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When mortgage lenders get stuck owning dilapidated houses in
shabby neighborhoods, they often call James Odell Barnes. Mr. Barnes works the rock bottom of the housing market, what
his lawyer calls the "sub-subprime market." He and his partners buy foreclosed
homes by the dozens, sight unseen, often for just a few thousand dollars apiece.
They resell them to low-income buyers who would have trouble qualifying for bank
mortgages, providing many buyers with seller financing. "The reason the banks call me is I will buy anything," says Mr.
Barnes, 55 years old, who often can be found puttering around his 54-acre horse
farm in this small town outside Columbia Times are good for Mr. Barnes, and they may get better. The
subprime mortgage market, which serves people with weak credit records, is in
turmoil. A surge in defaults has forced more than 20 lenders out of business in
recent months. At year-end, 4.53% of all subprime mortgages were in the process
of being foreclosed, up from 3.33% a year earlier, the Mortgage Bankers
Association said yesterday. That number is expected to grow as rising overdue
payments lead to more foreclosures. Bottom-fishers like Mr. Barnes will get more
opportunities to snap up cheap homes. Mr. Barnes farms out most of the deals to a group of about 40
investors around the country, collecting $1,000 for each deal he passes on to
them. Last year, he says, he and the investors bought more than 1,400 foreclosed
homes. Mr. Barnes, who never attended college, says his real-estate investment
income topped $1 million last year. Banks appreciate Mr. Barnes. Few real-estate agents are
interested in peddling low-priced houses in bad neighborhoods that have been
acquired by lenders through foreclosure. Mr. Barnes is happy to buy such houses
over the phone. He doesn't inspect them, or even visit them. Mr. Barnes and his investor friends don't fix up the
properties. They tack up handwritten "For Sale" signs informing potential buyers
of required down payments and monthly payments -- usually just a few hundred
dollars each. In essence, Mr. Barnes and his cohorts sell the houses on 15-year
installment plans. The interest rates they charge are a steep 12% -- about
double the rate of 15-year fixed-rate mortgages for people with strong credit --
and the late-payment penalties are tough. The shaky credit of many buyers
warrants it, he says. "Nobody gets cheated," he says. Mr. Barnes and his partners normally sell the loans to other
investors within six months, at a steep discount. George Kastanes, Mr. Barnes's
lawyer, estimates that about 30% of buyers eventually default on the loans. So
far, the trouble in the subprime market hasn't dampened investor appetite for
buying the kinds of loans Mr. Barnes and his partners sell, says Bob Repass,
managing director of Bayview First Funding, a Dallas-based buyer of such loans.
The seller financing extended by Mr. Barnes, which doesn't involve any banks, is
very different from the subprime mortgages made by financial institutions, he
says. Some nonprofit groups that promote affordable housing question
whether such deals are good for buyers. They worry that poor people who buy
run-down houses without having them inspected or appraised might not understand
what they're getting into. "You're setting them up for failure," says Bruce Marks, chief
executive of Neighborhood Assistance Corp. of America, a nonprofit
housing-services organization based in Boston. Low-income people who can't get a
conventional loan, he argues, often are better off renting until they can
improve their finances. Mr. Barnes says he's giving such buyers what may be their only
shots at home ownership. Low-income people, he says, generally know how to
recognize and fix flaws. "Poor people know how to install a hot-water heater and
they know how to paint" and even how to fix a foundation, he says. "Poor people
have a lot of ingenuity." Last September, Ola Gorby, a 35-year-old mother of four who
works evenings cleaning offices, put $500 down and agreed to pay $400 a month
for 15 years -- about $34,000, before interest -- for a home in Martins Ferry,
Ohio. Public records show the house previously sold, in October 2003, for
$44,000, then went into foreclosure in 2006 before being acquired by one of Mr.
Barnes's investors for $7,875. Ms. Gorby says she used to pay $470 a month for a three-bedroom
apartment, and that banks had told her she didn't have a strong enough credit
record to qualify for a home loan. Her new place needs work. Duct tape covers a hole where a
front-door lock was removed. Ms. Gorby had to replace some water pipes that had
been stolen, and a bedroom wall needs patching. But she says she's happy with
the home, which she figures is generally in good shape. Mr. Barnes's father was a waiter at a Palatka, Fla., diner. As
a teenager, Mr. Barnes says, he paid local farmers $1 apiece for calves
suffering from diarrhea, then fed them a mixture of powdered milk and flour to
"gum them up." The ones he saved, he says, could be sold for more than $100. He
bought his first house at age 14, he says, by putting $200 down and assuming a
mortgage. He says he found a tenant to pay $110 a month, more than enough to
meet his loan payment. After high school, he operated a pizzeria and a game arcade,
among other ventures. A deal to acquire pizza ovens got him into trouble in the
1970s. In 1977, he was convicted of receiving stolen property and sentenced to
three years in a Florida prison. Mr. Barnes maintains that he was innocent. In
1985, after he was released, he received a pardon from Florida's governor. Mr. Barnes moved to South Carolina, where he worked in a cotton
mill and as a maintenance man for apartments. By the early 1980s, he says, he
was spending much of his spare time investing in distressed property. He bought
motor homes, warehouses, motorcycles and convenience stores, even 150 old school
buses, he says. But mostly he bought real estate. These days, he focuses on recycling low-end houses, waiting for
calls to roll in from lenders. One morning last November, his cellphone rang and
he stepped into his home office to make a deal. "Any taxes?" he asked. "Did they ever list it? ... I'm not in
love with Rochester, N.Y. ... Give me an idea -- $2,000? ... All right, $2,500.
... And where is this at?" Within 10 minutes, Mr. Barnes had agreed to buy 12
homes in six states for a total of $35,250. Banks expect to get far more than that for most of their
foreclosed homes. In cities where housing is expensive and land is valuable,
lenders usually hire real-estate agents to market foreclosed properties. Mr. Barnes and his investors buy the dregs: homes in depressed
neighborhoods in cities like Detroit and Cleveland, where there is lots of
vacant housing, or in rural areas where few people are looking for homes.
"Real-estate agents aren't real motivated to deal with these houses" because
their commissions would be so small, says Mr. Barnes. "The banks just want them
gone." Until lenders sell the houses, they have to pay for taxes, insurance and
maintenance. Mr. Barnes says that because the houses cost so little, it
isn't worth his time to inspect them before buying. He guesstimates what they're
worth, based on experience. Most buyers of foreclosed homes spruce them up
before trying to resell them. Mr. Barnes wants nothing to do with renovation, a
time-consuming and expensive process. Houses are sold "as is." When one buyer called to complain
about finding a dead possum in a newly purchased house, Teresa Kastanes, who is
married to Mr. Barnes's lawyer and helps with the business, recalls responding:
"Listen. I'm throwing in the possum for free." Steven A. Nodine, a former manager of foreclosed real estate
for First Union Corp., now part of
Wachovia Corp., says Mr. Barnes buys more foreclosed homes than anyone he
knows. Mr. Nodine runs Tulsa-based Destiny Ventures LLC, which buys foreclosed
homes from lenders. He sells some to Mr. Barnes. Mr. Barnes also is one of the biggest buyers of homes from
Hudson & Marshall, a nationwide auctioneer of foreclosed homes, says Dave Webb,
a co-owner of the Dallas firm. After investors in Mr. Barnes's group buy homes, they often
turn to one of two people trained and paid by Mr. Barnes to examine the
properties and help set resale prices. One of them is another member of Mr.
Barnes's lawyer's family, his 22-year-old son, Alex. He spends most of his time
on the road handling these tasks. He carries pepper spray and a knife in case he
encounters trouble with squatters. In January, he drove to Pittsburgh to see two houses bought by
investors working with Mr. Barnes. He parked his Chevrolet Blazer in front of a
narrow, vinyl-sided three-story house in a working-class neighborhood and
climbed the icy front steps. Using a hammer and chisel, he broke open the
front-door lock and replaced it with a $4 combination lock. In the living room,
he found most of the carpeting stripped out and a ceiling tile dangling. Cold
air flowed through the window frames. Mr. Barnes and his investors offer seller financing. They set
total prices so that monthly payments are a bit below prevailing rents, they
say. After looking over the Pittsburgh house, Mr. Kastanes set off
to find out about rents. He buttonholed an electrician who used to live nearby,
who said he had paid $550 a month. Mr. Kastanes phoned the investor who had
bought the house and recommended pricing it so a buyer would have to pay $400 a
month -- $34,000, plus interest. The investor agreed. Using a black marker, Mr. Kastanes prepared three signs
offering the house for sale for $750 down and $400 a month. He listed a
toll-free number, but no total price. He fixed one sign to the front of the
house and the other two at nearby intersections. George Kastanes's South Carolina law office fields calls.
Teresa Kastanes handles some of them. Some of the houses are easy to sell, she
says. A white bungalow in Roseboro, N.C., purchased last October for $16,250,
quickly sold for $38,000 -- $500 down and $450 a month. Others are much harder to unload. Ms. Kastanes cites a small,
one-story house in Detroit. It has no furnace or water heater, and there are
water stains on the walls. "It's a dump," she says. It's priced $500 down and
$275 a month -- $23,400 before interest -- but there have been no takers after
several months. When houses fail to sell for a year or so, investors sometimes
auction them on eBay. Mr. Barnes's associates run credit checks on some potential
buyers, but they don't interpret credit reports the way banks do. "Not paying
your hospital bill I don't hold against you," says Mr. Barnes. He says he wants
to know: Have you cheated people? Do you have a job? And are you paying your
rent? "You do a whole lot on the seat of your pants, just listening to people
talk," he says. "It don't take long to figure out if they're running a game on
you." Ms. Kastanes says she would tend to trust a single mother with
a steady job in a hospital and a record of paying her rent, even if a past
divorce had led to unpaid bills and credit problems. But she'd be wary, she
says, of a potential buyer who failed to send back a "verification of
employment" form or to provide an employer's phone number. Under the standard loan agreement, buyers who are more than 15
days late on a monthly payment are slapped with a 10% penalty. That's twice the
5% fee charged on conventional loans guaranteed by Fannie Mae, the
government-sponsored provider of funds for home loans. Mr. Kastanes says the
higher percentage is necessary as a deterrent, given the small size of the
monthly payments. Nearly half of the people who call end up buying homes, Ms.
Kastanes says. Most of them don't bother with professional appraisals or
inspections, which would be mandatory if they got bank mortgages. Few buyers
consult lawyers. Mr. Barnes says about 90% of buyers manage to keep up on
payments for at least the first few months. If the buyers default, Mr. Barnes's investors move to repossess
the homes. Buyers generally don't get title to the properties right away, as
they would with conventional home purchases. Mr. Kastanes says that makes it
easier resell the homes if buyers abandon them within the first few months. He
says the title transfers usually don't take place until the loans are sold,
typically within three to six months of the deals. Robert Strupp, a lawyer at the Community Law Center, a
Baltimore nonprofit group that helps low-income people with housing issues, says
that's "very risky" for buyers because they might have no way to prove ownership
despite having made payments. Mr. Kastanes says Mr. Barnes and his partners
would never cheat buyers. Mr. Barnes says investors typically buy the loans for about 70%
of the balances owed. That steep discount reflects the high risk of default.
American Equity Funding Inc., a mortgage brokerage and investment company in
Fort Smith, Ark., is one of the regular buyers. Brokerage firms sell the loans to bigger investors, including
Bayview Financial LP, a Miami-based finance company that bills itself as the
nation's largest buyer of seller-financing mortgages. Bayview says it packages
some of the loans into securities for sale to other investors. Mr. Barnes maintains that his investment activities help poor
people. Still, he says, "I wouldn't do it if it wasn't for the money." Email your comments to rjeditor@dowjones.com . http://www.realestatejournal.com/b uysell/markettrends/20070315-hagerty.html Bargain Basement: Foreclosure Rise
END hooded headline by James R. Hagerty
Boosts This Investor's Bottom Line
From The Wall Street Journal Online
March 15, 2007
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