The USA foreclosure story and why realtors are not the best source of property

USA Foreclosures

The USA property market is 'on sale' right across the continent. Property investors have never had so much choice at such low prices. To benefit from the best deals you need to understand:

How the foreclosure process works
What can go wrong
When and where is the best place to buy
Why realtors (estate agents) are not your best option

Let's investigate all these things. Just in case you are not sure, 'foreclosures' in the USA are the same as repossessions here in the UK.

As the property crash has continued throughout the US, the Government has introduced new processes which are designed to help people to stay out of foreclosure. Therefore it is important to understand the entire process from end to end.

Different states also have different regulations and laws and, therefore, the process can vary. I'm presenting a generic approach which may be slightly different from state to state.

Loan modification

The first process is that the US Government has put pressure on lenders to agree to some modifications to the existing loan, in an attempt to enable more homeowners to remain in their properties.

At the current time, this primarily consists of reducing the monthly payment for a period and adding the shortfall to the outstanding capital. In general this isn't working because it doesn't deal with the huge issue that the loan could be (for example) $100,000 and the property may now only be worth $60,000. Making the outstanding loan even higher doesn't help the homeowner to keep the property long term.

Currently, a very high percentage of loan modifications are failing within 12 months - the owner is taking the reduced payments for a period and then not paying the higher amount when it is due again.

Typically as many as 90% of loan modifications don't work, which means the next stage of the foreclosure process begins.

Short sale

The owner may approach the bank and explain that they cannot meet the repayments and are going to default on the loan.

Rather than start repossession procedures the bank may say "bring us an offer and we will consider it."

In practice the owner then goes to a realtor who lists the property at a significantly-reduced price as a 'short sale'.

There are a number of problems with short sales:

Firstly, the realtor puts the property out at a very low price, to encourage multiple offers.

Secondly, the bank is overwhelmed with short sale offers and can take 3-6 months just to come back with an answer to an offer. In most cases the potential buyer has gotten fed up and gone elsewhere.

Thirdly, the bank has not told the realtor or the owner the price it is prepared to accept and most of the offers are rejected by the bank.

This is very confusing for an investor who sees a short sale advertised on the internet. The price has not been accepted by the bank and therefore presents a false view of 'value'.

Currently, about 70% of short sale offers are failing! In which case, the next step (in some states) is a trustee sale.

Trustee sale

A trustee sale is where the bank has taken charge of the property but does not technically own it yet. They appoint a 'trustee in bankruptcy' to sell the property for cash at the local courthouse.

Buying a property at the court house is fraught with difficulty:

Only 24 hours' notice is given.

In the time before the sale it's up to the buyer to:

check title
check any liens (charges and/or bad debts) attached to the property
inspect the property
ascertain value - including any refurbishments
arrange cash to pay the deposit on the day and also the balance in cash within 7 days

It's important to understand that, in most states, the sales take place at the courthouse which is local to the property. In a big city this can mean that, on the same day, as many as 20 sales in different locations are taking place. It's a logistic nightmare.

On top of this, how do you bid on multiple properties at different locations at the same time?

To give you an idea, in one major city I just visited (Phoenix, Arizona), there can be as many as 1,000 repossessions in one day - split across 20 or more different sales locations.

If the problems with deciding how much to bid and for which property is not enough, around 70% of notified sales are being withdrawn on the day, with little or no notice. This can be because of the bank encountering a legal problem, the owner paying up any overdue loan payments and so on.

Foreclosure

Finally, if the property goes through all the processes we have just discussed, then the bank finally forecloses and at that point actually owns the property. The big question is what they then do to dispose of the property.

In general there are two approaches. Their either sell the property, usually in a bundle, to 'wholesale' investors, or may appoint a realtor to put the property back on the retail market as an 'REO owned' property.

REO owned

When you see an 'REO' owned property in the USA listed for sale, it is owned by a bank at that point. The sale will be available through a realtor.

Liens

You might think that when a short sale, trustee sale or REO sale is made then the property will at least come to you free of any liens and charges.

Not so. In the USA there are many reasons that charges can be attached to the property and these become your responsibility when you purchase.

Some examples of common liens that attach to a property are:

Second loans taken out by the owner
Hire purchase agreements
Unpaid city taxes
Unpaid Homeowners Association (HOA) fees

It is critical to understand the impact of these liens. You could purchase a property for (say) $20,000 and find that there are $30,000 of liens that have to be cleared before you own the title free and clear!

Why buying from realtors is dangerous

The very best opportunities to purchase for an investor are either at a trustee sale, or as a bulk 'wholesale' deal directly from the bank.

The worst time for an investor to purchase is through a short sale or an REO owned property. You are in competition with other investors, the price is probably higher, the timescale can be hugely extended and the likelihood of success is low.

Guess what? Realtors offer short sales and REO owned property - just what you don't want. Not only that, but there are other major issues in buying from a realtor:

They represent the seller and have no duty of care to you as a buyer.
The property is likely to need refurbishment. Buy from a realtor and who are you going to get to assess the property fairly, give you a reasonable price and then complete the work to a satisfactory standard? Running a team of builders is difficult enough when you know them and can supervise the work - how on earth are you going to manage the risk when working with people in a different country that you have never met and don't know!
Location is critical. Even to the level of which side of the street you are on. Unless you visit, who is looking after your interests and ensuring you purchase in the right location?
The property is also critical. Some property is well constructed from good builders. Some is not. Again the realtor has no commitment to ensuring that you only buy the best property in good locations.
When it comes to tenant your property, the realtor will pass you over to a management company you don't know and could be good, or bad

At the end of the day, for UK investors buying in the USA, working with a realtor and purchasing off a website is fraught with risk. The most likely outcome is a poor investment and a potential loss of large amounts of capital.

How Axis delivers security for investors

Axis understands the foreclosure process in great detail. With our experienced US partners we take out almost all the risk of investing in the USA because:

Our investors buy very cheaply through distressed sellers, trustee sales and wholesale purchases from banks.
We take care of any liens to ensure the title is free and clear.
We ensure that the location is good for rental and eventual resale (where appropriate).
We complete all refurbishment work ready for occupation. It's included in the price so there are no unpleasant surprises.
We find tenants for the property and provide management through a proven, experienced team that is well known to our US partners.
Axis completes extensive due diligence - far more than a realtor ever would.
Most importantly, our responsibility is to you, the investor, and not to the vendor. Therefore we represent your interest!

Live with Abundance

Rod Thomas sig