441: Foreclosures Are Rising Across the Nation, But Who Should Buy Them?

24:52That doesn't mean that we're not going to see more personal stories as the economy could potentially slow down. That's going to cause issues. but it's a different thing right now. Like every short sale that we're involved in today is actually with private banks and hard money lenders, not with your traditional lender. Yeah, I definitely agree. I mean, to be honest, I was terrified just because I had clients who were participating in putting their mortgage payments on hold. And when it came time for, like I saw the documents that were coming from the title companies where they were getting these like weird balloons and seconds that the bank was forcing them to get in order to keep their mortgage going.

25:32And I just thought, this is bad. I can just see, you know, most people don't have savings. And I have been surprised that it hasn't affected, you know, actual owner occupants more than I thought it would. It's good that it hasn't. But, you know, talking about investors who got too expensive of money, I mean, we're seeing that too. I mean, we, you know, we had some flips with hard money on them, like we have one going on right now that our hard money lender, like he doesn't want to refi us out for that. And we're like, well, we still have it. It's a, I call it, this is so bad. I shouldn't probably say this on here, but I call it our dingleberry, where it's just like this weird one that we bought, you know, and it keeps hanging on and, you know, it's our fault.

26:15We had public and construction and permits and stuff like that. So we're gonna have to refi it out. And so if you, you know, don't have any excess capital in your flipping business or, Or, you know, I could see how you could get in a ton of trouble if you were comping things wrong or being over generous. As the market started to soften, interest rates went up, less buyers were involved. You know, I can see how you could get in some trouble. Yeah, leverage is, you know, leverage is the thing that can be the best thing in the world and help you grow rapidly. But it also can be just a sand trap that you get stuck in and you can't get out of.

26:48And, you know, I think, you know, as we start to see more foreclosures increase, you hear all this hype, like, oh, there's going to be short sales because the market has compressed a little bit. And, you know, there's going to be all this foreclosure coming to market. But I feel like it's going to be a different thing, right? Because back in the short sale days of 2008 to 2014, it was all about loan mods and short sales. And it was about that process pushing through with these huge banks that had all just bought tons of notes for pennies on the dollar. And it was a mess of notes, like a sea of bad debt, and that everyone was just trying to rip through and understand And it was a very long process.

27:24Those short sales would take on average five, nine, 12 months, sometimes up to two years. We'd be working a short sale for somebody. And then this era, it seems like, you know, as we're seeing the greed, right? And that kind of is what spawned 2008. People are getting greedy. They could get free access to money. They would get it and go spend it on other things. Or they run into hard times with the economy. This was like the investor greed is what we're seeing a lot more. And it's a different short sale process. Like when you're working with homeowners and, you know, as people are geared up, you know, I was talking to somebody the other day and they're like, hey, I'm getting geared up to start my short sale business up again.

27:58I'm like, yeah, but it's going to be kind of a different thing, like not targeting the homeowner. Whereas with right now, it's in that investment space and they're smaller banks, local banks, and they'll move a lot quicker. Whereas before it was like you had to order formal BPO, submit the documents, update them every 30 days. What we're seeing now with our short sales is we can get a deal done really, really quickly with these lenders because they're hard money guys. They want to get the debt off. And instead of being a nine month process, they're getting processed in 30 to 45 days. And you're working with local bankers.

28:29So it's actually a lot easier streamlined process right now than it was back in 2008. 2008. One thing that we are also seeing on the short sale process as people are starting to go in is instead of going directly to the seller, it actually makes sense to go directly to the bank and try to short sale their note and buy their note from them and then work through the process because as investors, you can be very streamlined and get through it. If you're talking about buying paper. We just bought a note and it took us nine days to negotiate the note down about 32%. And so the lender's like, hey, we're midstream and cutting it out.

29:10So it's going to be like a new way to be doing short sales. Instead of cold calling homeowners, we might be cold calling local banks trying to get the paper off. Have you started looking into that as the short sale business could be making a comeback? Or is it something that is a thing of your past, like it is for a lot of us brokers that had to do it? So we're so diversified right now. I feel like at this point, we have a lead that comes in. It's like, what's the best way to tackle this? And you were talking about before we started, you were talking about projects that you'll take on that have something weird, like extending the sewer pipe, which most people won't touch, that you're able to deal with.

29:46And I think that's one of our specialties as far as like, problem houses, is we will deal with like weird things. We'll deal with IRS debt. We'll deal with weird divorces. We'll deal with people who have eight different loans and liens on their property. And so with us, it's like, what's the best way to tackle this and get the best solution for everybody? So we don't specialize in that. We don't go after that specifically, but it depends on the house and the person in the situation. So yeah, but that is so cool that you were able to negotiate that for so much less. And what'd you say, nine days?

30:26That's amazing. So in some states, it seems like it can take months or over a year to foreclose on a residential property. James, are you saying that, and Laura, are you saying that the process to foreclose on an investment property with a non-Fannie Mae insured mortgage or note against it is much different or faster? There's less options for investors, right? With a homeowner, you can contact the loss mitigation department and you can work out a payment plan, especially coming off of COVID. The banks are still being very loose with the money. They don't want issues and they want to work people through.

31:06I think that was something that they realized from 2008 is if they would have worked with people more, the banks would have lost a lot less money. Even if they're writing down notes and fixing. And so they did learn a lot of hard lessons from 2008. But these are big banks that are working with residential people. So when you're calling as a homeowner, you can get your foreclosure extended. You can prevent it. They'll drag their feet. But when you're dealing with a hard money lender and they're dealing with investors inside their fund that also sold off a fraction of their note to a different bank, these are money guys that want to get a deal done and they're ready to move on, take a loss and redeploy out their money.

31:43And especially if it's for an asset that they don't understand. So it's about the difference of working with the type of bank and then the people asking, there's a lot less sympathy for investors, right? Like, I mean, if you go to your permitting department, the residential homeowner is going to get their permits a lot faster than an investor. Same with this. It's the bank. It's because it was done for a commercial purpose with a commercial intent. The bank is going, hey, this business now is over. We're going to move forward. So I think it's the decision makers. And there's a lot less red tape on the hard money side.

32:13And so it just streamlines the process. And also when you're calling them about buying their note, they're just doing a deal. They're looking at what's their cost of money, how much they can deploy it out for in a rapid way. Can they make up their yield and get their loss back in and then just move it on from there? And so a lot of times it makes a lot more sense for them to take a fraction or pennies on the dollar rather than to let this loan accumulate and rack up more debt and take it to auction. Yeah. Get the money back and they can send it out to someone else. So yeah. If you guys had to guess, there was 325 ,000 some odd foreclosures last year, probably pacing for 375 this year.

32:50What percentage of these are investors with hard money notes and what percentage are owner-occupant? I don't think that data exists, but do you have a guess? It still has to be fairly low because the amount of investor transactions I think is 1 % is owned by investors nationwide. But I would think that it's still going to be a higher, like you're probably still in that 10 to 15 % range because there's a lot of multifamily commercial. All those things are classed in there and there's some stuff in default right now. And so I would say, you know, if it was my guess, I would say 5%, which would be substantially higher than the statistical average of investment property owned.

33:25But in our local market, I'm probably seeing a good 5 % to 8 % of its investment product. Okay. So the 80-20 or the 95-5 is going to be the individual losing their home essentially. And one of the reasons I think why there's lower foreclosure volume today is because I don't think – the Great Recession is because of the less job loss to a large degree than in the Great Recession in the last couple of years. And then the much better overall quality of mortgages in this country. Most mortgages are 30 years. Most mortgages are fixed rate. Most mortgages are underwritten for folks with excellent credit scores and those types of things.

34:04People will fight like hell to keep those mortgages because they're so low interest and the alternative is going and paying a lot more in rent or buying a property. So Laura, when we're talking about the homeowners that are getting foreclosed on in this market, what is the nature of the situation that's afflicting the folks that are getting foreclosed on today? What are some of the things you're seeing that are specifically happening in the current environment? So it always comes from pain. And unfortunately, no matter what's going on in the market, there's just some universal things that will happen to people.

34:39So job loss, again, unemployment still at a historic low. but job loss, divorce, death, things like that, where people end up in a situation where they're not making their housing payment. And again, the whole thing of like someone just up and deciding someday, hey, I'm not going to make my house payment. I'm just going to keep my money. That does happen, but it's super rare. It's always a pain point. And so it's something to where, I mean, we've kind of honed in on short sales, but there's so many more options for people and especially us as investors that we can present to them. And I think before in the past in my career, I've been hyper focused on saying, hey, I'm calling and I'm bringing you in because I want you to sign it for a short sale.

35:23And right now, there's solutions that people can break even or maybe they can even make a little bit of money or they can leave their loan in place and we can reinstate it and take it over sub two. There's other interesting options that actually work out really well for investors that isn't just short sales. And so I think coming into a situation like this, especially doing wholesale for a couple of years, my initial default was cash offer. And that's not always the best solution for everybody. And that's not always the thing that's going to make you the most money too. So I think that having a couple of tools in your tool belt as an investor for some options for these people, getting them in and deciding, hey, what's the best way for us to tackle this that works out?

36:11But I think it's really cool that there's so many things that are working out really well for people who are in foreclosure. That isn't just short sales and isn't just a cash. Okay. Two follow-up questions here. One of them may be a dumb one here. But first, the dumb one, are all of these foreclosures or most of them short sales in the current environment? Or is something else happening with these foreclosures or pre-foreclosures? Not. I mean, a lot of these people have equity, which is so interesting. And I'm sure you've run into that, too. You're like, what are you doing? You could just sell your house.

36:44You could have listed your house the realtor and got rid of it. But again, there's usually some other things that are going into play where maybe it's not the correct house to sell on the open market with a real estate agent. Maybe there's some deferred maintenance that are going on to here. Maybe it's a hoarder situation. You know, there could be a million things. Maybe the roof is horrible. Like usually these pain things kind of coincide with the condition of the property as well. So but sometimes they do have equity or sometimes like there could be something to where they could just break even and get out from underneath it.

37:14So short sale isn't the thing that we're seeing the most often. And especially in, you know, the world that I live in, which is creative finance subject to we're buying a lot of these subject to, you know, we're reinstating the loan because it's cheap money. You know, these people have two, 3 % interest rates on the house. Why would we ever want to get rid of it? So it's like, hey, you're in default. Let's, you know, catch you up, reinstate it, and we'll purchase the property. And they're happy because, you know, they don't have any more late payments. We're making the payments on their behalf, which is helping their credit go back up.

37:47And we're happy we got cheap money. So can you, you know, that's fascinating. So it wasn't a dumb question after all. People are actually getting foreclosed on with equity and low interest rate mortgages in the current environment, and it's not in the context of a short sale. Can you walk us through an example of one of these situations that may have happened in the recent past and what pain the homeowner was facing and how and why a home might have transacted that had equity and a low interest rate mortgage, but gone through foreclosure? This is one of my favorite ones because sometimes I'm like, I wonder if any of these sellers will ever watch this because I'm going to air a little bit of dirty laundry for their pain points.

38:28But we had this really awesome guy. He had built, we have this really cool mountain range in Mesa, Arizona called the Superstition Mountains. And they're just beautiful. It's this old, like super million plus year old volcano. And it's gorgeous. But if you get out there and you get a piece of property, it's so cool. And he built, he and his wife, this amazing house where he even set up their primary bathroom to have this beautiful soaking tub that was copper that she could look out and see the superstition mountains. Anyways, they got a divorce. So horrible, very contentious divorce. Horrible, horrible, horrible.

39:04On top of that, he did not grade the property properly. And so it was dirt and he kind of built it up on a hill. And so all of, you know, as it was raining and monsoon season, he was getting, it was just falling away from the foundation of the house. So in his mind, he's like, this was a romantic gesture. I want nothing to do with it. My wife wants out of it. Or my ex-wife, I should say at this point. And there's also like, there's going to be some issues that I don't know how to fix. And so he moved out, he and his son. And he was like, why am I going to continue to pay on this? Like, why am I going to make two housing payments?

39:43I'm going through a divorce and paying attorney's fees. I'm going going to have to pay alimony. I'm going to have to pay child support. So he was in a bit of a, you know, a messy situation as divorces can be. And that is one of the most common things. And so we got in touch with him and we were like, hey, you know, like this is actually a really amazing property. It would make a great, you know, short term rental for us. We didn't tell him that, but like, that's how we were looking at it. We're like, this is essentially a brand new house. And it's in a really cool spot. And so we offered him terms.

40:14So we were like, hey, can we just take over your mortgage? I mean, he had just recently secured financing. It was like two-year-old house. And so he was like, you'll catch me up. Yep. You'll take over it. I'm not responsible for any of the repairs. I'm not responsible for the maintenance. Like you'll pay the property taxes. You'll pay the homeowner's insurance. Yep. And he was like, happy to do it. So we were like, how much money do you want? What price do you want to sell to us? And he was like, honestly, I just want to get out of it. So we cut him a check for like 10 grand, reinstated his loan.

40:46And so I think it was just under 3%. And it was great. I mean, turning that into a short-term rental, even turning it into a long-term rental would have cash flow, but turning it into a short-term rental. And it was great. He had a dog. The worst thing we had to do is figure out how to get the dog smell out of the house. But for the most part, it was a beautiful house. We furnished it, we got it up, and it worked out perfectly. And he's happy too. Awesome. So that's one example of why someone would walk away from equity in a situation. So there you go. There's the pain, the specific circumstance that's facing someone.

41:22Now, let's put ourselves in the shoes of someone who's on the other side of this. I'm not an investor, but I'm someone who's about to get foreclosed on, or I'm this individual, right, potentially. And I'd love to go through two examples. One, what does someone do if they're facing foreclosure and they have equity and this great interest rate debt? What are their options? And let's go through the same exercise again after that for someone who's facing a short sale situation because you said that's a portion of the foreclosure hitting the market here as well. So obviously the best case scenario, and I'm sure we could all agree, is for them to list with a real estate agent.

41:55So not everyone who's going to be watching this podcast is a real estate agent. So they're thinking, if I come across this type of lead, why would I just give it to some realtor. Well, a realtor can cut you back something, send you a referral fee, do something to make it worth your time. The problem is, is once a house is in foreclosure, it obviously has a foreclosure date looming. And so putting a house up on the traditional market, you're not guaranteed to get an offer in two, three days, get it accepted, get through, have the buyer who's getting a new loan not have any problems that's going to delay things because you can't have delays.

42:29It has to happen, the house has to sell before it gets foreclosed on. And so if you're banking on that being the solution, it sometimes is not. If you refer it to a real estate agent who is savvy, they'll be able to postpone the sale as long as they have an accepted purchase contract. And so that is a solution to that caveat. That's a problem. But a lot of times too, these do have a condition issue. So if you take, for example, the guy that we were just talking about, a buyer would see the grading issue, like literally the dirt just falling out from under this guy's slab. That would scare a lot of retail buyers away, you know, because how expensive is that to fix?

43:13And so being a good realtor, you could go get a bid to fix that so you can disclose to the buyers like, hey, we've brought someone over. This is how much it would be. And so that they're not afraid of it. But you're still going to scare a lot of people off. So although that is technically the best solution, it doesn't always work out on paper. And I think that's one of the things that when people hear about me talk about foreclosures, I think that they want me to kind of live in this fairy tale world where someone has some equity that it works out perfectly that we give the house from an owner-occupant to another owner-occupant and they make all of the money and it works out perfectly and it's like a Disney movie, but it doesn't always work out like that.

43:59And that a lot of times is due to condition or just the constraints of the timeline. So that would be the first option. The second thing you could do is give them a cash offer. So, you know, we're talking about offering people cash. Like sometimes people will take less than what is owed based on pain, based on just wanting to get out from underneath it. Even if they make$5 ,000 or$10 ,000 that they're guaranteed to make, they'll happily take it and be rid of the situation, be rid of the pain, be rid of their problem, then potentially list it and make$25 ,000,$30 ,000 after commissions and months of worrying about it, and it might not even go through.

44:38So a cash offer is a great thing to do. And then creative finance is something to where you can offer somebody retail and take over their cheap money and still make the deal work for your end goal, which would be holding onto it, keeping it in your portfolio, either turning into a short-term, mid-term, long-term rental, and it still can pencil out even if you're technically buying it for retail. So creative finance is another excellent solution for that. And none of those involved actually letting the house foreclose or doing a short sale. Yeah. And it's about when the foreclosure process starts, we've worked with a ton of different sellers.

45:17Again, we have a very similar background to Laura, where we'd be out driving properties, climbing up trees, looking in windows, trying to figure out condition when we're bidding on them. And what we've always found with the off-market sellers, when we're talking off-market sellers, there's really two, it comes down to what are they, just like anything, what kind of product they have. And the good thing about getting that cash offer that Laura is talking about for a lot of these sellers, because what we are seeing is it's really not the people that just got financing today or in the last couple of years that are in default.

45:48It's those, there's no matter what's going on in the market, there's always that core demographic where there's some sort of simp of distress with its repairs on the property that are in default and moving towards auctions. You know, the beautiful thing about the cash offer is, you know, like right now in the market, there's a huge variance. And I've seen this in almost every market I've looked at between as is comps and then fully renovated properties. And as the market, everything's gotten more expensive debt, as cash is starting burning up, the demand for housing right now is for fully finished properties.

46:23That's what people want to buy because they want to hang on to their cash. And what we've actually noticed, and I was telling my off-market team this the other day, I'm like, you guys, why are we paying more off-market than we are on-market for fixers? And so the thing about foreclosures and off-market sales, because the condition, it's always about that as-is value. What will this property trade for in the current condition on market? And what we have found, the reason we've gotten so many off-market deals done recently on these fixers, is we can go to sellers and say, hey, look, here's four homes in the area in the same condition that just sold.

46:57We're going to take off the real estate commissions, and this is what the seller netted. We can actually offer more almost every time than what those are selling for on market and give them a structured sale to where they can get packed up. that we can delay the foreclosure, we can get them into a new property, get them into credit repair. And, you know, it's funny, a lot of times people think of cash offers as low to these investors and their sellers, and that they should be taking it to market, but it's actually more detrimental than it is going through that structured sale. You know, especially if an investor can buy a property off market and structure the terms right, maybe they can get a longer close, get a little bit cheaper financing.

47:39Maybe they can get a lower down payment because they have a longer close and then go through a more underwriting at that point. The off-market cash sales for fixer properties are actually selling higher than they are on. And I think that's important to think about when anybody's working with foreclosure people is give them all the scenarios and look at the data. And don't ever forget about the as-is value because you can give people everything that they want, the most amount of money, and get them in a new situation and still get a really good buy as an investor. I think you brought up something really interesting is understanding the actual pain that this person is having and what they actually want.

48:16Because a lot of times these people, you know, maybe the thing that they want is they want some extra time in the property. They want help finding their next home. They want help with moving. And it can be something that's really small that then you can say, OK, well, this is what I want. This is a price I would need this house at. and you can make a deal happen and you'd be surprised at what you can get it for. So Laura, if you're either on the buy or the sell side in a foreclosure situation, how important do you think it is to work with an experienced investor-friendly agent? I mean, I think that if you're going to be helping an actual homeowner that's in foreclosure, you have to know what you're doing if you're going to do a short sale.

49:00So you can make a mistake by getting, once you're done with the entire thing, all that paperwork that we were talking about earlier, you get what's called a short sale approval letter. And if you don't know what you're doing and you don't know what to look for, you could either end up having like this weird ability for them to file a deficiency judgment against your seller. And that's one of the things that you want to make sure that you negotiate is that they don't go and do that once the property is closed. And so there's just a little few things here and there. So if you're going to take it on as an agent, if you're not familiar, I'm not saying don't do it, but just see if maybe you can partner up where you are the co-list or maybe you refer it to a short sale experience agent and you ask to learn the process or to shadow them.

49:44But I would definitely not just do it just because you're dealing with such a sensitive thing where someone's already in hot water and these people that end up in foreclosure, they've usually already drained their savings. They've gone to any friends or family members that they could have borrowed money from. And if they're not making their house payment, you know, they're not paying their property texts, they're not paying their HOA. Sometimes they're not paying credit cards. They're not paying for their cars. So it's like, these people are in a really bad situation and you don't want to advise them or help them through something to where they have something like the people I was just talking about, where you end up with a deficiency judgment and you don't even have house either.

50:19I think that's a huge point for, you know, like when you talk about brokers in general, just hiring the right broker for what you're trying to accomplish, you know, and like these short sale brokers, like if you're a seller that needs to do a short sale, finding that specialist to really walk you through that transaction. Or like you said, you focus a lot with investors and doing tons more business and focusing on that primary business. It's very easy for people to just call that broker that they know. Whereas each broker is different. If someone wants to go get shown around 20 homes and go through a bunch of open houses, I am not their guy.

50:55I'm an investment guy, looks at numbers, and I sell math. And I think that's just really important for anybody. It doesn't matter if you're an investor, homeowner, first-time homebuyer. Doesn't matter what it is, hire that specialist because not all real estate brokers are the same, nor should they be, and find the person that is going to help get you aligned with your goals, not just who you know. That is the biggest mistake. Hiring who you know isn't always a good thing. Hire who knows what you're trying to accomplish and you'll excel much further. You're not going to have$25 ,000 deficiencies.

51:27You're going to get the right deals if you're an investor and just really picking that right broker is fundamentally important. Laura, anything else you'd like to share on this topic of foreclosures, the opportunities, challenges, and creative situations that it presents? Absolutely. I appreciate all the real estate agents that are watching this and are opening their eyes to this other side of the business. But I also really want to encourage real estate investors to look at this section as a potential money-making thing because these people do have pain and they have a timeline. How many times are we working with sellers that have pain, but you just can't push them to sign?

52:04You can't push them to make a decision because they're on the fence because there is no timeline with a foreclosure. Unfortunately, these people's backs are against the wall. This house is going to sell on this date. Maybe it'll get postponed, but there is a set timeframe for them to make a decision. And so there is really good opportunities to make money, not just by referring it to a real estate agent to do a short sale, But to take some of these over subject to to give these people cash offers and get some good fix and flips going in your portfolio. Like there's so many ways to make money in this small niche that it definitely shouldn't be overlooked.

52:40And there's some hot markets that are definitely seeing an increase. Detroit had an 807 percent increase in foreclosures. Denver had a 641 percent increase. So if you don't necessarily have a lot of inventory coming and going as far as foreclosures are in your local market, it might be a good idea to maybe look into the Denver market and see if maybe you can start calling some of these sellers, understanding what they're going through and presenting an actual solution for these people. because they really do need help and they need someone who understands them and can give them advice other than just, hey, I guess we're gonna lose our house someday and I don't know what to do.

53:25Well, thank you so much for joining us today, Laura. Congratulations on your incredible real estate investing success and the tons of people you've helped, the tons of transactions that you've been a part of. Thank you for sharing your wisdom with us today and we hope you have a wonderful rest of your week in beautiful Montana. Thank you. I will. Appreciate you. All right. That was Laura Morby. James, what'd you think? Oh, I love this story. I was having flashbacks of my career. It was very similar, you know, getting going, the chaos of the foreclosure market back then and just banging doors, working through short sales, helping people out.

54:03I was having like little visual flashbacks as she was chatting. Yeah, I think it's a really interesting topic. I think that I'm actually surprised that foreclosures aren't more of a factor right now. I think two or three years ago, I would have been thinking, absolutely, we're going to see a lot more foreclosures in a rising interest rate environment. And I think that the quality of the mortgages that are out there, the amount of equity people have, the debt to equity ratios in a lot of cases, and the fact that some people own their homes free and clear. and all that's contributing to a still very low, but rising rate of foreclosures in this country.

54:40So it'll be interesting to see where that goes next. Yeah, and I think it's really gonna come down to what is the economy gonna do? If we go into recession, we could see it. And if not, we kind of skate by this recession, people could, there could be a very, very small uptake in foreclosures. Well, James, should we get out of here? Let's do it. All right, he is James Daynard and I am Scott Trench saying, chop, chop, lollipop. If you enjoyed today's episode, please give us a five-star review on Spotify or Apple. And if you're looking for even more money content, feel free to visit our YouTube channel at youtube.com slash BiggerPocketsMoney.

55:12BiggerPocketsMoney was created by Mindy Jensen and Scott Trench, produced by Kaylin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.