By James R. Hagerty
From The Wall Street Journal Online
POMONA, N.Y. -- The cooling market for real estate brought Michael Termine and Uso Mbanefo together.
Mr. 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 Mr. Termine, a 32-year-old novice real-estate investor, stepped in.
One afternoon in early April, Mr. Termine visited Mr. Mbanefo's office in a strip mall and offered to pay $400,000 for his house. Mr. Mbanefo showed Mr. Termine fliers for nearby homes offered at $600,000 or more. Mr. 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, Mr. 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 Mr. 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 email 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."
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% in the fourth quarter of 2005 from 4.4% a year earlier. With interest rates rising, it's harder for homeowners to refinance or sell quickly.
Such conditions are attractive to investors like Mr. Termine, who previously has owned a bar, worked in construction and tried acting. "I've always wanted to do the real-estate thing," says the father of two young children. "I just didn't know how."
Last year, Mr. 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. Mr. Termine says 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 says.
So far, he says, he has used home-equity lines of credit to purchase four homes in foreclosure. He has sold two of them, he says, clearing about $160,000 in profits. Though he expects some transactions to be less lucrative, Mr. 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.
Sour Deals
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.
Annie Stephens, a 68-year-old receptionist in Atlanta, says she fell behind on payments on her mortgage in 2003 after suffering a stroke. Nathan Mack, a real-estate investor, offered to help her avert foreclosure, according to a Fulton County, Ga., court filing. Ms. Stephens says she agreed to transfer the title to her house to an associate of Mr. Mack, Gaytonya Jones, with the understanding that Ms. Jones would refinance the house and Ms. Stephens could stay put, paying rent, for a year. After that, she says, she was to regain the title to her home.
As the new owner of the home, Ms. Jones obtained a new mortgage of $110,700 and used part of the proceeds to pay off Ms. Stephens's old $80,000 note, according to Michael P. Froman, an Atlanta lawyer who represents Ms. Stephens. Ms. Stephens received about $3,000 from the transaction, even though she was giving up title to a home in which she had built up about $40,000 of equity, Mr. Froman says.
Ms. Stephens says she paid rent to Ms. Jones, initially $700 a month and later $900 a month. Nevertheless, says Mr. Froman, Ms. Jones failed to make payments on the new mortgage loan, prompting the lender to initiate foreclosure proceedings in 2005. Now Mr. Froman is seeking a court order to return the title to his client, who still lives in the home pending resolution of the dispute.
Mr. Mack says there was nothing improper about the agreement with Ms. Stephens. "We thought we were helping her," he says. Ms. Jones couldn't be reached for comment.
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, says 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.
Illinois is among several states that have passed, or are considering, measures to bolster protections for homeowners considering foreclosure deals. New legislation in Illinois will require investors to provide a clear, written contract and give sellers the right to cancel within five business days after it is signed. The new Illinois rules also will limit the profit investors can make when they buy a home and allow the occupants to remain as renters with an option to repurchase the property.
Some investors are pushing back. Last year, a group of them formed the National Association of Responsible Home Rebuilders and Investors to lobby against what they see as overly restrictive state legislation.
"Let's create a regulatory framework that takes the bad people out of the industry" but doesn't block all transactions, says John Grant, executive director of the association. He says legitimate investors have been unfairly tarred by politicians aiming to crack down on scams.
One of the best-known buyers of homes from distressed owners is HomeVestors of America Inc., a franchising company based in Dallas that helped found the trade group headed by Mr. Grant. 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% 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," says John Hayes, the company's chief executive.
ForeclosureS.com, the firm that provided training to Mr. Termine, also says 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."
'A Ton of Dough'
Using such techniques, investors still "can make a ton of dough," Ms. McGee told the conference-call participants.
Mr. Termine hopes to do just that. One recent day, he started work at 7:30 a.m. in a cubicle at the office of a friend. Wearing blue jeans and a crisp white shirt, he switched on his computer, bringing up an image of his pet pit bull. Then he called up the Web site of New York's Rockland County Clerk, and began searching through legal notices of foreclosures.
He jotted down notes about people to call. "Every week that I do this more and more people are in trouble," he said. "It's slowly, like, on an incline."
When records show that people have loans and overdue taxes that total more than the value of their homes, Mr. Termine doesn't bother to make contact. He can make a profit only if there is equity remaining in the home after he buys it and pays off all the obligations.
After about an hour of computer research, Mr. Termine got back in the blue Ford Taurus he uses for work and set out to look at prospects. One stop: a two-story house in Stony Point, N.Y., with moldy white siding. From court filings, Mr. Termine knew the name of the home's owner and that a foreclosure auction was pending. A neighbor who was watering the lawn said the owners had two children, drove a new Lincoln Navigator and now live in Florida.
Mr. Termine made a note to track down the owners' current phone number. He then did some quick calculations. If the owner would sell him the home for around $230,000, "I'll probably make $100,000," said Mr. Termine -- even after spending about $30,000 on renovations and paying broker fees.
Later in the day, Mr. Termine arranged his meeting with Mr. Mbanefo. Mr. Termine first contacted Mr. Mbanefo early this year after finding court records showing that he faced foreclosure. The two had discussed Mr. Mbanefo's options and dickered over the value of his house for weeks.
Mr. Mbanefo bought the house in 1994 for about $175,000. Though the value has more than doubled, so has his mortgage debt because he has borrowed against the house to finance businesses, including a line of denim clothing branded Abani. Sitting across a table from Mr. Termine, Mr. Mbanefo tapped some numbers into his calculator. After buying, renovating and reselling the house, "you'll come up with 100 grand (in profit) at the end of the day," Mr. Mbanefo said.
"I don't know how much I'll make," Mr. Termine said.
A few weeks later, Mr. Termine reached a tentative agreement to buy Mr. Mbanefo's house, at a price the latter doesn't wish to disclose. At the time, Mr. 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 Mr. Mbanefo decided to sell to another investor instead. He declines to discuss that transaction.
Though the outcome was disappointing to Mr. Termine, he presses on. "I can't help everybody," he says. "But I try."
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