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Foreclosures are up. You have probably seen the headlines.
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According to ATTOM's August foreclosure report, completed repossessions, the ones where the lender actually takes the house, were up 42% from last year. The number of new foreclosures being started was only up 7%. Fewer going in the front door, a lot more coming out the back.
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What the headlines are not telling you is that most of that national increase is homeowners on FHA and VA loans who ran out of options when those programs tightened. That is real and it is rough, but it is not what I am seeing as an investor at the moment.
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What I am seeing is investors struggling... This summer I put nine offers on foreclosures in one week. Every single one was previously investor-owned, now REO with the lender.
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The story is almost always the same. Hard money is typically a 12 month note at 9% to 12%. The rehab takes six months, it sits on the market another six, the loan's due. Maybe the lender gives you a two month extension for a point or two. It still doesn't sell. Now you are underwater and it goes back to the lender.
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The data on hard money specifically is thinner than I would like, but it points the same way. KBRA, one of the ratings agencies, has roughly 6% to 7% of securitized hard money loans 60 days or more behind, in foreclosure, or already taken back. I know one lender personally (not us) that is over 10% default on their hard money loans currently...that's insane.
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Does it get worse from here? I genuinely don't know. Nobody does.
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I don't love admitting this...
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I have been that borrower.
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Some of you read about the house in Bentonville I posted about. Sat six months with a 12 month loan coming due. We pulled it, refinanced, and left $78,000 of my own cash in it so my lender got paid on time.
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The only difference between me and the investors out there who lost their house, is that I had the cash to write that check. Not because I'm smarter. Not at all, I make mistakes all the time.
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"But Tarl, are we really going to take advantage of investors who made bad choices a year or two ago?"
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Yep, but I am also one of those investors that made bad choices, I am paying for them.
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It is a little different here though because by the time a lender owns the house, that investor is already gone and somebody is going to buy it anyways. And before it gets there, a clean sale that pays the lender off is usually the best thing that can happen to them.
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A lot of hard money loans carry a personal guarantee. Walking away at break even beats a foreclosure following you around.
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What I would actually do with the situation out there:
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1. With a lender, certainty beats price. They have usually watched at least one deal fall apart already. The sure offer can beat the high one. But only if you have actually walked it and your funding is real, or you end up owning somebody else's problem. REO WILL NOT accept 'and/or assigns' so remember that too.
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Case in point: I bought a house this year from a hard money lender. They had been sitting on it for about a year. Listed at $330,000. I offered $285,000, $20,000 earnest money non-refundable, no inspection.
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They took somebody else's offer. A few days later: "Hey, you guys still serious?"
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The other buyer wanted an inspection. The lender just wanted to be done with the house. They wanted it gone.
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We got it for $285k, fixed it up, and it's worth about $490,000 today. Did we get lucky? Some. We had walked it ourselves and our funding was lined up to close in about ten days. Without both of those I would never tell you to do what I did.
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2. Their number is usually what they are owed, not what the house is worth. But not always... But a lender taking a house back is not trying to win. They are trying to get their money back and move on. There are hard money lenders out there that can handle rehab themselves, so this isn't one size fit all, some of them are actually making money on these...but nationwide HML doesn't usually have the same teams as a local HML does...
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3. Get there before the lender does. The investor at month 12 paying extension points is one of the most motivated sellers out there, and they are not advertising it. Talk to other investors. Ask what is sitting.
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4. Be the buyer they call first. Most hard money lenders do not have an REO department. If you already know them, you are the first text they send when one comes back. And text them yourself, not some automated drip. I have personally been sent deals more than once from hard money friends.
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5. The last investor already tested the market for you. Pull the listing history and you can see the price that did not sell. Pull the permit history and you can see what they opened and never finished. Figure out why it failed before you buy it...most of the time it's the reason the deal isn't done and sometimes it's better for you that the lender takes it back and 'resets the basis.'
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That all said...I want to offer something to everyone that I think will help people navigating the market out there...
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The Deal Teardown is October 21st
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If you are on the other side of this right now...holding a house at month eleven, deciding whether to drop the price again, refinance, or hand the keys back...or if you are 'stuck' not knowing what you should do at this time...this is who I am doing this for.
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The first Deal Teardown is Wednesday, October 21st, on Zoom. A handful of real deals, live, broken down the way I would look at them if they were my own.
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If you have a property you currently own, and are going through a lot of stress, unknowns, sitting on the market, construction issues, or whatever...and you want my eyes on it, then reach out using the info below.
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Email me with what you have got going on and I will put you on the list. The Deal Tear down is simple, you bring your situation, I discuss it with you live. You can do it anonymously if you want. I help you, you help others, it's that simple.
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Be on the look out for more information soon.
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Good luck, it's that sort of market right now.
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- Tarl Yarber
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(Once again, I personally write these...)
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PS: Need funding? If you are going after one of these (or you are one of these) having your money lined up before you offer is most of the game. We are actively lending on single family deals, DSCR loans, plus small multifamily, in 40 plus states. If the numbers make sense, we move fast. Go to www.fixatedfunding.com, or just email me and it comes straight to me.
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