Investors become 'white knight' in cooling home market

The cooling market for real estate brought Michael Termine and Uso Mbanefo together.Mbanefo, a 43-year-old entrepreneur struggling to launch a clothing-design company, had fallen behind on his mortgage payments. He needed to sell his four-bedroom house here quickly to avoid losing it in a foreclosure. That's when Termine, a 32-year-old novice real-estate investor, stepped in.
One afternoon in early April, Termine visited Mbanefo's office in a strip mall and offered to pay $400,000 for his house. Mbanefo showed Termine fliers for nearby homes offered at $600,000 or more. Termine pointed out that the inventory of unsold homes here, as in many parts of the country, has nearly doubled over the past year. Even so, Mbanefo said that he might be able to refinance his home, spruce it up and sell it for $500,000."I don't see it at 500," said Termine. "I think the magic number to move that house fast is 475." Before leaving, he reiterated his offer. "I have $400,000 waiting for you, in cash."
The slowdown in housing sales, after five years of frantic buying, has ended the party for many real estate investors. But the cooler market is welcome news for a subset of investors — those who target homeowners facing foreclosure.Most foreclosure investors run small, local operations, buying and reselling a handful of properties a year. Some are self-taught; others take courses touted on Web sites or in late-night TV ads. Invariably, they draw criticism from advocates for the poor, who accuse them of preying on the vulnerable."Our time has finally come!" proclaims a recent e-mail advertisement from ForeclosureS.com, a Fair Oaks, Calif.-based company that markets training materials for would-be investors. A 90-minute telephone program promises to teach foreclosure specialists how to be a "white knight" and not "feel like a shark."
Win-win
More people are falling behind on their mortgages, according to the Mortgage Bankers Association. The percentage of loans on which payments are at least 30 days overdue rose to 4.7 percent in the fourth quarter of 2005 from 4.4 percent a year earlier. With interest rates rising, it's harder for homeowners to refinance or sell quickly.
Such conditions are attractive to investors like Termine, who previously has owned a bar, worked in construction and tried acting. "I've always wanted to do the real-estate thing," said the father of two young children. "I just didn't know how."Last year, Termine bought home-study materials from ForeclosureS.com, including six compact discs, for about $400. Then he flew to California in November to take an intensive three-day course. Termine said the lessons taught him to deal honestly and ethically with people facing foreclosure — and make a good return for himself. "If I can create some kind of win-win, then it's worth it," he said.So far, he said, he has used home-equity lines of credit to purchase four homes in foreclosure. He has sold two of them, he said, clearing about $160,000 in profits. Though he expects some transactions to be less lucrative, Termine predicts he can easily earn a six-figure annual income. One sign of his confidence: he bought himself an $82,000 red Porsche Carrera late last year.
Investors find prospects by scanning court filings for notices of defaults on loans. Sometimes, they advertise in poor neighborhoods by tacking up signs on telephone poles. Most ads have a quick-cash pitch, and some hold out the promise of advice for people in distress.A common practice is to find people whose homes are worth much more than the mortgage-loan balance but who have fallen behind on payments. Some investors then persuade the owner to sell the home for a negligible sum above the balance due — with the promise that the former owner can stay on as a tenant and have an option to later repurchase the home.
"Piranhas"
Once the investor acquires the house for a bargain-basement price, some deals go sour. Some investors, for example, evict the former owner if he or she is unable to pay the rent. In other cases, an investor refinances the house, extracts tens of thousands in cash, and then fails to make payments on the new loan.The foreclosure process usually begins when people fall three months behind on their payments. If the borrower fails to catch up or work out a deal with the lender, it can take as little as a few months or as long as a few years before the lender meets various state and local requirements for selling the home at auction.
Lenders often lose money when they foreclose on homes since renovation and marketing costs can be high. And because many homeowners have saddled their properties with debt, houses often are worth less than the amount owed. This lopsided equation makes most lenders eager to work out arrangements with delinquent borrowers, giving them time to catch up on payments.Once an auction is scheduled, though, it may be too late to work out an arrangement with the lender. At that point, the homeowner can be an easy mark for those touting rescue plans.
Advocates for the poor, as well as some politicians, warn that deals with foreclosure specialists are rarely good for strapped homeowners. Elizabeth Renuart, a lawyer at the National Consumer Law Center in Boston and the co-author of a 2005 report on foreclosure scams, said it is "theoretically possible to make a fair deal if the investor makes only a modest profit and the sale returns a reasonable amount of equity to the homeowner." But she believes consumers would be better off trying to work out a deal with their lenders or seeking help from a financial counselor.Illinois Attorney General Lisa Madigan likens some foreclosure investors to "piranhas." She recently has filed three lawsuits against companies she alleges have misled homeowners into selling their houses for paltry sums.One of the best-known buyers of homes from distressed owners is HomeVestors of America Inc., a franchising company based in Dallas.
After paying an upfront fee of $49,000, franchisees receive two weeks of training, and can tap into leads generated by the company's ads. HomeVestors, known for big yellow billboards proclaiming "We Buy Ugly Houses," has 250 franchisees in 31 states and the District of Columbia, up from 43 at the end of 2000.The company says its franchisees typically offer about 65 percent of the estimated market value of homes, minus renovation costs. Such a deal, it says, can benefit people who lack the time or inclination to fix up and sell a home themselves."We never want to look like we're taking advantage of people down on their luck," said John Hayes, the company's chief executive.
ForeclosureS.com, the firm that provided training to Termine, also said that its methods are fair.During a recent $19.99 seminar provided via a telephone conference call, company president Alexis McGee said investors should be honest in describing borrowers' options — including how they might get a higher selling price by listing with a real estate agent. Rather than scare owners about the prospect of losing their homes, she suggested a softer approach: "Hi, my name is Alexis. I understand you are in a difficult situation with your house, and I wondered how I could help."
Termine first contacted Mbanefo early this year after finding court records showing that he faced foreclosure. The two had discussed Mbanefo's options and dickered over the value of his house for weeks before Termine reached a tentative agreement to buy Mbanefo's house, at a price the latter doesn't wish to disclose. At the time, Termine said in an interview that he might make a profit of around $85,000 after paying $20,000 for minor renovations and reselling the house.But the deal fell apart in May when Mbanefo decided to sell to another investor instead. He declines to discuss that transaction.Though the outcome was disappointing to Termine, he presses on. "I can't help everybody," he said. "But I try."