San Diego Source | San Diego Daily Transcript

Whether it is the homeowner's fault for not making the mortgage payment or the lender's fault for not making good loans, the results remain the same: Foreclosures are on the rise in San Diego.

D. Holbrook

In April, 539 homeowners began the foreclosure process, up from a low of 422 reached in February last year, and significantly less than the 850 filed nearly seven years ago. Not even the 26.1-percent property-value increase in the last 12 months will be enough to save hundreds of homes that will be lost to foreclosure this year.

For real estate investors, someone else's pain is their gain, assuming the new players don't get burned in the process. This is the slippery slope of foreclosure investing: It is the mixing of an emotionally charged issue with one of the most legally complex of real estate transactions. Working in this arena can be profitable, although potentially dangerous.

The six deadly sins

It can be helpful to know that there are six deadly sins of foreclosure investment. While these deadly sins may not result in eternal damnation, investors may not consider their investment the least bit heavenly if they commit one or more of them. Here's a look at the sins that can torpedo a foreclosure deal when investors aren't careful or adequately prepared for the financial and emotional challenges that lie ahead of them:

* Not knowing property values and the foreclosure process. Because foreclosure investing is the most legally complex and emotionally complicated real estate transaction, you will know less about the property, have fewer disclosures and even less time to identify the problems. Investors need to understand the market and be able to analyze the property without having the benefit of all of the information, meanwhile the clock is ticking.

* Not understanding the psychology involved. A distressed owner whose property is in foreclosure is not a rational seller. This sale is more about distressed ownership than it is about distressed property. In return for assisting in solving the problems faced by the distressed owners, investors are given the opportunity to buy the property at a discount. Helping troubled sellers emerge from the sale with some dignity intact, and some money in their pocket, improves investors' chances dramatically.

* Lacking persistence. Working at foreclosures is essentially a numbers game where investors play the odds of finding real gems among the fool's gold. It involves patience, timing and persistence. Sellers are actually buying relief from the emotional and financial stress and the uncertainty of their situation. The discount that investors receive when they purchase the property is the price the sellers pay for that relief.

Assuming 500 homes begin the 121-day foreclosure process monthly, there are approximately 2,000 homeowners in San Diego at any point in time who are working through the process, either trying to refinance, sell, reorganize or restructure their ownership in hopes of keeping the dream alive. Some won't, and 50 or so a month will be sold on the county courthouse steps. There is money to be made working with those other 450 or so owners creating a win-win situation by trying to salvage some of the equity that is left.

* Not knowing consumer protection laws. People whose homes are in foreclosure receive special protection by law against "foreclosure consultants" who prey upon their misfortune. California Civil Code protects consumers from fraud, deception and unfair dealing by home equity purchasers and foreclosure consultants. Well-meaning investors could find themselves liable for damages, subject to cancellation of a contract, and even criminal prosecution if they aren't careful.

* Not knowing the liens on the property. IRS liens, accrued interest on an underlying note, property taxes, judgments or any number of title time bombs could appear after a purchase. They were always there, but investors are sometimes unwilling or don't take the time to research them. The same title protections and disclosure found in a typical real estate process become a gamble in a foreclosure investment.

* Not coordinating time-sensitive dates. There are a number of important deadlines throughout the process that, when unmet, can potentially jeopardize the buyer's ownership or financing arrangements. For example, the IRS can claim redemption of a property within six months if certain conditions aren't met, and a lender's requirement by law to reinstate an existing loan ends 21 days prior to the sale. After that, it becomes a cash payoff, which significantly limits the investor's options. Critical dates can sometimes be extended.

A reality check for foreclosure investors

Foreclosure properties are out there to be had for those who not only know how and where to find the properties, but also how to work the opportunities. If you are determined to go after them, realize that just because it's a foreclosure doesn't make it a "deal."

Buying back REOs (real estate owned), for example, gathers a lot of interest as a foreclosure deal, but most of these sales take place many months after the property has been seized. A recent study shows that Federal Housing Authority repossessions take 292 days to get to market. The interest carry, improvements costs, sales commissions and lack of seller "distress" will take some of the wind out of the foreclosure sails. Consequently, many sales are made at or above market price.

Contrary to popular belief, foreclosures are rarely wrapped up in nice, neat packages. Investing in foreclosures tends to be messy and often complicated and fraught with emotion, and it doesn't carry the same warranty and disclosure that conventional real estate investments do.

Real foreclosure deals aren't picked off the shelf or selected from the pages of a multiple listing service. Foreclosure opportunities are mined from public records, from the investor's exhaustive research and from self-developed lists of homes that are for sale by their owners.

Most good foreclosure deals do not involve real estate agents because once agents are involved in the transaction, the price has been negotiated up, a commission has been added and market competition is present. Moreover, only a select few investors will actually be able to gain the distressed owners' trust, negotiate fairly with them and time the transaction right. It sounds easier than it is, but investors with vision, persistence and a plan can come away with significant bargains in today's growing foreclosure real estate market.

Dan Holbrook is president and CEO of AtVantage Consolidated Cos. in Carlsbad.