Using the Web and social media to sell real estate

Several banks and loan originators have been very sloppy in taking care of their paperwork during the high time of the real estate bubble, let’s say between 2005 and 2007 and today properties are being foreclosed on without the proper documents or even with forged documents. The situation is fairly wide spread and there is no safe way of telling if the title is clear when you buy a property directly from a bank. Many major banks have frozen  their foreclosures throughout the nation in order to address this very problem, but there is not short term solution in sight because several different types of laws have been violated in the process and prosecution is expected to happen also on class actions.

Foreclosure fraud can undermine international real estate investing.

How did it work?

To gain an understanding of the complex system that brought is where we are today, you can read the following very well written articles that go in the detail on how it all worked out and the key role that the State of Florida in playing in the scene:
Foreclosure Fraud For Dummies, 1: The Chains and the Stakes that explains how the court system was fooled into accepting forged or non existing documents for their foreclosures.
Foreclosure Fraud For Dummies, 2: What is a Note, and Why is it So Important? that explains you why even having the original and proper mortgage document (that often is not there) will not do and how this could heavily affect investors.
How to Find the Owner of Your Mortgage which gives you practical tips on how to trace the paperwork back to its source.
Unfortunately there is a lot to know and understand about this subject and it is unlikely that title companies will catch up with it in the short term, so some of them already are refusing to issue title insurances on properties that are in some way connected to foreclosures.
What are the liabilities for you?

If you are an investor, you run the serious risk of acquiring properties and then have your title of ownership challenged down the road with little or no support from your title policy. If you are an international buyer or and international real estate investor you find yourself potentially mired down into a legal mess that would be very difficult to solve from a distance even if you had the rights to defend yourself and the cost of the defence would easily surpass any profit or cash flow you have gathered on the property.

If you are a Realtor you could be involved into a transaction that either can’t go through, because title companies won’t provide an insurance on the property, or that can be challenged down the road and you might have been liable for not disclosing material facts on the property of which you should have been informed (the foreclosure fraud story is all over the media now).

But what is more important here, I believe, is that this particular crisis, that is going to last for a while, until the have found a way to clean it up in a legal and orderly way, will reduce one of the attraction factors of the US real estate market for international investors and buyer: the protection of private property and the transparency of the transaction. People from all over the world have been purchasing  properties at very low prices counting on the protection of their investment, many of these properties where bought, remodeled and rented on a lease option basis. This whole flow or capital into the US was based on the reasonable certainty that the investment was going to be protected by a very solid and tested judiciary system that has always been protecting private property. With a significant percentage of foreclosures running the risk of being challenged what do you think will happen to this flow of money?

It is likely to flow elsewhere, in other countries or maybe towards properties that have been owned free an clear for some time by private sellers, or there will be a whole new market for people and companies providing services in checking out the legal status of a property.

Roberto Mazzoni

The Florida Association of Realtors recently published a study on the type of foreclosures existing in the State and the characteristics of the people involved in them. The study covers a three year period going from March 2006 to February 2009. It is somewhat dated information, but it helps to shed some light on trends that better explain also the condition of the Florida real estate market today (here is the site that is being used to collect the information http://www.floridafaceofforeclosure.com/).

The research revolves around three types of indicators, all used to monitor the growth of foreclosures:

1) Lis Pendens which is a document recorded in the court house that signals the beginning of the foreclosure process after the owner stopped making payments on his loan (mortgage). When the lis pendes is recorded there are still chances that the situation is rectified and that the owner pays what is due to avoid foreclosure (it seldom happens, though). In the foreclosure phase that follows a lis pendens, which can be fairly long, we can also have an attempt by the owner to renegotiate the loan or we can have a short sale, that is a sale to a new owner for less money than what was owed on the loan by the current owner.

Lis Pendens are growing much more than actual foreclosed properties in Florida according to a research published by the Florida Association of Realtors.

2) Notice of Sale is the second indicator that communicates the end of the foreclosure process and the fact that the property is ready to be sold at a foreclosure auction on a certain date.

3) REO (Real Estate Owned) are the property that have gone back to the bank after the auction and that the bank is placing back on the market for sale.

The three indications have been shifting very differently: Lis Pendens have been going up steadily until July 2008 and then they started to decline, in Florida. Their quantity has been more than three times bigger than the other two indicators, which shows that probably two properties out of three don’t terminate the foreclosure process, but stop much before the notice of sale. It is fairly well known that banks are withholding from the market properties that are ready to complete the foreclosure process so not to glut the market with bank owned houses (here you can read the full report).

So the trend of Notices of Sale has been pretty flat and also REO’s are running kind of scarce. Just to give you some rough figures: in January 2009, Lis Pendens arrived at approx 190,000, while REO and notices of sale where hovering respectively at about 6,000 and 8,000.

This trend, combined with the recent action taken by most banks that are halting foreclosure proceeds, is giving us an abundance of Lis Pendens that are not resulting into a formal foreclosure and an overall stalling or decreasing number of property being offered at auction or as bank owned homes. Prices are kind of stabilizing waiting for the next wave of REO’s and this can be a good time to invest provided you get do your research done as to the soundness of the title of the house you are about to purchase.

Roberto Mazzoni

More and more major lenders have suspended the foreclosure process in several parts of the US so to have the time to review their paperwork. There have been an increasing number of cases where the original paperwork by the bank proved to be inadequate and was challenged in court by the home owner during the foreclosure process. Whenever the paperwork was found to be faulty by the judge, the foreclosure case was dismissed and the bank had to find a way to negotiate its way out by giving concessions to the owner.

Mountains of foreclosures being stopped for paper work review.

Aside from slowing down the whole foreclosure procedure, this actually led to the impossibility of actually foreclosing on a number of properties and additional loss for the bank which was unable to collect on its loan and was also unable to acquire the property that was originally provided as a security for the loan. The faulty paperwork “scandal” was the result of the automated underwriting procedures that were used during the heydays of the residential real estate bubble and also from the slicing and dicing of mortgages multiple times with external investors, messing up the paperwork trail.

Now several major banks have begun a major revision of their paperwork so to make sure they are able to foreclose “before” they actually start their foreclosure procedure. This will give more time to troubled home owners that will be able to stay in their house longer, waiting for this review process to complete. It will also reduce significantly the number of bank owned properties available on the market, causing probably a temporary recovery on prices, although it will have the long term effect of prolonging the time needed to clear the foreclosure glut.

There are three possible outcomes that are being predicted by experts:

1. The review will clear up technical flaws in the paper trail and will allow banks to proceed faster with the suspended foreclosures once the paperwork is straight.

2. The outcome will be negative and banks will be tied up for a while cleaning their paperwork, delaying the full recovery of the market.

3.  Title companies will refuse to insure foreclosed properties because of potential clouds on title and this will completely freeze the glut for a while.

For one thing, the lending process will continue to be slow and complex until these issues are completely solved and both the banks and the home buyers will have restored full confidence in the solidity of foreclosed homes’ titles and in the stability of the market.

Roberto Mazzoni

Associated Press reported yesterday that JPMorgan Chase has stopped foreclosures so that it will have the time to review loan documents for errors. Another major lender, GMAC Mortgage had done the same about ten days ago.

Less houses for sale from banks and lending institutions.

There is a growing percentage of litigations following foreclosures that often leverage on the fact that the bank doesn’t have adequate documentation to bring the cause forward and therefore it is stalled in court for quite some time.
Halting the foreclosure process before it gets to court will help these two companies in straightening out their paperwork and will generally slow the foreclosure flow, so there will be less foreclosed houses on the market and this will improve a bit prices that already seem to be increasing in some areas.
Banks and lending institutions are getting very active also in other areas: Fannie Mae and Freddie Mac are reported to have launched a project to unload 150,000 foreclosed properties: there will be low down payments and no requirement for mortgage insurance and $ 30,000 will be added to the mortgage for renovations.
Individual buyers will have a 15 day chance of submitting offers before investors can step in and Fannie and Freddie will also go the extra mile of repairing themselves any major areas, like the roof, the plumbing and electrical works. Also other banks are doing this: brokers and investors have turned into contractors and REO properties are sometimes repaired directly by the bank so to be able to then market them directly to home buyers at the best price the market can offer.

Roberto Mazzoni

Purchasing investment properties in the United States is a complex process that involves many steps that go beyond the initial negotiation and the selection of the property itself.

International investors need to overcome 5 hurdles.

Avoiding currency issues
A foreign buyer needs to convert his currency into dollars and deposit them in a bank account inside of the United States before he can perform the acquisition of the property. This step can be very tricky because exchanging currencies is a purchase process in itself. In the first place the investor needs to select the less expensive channel for the transfer, which means contacting several banks in his own native country and also contact international exchange companies to establish the least expensive way to convert. Banks usually charge a fee for the transfer, a fee for the exchange and an exchange rate that is less favorable than what is available on the free market.

On a major purchase this can mean several thousand dollars more in expenses if the investor hasn’t done a correct due diligence. Also the exchange rate changes daily and a major mistake is to wait until few days before closing before transferring the money: chances are the exchange has worsened and now the investor needs more of his own currency to get the same amount of dollars he agreed to pay which means the house is going to cost more to him and he might not have enough funds to complete.