Excerpted from the 7/13/22 EIC Club Conversations event, Jennifer de Jesus provides her “New Market” forecast on the current economic conditions and what she believes is an optimal time for real estate investing.

Welcome to the rising “New Market” in real estate

Caused by the collision of economics, inflation, rising interest rates and a turbulent, over-inflated housing market (from rental rates to home prices), real estate is entering a ‘New Market’. For investors, this new market has the potential to be lucrative, especially when it comes to the pending increase in foreclosure inventory.

Due to the Feds’ aggressive interest rate hikes — as an attempt to slow inflation — sales are plummeting. With banks raising their interest rates, it becomes more difficult to qualify for mortgages. As a result, homeowners (and maybe even some real estate investors) will be in distress.

Foreclosures will be the wave of the future, but they will take time to come to market as people try to “ride it out,” hoping that interest rates will hit their high water mark and they’ll be able to keep their homes. Though we are predicting that this recession will not be as dramatic as the last one, investors need to revert to the resources used during the recession of 2007-2009.

We need to remember what real estate looked like back then: a ton of short sales on the market. (For those who need a refresher, a short sale is when someone is trying to sell a property for less than what they owe on it; basically, they can’t sell their property for the debt they have on the property). Short sale transactions can have a very lengthy time frame, from six months to a year to process and are not always likely to go through because the bank has to approve the sale.

Short sales are time consuming and are not good for buyers unless they are dealing with an agent or directly with the seller. However, if you get in early, you can satisfy the liens and get that owner out of the property. For sellers, when their property values drop and they lose their ability to refinance, they either have to give up their homes or get out of the property via a short sale. “Deed in lieu of foreclosure” is where the owner hands the keys to the bank to avoid foreclosure. Deed-in-lieu is not as costly to a bank as a foreclosure and is less detrimental to the credit history of the property owner, and makes the most sense when the homeowner is underwater.

Foreclosures are definitely on the rise…slowly

Consumer-based foreclosure websites with foreclosure auctions are going to start having a lot more inventory soon, so make sure you are a member of these foreclosure websites. Here are a few of the more popular ones:

• https://www.hudhomesusa.org/

• https://www.auction.com/

• https://www.hubzu.com/

• https://www.hudhomestore.gov/Home/Index.aspx

• https://www.foreclosure.com/

• https://www.foreclosurelistings.com/

• https://www.equator.com/

• https://www.homesteps.com/

• https://www.resales.usda.gov/resales/public/home

• https://www.treasury.gov/auctions/irs/

Many general realty sites such as Realtor.com and Zillow.com also have filters for foreclosures. Note that you may need a broker for some of these to work a deal. Most of these sites use a bidding process to start a foreclosure transaction. Begin by creating an account, add your agent’s contact information so they can help prior to submitting the bid, search the properties and make your bids.

Here are a few tips to help you reduce risk and take advantage of the increasing foreclosure inventory:

• Make sure you do a title search on a property. When you buy foreclosed properties, you’re assuming risk and debt.

• When you are ready to bid, know that these sites have robots that compete and artificially inflate the bid. Bid last, not first. In the last few minutes of the auction, put in your bid.

  • Prior to bidding on these auctions, be fully aware of the deed you are taking on. You want to make sure your financing is in line because these are fast deals. You also may not have access to the property to do a true assessment of what you’re purchasing.

• Banks often foreclose with people still in the property, therefore, you may be assuming other people and may need to proceed with eviction.

• Read the fine print—every detail of the deal. The details and “trap doors” of each property are often buried in the foreclosure websites and you may miss them, so search carefully.

• If you can get a property manager or broker to look at the property for you, do so. Buying sight-unseen is unwise.

Other considerations if you want to do your own research and find opportunities where people are in distress and may want to rid themselves of a property:

• Target people with a second home, especially if their second home may be a distressed property; investors will sell their investments before their primary residence.

• Not everyone is well-versed on the value of their property. They are over-focused on the debt that’s stressing them out and want to get out of their house.

• Off-market deals are often lower than market pricing. You’re helping someone get out of their debt versus getting fair market value.

• The base method to the foreclosure is the bank’s debt. If you think about how foreclosure happens, the first lien holder is the only person who has the right to foreclose. Sometimes in these foreclosures, any additional liens are wiped away. Banks hold debt, not real estate. They don’t want these properties sitting in inventory.

• The bank will get “as is” condition value from an appraiser on a foreclosed property. You’re getting what that property is truly valued at which is typically below market standards.

If you would like more information about taking advantage of the “New Market,” please reach out to us as we’re happy to help.