Some pretty frightening concepts exist in real estate, and not only during Halloween. You might have heard of a zombie house: a property that's been abandoned and is decaying right before your eyes -- certainly frightening for the neighbors. But there's also the vampire foreclosure, which sucks the blood from the local real estate market.
Definition of a vampire foreclosure
The term "vampire foreclosure" describes what happens when an owner remains living in a property after they've lost the home to foreclosure -- they've become that guest who overstays their welcome.
Note that some states have a redemption period, usually between a month and a year after the foreclosure takes place, during which a former owner can reclaim their property if they meet certain requirements. And some right of redemption states allow those former homeowners to remain in the home until the end of the redemption period. Those people would not be vampires.
How vampire foreclosures happen
The mindset of the vampire (the person remaining in a home that is no longer theirs) is to just wait and see. Maybe the new owner (the bank) won't notice they're still living there, or maybe the bank isn't motivated enough to kick them out.
History of vampire foreclosures
In 2013, the phenomenon of people remaining in their homes after foreclosure became so prevalent that the term vampire foreclosure was coined. This was several years after the foreclosure crisis hit America hard. At the time, 47% of real estate-owned (REO) properties were still occupied by the former owner, reports CBS News. The hardest-hit cities saw a whopping 65% of REO homes being vampire foreclosures.
There were a couple of reasons banks allowed vampire foreclosures to happen to the extent they did. One was a deliberate measure to help boost home prices in the short-term. (If you recall your real estate history, home prices took a huge hit in the aftermath of the foreclosure crisis.) So banks were biding their time before getting serious about selling off their REO stock.
Another reason boiled down to a matter of weighing options: Allowing the former homeowners to remain in the property was often a better choice than having the home sit vacant, which is problematic as well.
How a vampire foreclosure differs from a zombie foreclosure
The term "zombie foreclosure" is sort of a misnomer, because a foreclosure doesn't actually occur here. A zombie foreclosure happens when the homeowner moves out of the home during the foreclosure process, and then the foreclosure doesn't take place. Awkward.
The person in a zombie foreclosure situation who abandoned the home is still the actual owner, complete with the obligations that accompany homeownership, such as paying property taxes and keeping the house in good repair -- only the zombie typically doesn't keep up with their obligation, leaving the home open to squatters and decay and causing blight in the neighborhood.
Why vampire foreclosures matter
A vampire foreclosure might look good on the outside, but that's only what the vampire wants you to see. Dig deeper, and you'll see the real problem: As with all vampire situations, lifeblood is being drained. In this case, it's the lifeblood of the local real estate market.
When a vampire occupies a home, that home is not on the market. By all rights, since the former owner lost the home to foreclosure, the home should go back on the market. But because it's sitting in limbo, an artificially low housing supply is being created. As mentioned, banks can regulate the fair market value of homes to some extent by the timing of when they hold and release their properties.
Penalties for being a vampire
Aside from getting the stake, vampires can expect the bank or new owner to kick them out anytime. The method used to accomplish this is eviction, and that is not good for the vampire. It's never good to have an eviction on your record, especially when you've just gone through a foreclosure.
It usually takes seven years after a foreclosure to get a mortgage loan to purchase another property, and many landlords won't rent to people with an eviction on their record. Vampires, when faced with the light of day (reality), are not in a good place.
How can investors protect themselves?
An investor, to prevent getting mixed up in a zombie foreclosure, can have a title search done during the due diligence period. They can then simply walk away -- no need to destroy any brains.
And to prevent a vampire foreclosure? If your intent for the property is to use it for rental income, you might try to strike a deal and turn those vampires into tenants. Otherwise, unless you want to deal with evicting people who haven't played by the rules up until now, you might want to steer clear of this deal and keep looking.
The Millionacres bottom line
So which is more deadly: the vampire or the zombie?
Zombies, known for their imperviousness to pain, hold true to form by abandoning their property and not viewing the hardship their action is causing their neighbors. And of course, their most horrifying attribute is their general appearance.
Vampires, on the other hand, are immortal bloodsuckers.
The bottom line: Both vampires and zombies are to be avoided at all costs, but if you are faced with one, you now know what to do.