Important note: PropStream does not offer financial advice. This article is for educational purposes only. Please consult a financial professional for further assistance.
Since COVID-19 foreclosure moratoriums ended in 2021, national foreclosure activity has been steadily rising; in fact, it is up 185% from two years ago and 13% from one year ago. “Zombie” properties, which are only a small portion of U.S. foreclosures, are increasing, too. In this article, we’ll explain zombie properties and how investors can benefit from them.
What Are Zombie Properties (and Zombie Mortgages)?
Zombie properties (aka zombie foreclosures) are properties whose homeowners default on their mortgage, move out, and mistakenly believe the foreclosure process is complete. However, homeownership never transfers, leaving the property in limbo. It’s called a “zombie property” because it’s neither occupied (alive) nor officially foreclosed on (dead). It’s an incomplete foreclosure.
Unfortunately, zombie properties tend to fall into disrepair because neither the lender nor the homeowner takes responsibility for them. This can have a negative impact on neighborhoods by bringing down home values, inviting illegal squatters, and creating safety concerns.
To understand what causes zombie properties, it’s helpful to understand the related term “zombie mortgages.” Typically, lenders have charged these mortgages off (i.e., written off as a loss) because they give up on collecting the debt (e.g., the borrower has become substantially delinquent). This leads some borrowers to believe that the mortgage is void when they are still on the hook.
What zombie properties and zombie mortgages have in common is a fundamental misunderstanding about ownership. In both cases, the homeowner mistakenly believes they no longer own the house or mortgage, but they still do.
The Recent Rise in Zombie Properties
In 2023, zombie properties are on the rise. According to the data, zombie foreclosures have increased every quarter since early 2022. In Q2 of 2023 (the most recent quarter), there were 8,752 zombie properties, up 7.5% from the prior quarter and 15.6% from a year ago.
States with the highest ratio of zombie properties to total residential homes are New York (1 in every 2,140), Ohio (1 in 3,615), Iowa (1 in 4,480), Illinois (1 in 4,687), and Florida (1 in 5,926).
Though zombie properties only make up a tiny fraction of the country’s total residential housing stock (101.3 million), the upward trend is worth noting.
What’s behind the rise in zombie foreclosures? It’s hard to say, but one explanation is that more lenders are pursuing payment from delinquent homeowners now that pandemic moratoriums have been lifted and borrowers are no longer in forbearance. A backlog of default notices is now being served, causing some distressed homeowners to abandon their homes prematurely.
Additionally, the rapid rise in home values over the last few years may motivate some lenders to collect on delinquent zombie debt. This is especially true for second mortgages. In a foreclosure with a second mortgage, second-mortgage holders only get paid after the primary mortgage is paid off. Now that home values are higher, the chances that there will be excess proceeds from a foreclosure sale (for a second mortgage holder to collect) are better.
In any case, “Zombie foreclosures keep inching up as lenders pursue more delinquent homeowners in courts around the country,” says Rob Barber, CEO of ATTOM.
Reasons to Invest in Zombie Properties
Now that you know what zombie properties are and that they’re on the upswing, here are some reasons you may want to invest in them:
Highly motivated sellers. Owners of zombie properties are often highly motivated to sell since they didn’t know they were the owner in the first place. They may want to rid themselves of the liability, including any tax or lien obligations, as soon as possible.
Attractive deals. Many zombie properties can be bought at a significant discount due to their motivated sellers and poor condition. If you can renovate them at a reasonable price, you could make a substantial profit by flipping them or renting them out.
Less competition. Zombie properties can be hard to find. They are off the market, and the homeowner may not realize they’re the owner. Consequently, if you find one, you may face less competition from other buyers to buy it than you usually would.
Positive externalities. Investing in a zombie property has benefits. It can also relieve the distressed homeowner, help pay the lender who is owed money, and improve the neighborhood by renovating what was previously an eyesore. It can be a win for all involved.
How to Find Zombie Property Deals
Investing in them can be challenging because zombie properties can be hard to find. That’s why it helps to build connections with local tax authorities, property managers, lenders, and real estate agents who may know about pre-foreclosure properties likely to turn into zombie properties and who can send leads your way.
Another way to locate zombie properties is with PropStream. It has a database of over 160 million properties that you can filter by pre-foreclosure filings, public auctions, vacant properties, tax liens, and more. PropStream even lets you generate pre-filtered lead lists of zombie properties and their homeowner’s contact information.
Pro Tip: Take our free Academy Course to learn how to use PropStream for finding zombie properties.
Once you find a zombie property that interests you, contact the homeowner to see if they are willing to sell. This can be a touchy subject since they may be unaware of their continued ownership. So come prepared with relevant documents showing their ownership and position your offer as a way to help them eliminate an unwanted liability.
Before closing the deal, run a title search to verify ownership and identify any outstanding liens or tax obligations. And don’t forget to arrange for a professional appraisal and home inspection. This can accurately assess the property’s value and alert you to any needed repairs, maintenance issues, or red flags.
To get a headstart on finding your first zombie property, try PropStream today with our free 7-day trial and get 50 leads on us!
