With foreclosures on the rise, particularly in the outer boroughs, the distressed properties market is expanding and giving investors an opportunity to buy at a discount. But while foreclosures have received the lion’s share of attention in the wake of the subprime mortgage crisis, real estate experts said that making an offer on a property in lis pendens – a stage of pre-foreclosure that a home enters after its owner has defaulted on mortgage payments – is an even better option.
In a recent webcast, The Real Deal’s Jen Benepe spoke with Bill Staniford, a partner at Property Shark, as part of a regular “Shark Report” installment on the program. Property Shark tracks homes in lis pendens, and Staniford said that despite the popular misconception that foreclosures are where all the action is, most distressed properties are being purchased in lis pendens. Staniford said not only is it possible to physically enter a property in lis pendens – which cannot be done for a property in foreclosure – but that once you make contact with the owner, you can make an offer and proceed just like any other normal sale.
And, he said it’s reasonable to expect a discount of 20 percent off market rate. Here’s more of Staniford’s tips on how to proceed when pursuing a home in lis pendens.
The Real Deal: We know it’s not nice to be a shark, but tell me how a person in today’s distressed market can take advantage of all the great deals out there.
Bill Staniford: In the distressed property industry, there are really three different ways that you can make money. The first one is the lis pendens stage; those are the pre-foreclosures. Then you have the foreclosure stage, and then the REOs, which is real estate owned by the bank.
TRD: So tell us a little about lis pendens. You said that they were your favorite. Why is that?
BS: I think that lis pendens is the most interesting for a couple of reasons. It’s certainly the most active. There are more lis pendens out there than foreclosures – probably about double. Most of the deals that are getting done today are done through lis pendens, and the real reason that’s occurring is because information is available.
TRD: Foreclosures were the great thing yesterday, and lis pendens is the great thing today. What’s the difference between them?
BS: When a property is in foreclosure, you’re not able to enter that property, and it’s very awkward. You’re never able to see what it looks like. It doesn’t look like a normal sale. In lis pendens, the real job is to contact the homeowner, and once you can contact the homeowner, then you can walk into the property, take a look at it and get an appraiser in there. It becomes much more of a normal sale.
TRD: How do you contact a homeowner to do that?
BS: Well, it can be difficult. That is a challenge. I would say that is where you need expertise when dealing with a lis pendens. But really, the way to do it is pick up the telephone, knock on the door or send a letter.
TRD: So the first thing you do is, you get a list of the lis pendens, right? You look down the list and see what looks interesting to you, and then what?
BS: Well actually, you’re really not using a list. Property Shark delivers maps where you can pinpoint different properties that are in distress by region or by area. You can also generate a list and then sort it by the building classes. So you can specifically go after three-family properties, for example, if that’s what you want.
TRD: So you contact them, you go and see the house, and then what do you do?
BS: Then you can make an offer on the property, and once an offer is accepted, it’s really just like a normal sale.
TRD: What kind of an offer would you make? What would you base your price on?
BS: Well, the real reason that we’re in this industry is to get a discount off the market rate. And we know that the homeowner is in distress. So I think that anything down to 20 percent off of market rate is reasonable. Going beyond that is a little unreasonable.
TRD: You make an offer to the owner, and then what
happens?
BS: Well, if the owner has enough equity, then he can make that transaction. If the owner does not have enough equity, then really you have to get his approval, go to the bank, and then you’ll do what’s called a short sale. Then, whether or not the bank is willing to accept your offer, that’s the question.
TRD: Tell us again what a short sale is.
BS: A short sale is simply when you have the approval of the owner, you go to the bank, and let’s say the owner owes more than the property is worth – then you can offer the bank less than what is owed, and they may be willing to accept it, depending upon a couple of different factors.
TRD: Tell us some of the factors. Why would a bank accept less than they were owed?
BS: Banks don’t like to have properties on their balance sheet. That’s something that’s going to hurt their credit rating.
Also, if the person is not paying the mortgage, then they’re not getting any cash flow from that either. So it really does behoove them to go ahead and make the transaction.