Distressed Real Estate

Distressed Real-Estate Priced to Sell in 2007


As a weak housing market nudges the foreclosure rate higher, next year is looking promising for investors in distressed real estate.

So far, the U.S. housing slump hasn't produced a bonanza for such investors, but lenders stuck with foreclosed property are becoming more inclined to slash prices or sell properties through auctions, industry experts say.

"We're all going to have to be more creative in the next 12 to 24 months" in selling foreclosed homes, says Chad Neel, president and chief operating officer of Fidelity National Asset Management Solutions, a unit of Fidelity National Information Services Inc., Jacksonville, Fla. Mr. Neel's company helps lenders manage and sell foreclosed homes.

Williams & Williams Inc., a Tulsa-based auctioneer, says its sales of foreclosed homes will nearly double this year to about 5,060. Dean Williams, chief executive of the auction firm, expects another near doubling of sales in 2007.

Dallas-based Hudson & Marshall Inc. expects its auction sales of foreclosed properties to total about 4,800 this year, up 23% from 2005. David Webb, co-owner of the auction company, believes sales will rise at least 20% in 2007.

The auction firms say their busiest auction markets recently have included Michigan, Ohio, Indiana, Pennsylvania, Texas and Colorado. "Word on the street is that California, Florida and Arizona will also be very active in the next 12 months," Mr. Webb says.

Lenders refer to foreclosed homes as REO, short for "real-estate owned." They generally try to sell REO homes as quickly as possible to minimize holding costs, such as those for insurance, taxes and lawn care.

In the first half of 2006, REO properties accounted for 3.1% of all U.S. home sales, up from 2.4% two years earlier, according to a study by First American Real Estate Solutions, a unit of First American Corp., Santa Ana, Calif. The study found that those homes sold at a median discount of 14% to their estimated value in the first half, compared with 12.5% two years before. The discounts reflect the gap between the actual sale price for the homes and the value estimated by a computer model, which takes into account sales of comparable homes nearby and price trends.

It has taken a while for foreclosures to mount. The housing boom of recent years reduced foreclosure rates because most people who fell behind on their loans could refinance or quickly sell their homes for at least enough to pay off the loans. At the end of this year's second quarter, only about 1% of all home mortgage loans outstanding were in the foreclosure process, down from an average of 1.2% over the past decade, according to the Mortgage Bankers Association. Doug Duncan, chief economist for the mortgage bankers, expects a modest rise in foreclosures over the next year or two.

People with weak credit records who have taken out loans over the past year are falling behind on payments at a rapid clip, according to a recent report by mortgage analysts at UBS AG in New York.

Christopher Cagan, director of research and analytics at First American Real Estate Solutions, notes that REO sales are a lagging indicator of the housing market because at least a few months elapse between a borrower's default and the foreclosure. Dr. Cagan expects a modestly higher foreclosure rate and deeper discounts next year.

Discounts are likely to be larger in areas where inventories of unsold homes have soared, such as in parts of Arizona and Florida, Dr. Cagan says. Another big factor in determining demand for REO homes is local job and population growth.

In Los Angeles County, which has strong housing demand and an extreme shortage of space, the median discount on REO homes was just 1.7% in this year's first half. In Ohio's Cuyahoga County, where job losses have left a glut of empty homes, the discount was about 30%.

Most REO homes are listed by real-estate brokers and sold like ordinary houses. But lenders often turn to auctions when they see their REO inventories piling up. Lenders that choose the auction route want to get "current market value, whatever it is, rather than sit on vacant property and speculate as to if or when it might sell," says Mr. Williams of the Tulsa-based auctioneer.

One recent buyer at a Hudson & Marshall auction was Warren Russell, who bought a 1,300-square-foot home in Detroit for just $1,500. Mr. Russell says the home is structurally sound but needs new windows, paint and some other items. He expects to spend about $10,000 renovating the home and then rent it out.

In considering purchases of foreclosed homes, Mr. Russell says, "you can't think, 'Would I live here?' There are people at every level of income that need a roof."

Connecticut Foreclosure Laws

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Connecticut has two types of foreclosure procedures: strict foreclosure and foreclosure by sale. A judge decides which process is used. The typical foreclosure process takes about 2-5 months, depending on the type of foreclosure.






Pre-foreclosure Period


A Connecticut foreclosure begins when the foreclosing lender files court documents against the borrower and notifies the borrower and other lien holders at least 12 days before a return date, which is the date the borrower and other lien holders are scheduled to appear in court. On the return date, the court will decide the debt, market value of the property, and costs, and whether a strict foreclosure or a foreclosure by sale will be used.


Strict foreclosure occurs if there is no equity in the property, and no sale occurs. The borrower receives a specified date when the debt must be paid. If the borrower does not pay the debt, the other lien holders have a chance to pay the debt and take ownership of the property. If no one pays the debt, the ownership automatically goes to the lender. The optimum timeline for this type of foreclosure is five months.


A judgment of foreclosure by sale occurs if there is equity in excess of the debt and a public auction is conducted to recover the debt. At any time, the borrower may stop the foreclosure prior to the sale by paying the amount due on the mortgage. If no payment is made, the foreclosure process continues.


Notice of Sale / Auction


In a judgment of foreclosure by sale, the court establishes the date of the sale, usually 60-90 days from the date the court makes its initial ruling. The court assigns an attorney, and the attorney publishes the sale notice and conducts the sale. The sale typically occurs on the property on a Saturday. A deposit of 10 percent of the property's value is required from the winning bidder, unless the lender is the winning bidder.


Within two weeks after the sale, the court decides whether to approve the sale. Until approved, the borrower can redeem by paying the amount owed plus costs. If the sale is approved the winning bidder usually has 30 days to pay the balance of the winning bid.


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The decision to buy a home can be one of the most valuable and important investments one can make. Therefore it is important that you are familiar with the mortgage process so that you can wisely finance your home. Essentially, a mortgage is just a loan that is used to finance the purchase of property. The property itself is used as security to ensure repayment until you have repaid the entire amount plus interest. There are many types of mortgages on the market and finding the right one can be an overwhelming project. The best approach is to divide the process into manageable tasks. Sit down with a mortgage professional and examine the advantages and disadvantages of all available options to determine which product is best suited to your current situation and future plans.

How to Find the Right Mortgage

Estimate how long you expect to live in the house. If the answer is less than three to five years, consider an Adjustable Rate Mortgage (ARM), which typically starts out with a lower rate. If you plan to live in your new home longer than five years, a fixed-rate mortgage offers protection against rising interest rates.

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Mortgage Terms

Amortization Period:The period of time after which, if all monthly payments are made on time and in full, the loan will be paid out.

Down Payment:The amount of money provided by you, the purchaser toward the price of the property (not including legal fees or other acquisition costs).
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Prepayment Privileges:The right of the borrower to pay out all or part of the outstanding principal before it comes due.

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