ForeclosuresMass - ForeclosuresMass Monthly - Interview with the Expert - Kevin Norton Reports from the Foreclosure Trenches (December 2007)

A twenty-year real estate veteran, Kevin Norton has seen it all. He's also been through the ups and downs of the Massachusetts market, including the huge downturn in the late 1980's and early 1990's, when property values plummeted. Catching Kevin in his office these days isn't easy - he has numerous deals going down and is often out in the field putting out fires. Fortunately we were able to catch him at his desk and get his take on the current market and how it's affecting real estate investors.

ForeclosuresMass Monthly: Kevin, how is this market different from one in the late 1980's/1990's?

Kevin Norton: That's a great question because there is one huge difference. Back in late 80's and early 90's, forecasters and economists had more of an idea when the downturn would level out. Although the situation then and the situation today are similar in nature - namely declining property values - you also had an overall economic downturn. People were out of work and the stock market had its big crash on October 23, 1987. Today's economy, however, is still humming. The stock market is doing well, joblessness is relatively low, and commercial real estate is doing very well.

But with the situation today economic experts have no clue what's going on - only that foreclosures will continue to rise. One problem is that banks are hiding some of the issues in order to minimize negative press.

Based on what I'm seeing, I'm estimating that approximately 30% of foreclosures are the result of fraud due to the rampant use of "no doc" loans. People were using their friends, cousins, anyone to qualify for a loan even though these people weren't going to be the owners. It's a mess - lenders, even attorneys are getting caught with their hands in the cookie jar. One woman I know refinanced six times in three years and finally the well dried up. The bank had no problem giving out the money but now she can't pay the loan.

* Next 37 17 investors only!

FMM: What kind of properties are you seeing come up for foreclosure? Is it limited to low-end properties or are you seeing higher-end properties?

KN: It's still a lot of low-end properties, but the jumbo loan properties will start showing up in the foreclosure market if the stock market declines. This is because professionals bought the higher-end homes with jumbos - these come with higher rates and have greater risk. If these people aren't making money on the stock market, they may not be able to make their mortgages.

Foreclosed vacation homes are also starting to appear - not in great numbers, but a few. People can't make the payments and are walking away from them.

KN: As we all know, lending standards have tightened up. It's really cutting into the market because your typical real estate investor is having a harder time financing foreclosures and REO properties.

Insurance companies, too, are tightening standards and will no longer insure properties in coastal markets due to hurricane and flood risk. In fact, I have one deal right now that has come to a halt because the buyer can't get insurance and will mostly likely have to resort to the Massachusetts Fair Plan - it's the plan run by the state and the last resort if you can't get insurance. Insurance companies are also moving away from insuring condexes and high-risk properties.

And due to limited paper because of "no doc" loans, you now have 5 - 10% of foreclosures with Title issues - specifically fraud. You have to run a Title search to ensure the foreclosure was done correctly, that junior lien holders were alerted before the auction took place, and check for fictitious names. We're now seeing a lot of fake names and other people's social security numbers attached to the property.

People are also carrying one, two, even three mortgages, so that's making it hard to do a short sale because you have to deal with two or three different lenders plus additional creditors. Everyone wants a piece of the sale proceeds, so short sales are not happening because too many people are involved - you have too many levels of bureaucracy.

FMM: Is the auction held at the Hynes Convention Center in November another indicator that makes this market different from the 80's market?

KN: Actually, you saw these huge auctions in the last market downturn, too. They're called "Ballroom Auctions."

FMM: Will they hold another auction like this in the future? And if so, can you suggest some strategies for investors on purchasing properties at events like this?

KN: Yes, I'm sure they'll hold two or three more events like the Hynes event - especially since foreclosures are expected to increase. I know you're interviewing me before the Hynes event takes place, but I can tell you a few things about it because I'll be there.

One, investors will find only REOs, and 85% of them have issues due to their condition, i.e. structural, septic, major infestation, mold, plus unknowns. You are taking a huge chance buying one of these properties sight unseen because they're being sold "as is." The company hosting the auction is holding open houses on the weekends in order to let buyers view the properties.

So if another auction like this is held, be sure that you view the properties you're considering - with your home inspector in tow.

Another big difference is the method of financing. The last time I attended one of these big auctions, you had 30 - 45 days to finance your purchase. For the Hynes event, however, you have to put up your $5K, which is standard for any auction, and then you have to pay a 5% cash deposit if you're the winning bidder. It's 10% for those who want to buy multiple properties.

So I predict only serious buyers will be at the Hynes event because how many people have that kind of cash? For one property, you could end up writing a check for $20K or more. That's a lot of money - and it's much harder to walk away from than it is with your typical weekend auction. With your typical auction, you go in knowing you may have to walk away from your $5K stake should you get buyer's remorse.

KN: The properties have been on the market six to twelve months and aren't moving, and the banks don't want to be real estate owners. However, they're also reluctant to lower prices because they can't take such a big hit. I have two properties in the Hynes auction and had good offers on them, but the bank wouldn't accept them. But they're going to get 30% less at auction than what they were offered by serious buyers.

KN: Buyer beware! These auctions are not for newbies. The properties being sold involve serious risk - you really have to know what you're doing.

Kevin Norton is the VP of the REO division for Daniel J. Flynn and Co, a Quincy, MA real estate company that provides auction and real estate services. Kevin can be reached at 617-479-9000 x 115 or by email at knorton@djflynn.com

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