," says Schaub, "there's no emotion involved."
Nearly everyone who has bought and sold more than few foreclosed homes, though, does agree on the starting points: Cash is king. And information is his queen.
Cash is integral in the foreclosure market because of the speed in which deals are done. No matter the buying stage, there will be competition for the property, and that requires the ability to have the funds to back up a quick decision.
Without information, though, brokers and buyers say that cash will be wasted. The first step in the research gathering process is to find the target house. Popular places to start are newspapers and Web sites that focus on the business, such as foreclosuresdialy.com and Realtytrac.com, which has a bigger presence nationwide. (The Review publishes weekly foreclosure notices for six Gulf Coast counties).
After zeroing in on a home, or several homes, it is important to do a thorough public records search, buyers say. Look for liens on the property, which can inflate the purchase price. It's also important to see what other homes in the area sell for - as well as what sellers and Realtors are asking for - in order to gauge potential profits.
The latter point is key, says Jim Willig, a Sarasota-based broker who has been in the Gulf Coast foreclosure business for about four years. He goes by the 70% rule: If he has to pay more than 70% of what he can ultimately sell the house for, including potential repairs, then he doesn't do the deal. "If you need a calculator," quips Willig, "it's probably not a good deal.
Another important part of the research process is to check state laws. Florida, for example, has a judicial foreclosure system, which requires the lender to sue the borrower and get an actual court order for the sale. Other populous states, such as Texas and California, don't require a judicial process.
Florida has also passed laws within the foreclosure segment, mostly to protect the rights of the occupants of the house going through the foreclosure process. One statute allows for borrowers to essentially claim they have sellers' remorse after signing over a deal, and at that point, the buyer could be fined - no matter how legitimate the original deal was.
Like just about any other business, information is only as good as how it's used. Wilson, who says he bought 14 homes over the past year and resold some for an overall profit of more than $100,000, says they trick is to develop a connection with the borrower. "Too many people spend all their time analyzing what makes a good deal," Wilson says, "and not spending their time talking to the actual homeowner."
Likewise, Ray Higdon, who runs Fort Myers-based foreclosure-buying firm RLH Holdings, says he's worked on about 60 foreclosed property deals over the last six months, from condos to single-family homes to even a hotel. And Higdon says the biggest lesson he's learned is that to succeed in the business, it's important to treat it like one.
Trend. Increased buying and selling of foreclosed homes.
Industry. Real estate
Key. Access to information and the financial ability to act quickly on it are two tricks to succeeding in buying and re-selling foreclosed houses.
There are Web sites, seminars, classes and group sessions offered up and down the Gulf Coast for those looking to become a broker of foreclosed properties. Some of the programs are for the more advanced buyer, while others are designed for a beginner. Here's a sampling of what's out there:
Foreclosures Daily: Company offers three-day boot camps, classes and coaching for new and experienced investors in foreclosed properties. Also has a DVD/CD package for sale.
Web site: www.foreclosuresdaily.com
Contact: Mike Kane, Foreclosures Daily, (727) 683-1145
Sarasota Real Estate Investment Association: Group is open to beginners and experienced dealers in the foreclosure market, with annual association dues of $100. A group of more experienced members meets weekly, while a beginner's group meets monthly. Members include Realtors, bankers and lawyers working in the real estate field.
Web site: www.sarasotareia.com
Contact: Jim Willig, Sire Properties, (941) 927-0040
Future Wealth Club: Group is mostly for entrepreneurs and real estate investors of varying experience. Recently expanded to include the Cape Coral market.
Web site: www.futurewealthclub.com
Contact: Ray Higdon, RLH Holdings, (239) 248-2112
AT A GLANCE
Gulf Coast Foreclosures
County 2006 2007 %chg.
Charlotte 67 92 37%
Collier 45 174 287%
Hillsborough 372 683 84%
Lee 146 638 337%
Pasco 184 414 125%
Pinellas 321 612 91%
Sarasota/Manatee 160 461 188%