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Meet Mr. Foreclosure
If you want to know what foreclosure really means, a good place to start is the copper, the wire, and the pipes. A family buys a house in Michigan, Ohio, or Indiana—the Rust Belt center of the foreclosure boom. They miss a payment, then another. Soon the bank takes the house. Three years ago, it might have sold for $50,000. The bank is hoping to get half that. Two months pass, three, four. What was once a beautiful turn-of-the-century Craftsman-style three-bedroom home stands empty.
That's when the vandals show up. The copper goes for $3 a pound. To get at it, though, you have to strip out all the wiring. Then you have to tear apart the plumbing. If the vandals thought to bring a sledgehammer and a chain saw, they start looking inside the walls. Now the house is uninhabitable. Repairs will cost $15,000. It's almost a total loss. That's where Clint Medford comes in.
Foreclosure: for the people who lost their house, a tragedy. For the bank that held the loan, a charge-off. For Clint, a profitable business.
Clint is a guy banks can turn to when they've foreclosed on a house, watched it sit on the market for a while, and realized that it might stay there for a long time. Every few days, he'll get a list of what's available from the five banks he works with. Sometimes the bank will send a photo. "Sometimes," he says, "it's just an address," and if the house is cheap, that's enough. It's all done by phone, and he never has to leave his house in Pilot Point, Texas, just north of Dallas.
Since he started the business five years ago, Clint estimates he's bought and sold a thousand houses. These days, he'll do 40 in a good month.
After he's bought a house, Clint will send one of his local contacts to check it out. He'll pick up houses in inner- city neighborhoods, the places the copper's likely to have been stripped, for about $1,000 and turn around and list them for, say, $9,900.
In the suburbs and the smaller Rust Belt towns—Elkhart, Indiana; Benton Harbor, Michigan—the houses are in better shape, sometimes almost ready for a new buyer to move right in. In those places, Clint will pay a little more. For a house in Georgia or Missouri, or once in a while in Pennsylvania or North Carolina—places where he can list a house for $30,000 or $40,000—he'll pay $6,000 to $10,000.
This is the aftermath of a decade of rising home prices and easy mortgages. Picture the foreclosure boom as a big, rippling wave. Start in Colorado, Nevada, and Ohio two years ago. Watch it grow bigger as the wave quickly moves north and hits Detroit, last year's foreclosure capital, before heading west to Las Vegas, then through the condo developments of Miami and Fort Lauderdale, and finally breaking this year over Southern California.
With the wave have come the opportunists. Each weekend, hundreds of properties—from the very cheap to million-dollar oceanfront homes—are auctioned off in convention halls filled with house flippers looking for bargains and middle-class families wondering if now might be the time they can afford to buy. In Southern California, seminars and radio shows promise to teach you how to make money on bank-owned properties. There are con artists offering short-term loans to those facing foreclosure and real estate agents eager to make a new round of commissions selling the houses that the banks and mortgage lenders have seized.
And then there is Clint, who does most of his business in the places where the foreclosure wave hit early—Indiana, Michigan, and Ohio, places where, as he puts it, "they're still waiting for the $20-an-hour union jobs to come back." These are the areas with the four-digit prices. For him, California remains a no-go zone. Sure, a house in what Clint calls Rancho Whatever in Southern California might be down to $550,000 from $700,000 or more. But the last thing Clint wants is to hold on to a place and wait for the market to come back. If you'd seen all the foreclosures he has, you'd probably think the same way.
The Ground Floor
Clint didn't start out with a plan of becoming Mr. Foreclosure. In the years of the housing boom, the 48-year-old Texan worked as a mortgage broker. The mortgage business was good, but Clint had a guess about what might come next. He had once worked at a company that financed cars for people who had trouble getting conventional loans. The company flopped—it turned out that lending money to folks with bad credit was a risky business. Clint looked at the mortgage business, and it seemed awfully similar: banks lending money to people who wouldn't be able to pay it back.
"I had a bank call to tell me they had a new loan for which you didn't need income, nothin', just a credit score," says Clint. "This was obviously going to end."
Dallas was one of the first places to see foreclosures shooting up, and Clint started buying houses that banks had repossessed. A real estate agent asked if maybe he wanted to start doing things on a bigger scale and buy directly from the banks. Easy question. Clint said yes.
So he found places where the market was scraping bottom, with prices so low, it didn't make sense to pay a real estate agent's $2,000 commission. Instead, he listed them at onlinehomebid.com and a few on eBay—and even sold houses by putting big signs out front, signs that could get the attention of people who may not have realized they could buy a house. He got used to moving them fast because an overzealous inspector in a tax-starved city could slap an empty house with $1,500 in code violations.
As Clint went along, he built up a list of his own investors—people who knew the areas that Clint was buying in, could fix a place up, and rent it out. In Detroit, for instance, Clint has Scott Izairi. Thirty-three years old, he lives in the suburb of Bloomfield Hills. Scott had almost given up on Detroit until he saw that the foreclosure boom could be a reason to stay. His first real estate investment was an accident. He was doing some contracting work when "a guy said that instead of paying me cash, he could give me a couple of houses." Scott figured why not.
Now he is one of the 600 or 700 names on Clint's e-mail list. Clint calls him when he has the kind of place Scott looks for, ideally a house right on the border of the suburbs. Usually the house needs repairs—even with Scott's regular team of contractors, they can cost as much as the house itself. But once they're done, Scott can rent it out for $650 to $1,000 a month. Two years at the most, and he'll have made back his money. Scott has gone from his first two houses to owning two dozen.
Selling houses to people like Scott has been a good business for Clint, but along the way, he realized that an even bigger opportunity was in selling houses to people who couldn't put very much down. In the places Clint finds his properties, places where a decade of economic expansion was barely a blip between factory closings, that's a lot of people.
In the rah-rah years, mortgage lenders would give a loan to just about anybody who could sign his name. Now prices in some places have gone through the floor. But for many folks in the foreclosure belt, even a $20,000 or $30,000 house may as well be a million if they can't get a mortgage. That got Clint thinking that if he didn't make the same mistakes he'd seen banks make and made sure the people he was selling to had real income he could verify, he could take a small down payment, write the mortgage himself, move his houses faster, and get a good return on the loan too. Now he does that in six out of ten of his deals, and he's hoping that eventually that'll be up to nine out of ten. The buyers are the same people who might have secured subprime mortgages two years ago. Clint is stepping in where the banks fear to go—charging customers the same high rates that helped get us into the mortgage mess in the first place.
The Numbers
And that raises an interesting question: Is Clint Medford a foreclosure vulture? Is he, as he would have it, a guy who's keeping neighborhoods alive by buying places where the banks "would pay people to move in if they could" to fight creeping blight? Or just one of the opportunists grabbing at the very last prize of the real estate boom? Or both?
To answer that question, consider a Clint Medford house in East Cleveland. It's a three-bedroom single-family home on Harvard Avenue, for $24,900. Price negotiable if you pay cash, less so if you want Clint to finance it.
The mortgage terms: 15 years, 11 percent interest. Usually 10 percent down. Low credit scores are not necessarily a deal breaker. ("When we see buyers with foreclosures pending," Clint says, "that becomes an issue. I'd want to see 30, 40 percent down, then.")
Certainly if you have a prime-rate mortgage, you're apt to think an interest rate of 11 percent is awfully high—it's higher, actually, than many subprime lenders charged. The word usury might come to mind. And if so, you might want to take a breath before reading the next sentence.
Clint paid all of $3,200 for the house on Harvard Avenue. He'll tell you he's got back taxes to pay and those code violations to worry about. But still... That's nearly $25,000 for a house he got for one-eighth that price. That's part of the reason he's willing to give out risky loans. In this case, if a buyer agrees to Clint's asking price and puts down 10 percent, Clint's already made half his money back. And he's still charging 11 percent interest. Scandalous? Maybe. But there's another way to look at it.
Back in 2002, that house on Harvard Avenue went for a princely $98,000. If you compare the price of the house with what Clint got it for, it's a rip-off. If you compare it with what it cost quite recently, it's a bargain.
But what if you don't compare it with anything at all but the cost of actually living in it? Because after all, before they were investments, that's what houses were for.
In that case, if you give Clint his full asking price and put $2,490 down, your payments are $255 a month. A lot less than rent. The kind of place someone can afford if he has just about any paying job and isn't drowning in other debts. And a house that could have fallen into disrepair and threatened a neighborhood is now occupied.
Now does it seem less scandalous? Of course, there's no right answer. It depends on where you stand.
If you think of a house the way so many folks thought about real estate a couple of years ago—as something to be bought, sold, flipped, and refinanced with every change in the interest rate—then you probably won't want to move into that house at 12827 Harvard Avenue. It will lead only to sleepless nights spent thinking about your interest rate and your resale value.
But if, on the other hand, you think the main purpose of the house is a place to live comfortably and affordably, it might actually look like a pretty good deal.
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