Since the beginning of the Sub-Prime Mortgage Crisis in the mid-2000s, millions of homes have been lost to foreclosure. Almost as many residential homes have been sold as a short sale. While a short sale allows homeowners to avoid foreclosure, this type of sale yields less than the value of the home’s mortgage(s).

Residential foreclosures have slowed over the past few years. The number of residential foreclosures plaguing the United States was once a daily news item. Today, foreclosures are hardly noticed by the media. With the topic of residential foreclosures no longer sparking the media’s interest, it seems to many that the residential foreclosure problem in this country has disappeared and the housing market has recovered. Today, the media tends to focus on rising real estate prices and a large demand for new residential construction.

But, wait! Not So fast! –

Residential foreclosure numbers are still staggering:

  • Over a million homes are currently in a phase of foreclosure
  • Almost 2 million homeowners are more than 90 days late on their mortgage
  • Many homes are still underwater (meaning their mortgage is higher than the home’s value)
  • While underwater homes have decreased over the past 24 months, these are the pieces of property at most risk of eventual foreclosure
  • Over 56% of the 3.3 million adjustable rate home equity lines of credit (HELOCs) have interest rates that are scheduled to reset in the next four years
  • Many of the abovementioned HELOC are on underwater homes, which makes it difficult for homeowners to refinance their first mortgage to a lower, more affordable, interest rate
  • Financial institutions are currently sitting on an unknown quantity of foreclosed properties, which are commonly referred to as the ” shadow inventory”

While the residential foreclosure situation is not as bleak as it was just a few years ago, there are still millions of homes in shadow inventory that will eventually return to the retail market, and ultimately sold at a substantial discount.

What do all of these statistics mean for the real estate investment market? It means it might not be as easy to benefit from REO investments in today’s real estate market, as it was between the years 2008 and 2012, but there are still multiple ways to invest successfully in real estate owned properties. The keys to success are time, patience and money. It takes substantial time to seek out good REO prospects, patience to find the opportunities for hidden profits, and money to purchase the REO properties from the financial institutions holding the inventory.

Profits from investing in distressed real estate are the most substantial when the residential notes are purchased properly. REO opportunities are much lower than they were in past years, but opportunities still abound. The best deals are found by investors that are able to purchase larger packages directly from the institutions that own the REO properties. However, investing this way requires more capital.

The following examples show the difference between buying one real estate owned property at a time vs. buying several REO properties in a package:

According to the median price for a foreclosure is $125,000 and the median retail sale is $191,000, about a 35% spread, which on the surface seems to be very acceptable, and it is depending on the work required to bring it up to date. Under normal package pricing, that same $125,000 is priced at about $95,000 or about 50% of Fair Market Value. The real key here is that the $30,000 is almost all profit, save for some realtor fees.

In our next newsletter, we will discuss how to take advantage of the opportunity to purchase distressed real estate as part of a large package directly from a financial institution.


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