Experts urge caution when weighing sales pitches


By Mark Davis
The Kansas City Star

J.D. Asbell buys houses cheap - and sellers are calling him.

He's a professional homebuyer in Kansas City, an investor who hopes to resell properties for a profit. Increasingly, the callers are troubled homeowners.

"We get a ton of calls on foreclosures," said Asbell, who owns Cityscape Properties LLC. "We've always gotten calls. It's just increased in the last six to 12 months."

A rising tide of mortgage delinquencies and foreclosures caused in part by quick jumps in interest rates on subprime mortgages has drawn attention to active housing investors.

Theirs is not a beloved industry. Some call them vultures. And members readily acknowledge seedy parts of the business. Prosecutors have busted scams.

"When people have issues and problems, there are those who are there to capitalize on others' misfortune," said Pam Hider Johnson, a housing counselor in Kansas City.

But legitimate investors are like vultures in a good way. They peck at houses others have left for dead. And each house they turn around helps reduce the number of unsold homes for the overall market.

They can be the last resort for owners facing foreclosure. Although late payments damage an owner's credit record, a sale would prevent the more serious damage of a foreclosure.

Stressed-out sellers, however, should expect heavily discounted bids, perhaps 60 to 70 percent of the home's value. And if the loan balance is high, an owner faces potentially long waits as the investor and mortgage company negotiate a deal.

Troubled owners also shouldn't sell their houses alone. Call the lender and tap any of Kansas City's several housing counseling agencies for help.

The buyers

Pending foreclosures actually aren't Asbell's biggest business.

His company is a franchise of HomeVestors of America Inc., a Texas company known by its familiar billboard pitch, "We Buy Ugly Houses."

Ugly sometimes means ugly. Investors often buy houses needing extensive repairs.

Ugly also can mean the situation is bad. Perhaps the house was inherited by the owner's children, who don't have time or resources to handle repairs.

Either way, ugly means the seller is motivated and attracted by Web sites such as www.experthomeoffers.com, www.easy2sellfast.com or www.fasthomeoffer.com.

As the names suggest, these buyers promise quick cash deals. Their main function is to attract leads and sell or deliver them to affiliated local investors who make contact.

House investors aren't regulated, and the business is easy to enter.

Troy Meyer said he started buying and repairing area properties for resale more than five years ago when he was on Kansas City's police force. The Meyer Organization is now his livelihood.

Meyer employs "short sale specialist" Carrissa Elliott to handle properties of sellers who owe more than their houses are worth.

"We're at the point we're turning them away because Carrissa can't work them fast enough," said Meyer, who has 20 pending short-sale deals.

Foreclosure problems are below average in Missouri and Kansas, but urban areas such as Kansas City have been hit harder, said Kelly Edmiston, a senior economist at the Federal Reserve Bank of Kansas City.

"Certain pockets are quite severe," said Edmiston, noting the highest rates are in census tracts with mostly low- and moderate-income residents.

Watch for red flags

Mounting foreclosures have drawn attention from Washington, where President Bush and members of Congress have proposed various ways to help owners keep their homes.

Prosecutors have acted against foreclosure-rescue scams that have robbed owners of homes and left them owing mortgages.

"There is definitely an underbelly of these foreclosure-rescue-scam guys out there," said Jeremy Brandt, a Texas investor who owns two online homebuyer sites.

Asbell said HomeVestors preaches ethical business practices and regularly audits franchisees' dealings by calling homeowners, including those who don't sell their houses.

Some buyer Web sites urge sellers to contact the consumer division of their state's attorney general's office, the local Better Business Bureau and state housing commissions. Another good idea is to ask investors for bank references, Asbell said.

Colleen Hernandez, a former Kansas Citian who now heads the Homeownership Preservation Foundation in Minneapolis, said homeowners should watch for signs of a scam.

Never pay for help with home loan problems, she said. Many free housing counseling services are available.

Hernandez, who previously ran the Kansas City Neighborhood Alliance, said owners also should balk at signing documents right away.

Another red flag is whether the person offering help contacted you or you contacted him, she said.

Examples of scams include one in which troubled owners are asked to sign over the deed to their house or sign a quitclaim deed. The buyer promises to make the house payments, but the owners instead find their houses are lost and the mortgages due.

In another scam, an investor buys the house and leases it back to the seller. The promise is the seller can buy it back when he gets on his feet financially. Often the seller can't even make the rent and is evicted. Also, the resale terms can be so unfavorable that he can't possibly buy back the house and is moved out when the investor finds another buyer.

The deal

An investor can't help a troubled homeowner save his home. His business is buying properties and selling them for a profit.

Housing advocate Mike Clarke said that he was OK with an investor sale as long as the homeowner knew about his other options and understood the situation with the investor.

"Recognize they have a motivation to offer as little as possible to acquire the property in order to make a profit. They're not a friend in the transaction," said Clarke, a former banker and president of Neighborhood Housing Services of Kansas City.

Investors clearly have the upper hand over homeowners distraught over missed house payments and other problems.

Some Web sites that collect leads for investors strengthen that hand by requiring the owner to enter what they believe their house is worth before the investor calls. One, www.1800sellfast.com, even requires an answer to the question: "If we were to purchase your property ĎAS-IS' and close FAST, what is the least you could accept?"

In any case, sellers can expect investors to bid only 60 to 70 percent of a house's retail sale value, or what a real estate agent could get by marketing the house in good condition.

Investors said that repair costs account for much of the difference, along with costs of holding and renting properties and ultimately finding new owners.

Kansas City generally is weathering the housing slowdown better than many other markets, particularly in California, Florida and Michigan. Even so, finding a new owner for area homes has gotten more difficult.

The Kansas City Regional Association of Realtors reported that the inventory of new and existing homes for sale in July stood at 21,474, up 5 percent from the same time last year. Meanwhile, home sales during the month totaled 3,073, down 7 percent from a year earlier.

At the July sales pace, the local market had nearly seven months of unsold inventory; above the six-month threshold the industry considers a buyer's market.

Separately, the RealtyTrac Web site currently lists about 3,000 homes in the Kansas City area heading toward foreclosure.

Reece & Nichols broker Bill Hargis said Kansas City's relatively stronger market had attracted investors from out of state and that had helped.

"It's getting some of the people out of trouble and getting some of the houses off the market," Hargis said.

Underwater owners

Buying from the most troubled homeowners has gotten harder, investors said.

Many owners missing payments owe as much on their mortgages as their homes are worth, maybe more. As a result, any sale would produce less money than the lender expects, which is called a short sale. Investors seeking a short sale must get the owner's permission and then negotiate a deal with the lender.

The message to homeowners with little or no equity: A quick cash sale won't happen. Short-sale negotiations can finish up in a month or take a year.

Homeowners have two big financial stakes in a short sale and need to know how they will be handled.

First, the investor talks to the lender because a full release of the mortgage on the property's deed is needed.

Clarke said the homeowner had a different question of the lender: "Will they forgive me on the (loan) balance free and clear or will they pursue a judgment against me?" The judgment means the owner owes the unpaid balance.

Typically, lenders will forgive the mortgage amount not covered by the negotiated sale. But that sets up the second big financial issue for the seller.

The homeowner will owe income tax on the amount forgiven.

One of the relief proposals in Washington, however, would temporarily suspend the tax on forgiven debt.

Though all this is business to investors, it is all new and complex to homeowners. "That's my concern, signing papers without any review and any counseling," said Clarke at Neighborhood Housing Services. "We're prepared to call the lender with you. I have four people standing ready to do that."