Turns out, plenty of homeowners are suffering despite the recent boom in house prices.
According to Foreclosure.com, a Boca Raton, Fla.-based data service that tracks delinquent mortgage holders, at the end of April there were 87,582 American homes in some phase of foreclosure. Though nationally the number is up just 2.6% from six months ago, in a few cities, foreclosure filings have jumped up by 26% and more.
If youre flush and hoping to get in early on what may be a bear market in real estate, there may be an opportunity for you in all this.
Rising interest rates -- up more than a percentage point on most mortgages since a year ago -- and a slowdown in booming prices are probably to blame. In 2002, a couple with solid credit using a one-year adjustable-rate mortgage and 10% down on the purchase of a $154,000 house (the national median at the time) was facing a manageable mortgage payment of $735 a month. If they got into a money squeeze, they could borrow against the rising value of their house -- median prices have jumped to $217,000 since.
Today, that same couple would be facing a mortgage payment of around $1,100, plus higher property taxes. With house price appreciation slowing, theres nowhere to turn in a financial crunch.
The jump in costs is most dramatic in cities such as Los Angeles, New York and Miami, where the rate of appreciation has far outpaced the national average. Foreclosure.com Chief Executive Brad Geisen guesses there will be more pain on the way, even in some of the cities where prices have spiked.
Foreclosures work differently from state to state, but the basics are pretty standard: When a homeowner starts missing mortgage payments, the bank gives notice to the homeowner and to the local government that the loan is delinquent. After a time, the bank is allowed to commence a repossession process that can result in the house being auctioned off to the highest bidder. The process can take weeks or months to play out; anywhere along the way, a homeowner retains the power make good with the bank. Frequently, homeowners in trouble with the banks are willing to sell their homes to private buyers at a discount to market value in order to preserve what little equity they have left.
Foreclosure.com sifted through data from the 25 most populous counties in the country and found eight places where homes are falling into foreclosure at above-average rates. (In the list that follows, we name the metro area that each county corresponds to -- Chicago for Cook County, Ill., for example.) We've also included a list of places that have lower-than-average foreclosure rates, but are worth a look because filings are growing so fast.
On average nationally, there are 29 houses in foreclosure for every 100,000 U.S. residents. But at the top of Foreclosure.coms list, in hard-up cities like Cleveland and Detroit, the rate is several times that. Even some higher-growth cities, including Dallas, Houston and Oakland, are seeing high rates of foreclosures. And rapid growth in new foreclosure filings threaten to put other high-growth cities like Las Vegas, Sacramento and San Diego into the above-average camp.
Geisen, himself a long-time investor in distressed homes, has a few tips for beginners thinking of making unsolicited offers to distressed borrowers. For starters, focus on a neighborhood you know well -- maybe the one you live in, so youll have a rock-solid sense of local property values. If youre lucky enough to find a homeowner willing to sell, theyll want to close fast, and there wont be enough time to research the neighborhood.
Consider working with a "hard equity lender," who specializes in making loans to vulture buyers. They charge higher interest rates than local banks, but Geisen says the higher cost is usually justified by the guidance and advice they offer. "Its a second set of eyes on your deal," he says. Your local mortgage broker should be able to refer you to such lenders.
Get ready to work the phone -- a lot. Geisen says the vast majority of distressed purchases happen well before the bank actually repossesses a home. Youll have to find and cold-call homeowners whove been flagged as delinquent or who are still in the early stages of foreclosure, and you should expect to work on at least a dozen different homes before you hook a deal. In most cases, the best way to contact the homeowner is by telephone. Letters dont work. "You have to make personal contact," he says. And be gracious. "Offer to help them find a lender or an agent first," he suggests. It might mean losing a potential sale in the short run, he admits, but a distressed homeowner is more likely to seek a deal with you later.
Dont waste too much time on how-to books and seminars. Most of them are "OK for motivation," says Geisen, but they dont contain the genuinely useful knowledge of how to get a distressed purchase finished. That youll have to gain yourself, most likely by the first 14 or so deals you fail to close.
One absolute no-no: Buying property sight unseen. Another: Taking it personally when deals fall apart. "If youre bidding a property up because youre frustrated or youre really trying to beat the other guy, youre going to end up overpaying."
A good lesson to remember, since more than likely, overpaying is what got the guy youre buying property from in trouble in the first place.