For Some, Foreclosure Wave Means Opportunity

March 15, 2007 — -- A record spike in home foreclosures is sending shock waves through thehousing market -- but while many investors are running for the proverbialhills, others see an opportunity.

"One out of every three calls I get has something to do with theforeclosure-related market," said Greg Reiter, a North Carolina realestate broker and investor. "It seems like everybody and their brotheris a real estate investor at this point."

Irrational or not, there is real exuberance in the foreclosure market.The glut of distressed properties is, in part, the result of a meltdownin the "subprime" lending market. With more and more Americans unable tomake their mortgage payments on these risky, high interest rate loans --which are largely aimed at borrowers with poor credit -- investors arenow looking to pounce.

"There are literally thousands and thousands of bargains to be had," said Rick Sharga of RealtyTrac, an online database of foreclosure and bank-owned homes which has seen athree-fold increase in Internet traffic in the past two years. "We have properties from $2 million Beverly Hills homes to $5,000 fixer-uppers in rural West Virginia.

"As we're tracking the sale of these properties in various stages offoreclosure, on average they're selling at between 70 and 75 percent ofestimated market value, a 25 to 30 percent savings," said Sharga.

But buying a foreclosed property may not necessarily translate to aquick buck.

"In terms of the speculative aspect, I think you have to be extremelycareful," said Bill Barnhart, financial markets columnist at the ChicagoTribune. "There's sort of a new industry developed of people trying tobe bottom-fishers, if you will, in the real estate market."

Unlike a traditional foreclosure market -- which is driven by recessionor high unemployment -- the current rash of foreclosures is largely aresult of rising interest rates and stalled or, in some areas, fallinghome prices.

Those market conditions meant the subprime borrowers couldneither make their mortgage payments nor sell their homes at a profit topay off their debts, and those forces could now throw a wrench into theplans of would-be profiteers.

"There's no swooping in," said Austan Goolsbee, an economics professorat the University of Chicago Graduate School of Business. "The root ofthe problem here is the properties aren't worth it anymore. The priceshave gone down, and that's why they're foreclosing. … The house isactually worth less than the payment in some of these cases."

Another pitfall is the sheer number of investors.

"With more and more interest, and with it becoming more and moremainstream, the prices of foreclosures have increased 10 to 15 percent,"said Reiter, who's been dealing almost exclusively in distressedproperties since 2003. "There's not as much savings in it as there usedto be because of supply and demand."

Still, foreclosure properties could present a unique opportunity formany.

"If you're looking to buy as a residence or some sort of long-terminvestment, I think it is a buyer's market in that sense," saidBarnhart.

"Even if the market continues to dip a little bit, you'll probably be inthe house long enough to see the next upward cycle in prices," saidSharga. "If you're looking to buy and flip a property quickly, there's alot of risk in the market right now. It's probably not the best time tobe active."