Thursday, September 06, 2007

Live Rent Free, Don't give the Bank the Keys

Everyone is talking about all of the foreclosures and how rental rates will rise because of the demand from all of the displaced owners. Maybe there is one item that has been overlooked.

When banks foreclose and get title, there is a year or two wait to complete the process. We are talking about the actual deed, not a note saying that the title was conveyed and it is free and clear. The paperwork takes a while.

In the mean time, the neighbor across the way trades out his broken dishwasher with the one in the foreclosure. In California, the air conditioner would probably grow legs in two weeks. In a year’s time, there might not be much left. I’ve seen places that the neighborhood kids would use and by the time they are finished with it, you really wouldn’t want it at any price.

This can even get worse. Consider a foreclosure in Colorado, the pipes freeze and break. In Florida, a closed up house might mold over like a loaf of bread. Some states have laws on the books that allow the foreclosed owner two years to redeem the house after the event. So, clear title could be a very long wait.

Considering the length of time needed to sell a house lately, a year is not an unreasonable estimate of time. The note holder has a chance to lose big time. His asset could be run through the local recycler without his knowledge, copper pipes and all. It behooves him to have the house occupied.

The foreclosed home owner can’t lose if he plays his cards right. Walk up to the lender handling the foreclosure, and offer to keep living in the house rent free until it is sold, on the condition that you take care of the lawn and the house in general. Sounds crazy, but who the hell is going to buy it in this market? At least nobody is going to steal the air conditioner before you have a chance to sell it. At the present time, things aren't quite that bad, so you might have to pay monthly rent payments.

An impossible pipe dream? People living in foreclosed homes and not being tossed out?? It’s happened before, just not in the last 75 years. States even passed laws so it could happen.


Anonymous said...

Hi Jim, I was going to ask you about how mortgage backed securities could be leveraged and to what degree they were, but, not knowing enough about finances in general to make a coherent question on the subject, let me ask you this; I`ve heard that the "genie" is out of the bottle, and know matter if the fed cuts rates or not, it cannot be put back into the bottle. Are you of this opinion? Or can it be contained like in 1998 with the Long Term Capital Management fiasco?

Tyrone said...

Talking about banked owned... check out this gem:
Looks like somebody hit the "ATM" and walked. Now owned by BANK OF NEW YORK. Total dump.

4374 Sebastopol Rd, Santa Rosa, CA
List Price: $342,900
Sale History
04/18/2007: $353,250
07/19/2000: $60,000

The BANK OF NEW YORK owns 19 homes in Santa Rosa!

Jim in San Marcos said...

Hi Anon 10:31

I don't put much stock in the Fed's possible rate cut having any effect. The discount window is at 5.25% right now and the Treasury is selling T-bills at around 4.5%. Since the T-Bills sell at auction, a low bid submission for tender insures that your money is accepted. When investors are scared, they go to Treasury's. I believe that the Feds could drop the rate 3/4 of a point with little effect. It would however put them at the front of the line as a lender with a better rate than the Street.

The yield curve of short vs long term T-bills/bonds is still inverted. Suggesting that things are a little or a lot out of plumb.

You mentioned "not knowing enough about finances in general," is pretty typical of a majority of people playing the market. I would agree that there is a 10% factor that has to do with financial knowledge, but I would also argue that 90% of what happens in the market revolves around the psychology of human nature and greed. What will happen is a reaction of greed turning to fear.

If you look at how common sense, screwed up the real estate market, it doesn't take much to realize that the herd mentality can lead us off a cliff.

Sadly I think, government has realized how bad things are and wants to step in and help which only makes things worse. The 1907 crash was over in 9 months, the government did nothing. In 1929 they did a lot and spread it out for 10 years, kind of like what Japan did in the 90's.

It's a little like government rent control which has been compared to as the equivalent of nuclear bombing an area.

Jim in San Marcos said...


It could get worse, a house in Beverly Hills that sold for 6 million in 1928 was sold in 1954 for $40,000. I can't google any docs on this, I am depending on my memory which alas is getting --ah let's not go there! RX take with grain of salt.

Lone Ranger said...

Hi Jim,

Back in 1931, my grandfather was killed in an accident at work, leaving my grandmother to support four children.

From 1932 until 1936, grandmaw and the kids lived rent free in a house owned by a private investor, under the condition that the house would be well cared for.

Worked out well for both tenents and owner.

It's not unlikely that this will become common once more.

Thanks for the great website!

Jim in San Marcos said...

Hi Lone Ranger

It's nice to hear that people back then had the compassion and the ability to be pragmatic and come to such a solution.

When you really think about it, caring for your neighbor is what it's all about.

Thank you for your post.

zgirl said...

I am already seeing the odd post to craigslist selling off anything the buyer has the tools and cash to remove, usually with a note that "I have to be out of here by ___" or something similar. While losing one's house is awful, screwing the note holder out of the cabinets and water heater was probably never factored into the interest rate. I hope the tax break on mortgage forgiveness allows the bank to charge the owner if they take/sell the toilets and such.

We looked at a foreclosure a few months back; local kids (in a "good" neighborhood) had taken to painting the walls, and folks kept dumping piles of trash in front of the house. The bank doesn't want to "take a loss" by selling for a price that actually gets it sold, but they're leaking money every month as they have yet another pile of trash hauled away, fix yet another broken door/window.

Meantime, as a potential buyer, I had qualms about buying a house that the local kids think of as their playground. Would I move my family in and have a break-in when some kid doesn't realize it's occupied? Heck, the kids already know how to get in. Would they have tried (and succeeded) if the house was occupied? I doubt it.

Unknown said...

FWIW, I got stuck with a tax sale foreclosure in 2004. The locals use it for smoking dope and having sex. Crazy is the wierdo who takes a dump on a floor rather than going outside. We left the mattress in there until we could get the weeds cut and doors on teh place. The funniest thing was some kid had written "Gangsta" in crayon. And there were some candy wrappers nearby.

The big bank neither wanted to pay the taxes nor care for the property and it had been vacant for maybe 5 years. But after about 9 months and hundreds of hours and thousands of dollars of repairs then they started legal maneuvers to take the house.

I know it takes 5 months to evict someone but am not sure how long the foreclosure process takes. At the trumped up prices today some people are paying house payments north of $1000/month. Should be easy to get a lawyer to file and extend your stay for less than that. I found out real-estate law and judges don't at all consider common sense, the state laws, or who has invested. All they care about is real-estate processes. Things such as forms being filled out right. If your bank filled out a form wrong then they could lose everything. Amazing how our court system no longer has anything to do with fairness.