Somewhere around 1 a.m.
real estate commercials start making you offers you would be stupid to refuse: Buy houses at government auctions for as little as $100; gobble up distressed properties with no money down — and for half their market value — and sell them for enough profit to earn a yacht full of Playboy Playmates like the guy selling his secrets on TV.
Stephen Waniak, broker for Keller Williams Cornerstone Realty in Belle Meade, would like to remind would-be real estate investors of the cliche about things that sound too good to be true. There are ways to make money in distressed real estate and there are ways to buy properties for less than market value, he says. But lenders will guard the properties on which they hold liens. Sheriffs’ offices will ask you for 20 percent when they hold sales on foreclosed properties. And you will almost never find a livable house going for 50 cents on the dollar.
Besides, if your goal is to find a good deal on a piece of property, does it matter whether the house is actually in foreclosure?
Waniak will present “How To Buy Foreclosed Properties” on Saturday, June 27, at 9 a.m. at Mercer County Community College in West Windsor. Cost: $60. Visit www.mccc.edu or call 609-570-3311.
Waniak, who grew up in Absecon, studied at Rutgers but ultimately left for a career in real estate. That was 26 years ago, when he got into the sales end. He eventually started his own company, sold it, and became a broker, working with several national firms, most recently h GMAC Gloria Nilson.
When it comes to buying foreclosed real estate, misconceptions and pitfalls are everywhere. The biggest misconception Waniak finds is that people think they are going to walk into a sheriff’s sale with no money and walk out with a massive new home. In truth, he says, to walk out of a sheriff’s sale with a property in tow you will need to cover 20 percent of the purchase price with cash (or certified funds) and be able to close within 30 days. There also is no home inspection — homes are sold in as-is condition. “You don’t always know what you’ll get,” Waniak says.
Mostly houses go into foreclosure because they are over-financed. Whether because of subsequent mortgages, because the adjustable rate adjusted just a little too far, or because the homeowner lost income, the borrower can no longer afford the house. But the lender still wants its money, and if a homeowner can’t pay, the bank will move to possess the house. In most cases the lender sends a representative to the sale to “bid up” the property to the amount of the lien against it. Without a higher bid from another buyer, the lender will take possession of the property. The property then is labeled “real estate-owned.”
Outside investors can and do win properties at auction, but those who do are not just people with nothing else to do, Waniak says. They are serious investors with lines of credit, money, and the ability to do title searches. “They’re almost professional buyers,” he says.
In short, buying distressed properties is not simply paying the difference between what was paid and what is owed on a mortgage. Homeowners need to be aware of predatory offers for foreclosure alternatives, such as ones in which a buyer takes over the payments on a property and the homeowner signs over the deed. Homeowners in Florida and Nevada, two of the hardest-hit markets in the country, have been hit with a number of these offers, which only compound the problem, Waniak says.
“Florida is just decimated,” he says. “There are literally thousands of properties on the market and a severe shortage of willing buyers.” And lenders are saddled with “non-performing assets,” which in turn causes problems when they go to fund new loans. Consequently, fewer people can borrow and fewer are in a position to buy. So properties sit there, unsold.
The good news for investors is that banks do not necessarily want to own a lot of debt-laden properties, and this creates opportunities to buy real estate at below-market values. Investors just need to be motivated to navigate the proceedings and to understand some of the terms and processes.
Where to look. Finding properties in foreclosure is the easiest part of the process. Sheriffs’ departments advertise properties in newspaper classifieds and online searches are plentiful. There are businesses that sell lists of distressed properties, Waniak says, but those are hardly necessary. The most popular site, www.foreclosure.com, lists properties by state, city, and region, including sale prices and comparison market values.
“Finding foreclosures has never been the problem,” Waniak says. “If you want you can just go to the sheriff’s office and ask to see the list.”
HUD. The federal government offers vast amounts of information for free. Through the government anyone can find lists of distressed properties, procedures for bidding, and information on just about anything connected to real estate sales and auctions.
You will also get no help with it. While the information is there, knowing how to decipher it is a skill itself, and even then is no guarantee of success. “It can be very complicated and frustrating,” Waniak says. “If something doesn’t work, you don’t know why it didn’t work, they never tell you. It’s really a faceless transaction.”
Upside-down. You once took out a mortgage to buy your house for $150,000. Then you decided to refinance. The bank, riding high over most of the past decade, was all to eager to give you a king’s ransom as a second mortgage.
When the bottom fell out, you found you owed $500,000 on a house worth no more than $475,000. “This is what we mean when we say someone is upside-down on the mortgage,” Waniak says.
People get upside down for a few reasons, he says. Some are victims of adjustable-rate mortgages. A few years ago lenders were giving money away to almost anyone. Credit standards were relaxed, down payments were not always needed, and even the fact that someone was out of work was not always a barrier to a handsome loan. Lenders offered low introductory rates that would adjust over time. Consequently, many people eventually got adjusted right out of their affordability range. Many needed to refinance and ended up taking on bigger debts in exchange for lower payments that still found their way out of the borrower’s comfort zone.
Others are victims of market retraction. Unable to make payments for a $350,000 house, they lost the property. But in the meantime, the value of the property sank to $335,000.
Short sales. A short sale is the sale of any property for less than the value owed on it. It can be the result of an inability to keep up on payments, but Waniak says it does not automatically mean a homeowner is in financial tumult. “They might not be behind, they might just want to sell the house and they owe more than it’s worth,” he says.
However a short sale occurs, the homeowner will petition the lender to accept a lesser value. It is not itself a foreclosure issue, Waniak says. It is, rather, an alternative to foreclosure. But the result for a buyer is opportunity to find good properties for less than they are really worth. A dose of reality, however: Less than market value is rarely half or a quarter market value. The difference often is less than $50,000.
And all advantages in a short sale do not belong to the buyer. For the seller, there will be no foreclosure on his record; for the bank, the loss of $20,000 in outstanding debt outweighs the $80,000 in procedural costs it will take to settle the estate.
No stress. Waniak gets a lot of calls from people looking to understand the distressed property puzzle. Many are under the spell of real estate infomercials that turn a nice profit for their purveyors and much confusion among their buyers. Such programs explain the benefits of cashing in on pre-foreclosure and foreclosed properties, but Waniak says they miss something most people do not stop to consider.
“I always ask people what their investment objective is,” he says. “Some people want to buy a house and live in it. Some want to buy it, rehab it, and hold it. What everybody wants is to be able to buy property for less money. So I ask them, ‘Does it matter whether it’s a foreclosure?’”
Distressed properties are not the only ones that sell for less than their eventual resale. Sometimes people are motivated to sell a house that belonged to a family member and they will take a low-ball. Some markets have shrunk and eventually will open up, but not until after a homeowner is forced to leave. Some people sell properties themselves and do not know they could get more.
Use an agent. Good buys exist, and not just in bad situations. What Waniak wants people to know is that qualified real estate agents are the best bet in making real estate deals. “Just be careful out there,” he advises. “Talk to a broker. And I don’t say that because I’m a broker. Nobody is going to give you better advice than someone who deals in real estate professionally.”