REI Wealth Magazine Featuring Paul Finck | Page 77
2) PROBATE IS APPLICABLE IN
ALL MARKET CYCLES
One of the benefits of investing in probate properties
is that this niche never becomes out of vogue. When I
first became seriously involved personally in real estate
investing, just after the financial crisis of 2007–08, there
were millions of REO (Real Estate Owned, the
euphemism for bank foreclosed properties) homes on the
market. However, there were many fewer real estate
investors at that time, because most people were scared,
and could not see the bottom of the market. Those of us
who were seasoned real estate professionals saw just how
low the market had dropped, and then began buying at a
frenzied pace. By approximately 2010–11, the supply of
REOs was dwindling rapidly, and dropped even further,
as the big Wall Street investors also dove into the market,
and purchased tens of thousands of homes, primarily in
the Sun Belt states.
Another investment niche that was in favor shortly
after the financial crisis of 2008 was short sales. Short
sales occurred when property values fell below the
previous appraised levels, and could not be sold for a
sufficiently high price to pay the existing loan in full. The
homeowners, in many of these cases, lacked the liquidity
to cover this negative spread between the deflated
property value and loan balance, and so these borrowers
were compelled to request that their respective lenders
approve the sale for less than the outstanding loan
balance—ergo the nickname, short sale. Real estate
agents, who had seen their livelihoods negatively
impacted by the suddenly stifled real estate market, were
now assisted by a cottage industry of small firms, which
specialized in making shortsales happen for a few years.
This investment sector quickly faded into the sunset
once the U.S. Justice Department and other federal and
state agencies extracted billions of dollars in concessions
from the major money center banks (i.e. Wells Fargo,
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Bank of America, JP Morgan Chase, Citibank, et al) for
their alleged abuses and mismanagement of real estate
borrowers during the financial crisis. Instead of paying the
U.S. and state governments these multibillion dollar
settlements in cash, the majority of these payments were
provided to homeowners via credits given to those
individuals who were delinquent or in foreclosure. These
credits allowed the banks to either reduce interest rates
and/or loan balances, or defer loan payments to the end of
the loan. The combination of these remedies provided
qualified homeowners with some form of loan relief. This
action almost immediately eliminated the need or
necessity of the banks to approve shortsales, as now the
banks were required to spend these concessions on their
existing customers who needed assistance. Rather than
approve a shortsale and see that loan—that potential
stream of income—disappear forever, the new incentives
for loan modifications enabled the banks to eventually
recapture their lost income via these recast loans. The
modified loans would be less profitable than those they
replaced, but these loans were once again profitable and
still on the books. Whereas REOs and shortsales have
come and gone, probate opportunities remain.