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Article of the Month for May 2001

Foreclosure Trends and Cycles

Every business has its unique patterns of boom or bust. Speculating in foreclosures is no different, except that it is a counter-cyclical business. The best bargains abound during periods of high interest rates or economic gloom when the general economy is at its worst and hardly anybody is interested in buying anything - even at bargain basement levels. This is the period of property accumulation . . . buying, re-habbing and renting it until the inevitable economic rebound gets strong enough to promote reselling it in the upswing of pent up demand and higher prices.

Though there is hardly any competitive bidding during a "down" economy and "oodles" of foreclosure bargains, there is far too much bidding when the economy is "up" and foreclosures are skimpy. The level of winning bids rises from about 60% of fair market value up to the 80% level, much too high for all the work and extraordinary risks involved.

Such periods of "overbidding" call for a different strategy - that of buying up junior notes and trust deeds at deep discounts from fearful beneficiaries before the impending trustee's sale on the senior note. Since the overbid goes, pro-tanto, to the next successive note/lien holders of record, it's usually only a matter of weeks before the new beneficiary is paid off in full . . . without putting up with the hassle of actually taking title to and possession of the real property!

An additional, rarely exploited maneuver is that of buying up severely discounted judgment liens, secured by properties prone to be overbid at an upcoming foreclosure sale, or prone to being completely refinanced beforehand. Either way, the discounted lien would be paid off in full.

Needless to say though, the actual process of identifying an appropriate buyout situation involves a lot of analysis and tedious detail in such overlapping fields as foreclosure, bankruptcy, IRS lien, etc. Thus, real competition is reduced to a tenacious handful of full-time specialists possessing above-average amounts of investors, knowledge and time.

The inexperienced and unwary cannot survive where mistakes and ineptitude aren't forgiven-where there are no warranties, no title insurance and no voluntary or mandatory disclosures of any sort.

However, the reality of such a harsh, uncompromising "buyer beware" environment is that it preserves opportunity. The few diehards that persevere and ultimately prosper universally appreciate that . . .

"What's good is bad, and what's bad is REALLY good!!"

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