Entrepreneurs in High-Foreclosure Areas Turn Homeowners Into Tenants

A recent New York Times article describes how the economic downturn and the foreclosure crisis are creating a new kind of real estate entrepreneur.

A flood of absentee buyers are now looking to purchase foreclosed and REO properties at rock bottom prices and then offer them up to the former homeowners as rentals before the original occupants ever leave.

Lou Jarvis, a freelance bidder in Phoenix, follows the trail of soon-to-be-foreclosures with an eye for homeowners who would like to stay put and can afford to rent.

When Jarvis finds the right combination of occupant and property, he bids on the homes at sheriff’s auction on behalf of other investors, who then turn around and rent the place to the former owners for far less than their original mortgage payment.

In cases where the gambit works out, everybody wins.

The former homeowners not only do not have to vacate, they end up with a much lower monthly payment than they had as buyers. The new owners get an instantly occupied rental property at a fire sale price with no immediate repairs or upgrades required.

The technique is just now beginning to take off, indicating that in some of the hardest hit cities the market has indeed hit some kind of bottom.

Foreclosures are at an all-time high and are beginning to hit even people with good credit due to the enormous number of job losses in recent months, but most of these people cannot get loans and don’t even have the credit rating they need to get a decent rental. Many are not poor risks; they’re just people who have fallen on hard times and can’t get loans. Keeping them in their homes at a reduced rental rate makes sense for them and for the investors who snap these properties up.

Bank owned property for $15000

Bidding wars are not unusual in recent months, especially in prime areas.

There is a dark side, however.

Phoenix (and so many other western cities) got in trouble in the first place during booms times when absentee buyers began to snap up as many houses as they could no matter what the price, convinced that becoming landlords would make them rich. Lots of buyers with no former real estate experience jumped into a market that was already red hot and made it hotter, riding high on the premise that prices would never go down.

We all know what came of that feeding frenzy.

The current boom shows signs of another feeding frenzy beginning.

In April, 4 out of 10 homes sold in Phoenix were sold to absentee buyers. That’s up 50% over last year, and is roughly the same ratio as at the peak of the housing bubble.

How can an investor go wrong when prices are this low?

Easy.

“If Phoenix loses population,” Mr. Jarvis says, “then buying houses here is a bad bet.”

And indeed, no one really knows what will happen next. Phoenix could loose population. The United States could lose population.

But for the time being, there’s blood in the streets, and the pirhannas are out in full force.