Foreclosures Are Rising Across the Nation, But Who Should Buy Them?

Scott:
Welcome to the BiggerPockets Money podcast, where we interview Laura Morby and talk about foreclosures.
Hello, hello, hello, my name is Scott Trench, and with me today is James Dainard from the On the Market Podcast. James, how’s it going today?

James:
Going good, man. I’m excited to be back on Money. I like hanging out with you.

Scott:
Awesome, me too. It’s great to see you. And, James and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story and every money opportunity, because we truly believe financial freedom is attainable for everyone, no matter where or when you’re starting.

James:
Whether you want to retire early and travel the world, go on, make big time investments in assets like real estate, or start your own business, we’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards your dreams.

Scott:
We have a new segment of the show called, The Money Moments, where we share a money hack, tip or trick to help you on your financial journey. And today’s Money Moment is, have a weekly budget check-in with yourself, your partner or your family. Are you on track? Are you at risk of spending too much? Do you need to cut back? Check in regularly and make adjustments from there, a money date, for example. Do you have a money tip for us? Email [email protected].
All right, before we bring in Laura, quick note. Laura is enjoying the beautiful summer nature experience of Montana and is recording from a lake house with a beautiful, beautiful backdrop. You might hear a little bit of wind here and there throughout the podcast. Just know that’s not your earbuds, that’s the beautiful Montana wind flowing through and making it onto our show. So let it take you there.
Laura has had a long history in real estate from working as an eviction assistant, buyer’s agent and real estate agent with a hundred percent sign rate of short sale listing appointments. And Laura is now in the top 0.05% of real estate agents with over $7 million in combined sales for 2021. Laura Morby, welcome to the BiggerPockets Money podcast. We are so excited to talk to you today.

Laura:
Oh my gosh, I’m truly honored to be here. Thank you so much. We’re going to have to get you some updated stats for me, because 2021 just isn’t cutting it anymore.

Scott:
All right. 2022 and 2023 are off to even better? 2022 was even better?

Laura:
Yep, absolutely.

Scott:
All right. So top 0.01% of real estate agents or thereabouts for Laura Morby here. So Laura, would you mind telling us a little bit about yourself and your real estate journey, for folks who are not familiar with you?

Laura:
Absolutely. So I am a daughter of a general contractor, grew up Sunday afternoons going, walking property with my dad and I got my license when I was super young. I was 22 years old and been licensed since 2010, so I’ve been in it for quite a bit of time. But when I originally got licensed, I definitely wasn’t thinking investor. I was thinking normal retail real estate agent, meaning working with buyers and sellers who are actually going to live in the homes. And I was in the office every single day, trying to do open houses, working my sphere, farming areas, doing whatever I could and it just wasn’t happening for me.
And an investor who rented an office right next to the bullpen where I was every day, just begging people to get in the car with me, noticed me and I think probably took a little bit of pity on me. And so, he decided to offer me a job, just to make some extra money. He at the time was bidding at the foreclosure auctions and flipping a ton of property. And so what I did for him was going and picking up keys, installing lock boxes, evicting people, taking photos, things like that. So nothing glamorous by any means. I guess you could call me a runner. Back then we were called runners, and so I was just driving all over the valley, helping him out.
But what it showed me is that there is a whole world of being a realtor where you’re selling and buying a ton of property, making a ton of money and having a lot of fun. And that was my first, dipping my toes into this side of the business. And ever since then, it’s almost been 15 years now, but it seemed like the industry kept pulling me back. I kept trying to be a retail agent, just because I thought that’s what success meant as a realtor. And it just kept pulling me back into the investor side. And probably about five to seven years ago, I decided to fully commit to it. And that was the best decision I’ve ever made. I’ve never made so much more money. I’ve never ranked so high. I’ve never had as much success, as fully devoting myself to this side of the business.

Scott:
And so your career really got running here in the heart of the great recession, right? In the 2008-2011 period when you made this transition. And you became familiar with every aspect of residential real estate investing, I presume, and are an expert in many of these categories. But I believe you had particular strength in working with foreclosures. Can you talk to us a little bit about that specifically?

Laura:
Yeah. So from working with the guy who was bidding at the foreclosure auction, I decided to try to go back into being a retail agent. And I ended up working, getting offered a job to work for a trustee sale. So in Arizona, we don’t have mortgages, we have deeds of trust. So, I got offered a job to work at a bidding service company. And so, what that entailed was we would get the list of everything that was going up for auction the next day, and back then it could be hundreds of properties, thousands of properties. And one of the owners had created this really cool program that would take Zillow’s estimates compared to the opening bid, and it would run through the data and it would kind of rank them what could potentially be the best deals for us. And of course, Zillow’s estimates are horribly inaccurate.
So then we’d come in every morning, 6:00 AM in this little 10 by 10 office. We’d all be squished in there with our laptops and we would just comp through everything that was deemed a potential good deal. And then we would come up with our hot list and we would send out an actual runner every morning by 7:30. And so unfortunately, we were one of the people that dispatched somebody that was climbing walls and looking in windows, and checking out AC units, and hopping up on the roof if he could, to see if it was occupied. What’s the status of the AC unit, how bad of shape is the property, anything that he could find out. He would take videos, send it to our investors, and then we would go to the auction and bid for them, whatever they wanted. So that was really fun and really good.
But we realized that there was a ton of opportunity for us, we were all licensed realtors, to come in and actually potentially snag some of these people before they ended up at the auction block. And so we started a short sale division of our company. And that was really interesting because my boss essentially gave me the notice of default list, so people who have hit 90 days late on their mortgage and they officially have an option date. He would give me that list and he said, “You need to be in here every morning at 8:00 AM. And I want you to call through all these people and I want you to get them in the office.” So I didn’t have a script, I didn’t know what to say to these people, I just figured it out, winging it. Got them in. He came and did my first short sale listing appointment with me and let me watch.
Second person that came in, he said, “You’re running it and I’m going to watch you.” We signed them. And the third one, he said, “You’re on your own.” And after that, I ran every single one of them. I signed every single person that came in and met with me, or that I met at a McDonald’s, or went and met them in their living room. And that year, I think we did 364 short sales, which is crazy our first year. And it was really chaotic, because back then lenders didn’t have the systems and processes to handle everything. So a lot of our job was really a lot of follow up, a lot of paperwork, a lot of banging our head against the wall trying to get these done, but we ended up being super successful in it. And it made me realize how much I enjoyed the emotional connection of being able to help these people, and I fell in love with it.

Scott:
Now, our data only went through 2021, but at that point, you had a hundred percent sign rate of short sale listing appointments. Has that continued through to today?

Laura:
Yeah, it has. If you come and meet with me, I’m guaranteed to sign you.

Scott:
Awesome. And your Instagram handle, I believe is the Sure Selling Short Seller, right?

Laura:
Yeah.

James:
And that’s why Pace has been so successful. Laura closes everybody.

Laura:
Oh, no, no. The ultimate closer. Sometimes I’ll hear him on the phone, I’m like, “How did you get them to tell you that? How did you figure out that piece of information, that I’ve been trying to figure out what’s holding them back?” He’s so good. Oh my gosh, that man is like the king closer. What’s really funny is we owned a Home Busters franchise together and he would close them and then I would take them through the end, I would run them through the escrow process, signed the contract, all stuff. And it was really funny because the first time we started hearing Pace’s stats, he was the top three franchise in the entire United States for closing. So if he went on an appointment, his close ratio was insane. And I was like, “Wow, you’re so good. Wow. Let’s bring you out. Lord, this is awesome.” So Pace is a hidden assassin.

James:
Well, I’m impressed by your sales stat. I’m definitely not at a hundred percent. Laura, I love your story, because it reminds me just, that 2008 to 2014 era is just like this isolated time capsule, and I feel like there’s a small percentage of us that really grinded it through those days. There was massive amounts of inventory. We had a very similar business, taking people down to the auction, providing bidding service and financing down there. And then, I know we had done the same thing where we started doing short sales because people needed that service and it kind of exploded, where we were doing the same thing where we had two to 300 short sales at a time. And that was absolute chaos, the amount of paperwork, tracking, ordering BPOs, and it was like, I always say it was the most miserable job of all time, pushing paperwork. It was like, you’re just kind of moving paperwork around.
And at some point, it became so large because we really focused it on the service side. And you had mentioned that a couple times about not just looking at it as a transaction. And I think that’s really important for all brokers, whether you’re working with investors, short sale people or just retail. It’s that relationship and taking care of your client gets you the business.
And we had designed a service where we were helping people credit repair and moving them in new houses, and it just kind of exploded. We had made that service based on the needs, right? Because I had a similar scenario, what a lot of people were going through at the time, where I had to short sale off four investment properties, way over leveraged. Learned a lot about leverage during that time. And I know you have a very similar background and kind of a story with your parents of you’re taking that negative experience and then building a service that really takes care of people, and it goes a long ways. Can you tell us a little bit about that, and how that event in your life also changed how you work as a broker?

Laura:
Oh, absolutely. So I think it started just because I was trying to figure out a way to essentially create my own, getting these people in the door. And so when you’re cold calling these people, you’re met with, I mean, they’ve been called 30, 40 times before they got on the phone with you. And then you’re talking to them and they say, “You’ve already called me eight times today.” And it was like, “That’s not me.” “Yeah, it’s someone from your company,” and you don’t want to argue with these people. See, I realized really quickly that that anger was a mask for just utter embarrassment, and how that translated to my life. So my dad ended up getting foreclosed on for two properties.
And so, he had spent his whole life being a general contractor for other investors, and he was talked into starting in 2008, using his license to build his first multimillion dollar spec home. And so he bought the lot, put the money into it, started spending all of his life savings to get this beautiful home done, and he had construction financing on the build and it was $2.3 million. And when it was time to refi out of that temporary construction financing, the appraisal came back at $600,000.
And so that’s how much the market was in a free fall, especially at that price point. And so, it became something to where he had taken money to do things like the landscaping, the pool, shutters, just these little things to do the down payment. And he was absolutely tapped out, and then he lost that investment, but at the foreclosure auction. And so, my dad at that point, I mean you reach a certain point in time where your ambition just kind of goes away. You’ve done enough, you’ve grinded enough. And so he was in his late 60s when this happened, and it was something that just completely took the wind out of his sails. It’s something that he couldn’t recover from anymore. He just didn’t have it in him. He didn’t have that drive, that testosterone, whatever you want to call it, to go and create that wealth that he had accumulated. And it totally knocked him out.
And so, I’ve had to watch my dad now put on his bags as a framing contractor and get up and frame houses now in his 70s, just to put food on his table. And so it was something that I realized like, “Hey, you guys are really angry at me that I’m calling you, and I’m calling you because I want help you. Because I’ve seen how destructive an actual foreclosure auction can be, and how scary it is to not know, are you going to lose your house on Tuesday, or is it going to get postponed again? And if you do, is someone going to lock you out? Do you know where your family’s going to sleep on Wednesday night? Those things are terrifying.” And so when I shared what was going on in my world, I think it completely broke people down. And they were like, “Okay, you get it.” And then it made people more willing to talk to me and open up to me about what actually was going on, because people don’t just stop paying their housing payment. There’s usually something happened.
Back then, extreme loss of value was a contributing factor for some people. But for a lot of people, it was loss of job, illness, death, divorce, horrible things had happened to these people. And so they just felt like everyone was calling them to get a piece of their flesh, or to get mad at them or to hound them for a payment that they just didn’t have. And when you’re calling them and saying, “Look, this has happened to my family, this is what’s going on with me and I know that I can help you.” And I think really confidently also telling people, “I can help you. I have solutions. Let me talk to you. Please don’t just go to foreclosure. That’s the worst thing that you can do.” And so I think, just humanizing them and making them realize that I’ve been there too is great. And so, you said that you had been through it too, four times. It’s awful. Feels terrible.

Scott:
Yeah, it’s hard to hear how personal and destructive these foreclosure events are for every person that has to go through it, essentially. And in 2008, just for context of scale, there were 2.3 million of these foreclosures. In 2010, there were close to 2.9 million foreclosures. That said, foreclosures have been declining pretty dramatically every year since then and reached a low of like 150,000 in 2021. It was almost really rare, essentially to see a foreclosure. That doubled in 2022 to 325,000 some odd, and it’s growing again this year, but it’s still 20 times less common than it was in those periods.

Laura:
I wanted to see when all of the government programs were going on for the COVID-19 pandemic, the mortgage moratorium and things like that, I actually had a really bad feeling about it. And I wonder if you guys felt the same. I just felt like this was a bandaid that was going to create a larger problem in the future. But as far as the data that I’m seeing that’s come out so far, everyone for a while there when the moratorium was ending was like, “Oh, there’s this huge hidden bubble of foreclosures that’s going to happen.” And so far, although they’re increasing, it hasn’t really happened. So it seems to me that those government programs surprisingly kind of worked.

Scott:
Yeah, that’s what I was going to ask. We’re talking about foreclosures today, they’re a part of the market. They’re back from basically being a non-factor two or three years ago, but what do you guys see, James and Laura for foreclosures coming forward here? Are you surprised that they’re not roaring back in a way, in a dramatic fashion, and back kind of in those levels approaching the great recession?

James:
With the amount of money that’s been printed, it’s still getting burned off right now, and so I do think it’s going to trend up. Not to 2008 numbers, by any means. That was just detrimental. Not unless there’s some other outside impact that kind of comes in. But what we are seeing is the tax foreclosure auctions are having a lot more, it’s much higher than a 300% increase. I mean that list, because they suspended those, so that those auctions are very heavy with what’s being targeted right now. I think we just pulled that updated list and we’ve seen at least in our local market, a thousand percent increase, that there was that moratorium. So it’s going to be a big percentage.
The other thing that we’re seeing a lot of short sales on, or at least we are in our local market, is actually investors short selling their hard moneylenders. Where they’re half-built, people … A lot of what’s going on right now, at least what we’re seeing is people took down short-term debt that was expensive, the market deflated, and they’re stuck in some expensive debt with a half-built project. And the lenders are jamming them up, because they don’t want to issue any more funds because they don’t have the cash to do it. It’s a much different foreclosure market than we saw in 2008. That doesn’t mean that we’re not going to see more personal stories run, as the economy could potentially slow down. That’s going to cause issues, but it’s a different thing right now. Every short sale that we’re involved in today is actually with private banks and hard moneylenders, not with your traditional lender.

Laura:
Yeah, I definitely agree. I mean, to be honest, I was terrified, just because I had clients who were participating in putting their mortgage payments on hold. And when it came time for, I saw the documents that were coming from the title companies where they were getting these weird balloons in seconds, that the bank was forcing them to get in order to keep their mortgage going. And I just thought, “This is bad.” I can just see, most people don’t have savings. And I have been surprised that it hasn’t affected actual owner occupants more than I thought it would. It’s good that it hasn’t, but talking about investors who got too expensive of money, I mean, we’re seeing that too. I mean, we had some flips with hard money on them, like we have one going on right now that our hard moneylender, he doesn’t want to refi us out for that.
And we’re like, “Well, we still have it.” I call it, this is so bad, I shouldn’t probably say this on here, but I call it our dingle berry, where it’s just this weird one that we bought, and we knew better, and it keeps hanging on and it’s our fault. We have homes in construction and permits and stuff like that, so we’re going to have to refi it out. And so if you don’t have any excess capital in your flipping business, or I could see how you could get in a ton of trouble if you’re comping things wrong or being overgenerous. As the market started to soften, interest rates went up, less buyers were involved. I can see how you could get in some trouble.

James:
Leverage is the thing that, it can be the best thing in the world and help you grow rapidly, but it also can be just a sand trap that you get stuck in and you can’t get out of. And I think as we start to see more foreclosures increase, you hear all this hype like, “Oh, there’s going to be short sales,” because the market has compressed a little bit and there’s going to be all this foreclosure coming to market, but I feel like it’s going to be a different thing, right? Because back in the short sale days of 2008 to 2014, it was all about loan mods and short sales. And it was about that process pushing through with these huge banks that had all just bought tons of notes for pennies on the dollar, and it was a mess of notes, like a sea of bad debt, and that everyone was just trying to rip through it and understand.
And it was a very long process. Those short sales would take on average five, nine, 12 months, sometimes up to two years, we’d be working a short sale for somebody. And in this era, it seems like as we’re seeing the greed, and that kind of is what spawned 2008. People were getting greedy. They could get free access to money, they would get it and go spend it on other things, or they’d run into hard times with the economy.
This was like the investor greed, is what we’re seeing a lot more, and it’s a different short sale process when you’re working with homeowners and as people are geared up. I was talking to somebody the other day and they’re like, “Hey, I’m getting geared up to start my short sale business up again.” I’m like, “Yeah, but it’s going to be kind of a different thing,” like not targeting the homeowner. Whereas with right now, it’s in that investment space and they’re smaller banks, local banks, and they’ll move a lot quicker. Whereas before, it was like you had to order formal BPOs, submit the documents, update them every 30 days.
What we’re seeing now with our short sales is we can get a deal done really, really quickly with these lenders, because they’re hard money guys that want to get the debt off. And instead of being a nine-month process, they’re getting processed in 30 to 45 days. And you’re working with local bankers, so it’s actually a lot easier streamlined process right now than it was back in 2008. One thing that we are also seeing on the short sale process as people are starting to go in is, instead of going directly to the seller, it actually makes sense to go directly to the bank and try to short sale their note and buy their note from them, and then work through the process. Because as investors, you can be very streamlined and get through it.
If you’re talking about buying paper, we just bought a note and it took us nine days to negotiate the note down about 32%. And so the lender’s like, “Hey, we’re midstream and cutting it out.” So it is going to be a new way to be doing short sales. Instead of cold calling homeowners, we might be cold calling local banks trying to get the paper off. Have you started looking into that as the short sale business could be making a comeback, or is it something that is a thing of your past, like it is for a lot of us brokers that had to do it?

Laura:
So we are so diversified right now, I feel like at this point, we have a lead that comes in and it’s like, “What’s the best way to tackle this?” And before we started, you were talking about projects that you’ll take on that have something weird like extending the sewer pipe, which most people won’t touch, that you are able to deal with. And I think that’s one of our specialties as far as problem houses, is we will deal with weird things. We’ll deal with IRS debt, we’ll deal with weird divorces, we’ll deal with people who have eight different loans and liens on their property. And so with us, it’s like “What’s the best way to tackle this and get the best solution for everybody?” So definitely we don’t specialize in that. We don’t go after that specifically, but it depends on the house and the person and the situation. Yeah, but that is so cool that you were able to negotiate that for so much less, and what’d you say, nine days? That’s crazy. That’s amazing.

Scott:
So in some states, it seems like it can take months or over a year to foreclose on a residential property. James, are you saying that, and Laura, are you saying that the process to foreclose on an investment property with a non-Fannie Mae insured mortgage or note against it, is much different or faster?

James:
There’s less options for investors, right? With a homeowner, you can contact the loss mitigation department and you can work out a payment plan. Especially coming off of COVID, the banks are still being very loose with the money. They don’t want issues and they want to work people through. I think that was something that they realized from 2008 is if they would’ve worked with people more, the banks would’ve lost a lot less money, even if they’re writing down notes and fixing. And so they did learn a lot of hard lessons from 2008, but these are big banks that are working with residential people. So when you’re calling in as a homeowner, you can get your foreclosure extended, you can prevent it, they’ll drag their feet. But when you’re dealing with a hard moneylender and they’re dealing with investors inside their fund that also sold off a fraction of their note to a different bank, these are money guys that want to get a deal done and they’re ready to move on, take a loss and redeploy out their money. And especially, if it’s for an asset that they don’t understand.
So it’s about the difference of working with the type of bank. And then the people asking, there’s a lot less sympathy for investors. I mean, if you go to your permitting department, the residential homeowner is going to get their permits a lot faster than an investor. Same with this. Because it was done for a commercial purpose with a commercial intent, the bank is going, “Hey, this business now is over, we’re going to move forward.” So I think it’s the decision makers and there’s a lot less red tape on the hard money side. And so it just streamlines the process. And also, when you’re calling them about buying their note, they’re just doing a deal. They’re looking at what’s their cost of money, how much they can deploy it out for in a rapid way. Can they make up their yield and get their loss back in, and then just move it on from there? And so a lot of times it makes a lot more sense for them to take a fraction or pennies on the dollar, rather than to let this loan accumulate and rack up more debt and take it to auction.

Laura:
Yeah. Get the money back, and they can send it out to someone else. So, yeah.

Scott:
If you guys had to guess, there was 325,000 some odd foreclosures last year, probably pacing for 375 this year. What percentage of these are investors with hard money notes and what percentage are owner occupant? I don’t think that data exists, but do you have a guess?

James:
It still has to be fairly low because, I mean, the amount of investor transactions I think, is 1% is owned by investors nationwide. But I would think that it’s still going to be a higher, like you’re probably still in that 10 to 15% range because there’s a lot of multifamily, commercial, all those things are classed in there, and there’s some stuff in default right now. And so, I would say if it was my guess, I would say 5%, which would be substantially higher than the statistical average of investment property owned. But in our local market, I’m probably seeing, a good five to 8% of its investment product.

Scott:
Okay, so the 80/20 or the 95/5 is going to be the individual losing their home, essentially. And one of the reasons I think why there’s lower foreclosure volume today, is because of the less job loss to a large degree, than in the great recession in the last couple of years. And then the much better overall quality of mortgages in this country. Most mortgages are 30 years, most mortgages are fixed rate, most mortgages are underwritten for folks with excellent credit scores and those types of things. People will fight like hell to keep those mortgages, because they’re so low interest, and the alternative is going and paying a lot more in rent or buying a property. So Laura, when we’re talking about the homeowners that are getting foreclosed on in this market, what is the nature of the situation that’s afflicting the folks that are getting foreclosed on today? What are some of the things you’re seeing that are specifically happening in the current environment?

Laura:
So it always comes from pain, and unfortunately, no matter what’s going on in the market, there’s just some universal things that will happen to people. So job loss, again, unemployment still at a historic low, but job loss, divorce, death, things like that where people end up in a situation where they’re not making their housing payment. And again, the whole thing of someone just up and deciding someday, “Hey, I’m not going to make my house payment, I’m just going to keep my money.” That does happen. But it’s super rare. It’s always a pain point.
And so it’s something to where, I mean we’ve kind of honed in on short sales, but there’s so many more options for people, and especially us as investors that we can present to them. And I think before, in the past in my career, I’ve been hyper-focused on saying, “Hey, I’m calling and I’m bringing you in because I want you to sign up for a short sale.” And right now, there’s solutions that people can break even, or maybe they can even make a little bit of money, or they can leave their loan in place and we can reinstate it and take it over sub two. There’s other interesting options that actually work out really well for investors that isn’t just short sales.
And so I think, coming into a situation like this where especially doing wholesale for a couple of years, my initial default was cash offer. And that’s not always the best solution for everybody, and that’s not always the thing that’s going to make you the most money, too. So I think that having a couple tools in your tool belt as an investor for some options for these people, getting them in and deciding, “Hey, what’s the best way for us to tackle this that works out?” But I think, it’s really cool that there’s so many things that are working out really well for people who are in foreclosure, that isn’t just short sales and isn’t just a cash out.

Scott:
Okay. Two follow up questions here. One of them may be a dumb one here. But first, the dumb one, are all of these foreclosures or most of them short sales in the current environment, or is something else happening with these foreclosures or pre-foreclosures?

Laura:
Not. I mean, a lot of these people have equity, which is so interesting, and I’m sure you’ve run into that too. You’re like, “What are you doing? You could just sell your house. You could have listed your house with a realtor and gotten rid of it.” But again, there’s usually some other things that are going into play where maybe it’s not the correct house to sell on the open market with a real estate agent. Maybe there’s some deferred maintenance that are going on here. Maybe it’s a hoarder situation. There could be a million things, maybe the roof is horrible. Usually these pain things coincide with the condition of the property as well.
But sometimes, they do have equity or sometimes there could be something to where they could just break even, and get out from underneath it. So short sale isn’t the thing that we’re seeing the most often, and especially in the world that I live in, which is creative finance, subject to. We’re buying a lot of these subject to. We’re reinstating the loan, it’s cheap money. These people have two 3% interest rates on the house. Why would we ever want to get rid of it? So it’s like, “Hey, you’re in default. Let’s catch you up, reinstate it, and we’ll purchase the property.” And they’re happy because they don’t have any more late payments. We’re making the payments on their behalf, which is helping their credit go back up, and we’re happy we got cheap money.

Scott:
That’s fascinating. So it wasn’t a dumb question after all. People are actually getting foreclosed on with equity and low interest rate mortgages in the current environment, and it’s not in the context of a short sale. Can you walk us through an example of one of these situations that may have happened in the recent past, and what pain the homeowner was facing? And how and why a home might’ve transacted that had equity and a low interest rate mortgage, but gone through foreclosure?

Laura:
This is one of my favorite ones, because I wonder. Sometimes I’m like, “I wonder if any of these sellers will ever watch this,” because I’m going to air a little bit of dirty laundry for their pain points. But we had this really awesome guy. He had built … We have this really cool mountain range in Mesa, Arizona that’s called the Superstition Mountains, and they’re just beautiful, because it’s this old, super million plus year old volcano and it’s gorgeous. But if you get out there and you get a piece of property, it’s so cool. And he built he and his wife this amazing house, where he even set up their primary bathroom to have this beautiful soaking tub that was copper, that she could look out and see the Superstition Mountains. Anyways, they got a divorce. So, a horrible, very contentious divorce. Horrible, horrible, horrible.
On top of that, he did not grade the property properly, and so it was dirt and he kind of built it up on a hill. And so, as it was raining and monsoon season, he was getting, it was just falling away from the foundation of the house. So in his mind he’s like, “This was a romantic gesture. I want nothing to do with it. My wife wants out of it, or my ex-wife I should say at this point. And there’s also, there’s going to be some issues that I don’t know how to fix.” And so, he moved out, he and his son, and he was like, “Why am I going to continue to pay on this? Why am I going to make two housing payments? I’m going through a divorce, I’m paying attorney’s fees, I’m going to have to pay alimony. I’m going to have to pay child support.” He was in a bit of a messy situation as divorces can be, and that is one of the most common things.
And so we got in touch with him and we were like, “Hey, this is actually a really amazing property. It would make a great short-term rental for us.” We didn’t tell him that, but that’s how we were looking at it. We were like, “This is essentially a brand new house and it’s in a really cool spot.” And so we offered him terms. So we were like, “Hey, can we just take over your mortgage?” I mean, he had just recently secured financing. It was like a two-year-old house. And so he was like, “You’ll catch me up?” “Yep.” “You’ll take over it? I’m not responsible for any of the repairs? I’m not responsible for the maintenance? You’ll pay the property taxes, you’ll pay the homeowner’s insurance?” “Yep.” And he was happy to do it.
So we were like, “How much money do you want? What price do you want to sell to us?” And he was like, “Honestly, I just want to get out of it.” So we cut him a check for 10 grand, reinstated his loan, and so I think it was just under 3% and it was great. I mean, turning that into a short-term rental, even turning it into a long-term rental would have cash flowed, but turning it into a short-term rental, and it was great. He had a dog. The worst thing we had to do is figure out how to get the dog smell out of the house. But for the most part, it was a beautiful house. We furnished it, we got it up and it worked out perfectly, and he’s happy too.

Scott:
Awesome. So that’s one example of why someone would walk away from equity in a situation. So there you go. There’s the pain and the specific circumstance that’s facing someone. Now, let’s put ourselves in the shoes of someone who’s on the other side of this. I’m not an investor, but I’m someone who’s about to get foreclosed on, or I’m this individual, potentially. And I’d love to go through two examples. One, what does someone do if they’re facing foreclosure and they have equity, and this great interest rate debt? What are their options? And let’s go through the same exercise again after that for someone who’s facing a short sale situation, because you said that’s a portion of the foreclosures hitting the market here as well.

Laura:
So obviously, the best case scenario, and I’m sure we could all agree, is for them to list with a real estate agent. So not everyone who’s going to be watching this podcast as a real estate agent, so they’re thinking, “I come across this type of lead. Why would I just give it to some realtor?” Well, a realtor can cut you back something, send you a referral fee, do something to make it worth your time. The problem is, is once a house is in foreclosure, it obviously has a foreclosure date looming. And so, putting a house up on the traditional market, you’re not guaranteed to get an offer in two, three days, get it accepted, get through, have the buyer who’s getting a new loan, not have any problems that’s going to delay things, because you can’t have delays. It has to happen. The house has to sell before it gets foreclosed on. And so, if you’re banking on that being the solution, it sometimes is not.
If you refer it to a real estate agent who is savvy, they’ll be able to postpone the sale as long as they have an accepted purchase contract. And so that is a solution to that caveat, that’s a problem. But a lot of times too, these do have a condition issue. So if you take, for example, the guy that we were just talking about, a buyer would see the grading issue, literally the dirt just falling out from under this guy’s slab. That would scare a lot of retail buyers away, because how expensive is that to fix? And so being a good realtor, you could go get a bid to fix that, so you can disclose to the buyers like, “Hey, we’ve brought someone over, this is how much it would be.” And so, they’re not afraid of it, but you’re still going to scare a lot of people off.
So although that is technically the best solution, it doesn’t always work out on paper. And I think that’s one of the things that when people hear short, not short sales. When people hear about me talk about foreclosures, I think that they want me to kind of live in this fairytale world where someone has some equity, that it works out perfectly. That we give the house from an owner occupant to another owner occupant, and they make all of the money and it works out perfectly, and it’s like a Disney movie. But it doesn’t always work out like that, and that a lot of times is due to condition, or just the constraints of the timeline. So that would be the first option.
The second thing you could do is give them a cash offer. So when we’re talking about offering people cash, sometimes people will take less than what is owed based on paying, based on just wanting to get out from underneath it. Even if they make five or 10 grand that they’re guaranteed to make, they’ll happily take it and be rid of the situation, be rid of the pain, be rid of their problem, than potentially, list it and make 25, 30 grand after commissions and months of worrying about it, and it might not even go through. So a cash offer is a great thing to do.
And then, creative finance is something to where you can offer somebody retail and take over their cheap money, and still make the deal work for your end goal, which would be holding onto it, keeping it in your portfolio, either turning into a short-term, midterm, long-term rental. And it still can pencil out, even if you’re technically buying it for a retail. So creative finance is another excellent solution for that. And none of those involved actually letting the house foreclose or doing a short sale.

James:
Yeah, and it’s about when the foreclosure process starts. We’ve worked with a ton of different sellers. Again, we have a very similar background to Laura, where we’d be out driving properties, climbing up trees, looking in windows, trying to figure out condition. We were bidding on them. And what we’ve always found with the off-market sellers, when we’re talking to off-market sellers, there’s really, it comes down to just like anything, what kind of product they have. And the good thing about getting that cash offer that Laura’s talking about for a lot of these sellers, because what we are seeing is it’s really not the people that just got financing today, or in the last couple years that are in default. No matter what’s going on in the market, there’s always that core demographic where there’s some sort of symptom of distress, whether it’s repairs on the property that are in default and moving towards auctions.
The beautiful thing about the cash offer is like right now in the market, there’s a huge variance, and I’ve seen this in almost every market I’ve looked at, between as-is comps and then fully renovated properties. And as the market, everything has gotten more expensive, debt as cash is starting burning up. The demand for housing right now is for fully finished properties. That’s what people want to buy, because they want to hang onto their cash. And what we’ve actually noticed, and I was telling my off market team this the other day, I’m like, “You guys, why are we paying more off market than we are on market for fixers?” And so, the thing about foreclosures in off market sales, because the condition, it’s always about that as-is value. What will this property trade for in the current condition on market?
What we have found, the reason we’ve gotten so many off market deals done recently on these fixers is we can go to sellers and say, “Hey, look, here’s four homes in the area in the same condition that just sold. We’re going to take off the real estate commissions and this is what the seller netted.” We can actually offer more almost every time than what those are selling for on market, and give them a structured sale to where they can get packed up. That we can delay the foreclosure, we can get them into a new property, get them into credit repair.
And it’s funny, a lot of times people think of cash offers as low to these investors and their sellers, and that they should be taking it to market, but it’s actually more detrimental than it is going through that structured sale. Especially if an investor can buy a property off market and structure the terms, right? Maybe they can get a longer close, get a little bit cheaper financing, maybe they can get a lower down payment because they have a longer close, and then go through a more underwriting at that point. The off-market cash sales for fixer properties are actually selling higher than they are on, and I think that’s important to think about when anybody’s working with foreclosure people, is give them all the scenarios and look at the data. And don’t ever forget about that as-is value, because you can give people everything that they want, the most amount of money and get them in a new situation, and still get a really good buy as an investor.

Laura:
I think you brought up something really interesting, is understanding the actual pain that this person is having and what they actually want. Because a lot of times these people, maybe the thing that they want is they want some extra time in the property. They want help finding their next home, they want help with moving, and it can be something that’s really small, that then you can say, “Okay, well this is what I want. This is the price I would need this house at,” and you can make a deal happen and you’d be surprised at what you can get it for.

Scott:
So, Laura, if you’re either on the buy or the sell side in a foreclosure situation, how important do you think it is to work with an experienced, investor-friendly agent?

Laura:
I mean, I think that if you’re going to be helping an actual homeowner that’s in foreclosure, you have to know what you’re doing if you’re going to do a short sale. So you can make a mistake by getting, once you’re done with the entire thing, all that paperwork that we were talking about earlier, you get what’s called a short sale approval letter. And if you don’t know what you’re doing and you don’t know what to look for, you could either end up having this weird ability for them to file a deficiency judgment against your seller. And that’s one of the things that you want to make sure that you negotiate, is that they don’t go and do that once the property is closed.
And so there’s just a little few things here and there. So if you’re going to take it on as an agent, if you’re not familiar, I’m not saying don’t do it. But just see if maybe you can partner up, or you are the co-list or maybe you refer it to a short sale experienced agent, and you ask to learn the process or to shadow them. But I would definitely not just do it, just because you’re dealing with such a sensitive thing where someone’s already in hot water. And these people that end up in foreclosure, they’ve usually already drained their savings, they’ve gone to any friends or family members that they could have borrowed money from. And if they’re not making their house payment, they’re not paying their property taxes, they’re not paying their HOA. Sometimes they’re not paying credit cards, they’re not paying for their cars.
So it’s like these people are in a really bad situation, and you don’t want to advise them or help them through something to where they have something like the people I was just talking about. Where you end up with a deficiency judgment, and you don’t even have the house either.

James:
I think that’s a huge point for, when you talk about brokers in general, just hiring the right broker for what you’re trying to accomplish. And these short sale brokers, if you’re a seller that needs to do a short sale, finding that specialist to really walk you through that transaction. Or like you said, you focus a lot with investors and doing tons more business, and focusing on that primary business.
It’s very easy for people to just call that broker that they know, whereas each broker is different. If someone wants to go get shown around 20 homes and go through a bunch of open houses, I am not their guy. I’m an investment guy, looks at numbers and I sell math. And I think that’s just really important for anybody. It doesn’t matter if you’re an investor, or homeowner, first time home buyer, doesn’t matter what it is, hire that specialist, because not all real estate brokers are the same, nor should they be. And find the person that is going to help get you aligned with your goals, not just who you know. That is the biggest mistake. Hiring who you know isn’t always a good thing. Hire who knows what you’re trying to accomplish and you’ll excel much further. You’re not going to have $25,000 deficiencies. You’re going to get the right deals if you’re an investor. And just really, picking that right broker is fundamentally important.

Scott:
Laura, anything else you’d like to share on this topic of foreclosures? The opportunities, challenges, and creative situations that it presents?

Laura:
Absolutely. I appreciate all the real estate agents that are watching this and are opening their eyes to this other side of the business, but I also really want to encourage real estate investors to look at this section as a potential moneymaking thing, because these people do have pain and they have a timeline. How many times are we working with sellers that have pain, but you just can’t push them to sign? You can’t push them to make a decision, because they’re on the fence because there is no timeline. With a foreclosure, unfortunately, these people’s backs are against the wall. This house is going to sell on this date. Maybe you’ll get postponed, but there is a set timeframe for them to make a decision.
And so, there is really good opportunities to make money, not just by referring it to a real estate agent to do a short sale, but to take some of these over subject two, to give these people cash offers, and get some good fix and flips going in your portfolio. There’s so many ways to make money in this small niche that it definitely shouldn’t be overlooked.
And, there’s some hot markets that are definitely seeing an increase. Detroit had an 807% increase in foreclosures. Denver had a 641% increase. So, if you don’t necessarily have a lot of inventory coming and going as far as foreclosures are in your local market, it might be a good idea to maybe look into the Denver market and see if maybe you can start calling some of these sellers, understanding what they’re going through and presenting an actual solution for these people. Because, they really do need help and they need someone who understands them and can give them advice, other than just, “Hey, guess we’re going to lose our house someday and I don’t know what to do.”

Scott:
Well, thank you so much for joining us today, Laura. Congratulations on your incredible real estate investing success and the tons of people you’ve helped, the tons of transactions that you’ve been a part of. Thank you for sharing your wisdom with us today, and we hope you have a wonderful rest of your week in beautiful Montana.

Laura:
Thank you. I will appreciate you.

Scott:
All right. That was Laura Morby. James, what’d you think?

James:
Oh, I love this story. I was having flashbacks of my career. It was very similar, getting going. The chaos of the foreclosure market back then, and just banging doors, working through short sales, helping people out. I was having little visual flashbacks, as she was chatting.

Scott:
Yeah. I think it’s a really interesting topic. I think that, I’m actually surprised that foreclosures aren’t more of a factor right now. I think two or three years ago, I would’ve been thinking, “Absolutely, we’re going to see a lot more foreclosures in a rising interest rate environment.” And I think that the quality of the mortgages that are out there, the amount of equity people have, the debt to equity ratios in a lot of cases, and the fact that some people own their homes free and clear. I think all that’s contributing to a still very low but rising rate of foreclosures in this country. So it’ll be interesting to see where that goes next.

James:
And I think it’s really going to come down to, what is the economy going to do? If we go into recession, we could see it, and if not, and we kind of skate by this recession, there could be a very, very small uptake in foreclosures.

Scott:
Well, James, should we get out of here?

James:
Let’s do it.

Scott:
All right. He is James Dainard, and I am Scott Trench saying, chop, chop lollipop. If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Speaker 4:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kaylin Bennett, editing by Exodus Media. Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.