However, due to speculators and easy finance options for buyers, home values soared through 2001-2005.  All of the sudden people had all of this equity in their homes.  So what did they do?  They went and took out more loans of course!  Let’s bring up Joe Borrower again as an example.   Let’s say his original loan was for $100,000 in 1999.  He began to see his home value get higher and higher.  All of the sudden in 2003, his home was appraised at $255,000.  What does Joe do?  He re-financed and took $100,000 out.  No problem, he still has another $50,000 in equity right?  Then in 2004 his home appraised at $325,000.  Joe is living pretty well and figures he should go ahead and get that new car and pool he’s been wanting.  He goes back to the bank; they offer him one of those wonderful Adjustable Rate Mortgages (ARM’s), give him another $50,000...and guess what?  Because his ARM rate was so low, his payment barely increased at all – and he still had $75,000 in equity!  What happened after that? 

The housing market was a hollow shell of irresponsible and unethical lending and borrowing.  It was like a plane flying at 35,000 feet and two oblivious pilots telling the passengers that they had plenty of gas, when in fact, the tanks were empty.  Well, just like a plane in the air with no fuel, this housing market crashed.  On top of that – you know what happened to Joe’s great interest rate after 2 years?  It went up -and his payment doubled.  This happened over and over again all over the country, as well as other situations like it.  Joe’s $345,000 home became a $150,000 home.  It depreciated nearly as fast as it had appreciated.  But guess what?  The bank still had $250,000 invested in it.  They just lost at least $100,000 and now have this “collateral” that sits on their books more like a liability.  I will not even get into the buyers who purchased properties during those high years – but the outcome was nearly the same.  Bottom line – there are big loans on homes and property that no longer have any equity and quite frequently, are in the negative.  Very bad for Joe, the bank, and our economy – but good for the informed buyer or investor today.

Once foreclosed upon, the bank will likely have already conducted their own Broker Price Opinion, or BPO, and have obtained a real estate agent to market the property.  The bank usually knows what they want to net from the property and they will not negotiate much from that.  Many have a time formula that they use and if the property has not sold in “x” amount of time – they lower the price.  They will do this over and over again in increments until they can generate enough interested buyers.  One of the great things about Foreclosures, known as REO’s (Real Estate Owned) to the lenders, is that they are usually priced to sell.  These homes have been around the Loss Mitigation Department for a while and they already have files on them.  The research has been done and the bank has provided the real estate agent a number to work with.  You will likely have a response to your offer within 48-72 hours with many of these foreclosures.  The down points to foreclosures are similar to pre-foreclosures (short sales) with the added likelihood that these properties can need quite a bit of TLC.  They will not likely have been properly maintained for quite some time and this could present some additional repair and maintenance expenses.  The up side is that you are going to be able to negotiate these deals much quicker and be able to get into the home much faster.  So, if you do not have the time or patience to deal with a short sale – go with a foreclosed property.  Again, you must have a competent real estate agent working with you on these to protect your best interests.  

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