"Preforeclosures"?

[Anon1234_IHB]

Hello: I am new to this forum, even though I have been reading for some time now. I was looking on www.foreclosures.com for fun...just to see what the site was about. I used to work with REO properties, but in an asset mgmt (after the foreclosure) role.

Here is my question: Can anyone provide me a real life or realistic hypothetical example of a person making a "good buy" on a preforclosure home? Here is what I don't get...

Generally, a preforclosure has conditions where the market price (net of selling costs) is lower than the existing debt and/or liens on the home...right? If this were not the case, the distressed owners would simply sell the home and be done with it.

The way I see it is there is NO GOOD BUYING OPPORTUNITY on a preforclosure because the owner cannot possibly afford to sell at a market price due to the fact that they will have to pay off exiting debt/liens in CASH at closing. They don't have the cash, so they don't sell for a mkt price, and the owner's best option is the live in the house payment-free until eviction, and then let it go to foreclosure.

Here is a numeric example:

Purchase Price: $500,000 (irrelevant)

Existing Debt: $475,000

Market Value: $425,000 (net of selling costs)

Owner's Cash Payment to Lender at Close: $50,000

There is no way most people have $50,000 sitting in a checking account to pay off a home loan gone bad. So, they simply reject all offers by "preforclosure" buyers and let the house go back to the lender (while living in the house for 3 to 6 months for free).

This is simply the way I see it...am I missing something here or is there a way to actually make a preforclosure deal happen at market prices?

Thanks!

 

[bigmoneysalsa_IHB]

Very good point. I think a lot of situations very much like your example exist right now and are a big reason why home prices are "sticky" on the downside. Very few underwater owners have the cash to bring to the table and even if they did, why would they given the non-recourse law? The problem is that the mortgage holder doesn't accept how much the market price has dropped and would rather foreclose than go for a short sale. I think eventually in 2008 or 2009, it will start to dawn on mortgage holders that its in their best interests to agree to short sales rather than go through the timely and costly foreclosures, and it will start being possible to get good buys on underwater homes again.

 

[effenheimer_IHB]

Anon1234, the situation you describe is why banks sometimes do a "short sale." They know they're gonna lose their ass on the open market six months from now, so they accept an amount that's less than the loan's payoff just to get that defaulted deadbeat numbskull out of the house and as much of their money back as they can.