5 Myths of Foreclosure

[Jim Watkins]

Myths about Foreclosure (Texas)

Please note that my area of expertise is in the State of Texas and the statistics contained in this article should not be relative to other states.

The following question was asked on a local Dallas Real Estate Board about foreclosure deals...
[i]
"So where are these great deals!! Inquiring minds want to know :confused"[/i]

Here is my relpy...

All you need to do is wait at home because the foreclosure deals are set to be delivered right to your front door! Packed with equity and eager homeowners ready to leave their homes in tip-top condition!

WRONG

I feel this is a good time to relay a little bit of REALITY.

The Myths of Foreclosures:

[b]1. Foreclosures represent great deals

2. Houses in foreclosure have a lot of equity

3. Homeowners are never at fault

4. Texas is 6th in the nation with foreclosures

5. Homeowners are Motivated to sell[/b]
You DID note that I said Myths? I.E. Not true.

Ok here are my comments to the Myths. Or in other words.... here is the reality of foreclosure.

1. Foreclosures represent great deals

No they don't. In fact ony HALF of all properties posted for foreclosure, make it to the courthouse steps for the auction. Of the 50% that go to sale, only EIGHT percent (8%) are offered with an opening bid that has enough equity to warrant a bid. That means 92% of the properties at the sale, go back to the lender.

2. Houses in foreclosure have a lot of equity

Not true. While the total number of properties posted for foreclosure skyrocket, the equity (in Texas) hasn't. The recent loose lending habits allowed many owners to borrow up to 100% and some allowed the closing costs to be rolled into the loans! Interest Only loans also have contributed to the problem (granted Texas hasn't had as many as other states). Texas hasn't appreciated like elsewhere. The result? The owner loses the house.

3. Homeowners are never at fault

Yeah, right!

According to Foreclosure Listing Service, Inc. in Addison, Texas, the top three reasons for foreclosure are:
[b]Divorce
Loss of Job
Health[/b]

I agree with those being the root problem. However, I know a lot of people that got a divorce and didn't lose their house. I know a lot of people that got laid off but didn't lose their house. I know a lot of people that have had major health setbacks but managed to not lose their house. The top 3 reasons are what starts off a series of Poor Choices!

In my experience, only 1 out of 25 homeowners that are in foreclosure, are there for reasons other than poor choices. The one that comes to mind was a couple that I consulted in Richardson. The woman was a smart, well dressed, Paralegal of all things. Her husband was an INS Attorney. I was baffled and asked how they got to the point of foreclosure. She said, "My eight year old daughter has a brain aneurysm. She has been in and out of hospitals since she was five. I understand the bank has to protect their position at some point but, any money we have had access to, has gone to the care of our daughter." I wanted to disappear into thin air right then. More than I ever had before. THAT scenario, I think anyone would understand.

That coulple is the ONLY one out of hundreds of owners in foreclosure that stands out as someone I can reason with. The vast majority of the time, it's brought on by poor, bad or just dumb choices.

It's easy to sit and say, "I feel so bad people are losing their houses." Let me twist it a little and ask, "If you had given someone the money to buy a house and they failed to make a payment in TEN months... would you still feel the same way?"

4. Texas is 6th in the nation with foreclosures

I had to read the posting three times to catch it. Read what it says... "The RealtyTrac report is based on data on more than 800,000 properties from nearly 2,500 counties across the United States -- including databases of pre-foreclosure and foreclosed properties."

"Including databases of pre-foreclosure and foreclosED properties."

They are two very different markets. Pre-foreclosure means the homeowner is still the legal owner and most likely is still on title. "Foreclosed" property is otherwise known as an "R.E.O." It stands for Real Estate Owned. It no longer belongs to the homeowner. It has passed through all the legal steps and was sold at the auction. If there are no bidders, then the lender becomes the buyer and the house is then REO with the lender.

Adding those statistics together is not a fair way to relay foreclosure statistics to the public.

Texas and Florida go back and forth as the top 2 states in Actual PRE-FORECLOSURE postings monthly. Dallas County, ranks number one in the Country in overall postings monthy. Last month Dallas County was just shy of 2,000 properties posted for foreclosure.The following table chart shows the local foreclosure statistics, not Florida's or Ohio's or California's, where I don't work or have any use for their figures. The source of these statistics are courtesy of George Roddy Sr., who is the President and Owner of Addison based Foreclosure Listing Service, Inc. (http://flsonline.com/).

AREA
OR COUNTY

#

RESI

POSTINGS

MARCH

2006

#

RESI

POSTINGS

MARCH

2007

%

CHANGE

FROM

MARCH

2006

%

CHANGE

FROM

PREVIOUS

MONTH

D/FW METRO
3,063
3,276
7 %
-19 %

DALLAS
1,473
1,510
3 %
-22 %

TARRANT
934
1,029
10 %
-19 %

COLLIN
341
411
21 %
-13 %

DENTON
315
326
3 %
-14 %

[b]
5. Homeowners are motivated to sell[/b]

This is, in my opinion one of the largest myths in the business. We all agree that the general public dislikes attorneys, right (personally, I feel that my work could not be done without them)?

If that is true, and and most homeowners are in denial, then why do over 40% of the owners in foreclosure, file for Bankruptcy (Chapter 13 is most common and Chapter 7 is filed on occasion)? A lawyer is usually the one that files on behalf of an owner. Oh wait, the owner isn't in a right state of mind so why would they willingly go to an attorney? Simple. Bankruptcy lawyers help people stay in their house by getting it protected in Bankruptcy so the lender can't proceed to sell the house at the auction.

Before the Bankruptcy laws changed in October of 2005, nearly 60% filed for Bankruptcy. SIXTY!

Maybe I am wrong in my analysis though? On second thought, yes. Homeowners ARE motivated... To KEEP their home. Not house. It's their home. Who lives in homes? People. While this business is about buying and selling houses, we tend to overlook that people live in those houses. So actually it's a business about people.

Treat them right. Don't take advantage of their situation as some have before. Talk to them. Let them know what options they may have overall and that is something most Investors, Lawyers, Realtors and Lenders don't do very often.

Should any of this be seen as a negative? Absolutely NOT! I have made a living working the local foreclosure market and also teach/mentor others about it. It's the "myths" that can mislead some people into thinking there are all sorts of "deals" out there. In Reality, there are good deals in foreclsoures. Just take the time to properly research any foreclosure property. They all start by being posted for foreclosure. Don't get mislead into thinking there are all kinds of "free" foreclosure lists out there or take RealtyTrac's statistics as gospel locally.

Hope this has helped.

-Jim Watkins