4 Things Real Estate Investors Need to Know About Foreclosures

NEW YORK (TheStreet) — Nearly 1.5 million properties were in some stage of foreclosure in the first quarter of 2013, according to a new quarterly analysis of foreclosure inventory by RealtyTrac.

That is up 9% from a year ago, but is down 32% from the peak in December 2010.

The annual increase in foreclosure inventory at a national level was caused by a 59 percent jump in pre-foreclosure inventory.

Pre-foreclosure is the period before the home is put up for public auction. With short sales on the rise, more homes are being sold in the pre-foreclosure period.

Inventory of homes scheduled for foreclosure auction decreased 25 percent and inventory of bank-owned homes decreased 3 percent.

Fannie Mae (FNMA), Freddie Mac (FMCC) accounted for 12% of the foreclosure inventory, followed by Bank of America (BAC), Wells Fargo (WFC) and JPMorgan Chase (JPM). JPMorgan saw its foreclosure inventory increase 58% year-on-year.

Smaller servicers who have been gaining market share from the big banks posted the biggest rise in foreclosure inventory. Nationstar Mortgage (NSM) saw its foreclosure inventory more than double.

Foreclosure inventory has been declining as default rates have improved due to the economic recovery and banks have increasingly pursued alternatives to foreclosure such as short sales and mortgage modifications.

Still, the trends in recent months have been uneven. States that follow a judicial foreclosure process where banks need court approval to file a foreclosure action against a delinquent borrower continue to see a rise in foreclosures. The foreclosure process in these states now runs into several years.

Banks are also still adjusting to new foreclosure laws enacted at various states, which has slowed down the pace of foreclosures. But banks are still dealing with elevated levels of problem loans so while foreclosure activity is heading lower overall, periodic reversals are likely as banks push foreclosures through the pipeline.

"Delinquent loans that fell into a deep sleep after the robo-signing controversy in late 2010 are gradually coming out of hibernation following the finalization of the national mortgage settlement in April 2012," said Daren Blomquist, vice president at RealtyTrac in a statement. "The settlement provided some closure regarding accepted foreclosure processing practices, and as a result lenders have been reviving more of these delinquent loans and pushing them into foreclosure over the past 12 months, particularly in states where a lengthy court process has resulted in a bigger backlog of non-performing loans still in snooze mode."

RealtyTrac's analysis of foreclosures in the first quarter reveals a few interesting trends for real estate investors.

One, among properties actively in the foreclosure process (excluding bank-owned properties), 35 percent were properties identified as vacant or where the homeowner had moved. The percentage of owner-vacated foreclosure inventory was 50 percent or higher in several states, including Indiana, Oregon, Washington and Nevada

Homes that are vacant for too long start to deteriorate as the owner fails to maintain them. This lowers their market value and also brings down home prices in the neighborhood.

But the data also suggests that there are plenty of vacant single-family homes, which is good news for investors in the business of fixing up these homes and then renting them out or selling them. Institutional investors are betting big money on converting foreclosures into rentals with Blackstone (BX) leading the way.

Two, there was a 12% increase in "shadow inventory" – homes that have started the foreclosure process but have not yet been listed in the market. "Many of these properties will be listed for sale as short sales in the next six to 12 months, or go through the foreclosure process and eventually be listed for sale as bank owned in the next 12 to 18 months," according to the report.

That is good news for buyers in markets that are suffering from a shortage of inventory. Some of the biggest increases in unlisted foreclosure inventory were in New York, Florida, New Jersey, Washington and Illinois, according to the report.

Three, some of the foreclosure inventory is really old. About a third of the foreclosure inventory as of the first quarter was built before 1960 and this is up 11% from a year ago. Investors are unlikely to find these appealing because the costs to repair and maintain them are considerable.

That means more bidding wars for the more desirable properties — the ones built after 1990, which account for another third of the inventory. These pose the least risk for significant maintenance and repairs, according to RealtyTrac.

The homes built between 1960 and 1990 which account for the remaining third need more work, but may be appealing to owner-occupants and investors as well.

Four, foreclosure inventory is increasing the most at the very low end and at the very high end. While 60% of distressed properties are homes valued below $200,000, the properties priced above $5 million saw a 126% jump from a year ago, while foreclosure inventory of homes with loan amounts less than $50,000 increased 62%.

— Written by Shanthi Bharatwaj New York.

Curious about Seattle area foreclosures and investment properties? Give us a call, we are eager to help; 206-769-9577.

Steve Hill and Sandra Brenner, Windermere Real Estate Seattle – Northwest