Wholesale Leads via Loan Modification Records

[Jimmy Le]

I’ve had a few close friends ask about how I would navigate the current real estate climate to find wholesale properties in Houston.

After looking into some patterns from the previous financial crisis, I’ve honed in on a source of wholesale leads that have a 41% likelihood of defaulting within the next 6-12 months.

In this post, I’ll go into how to farm these wholesale properties from publicly available information.

COVID-19 impact on foreclosures

Since April of this year, there are several factors have created an effective dam preventing foreclosure sales:

• Federal and local stimulus packages
• Temporary increases in unemployment benefits
• Cancelled foreclosure auctions

In the following graph, you’ll see the steep drop off in foreclosure notices since April. Effectively creating an artificial back log of properties in default that are not being processed.

When the foreclosure process resumes, I expect there to be a surge of sales and a rush of opportunities.

So how can we get ahead of the crowd? What can we learn from the previous financial crisis?

Subprime mortgage crisis indicators

From the Journal of Real Estate Finance and Economics, Maxmilian Schmeiser and Matthew Gross reviewed over 20 million subprime loans from 2008-2014 to discover clues that lead to re-default and eventually foreclosure.

After the financial crisis, they found that most mortgages were taken back by the bank (REO), sold at a loss (short sale), or sold at foreclosure auctions.

In their study, they looked closely at loan modifications that enabled homeowners in default to renegotiate their loan to more favorable terms. This could mean either reducing their principal, lower their rates, or extending the loan term.

Despite the government’s efforts with the Home Affordable Modification Program (HAMP), the study find that 41% of all loan modifications became delinquent again within 12 months.

Additionally, loan modifications that had a loan-to-value ratio that was higher than 80% were more likely to default by an additional 17%.

My hypothesis is that this pattern will also emerge in this upcoming flood of foreclosures.

Armed with this information, we’ll to the County Clerk’s office to search for loan modifications that have occurred since April.

This post was written for the Greater Houston area in mind, but I suspect it will be similar for any other county as well.

Mining the public records

Let’s visit the Harris County Clerk’s Real Property Records.

To get a list of loan modifications that occurred since April 2020, we’ll search for MODIF in the Instrument Type and we’ll enter 04/01/2020 into the Date (From). Leave all other fields blank.

This gives us over 4,000 loan modifications and if our hypothesis is correct, they will have a 41% likelihood to re-default.

As we’ll soon discover, public loan modification records reveal a lot more information about the underlying loan than your typical mortgage or deed of trust.

To build our list, we’ll open up each of the Film Codes for and look for the following data points:

• Owner
• Property Address
• Unpaid Principal Amount
• Interest Rate
• Total Monthly Payments including Taxes and Insurance
• Maturity Date

Here’s are some example screenshots of what they look like. Though this is public information, I’ve redacted their personal details:

For this particular case we can extract the following information:

• Unpaid Principal Amount: $369,027.93
• Interest Rate: 3.50%
• Total Monthly Payments including Taxes and Insurance: $2,318.27
• Maturity Date: September 1, 2050

Combine with Zillow data

Now that we know the details of their loan modification, we’ll visit Zillow to extract the following information:

• Zestimate: $360,000
• Rent Zestimate: $2,695/mo

In this case, there was also some photos from a previous listing so we’ll take a peek inside.

As you can see, it’s a beautiful home on the inside! Most of the time… it probably won’t look like this. It’s nice to know what you’re getting into before meeting a seller at their property for the first time.

Filtering opportunities

Now that you have a list of potential leads, you can start filtering the records out based on your preferred investing strategy.

For our particular example, the house is over leveraged. You would only be able to make a deal if the owner paid YOU to take the home or if they were willing to hand you the keys for free, let you take over their mortgage and collect the $400/mo difference.

If you were looking at strict wholesaling opportunities, you would filter out all properties that has less than 30-35% equity.

Start marketing

Now that you have your list, integrate them into your existing marketing funnels:

• Direct mail
• Door knocking
• Skip tracing
• Cold calling
• Cold texting
• Social media ads

Anyways, hope you guys enjoyed this post!  Did I miss anything?  Let me know below.