Investor Opportunities Still Abound in Judicial Foreclosure States

The housing market has largely stabilized now that nearly seven years have passed since the onset of the Great Recession. While that’s good news for the country generally, active …

The housing market has largely stabilized now that nearly seven years have passed since the onset of the Great Recession. While that’s good news for the country generally, active investors who specialize in renovating residential properties now often find that a primary source of such opportunities is drying up – foreclosed properties that become available through court auctions, bank sales or similar dispositions. 

This “slowdown” in the availability of foreclosed properties is not uniform, however. In many states featuring a “judicial” foreclosure process, this year has often seen more distressed properties coming to market.  How can this be?

Varied Foreclosure Processes in Different States

Foreclosure processes vary greatly from state to state. Generally, states that use mortgages conduct judicial foreclosures; states that use deeds of trust conduct non-judicial, or statutory, foreclosures. As one might expect, the judicial procedure requires court action, so the process in judicial foreclosure states is usually lengthier and more expensive.

Deeds of trust in statutory foreclosure states generally contain power-of-sale clauses, enabling the trustee to initiate a foreclosure sale without having to go to court. In judicial foreclosure states, however, a lender must often wait for several mortgage payments to have gone unpaid before pursue court action, needed both to prove the validity of its claim and to get the court’s approval to initiate foreclosure. The waiting time to get claims through the judicial process can be long, and attorneys’ costs are generally greater.

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Although the whole country was affected by the Great Recession, certain real estate markets rebounded much faster – namely, in those where state laws permit foreclosures to move quickly. By contrast, in judicial foreclosure states, large numbers of homes remained in legal limbo for extended periods — especially as the courts became backlogged with foreclosure cases. This also hindered home-price recoveries, as lenders have been prevented from recovering residences in default even where those properties had already been vacated by the homeowners  – often called “zombie” foreclosures – and so haven’t been able to offload them to new buyers.

Foreclosure Activity is Actually Rising in Some States

Because the court backlog was so significant in some states – in New York and New Jersey, it has taken as long as five years – the “clean-up” of foreclosed properties is still continuing in many places. Indeed, half of the states recently posted a year-over-year increase in scheduled foreclosure auctions. Similarly, 15 states posted increases in lender repossessions (REOs), including Maryland, Ohio, and North Carolina.

As these properties finally exit the legal process, active investors who specialize in fix-and-flips – or who look to renovate and then hold the properties for ongoing rental – should be able to benefit from the appearance of these distressed properties on the market. Zombie properties present a particularly inviting opportunity, since they are essentially ready for renovation as soon as the ownership transfer can be completed. Significant numbers of these properties should continue to appear on the market in these backlogged states, as they finally become bank-owned or enter into the ending foreclosure auction process. 

An Improving Market, Available Financing, and Product – What’s Not to Like?

The residential housing market seems on track for perhaps its best year since the Great Recession, as the jobs market continues to slowly improve. Inventory is moving more quickly, and most markets are showing slow but steady price increases.

Numerous online financing options have also recently appeared. The better of these, such as the company I work for, have a specific focus toward toward fix-and-flip investors and offer a streamlined application process and competitive terms. They are also often able to offer relatively high loan-to-value ratios, since their financing products generally take into account construction costs and the ultimate “after repair” value of renovated properties.

Add to this a continuing stream of distressed properties appearing on the market in those states where those properties are finally exiting the legal process, and investors active in those states appear to be in a good position. While flipped houses represent an increasingly low portion of overall home sales in many states, those states utilizing a judicial foreclosure process are now (paradoxically, perhaps) presenting investors there with a solid opportunity to enjoy solid profits. The market for such properties will likely be competitive, but at least it remains robust – and in a rising market, that gives active investors in those states plenty of room for optimism!


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