Pre-Foreclosure Homes

Ever since I started looking into auction and bank owned properties, I've had a growing awareness of my complete and total ignorance of what's going on. I'm going to a walk-through for a bank owned house tomorrow, and I should have something to report after that auction takes place on Tuesday. I wouldn't even consider buying a house sight unseen, bidding blindly in some county courthouse or in the front yard of the house with the ragged kids peeking out the drapes. However, once the bank has foreclosed and it's been standing vacant for several months, I figure it may as well be me as some other guy.

Getting back to my ignorance, I wanted to educate myself about the real estate scene, so I went hunting for a good book on Amazon. There were plenty of titles with mixed reviews, many of which appeared to be fakes posted by the authors, but the book that caught my eye was "The Pre-Foreclosure Property Investor's Kit" by Thomas J. Lucier. I bought it not because I have any interest in pre-foreclosure real estate, but because I believed the tone of the reviews that this was a very useful book. I wasn't disappointed.

Lucier has a pretty agressive style for a how-to writer. He tells you where he stands, where his customers stand, where his competitors stand, pretty much where everybody stands. But he's sincere about it, and I got the impression that this is a man who is at peace with his business (not so common) and knows what he's about. I'd have preferred if he didn't keep telling me what he was about to tell me, but that's a minor flaw for a book that was so packed with information that 90% of it probably went right over my head.

I came away with the following take on the business model. A pre-foreclosure investor spends a lot of time and effort trying to interest homeowners who have defaulted on their mortgage to to sell out to the investor before the bank auctions off the house. The investor may pay 40 cents to 50 cents on the dollar for the owner's equity, in return for assuming the mortgage and keeping the owners credit history clean. This is complicated by the fact that most homeowners in default on their mortgage wait for the last minute to try to find a way out, believing all the while they may win the lottery and be saved from having to make a decision. Also, many of them have no equity in their homes, so the business would only make sense if the mortgage is much less than the current market value.

From there it gets complicated. Above all, the business calls for a talented negotiator. The investor must negotiate with the homeowner, the bank(s) and any lien holders, which could include anyone from the local roofer to the IRS. Lucier backs his statements with anecdotes from his own business or experience, and he gives investor wannabees a series of checklists they'd be wise to follow. He also spends some ink explaining why all the get rich quick schemes are a bunch of bullspit, and how you can't be afraid to roll your sleeves up.

Aside from my general interest in how-to books and writing, I learned quite a bit about how mortgages work, and about how people act under the stress of losing their home. I'd rather not have to deal with the former and I'm not going to have anything to do with the latter, but it's always valuable to know how the other half lives. I'd suggest this book to anybody thinking of buying a house on the regular market, both as a wake-up call to things that could go wrong if you don't have a decent title search lawyer, and as a caution to buying more house than you can afford.

And a word of warning. While it may sound counterintuitive, it struck me as a model that would have a much better chance for the amateur in a rising real estate market than in a falling real estate market. So many homes in the New England area are now upside-down that I already know of one case, in one of the best neighborhoods in town, where the owners who bought next door to a friend of mine two years ago have walked away from the house. They can't make the payments, they can't sell it for anywhere near the mortgage value, they have no equity, and they've given up. My friend tells me that "investors" have been sniffing around, but why anybody would by a pre-foreclosure for more than it's worth (banks won't negotiate a lower principal mortgage) is beyond me.