Important changes to foreclosure law headed to governor’s desk
April 9, 2009
OLYMPIA – A bill that aims to increase consumer protection in the area of housing, as well as protection of tenants and homeowners, has passed the Legislature and is now on its way to Gov. Gregoire for her signature.
The legislation (ESB 5810) would give owners and tenants more notice with foreclosures on deeds of trust; it would require lenders to contact homeowners prior to issuing a notice of default; and it would also give tenants more time to move after a foreclosure sale.
“One component critical to helping the economy is to stabilize the housing market. Washington state is still struggling as housing prices and home sales have declined along with an 83 percent rise in foreclosures,” said Rep. Tina Orwall (D-Normandy Park) who sponsored the companion bill in the House. “But we can help the housing market by addressing the issue of foreclosure and making sure that families with the ability to receive assistance to keep their homes do, in fact, get the help they need.”
Deeds of trust are security interests in real property. The Deeds of Trust Act establishes procedures for non-judicial foreclosure in which the homeowner grants a deed creating a lien on the real property for an obligation due to the lender.
Most foreclosures in Washington state are known as non-judicial foreclosures because they don't involve the courts. When homeowners fall behind in their mortgage payments, they receive a notice of default informing them that the foreclosure process has begun.
The bill puts in place a meet and confer requirement, which essentially involves the mortgagee contacting the borrower, assessing his or her financial situation and exploring alternatives to foreclosure, all before issuing a notice of default. This requirement does not apply when the beneficiary is a homeowners or condominium association.
Renters benefit as well under this bill. Additional sections of the bill provide them with notice regarding the foreclosure process, which is not currently required because they do not own the property where they live. Not only do they now get notice, but they also get a 60-day notice of eviction, instead of the 20 days required by current law. This allows them to have greater success in finding a new place to live, and also prevents an eviction notice on their record, which could hinder their finding future rental housing.
“A lot of work was put into this legislation to include important consumer protections so that families actually have the time and resources they need to remain in their homes when possible, and renters –who are often victims in these situations-- have more time to find housing if their homes are foreclosed,” added Orwall.
ESB 5810 also provides that a homeowner can bring an action after the foreclosure sale if there were irregularities in the process, such as fraud or misrepresentation. That section of the bill also:
adds to the list of nonwaived claims a violation of Title 19 RCW (regulations of businesses, including the Consumer Protection Act);
clarifies that the relief is for money damages; and
clarifies that the nonwaived claims must be brought within two years of the foreclosure sale or within the applicable statute of limitation for the claim, whichever is earlier.
Tuesday, April 28, 2009
Obama expands foreclosure fix
Obama expands foreclosure fix
Two steps: Second liens now covered by modification program; servicers must offer eligible borrowers principal reduction under Hope for Homeowners.
NEW YORK (CNNMoney.com) -- The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Announced with great fanfare in mid-February, the president's $75 billion program has gotten off to a slow start. Loan servicers only recently started taking applications and many delinquent borrowers have complained about being left in the cold because their home values have dropped or they've lost their jobs.
The administration is seeking to address some of the concerns by tweaking the original modification plan, which calls for adjusting eligible borrowers' loans so monthly payments are no more than 31% of pre-tax income.
Servicers covering 75% of the nation's mortgages are now participating in the program, which also allows some homeowners with little or no equity to refinance their mortgages, a senior administration official said Tuesday. Together, the plans are expected to help up to 9 million avoid foreclosure.
Second mortgage roadblock
During the housing frenzy, many borrowers obtained second mortgages to allow them to put little or nothing down when buying a home. Up to half of at-risk borrowers have second liens, according to the administration.
These loans have complicated the modification process. For one thing, they add to troubled homeowners' debt levels. Also, mortgage investors have balked at reducing payments on first mortgages when the second loan was left intact.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.
Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage.
Investors can also receive a payment in exchange for extinguishing the second lien. They would receive 3 cents on the dollar for loans more than 180 days delinquent and between 4 cents and 12 cents for less delinquent loans, depending on the borrowers' debt levels.
Servicers who join the new program must modify second loans when a borrower's first mortgage is adjusted. It will likely take a month to implement, but it should not slow down the modifications of primary mortgages, the administration said.
"By bringing both the first lien and second lien program together, we can reduce monthly payments for borrowers and make it much more likely that they can stay in their homes," a senior administration official said.
Hope for Homeowners option
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
As an incentive to participate, servicers will be paid $2,500 for each refinancing, while lenders who originate the new loans will receive up to $1,000 a year for three years, as long as the loan remains current.
Separately, however, another pillar of the president's plan appears to be headed for defeat this week. The Senate is not expected to pass legislation allowing bankruptcy judges to modify mortgages. The administration had sought this change to pressure servicers to modify loans before borrowers declare bankruptcy.
Two steps: Second liens now covered by modification program; servicers must offer eligible borrowers principal reduction under Hope for Homeowners.
NEW YORK (CNNMoney.com) -- The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Announced with great fanfare in mid-February, the president's $75 billion program has gotten off to a slow start. Loan servicers only recently started taking applications and many delinquent borrowers have complained about being left in the cold because their home values have dropped or they've lost their jobs.
The administration is seeking to address some of the concerns by tweaking the original modification plan, which calls for adjusting eligible borrowers' loans so monthly payments are no more than 31% of pre-tax income.
Servicers covering 75% of the nation's mortgages are now participating in the program, which also allows some homeowners with little or no equity to refinance their mortgages, a senior administration official said Tuesday. Together, the plans are expected to help up to 9 million avoid foreclosure.
Second mortgage roadblock
During the housing frenzy, many borrowers obtained second mortgages to allow them to put little or nothing down when buying a home. Up to half of at-risk borrowers have second liens, according to the administration.
These loans have complicated the modification process. For one thing, they add to troubled homeowners' debt levels. Also, mortgage investors have balked at reducing payments on first mortgages when the second loan was left intact.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.
Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage.
Investors can also receive a payment in exchange for extinguishing the second lien. They would receive 3 cents on the dollar for loans more than 180 days delinquent and between 4 cents and 12 cents for less delinquent loans, depending on the borrowers' debt levels.
Servicers who join the new program must modify second loans when a borrower's first mortgage is adjusted. It will likely take a month to implement, but it should not slow down the modifications of primary mortgages, the administration said.
"By bringing both the first lien and second lien program together, we can reduce monthly payments for borrowers and make it much more likely that they can stay in their homes," a senior administration official said.
Hope for Homeowners option
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
As an incentive to participate, servicers will be paid $2,500 for each refinancing, while lenders who originate the new loans will receive up to $1,000 a year for three years, as long as the loan remains current.
Separately, however, another pillar of the president's plan appears to be headed for defeat this week. The Senate is not expected to pass legislation allowing bankruptcy judges to modify mortgages. The administration had sought this change to pressure servicers to modify loans before borrowers declare bankruptcy.
Thursday, April 2, 2009
Six reasons to tap retirement funds now to buy rental property
Using IRAs to buy real estate
Six reasons to tap retirement funds now to buy rental property
By Chris Pummer
Last update: 9:02 p.m. EDT April 1, 2009Comments: 115SAN FRANCISCO (MarketWatch) -- One of today's soundest investments is never touted in financial-services ads. The reason: Wall Street wouldn't make any money off it.
Since 1974, Americans have had the ability to use IRA assets to buy investment property. Yet the means to do that -- called a self-directed IRA -- remains one of the least known and unheralded investment vehicles in the vast financial marketplace.
Video: Finding a bottom for home prices
David Berson, chief economist of PMI Group, talks to MarketWatch's Stacey Delo about how the housing market will rebound before jobs do, and why he expects home prices to bottom for most of the U.S. in early 2010. (April 1)With foreclosed homes selling at dimes on the dollar, residential real estate is a bargain for investors holding cash. And if they can put 30% down, IRA investors will find specialty lenders eager to help them leverage their retirement savings with mortgages on rental properties.
The U.S. housing market may not yet have hit bottom, but the winds appear to be shifting. Existing-home sales are on the mend in hardest-hit markets and foreclosure-avoidance programs are expected to stem the rising inventory of bank repossessions, meaning the window to buy at rock-bottom prices could close before the year is out.
Bear in mind homes purchased with IRA funds can't be used for personal purposes. Doing so risks the IRS declaring the assets withdrawn and demanding immediate payment of income taxes and penalties on the entire account value.
Still, as an investment readily understood by anyone who's been through the home buying and selling process, purchasing a steeply discounted property that can produce annual income of 10% and more is a low-risk strategy for uncertain times -- especially for retirees whose fixed-income investments are paying paltry yields right now. Read more on setting up a managing a self-directed IRA.
Here are six reasons why buying real estate with an IRA is a potentially lucrative and wise move today:
1. A solid alternative to stocks
When economies teeter, investors often run to hard assets such as gold -- humankind's historic "store of value." Yet gold's value is measured not only in ounces but also in the intangible fear that surrounds its price spikes.
When it comes to hard assets, there's perhaps no greater shared sense of value from Mongolia to Montana than for land and a dwelling. And in U.S. history, there's never been such a fire sale on our housing stock.
The Great Depression exacted a heavy toll on home values, but there was nowhere near the inventory flooding the housing market as in the past year. The reason: A collapse in home prices, not stocks, triggered this meltdown.
Of course, some would say foreclosed-home buyers capitalize on others' misfortune. But the sooner we clear the massive, nationwide inventory of unsold homes -- which many economists argue is a key to recovery -- the better off we'll all be.
2. An investment well-suited for long-term investors
Even in the best of times, the stock market looks out six months to a year. Right now, even seasoned pros can't feel the bottom of the muck we're in.
Many retirement savers are uncomfortable with their nest egg tied up largely in stocks. That's just the direction where the system of IRAs and 401(k)s -- which also advances Wall Street's interests -- shepherds them.
Real-estate cycles generally run in decade-or-so swings and this one may not yet have neared its bottom. Housing values could drop another 10% to 20%, but the stock market also could drop further and take a decade to well surpass its previous highs.
Especially for those in or near retirement, buying a property that produces rental income that's likely to increase with inflation is as sound a long-term investment as any TV commentator or investing guru might offer.
3. Purchasing a significantly undervalued asset
For investors willing to hang on to a property for five years or more, residential real estate today presents a tremendous opportunity to do just what investors ideally do -- buy low and sell high.
In some of the hardest-hit regional markets nationwide, homes are selling for as little as 20% of their value in 2006. In the San Francisco Bay Area, for instance, a 3,400-square-foot, five-bedroom, three-bath house built in 2000 recently listed for $257,000 -- after last selling for $795,000 just three years ago.
More importantly, at a cost of just $75 per-square-foot, that's about a third of the new construction cost for a well-outfitted, single-family home in that region. An IRA buyer in that case would get a relatively new house that would require little maintenance -- and a 7,000-square-foot lot essentially thrown in for free
While that may be an extreme example, countless thousands of existing homes nationwide are selling for 50% of today's construction and land costs. Putting aside previous overinflated values, that statistic illustrates how inexpensive home prices have become -- and how much upside they offer in terms of appreciation when the real-estate market finally recovers.
4. A steady income generator
At a time when companies are slashing stock dividends at record rates, retirees can't be assured of that income source. And with government bonds paying a pittance in terms of yield, that fixed-income stream is running mighty shallow.
Income from a rental property bought with a self-directed IRA flows back into the retirement account. The IRA holds title to the property and the income it produces can be directed into all manner of investments typically held within an IRA, be it stocks, bonds, mutual funds or money market accounts.
On a percentage basis, that income can be two to three times higher than today's fixed-income offerings even after paying expenses such as property taxes and insurance. Meanwhile, the accountholder can eventually reap the potential appreciation of the underlying asset -- the property -- that the IRA owns.
For retirement savers needing to fund a child's college costs, a rental property held in an IRA also can be a valuable source of funds. While money taken out of a traditional IRA is subject to income taxes, it doesn't face early-withdrawal penalties if used for higher-education costs. And while financial advisers caution against using retirement funds to pay for college costs, the IRA owner still has upside potential on the property to count on and the income in years ahead.
5. A safer means to play the stock market
For those who don't want to abandon potential stock-market returns, a rental home owned in an IRA still affords them the ability to invest in stocks.
Rental income funneled into stocks or stock mutual funds today will be buying shares at sharply reduced prices. Directing the proceeds of each monthly rent check into stocks or mutual-fund shares accomplishes the same "dollar-cost averaging" strategy that occurs when employees steer a fixed amount of every paycheck into their 401(k).
Over a 10- to 20-year period, the return that the rental income produces if plowed into stocks is rich icing on the cake, coming on top of the return provided by the rental income itself.
6. The ability to flip real estate with no tax bite
Proceeds from selling an IRA-owned home roll back into the IRA without facing capital-gains taxes. To the contrary, an investor who buys and resells a property within a year with nonretirement funds faces a capital-gains levy.
Many foreclosed homes today are "distressed," vandalized by angry departing owners who may have deferred maintenance due to tough times. They often ransack anything and everything not nailed down and many things that are, from lighting fixtures and kitchen appliances to furnaces and central-air conditioners, toilets and bathroom vanities.
Such properties -- which can be found at most all price points -- are among the cheapest on the market on a per-square-foot basis because the Federal Housing Administration (FHA) and most private mortgage lenders won't loan on homes deemed "uninhabitable." That drastically reduces the potential buyer pool to just cash purchasers -- and reduces the property values as a result.
Even homes needing only cosmetic fixes sell at a discount today because there are countless others available in move-in condition. If an IRA home buyer has enough in the account post-purchase to refit a home's interior -- whether it's laying carpet and laminate flooring or upgrading a kitchen or bathroom -- going the minor-rehab route can be a rewarding approach.
Buyers might choose to fix up the cheapest, distressed property in a solid neighborhood so it qualifies for a mortgage and then resell it. They also could improve upon it over several years with the rental income. Either way, it's a potentially enriching value-add strategy.
The ultimate choice
The bottom line with buying rental properties with an IRA is that the investor retains a level of control over a tangible asset that he or she could never remotely attain in owning shares of a company or a mutual fund.
The question that bears asking: What will yield a better return in the next five to 10 years -- shares of Microsoft, General Electric or Citigroup, or a modest rental home in a decent school district -- selling for 30 cents on the dollar -- whose value may soon be juiced by record-low mortgage rates and unprecedented tax breaks?
Six reasons to tap retirement funds now to buy rental property
By Chris Pummer
Last update: 9:02 p.m. EDT April 1, 2009Comments: 115SAN FRANCISCO (MarketWatch) -- One of today's soundest investments is never touted in financial-services ads. The reason: Wall Street wouldn't make any money off it.
Since 1974, Americans have had the ability to use IRA assets to buy investment property. Yet the means to do that -- called a self-directed IRA -- remains one of the least known and unheralded investment vehicles in the vast financial marketplace.
Video: Finding a bottom for home prices
David Berson, chief economist of PMI Group, talks to MarketWatch's Stacey Delo about how the housing market will rebound before jobs do, and why he expects home prices to bottom for most of the U.S. in early 2010. (April 1)With foreclosed homes selling at dimes on the dollar, residential real estate is a bargain for investors holding cash. And if they can put 30% down, IRA investors will find specialty lenders eager to help them leverage their retirement savings with mortgages on rental properties.
The U.S. housing market may not yet have hit bottom, but the winds appear to be shifting. Existing-home sales are on the mend in hardest-hit markets and foreclosure-avoidance programs are expected to stem the rising inventory of bank repossessions, meaning the window to buy at rock-bottom prices could close before the year is out.
Bear in mind homes purchased with IRA funds can't be used for personal purposes. Doing so risks the IRS declaring the assets withdrawn and demanding immediate payment of income taxes and penalties on the entire account value.
Still, as an investment readily understood by anyone who's been through the home buying and selling process, purchasing a steeply discounted property that can produce annual income of 10% and more is a low-risk strategy for uncertain times -- especially for retirees whose fixed-income investments are paying paltry yields right now. Read more on setting up a managing a self-directed IRA.
Here are six reasons why buying real estate with an IRA is a potentially lucrative and wise move today:
1. A solid alternative to stocks
When economies teeter, investors often run to hard assets such as gold -- humankind's historic "store of value." Yet gold's value is measured not only in ounces but also in the intangible fear that surrounds its price spikes.
When it comes to hard assets, there's perhaps no greater shared sense of value from Mongolia to Montana than for land and a dwelling. And in U.S. history, there's never been such a fire sale on our housing stock.
The Great Depression exacted a heavy toll on home values, but there was nowhere near the inventory flooding the housing market as in the past year. The reason: A collapse in home prices, not stocks, triggered this meltdown.
Of course, some would say foreclosed-home buyers capitalize on others' misfortune. But the sooner we clear the massive, nationwide inventory of unsold homes -- which many economists argue is a key to recovery -- the better off we'll all be.
2. An investment well-suited for long-term investors
Even in the best of times, the stock market looks out six months to a year. Right now, even seasoned pros can't feel the bottom of the muck we're in.
Many retirement savers are uncomfortable with their nest egg tied up largely in stocks. That's just the direction where the system of IRAs and 401(k)s -- which also advances Wall Street's interests -- shepherds them.
Real-estate cycles generally run in decade-or-so swings and this one may not yet have neared its bottom. Housing values could drop another 10% to 20%, but the stock market also could drop further and take a decade to well surpass its previous highs.
Especially for those in or near retirement, buying a property that produces rental income that's likely to increase with inflation is as sound a long-term investment as any TV commentator or investing guru might offer.
3. Purchasing a significantly undervalued asset
For investors willing to hang on to a property for five years or more, residential real estate today presents a tremendous opportunity to do just what investors ideally do -- buy low and sell high.
In some of the hardest-hit regional markets nationwide, homes are selling for as little as 20% of their value in 2006. In the San Francisco Bay Area, for instance, a 3,400-square-foot, five-bedroom, three-bath house built in 2000 recently listed for $257,000 -- after last selling for $795,000 just three years ago.
More importantly, at a cost of just $75 per-square-foot, that's about a third of the new construction cost for a well-outfitted, single-family home in that region. An IRA buyer in that case would get a relatively new house that would require little maintenance -- and a 7,000-square-foot lot essentially thrown in for free
While that may be an extreme example, countless thousands of existing homes nationwide are selling for 50% of today's construction and land costs. Putting aside previous overinflated values, that statistic illustrates how inexpensive home prices have become -- and how much upside they offer in terms of appreciation when the real-estate market finally recovers.
4. A steady income generator
At a time when companies are slashing stock dividends at record rates, retirees can't be assured of that income source. And with government bonds paying a pittance in terms of yield, that fixed-income stream is running mighty shallow.
Income from a rental property bought with a self-directed IRA flows back into the retirement account. The IRA holds title to the property and the income it produces can be directed into all manner of investments typically held within an IRA, be it stocks, bonds, mutual funds or money market accounts.
On a percentage basis, that income can be two to three times higher than today's fixed-income offerings even after paying expenses such as property taxes and insurance. Meanwhile, the accountholder can eventually reap the potential appreciation of the underlying asset -- the property -- that the IRA owns.
For retirement savers needing to fund a child's college costs, a rental property held in an IRA also can be a valuable source of funds. While money taken out of a traditional IRA is subject to income taxes, it doesn't face early-withdrawal penalties if used for higher-education costs. And while financial advisers caution against using retirement funds to pay for college costs, the IRA owner still has upside potential on the property to count on and the income in years ahead.
5. A safer means to play the stock market
For those who don't want to abandon potential stock-market returns, a rental home owned in an IRA still affords them the ability to invest in stocks.
Rental income funneled into stocks or stock mutual funds today will be buying shares at sharply reduced prices. Directing the proceeds of each monthly rent check into stocks or mutual-fund shares accomplishes the same "dollar-cost averaging" strategy that occurs when employees steer a fixed amount of every paycheck into their 401(k).
Over a 10- to 20-year period, the return that the rental income produces if plowed into stocks is rich icing on the cake, coming on top of the return provided by the rental income itself.
6. The ability to flip real estate with no tax bite
Proceeds from selling an IRA-owned home roll back into the IRA without facing capital-gains taxes. To the contrary, an investor who buys and resells a property within a year with nonretirement funds faces a capital-gains levy.
Many foreclosed homes today are "distressed," vandalized by angry departing owners who may have deferred maintenance due to tough times. They often ransack anything and everything not nailed down and many things that are, from lighting fixtures and kitchen appliances to furnaces and central-air conditioners, toilets and bathroom vanities.
Such properties -- which can be found at most all price points -- are among the cheapest on the market on a per-square-foot basis because the Federal Housing Administration (FHA) and most private mortgage lenders won't loan on homes deemed "uninhabitable." That drastically reduces the potential buyer pool to just cash purchasers -- and reduces the property values as a result.
Even homes needing only cosmetic fixes sell at a discount today because there are countless others available in move-in condition. If an IRA home buyer has enough in the account post-purchase to refit a home's interior -- whether it's laying carpet and laminate flooring or upgrading a kitchen or bathroom -- going the minor-rehab route can be a rewarding approach.
Buyers might choose to fix up the cheapest, distressed property in a solid neighborhood so it qualifies for a mortgage and then resell it. They also could improve upon it over several years with the rental income. Either way, it's a potentially enriching value-add strategy.
The ultimate choice
The bottom line with buying rental properties with an IRA is that the investor retains a level of control over a tangible asset that he or she could never remotely attain in owning shares of a company or a mutual fund.
The question that bears asking: What will yield a better return in the next five to 10 years -- shares of Microsoft, General Electric or Citigroup, or a modest rental home in a decent school district -- selling for 30 cents on the dollar -- whose value may soon be juiced by record-low mortgage rates and unprecedented tax breaks?
Wednesday, March 25, 2009
Existing home sales spike 5%
NEW YORK (CNNMoney.com) -- Sales of existing homes unexpectedly rose in February, recovering from a sharp drop in the previous month, according to an industry report released Monday.
The National Association of Realtors said that existing home sales rose last month to a seasonally adjusted annual rate of 4.72 million million units, up 5.1% from a rate of 4.49 million in January. February sales were down nearly 5% from year ago levels.
Economists surveyed by Briefing.com were expecting existing home sales to decline to 4.45 million.
The report said first-time buyers made up half of all purchases in February, and that sales of distressed properties accounted for about 45% of all transactions.
Sales were unexpectedly strong in the West, with activity increasing more than 30% over last year.
"February wasn't too shabby for the existing-home market," said Mike Larson, real estate analyst at Weiss Research. "The catch? The increase in sales activity is coming at the expense of pricing."
The national median existing-home price was $165,400 in February, down 15.5% from last year, when the median price was $195,800.
Prices were depressed by the large number of foreclosed properties on the market, said NAR chief economist Lawrence Yun in a statement.
"Our analysis shows that distressed homes typically are selling for 20% less than the normal market price, and this naturally is drawing down the overall median price."
Meanwhile, the total number of existing homes on the market at the end of February rose 5.2% to 3.80 million units. At the current sales pace, it would take an estimated 9.7 months to sell down that inventory of properties.
The report also said the total number of homes for sale has steadily declined over the past six months from a record level last July.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said there's a "good chance" the collapse in home sales that has been going on since September is "now over." "Though a sustained recovery is still a long way off," he added.
The National Association of Realtors said that existing home sales rose last month to a seasonally adjusted annual rate of 4.72 million million units, up 5.1% from a rate of 4.49 million in January. February sales were down nearly 5% from year ago levels.
Economists surveyed by Briefing.com were expecting existing home sales to decline to 4.45 million.
The report said first-time buyers made up half of all purchases in February, and that sales of distressed properties accounted for about 45% of all transactions.
Sales were unexpectedly strong in the West, with activity increasing more than 30% over last year.
"February wasn't too shabby for the existing-home market," said Mike Larson, real estate analyst at Weiss Research. "The catch? The increase in sales activity is coming at the expense of pricing."
The national median existing-home price was $165,400 in February, down 15.5% from last year, when the median price was $195,800.
Prices were depressed by the large number of foreclosed properties on the market, said NAR chief economist Lawrence Yun in a statement.
"Our analysis shows that distressed homes typically are selling for 20% less than the normal market price, and this naturally is drawing down the overall median price."
Meanwhile, the total number of existing homes on the market at the end of February rose 5.2% to 3.80 million units. At the current sales pace, it would take an estimated 9.7 months to sell down that inventory of properties.
The report also said the total number of homes for sale has steadily declined over the past six months from a record level last July.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said there's a "good chance" the collapse in home sales that has been going on since September is "now over." "Though a sustained recovery is still a long way off," he added.
Tuesday, March 24, 2009
Home prices rise 1.7% in January, federal regulator says
WASHINGTON (MarketWatch) -- U.S. home prices rose 1.7% in January compared with December, the Federal Housing Finance Agency reported Tuesday. It was the first monthly increase in a year. Home prices are down 6.3% in the past year and are down 9.6% from the peak in April 2006, the agency said. The "unexpected rise" was partially due to stronger sales in some markets, FHFA said. Prices rose or were flat in eight of nine regions in January; only the Pacific states registered a decline, down 0.9%. Prices rose 3.9% in the East North Central region, which includes most of the Great Lakes states.
Monday, March 23, 2009
Banks burdened as Washington foreclosure auctions slow
Puget Sound Business Journal (Seattle) - by Jeanne Lang Jones & Kirsten Grind Staff Writers
Media
On the cold, bright morning of Friday, March 13, Glen Hayton stepped outside the King County Administration building in Seattle. Normally, he might auction dozens of houses seized in foreclosure.
But instead the auctioneer spent the first half hour announcing scores of sales that had been canceled or postponed.
Welcome to the new foreclosure market.
Out of 172 homes tracked by the Puget Sound Business Journal since December, only five sold at auction on the appointed day. The homes, a week’s worth of foreclosures in King County, show how drastically the housing market has changed.
Repossessed homes used to be easy to unload. During the housing boom, banks could take homes back and sell them at auction at a reasonable discount. Seasoned buyers with pockets full of six-figure cashiers’ checks bumped elbows with young couples and newbies looking to get a deal on a starter home.
Now, with prices falling, buyers are wary and few homes are selling at auction. Instead, they’re piling up on lenders’ books, costing hundreds of dollars a month in carrying costs and exposing lenders to the risk of further price declines.
Sales also are stalling as the troubled owners try to work out deals with their lenders. They’re finding lenders are much more willing to negotiate.
The growing number of foreclosed homes in limbo shows a new dimension of the historic foreclosure crisis. It is slowing the housing market’s recovery and undermining house values. The median price of a single-family home in King County has fallen about 13 percent in the past year.
The situation could get worse. More mortgages are due to reset in the next two years, potentially at higher rates. Unemployment, now 8.4 percent in Washington, is expected to continue rising, threatening the ability of more homeowners to keep up with their mortgage payments.
Some lenders fear homeowners who are underwater on their mortgages will just walk away from homes that now are worth less than what’s owed on them.
“We have cases where people are tapped out,” said Ron McKenzie, a vice president at Seattle-based Washington Federal Savings. “They’ll call us one day and say, ‘I can’t make any more payments. Where do I leave my keys?’”
The property is perfect: a five-bedroom house on nearly two acres of land, tucked away in the country surrounding Covington.
Charlene Binfet is ecstatic.
It’s a sunny Saturday at the end of February, only three weeks before the family’s five-bedroom house in Auburn is due to be sold at King County’s foreclosure auction.
Like thousands of others around the country, Charlene and Joseph Binfet can no longer make payments on their $303,000 mortgage. They’ve considered their options: a short sale, potential government rescue or working out new loan terms. They’re not sure how it’s going to work out.
Charlene and one of her three teenage sons have driven out on a whim to see a rental property, listed for only $1,500 a month on a real estate website.
At first, Charlene thinks it’s too good to be true.
How can such a spacious property — with a house that’s 900 square feet larger than their current home — cost less than half their monthly mortgage payment?
She and her son get a tour from the caretaker of the land. It includes a 60-year-old farm house, and it needs some work.
But the Binfets are willing to put in the sweat equity, if it means establishing another home. They are trying to separate themselves from their five-bedroom Auburn home, in foreclosure after Joe Binfet’s salary as a lumber salesman took a hit following the housing market downturn.
They’ve lived there for six years and owned it for four. It was their first foray into homeownership.
Charlene and her son are falling in love with the new house already when they spy the real prize: a 1,500-sqaure-foot tool shop, complete with a hydraulic lift.
Perfect for Joe Binfet, who has had a harder time letting go of the family’s Auburn house.
Charlene’s son keeps nudging her. “You have to call Dad, you have to call Dad,” he says.
She catches Joe at work on a house remodel. “I have a bomb to drop on you,” Charlene says. “I just happened to come across this property and you have to come look at it today.”
Days later, the family has put the first month’s rent down.
They start collecting moving boxes. For the first time since December, when they received notice that their house would be sold in foreclosure auction, they have a plan.
Charlene is relieved. The struggle is nearly over.
Foreclosures are on the rise, but most homes aren’t reaching the auction block any more. The number of properties that were scheduled to go to King County’s foreclosure auctions nearly doubled last year from 2007, climbing to 4,492.
But at the same time, the number that actually got to auction and sold fell by 40 percent. Now, just under one in 10 properties actually changes hands at an auction, according to a tally by ForeclosurePoint, a national property tracking service.
About half of the sales are called off or postponed. The remaining third go back to the bank — more than twice as many as the year before.
The trend is accelerating. In the foreclosures the Business Journal tracked from the week of Dec. 8, sales of 66 percent of the homes were postponed, either because the delinquent homeowners were working out new payment plans with their lenders or had filed for bankruptcy.
Sales were canceled for another 21 percent of the houses, likely because the owners had negotiated a loan modification or managed to sell their houses ahead of the auction.
Ten percent went back to the bank.
Just five houses, less than 3 percent of the total, actually sold.
Of those, only two attracted much bidding.
“There are more foreclosures, but there are less people at auction because nobody’s really secure about the market,” said Dean Street, a longtime local foreclosure broker representing real estate investors.
The voice of auction crier Hayton announcing property sales on the steps of the King County Administration Building is barely audible over the wailing of ambulances and roar of buses.
About 20 investors, real estate agents and foreclosure specialists are huddling around, thumbing through thick packets of property listings.
It’s a week after a moratorium on foreclosures under federal lending programs has ended. They are expecting a big day of sales. But as they strain to hear about the properties they’re interested in, auction after auction is called off. The crier rattles off names and addresses in a clipped monotone.
“Binfet,” he calls as he reaches the family’s five-bedroom home in Auburn. The family isn’t there.
“This sale is canceled.”
A few minutes later, he starts to auction the first home. He asks for bidders. No one in the crowd responds. The same thing happens for the first half-dozen properties that Hayton tries to sell. No bidders, no sale. Finally, he comes to one where the starting price is low enough that buyers step up.
Four years ago, lenders would see multiple bidders on a foreclosed property and investors would typically pay 82 cents on the dollar for homes being auctioned, said Christopher Hall of Vestus Foreclosure Group in Kirkland. With home prices climbing each year, they could expect to unload the home later at a profit.
Now there may be only one or two bidders on a property — and they typically pay only 65 cents to 75 cents on the dollar, Hall said. Paying more is just too risky.
Partly it’s because housing prices are sliding. Partly, it’s because it’s harder to get financing. In the past, speculators at an auction would tap their line of credit or turn to hard-money lenders for a bridge loan. At worst, the hard-money loan would cover the purchase price of the house for up to six months with an interest rate of up to 12 percent and a cash down payment of up to 20 percent. Fees range from 3 to 5 percent of the value of the house.
Investors could always refinance into a traditional mortgage later on.
“You could go down there with a little bit of money, flip it and make 30 grand in sixty days,” said Chris Matty, chief marketing officer at Bellevue-based DepotPoint, the owner of the ForeclosurePoint service.
With fewer investors now to snap up the properties, banks are forced to take them back.
That puts them in the position of playing property manager and real estate agent, and often selling the home at a discount anyway. It also stresses banks at a time when most also are struggling with steep losses on commercial real estate loans.
When a bank takes back a house and can’t sell it, the carrying costs can run to about 10 percent of the value of the home, or between $40,000 to $50,000 for a typical Puget Sound area property, according to several foreclosure experts. Those costs include taxes, insurance and fixing up and maintaining the property.
Washington Federal Savings, one of the few local banks with mortgage loans on its books, has found that the cost of carrying a house also depends on the condition of the property and the neighborhood. Some homeowners clean up before they leave, others aren’t so gracious.
“We had a property in Seattle where we had to go do an eviction with the sheriff recently and it probably cost us between $2,000 and $4,000 to haul all the garbage away,” said McKenzie of Washington Federal.
Those costs mount over time, particularly in more distressed areas of the country. “We may be holding that property for six to nine months before we make a sale,” said McKenzie, who manages the bank’s special credit group. The bank’s goal is to offload all Real Estate Owned, or REO, properties within a year.
Washington Federal has seen a sharp pickup in REOs. At the end of 2008, it had $61.9 million in inventory, up from $37 million on Sept. 30, as foreclosures rose among developers and homeowners in the eight states it serves. Home mortgage foreclosures represent less than half the total.
“We’re losing money the minute we stop getting payments from people,” said a Washington Federal spokeswoman.
Mounting losses are making banks more willing to deal.
“Foreclosures really are our last choice,” said Susan Greenwald, a senior vice president and director of family lending operations at HomeStreet Bank. The Seattle-based bank services 42,000 mortgage loans backed by Fannie Mae, Freddie Mac, Federal Housing Administration and Veterans Administration lending programs, along with a small portfolio of its own home loans.
Greenwald estimates the bank is able to work out new payment programs about 90 percent of the time. As a result, the bank only has one foreclosure in Seattle, Greenwald said.
It helps that the housing market here isn’t as bad as other parts of the country. She points out that just over two dozen Fannie Mae loans are in foreclosure in Seattle, compared with more than 900 in Phoenix.
But there are limits to what banks are putting on the table. Even the Obama administration’s new homeowner affordability plan requires loan modifications to cost less than foreclosure, she said.
“At the end of the day, it is still a business,” Greenwald said. “We still have to look out for the financial interests of the lenders in servicing the loans.”
For consumers, this means there’s wiggle room with banks that wasn’t available even six months ago.
“They absolutely will reduce the principal owed,” said Hall of Vestus Foreclosure Group. “They would much rather take the discount now than take it later. In a normal market a bank may not care if it gets the house back — it can sell it for close to the debt owed. Now that is not the case.”
Who eats the loss when a house sells for less than the loan?
In Washington and other Western states, lenders traditionally have chosen to settle foreclosures out of court, rather than have terms dictated by a judge. That means lenders have to absorb the loss. But they save the time and cost of going to court. They can still go after the debtors with a lawsuit, but few bother.
“People who lose their homes do not have much anyway — why waste your time,” said attorney Danial Pharris, a principal at the Seattle law firm of Lasher Holzapfel Sperry & Ebberson PLLC.
In the middle of February 2009, Charlene and Joe file for Chapter 13 bankruptcy.
The filing effectively postpones their foreclosure sale for several months, a tactic used by some families to delay losing their homes. That’s why their March 13 sale was canceled. They are now part of the backlog of unsold homes.
It is the family’s third bankruptcy since 1993. They bought their Auburn house in late 2004, after only recently emerging from their second Chapter 7 bankruptcy filing.
The Binfets see this most recent bankruptcy as the only logical way out of their growing pile of debt.
In their filing in U.S. Bankruptcy Court for the Western District of Washington, the couple lists assets of $329,397 and liabilities of $468,349.
Their assets range from their Chrysler van worth $15,150 and their 401(k) worth $6,797. Their biggest asset is their house, worth $301,000.
Because the Binfets file a Chapter 13 bankruptcy — “the good kind,” says Charlene — they are required to pay off their debts through a payment plan. Previously, when they filed Chapter 7s, their debt was wiped out.
Now the court has ordered them to make monthly payments of $600 for five years to clear their debt. Coupled with their new rent of $1,500, they’ll pay $2,100 a month, or about $1,000 less than their old mortgage payment.
They will not keep their home. They are working with Litton Loan of Texas and HomeEq of California, the servicers of their first and second mortgages, Charlene says, to sell the Auburn house in a short sale. They are done trying to save it.
But they are not done with homeownership. They plan to spend the next several years renting until their youngest child — now a freshman in high school — has graduated.
Then they will buy again, likely the house that Charlene says they’ll retire in eventually. By the time they enter the housing market once more, the family expects their credit will be repaired. And so, hopefully, will be the wreckage of the recession and the housing market’s downturn.
“We have enjoyed owning our own home,” Charlene says recently. “This is just Plan B
Thursday, March 19, 2009
Mortgage meltdown sends newcomers and old hands in search of bargains
. PT, Thurs., March. 19, 2009
BELLEVUE, Wash. - Opportunity is knocking in the chilly winter air of this Seattle suburb, and Rock Harrison intends to answer it.
Built like a linebacker and sporting a mustache-goatee combo, Harrison, 37, is one of three dozen people who have gathered around an aluminum picnic table outside an office building in a strip mall for one of two weekly public foreclosure auctions in Washington’s King County.
Harrison and four competitors have qualified to bid on a 3,300-square-foot McMansion on an acre lot in the south county town of Auburn. The house last sold for $470,450 more than four years ago, the county assesses it at $577,000, and well over $600,000 is owed against it on a pair of loans.
But the foreclosing lender, trying to recoup what it can in an area of plummeting real estate prices, has set the opening bid at just $267,000. Interest is high because most would-be buyers figure the house, currently vacant and in decent shape, can be quickly resold for about $500,000.
A short, bespectacled crier presides over the auction from one end of the picnic table.
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The bidding quickly leaps over $300,000, going up $3,000 and $4,000 at a pop, with offers from all participants. Above $320,000, where Harrison drops out, it becomes a two-man contest, each new bid often just $100 or $200 above the last. After more than 10 minutes and 75 bids, the property finally sells for just under $371,000.
Harrison tosses his bidding card on the table, tugs on his baseball cap with its Skidoo logo and awaits his next prospect.
The Bellevue bidders are participating in what is one of the few growth areas in the battered U.S. real estate industry. While savvy investors have long profited from dealing in distressed properties, the soaring rate of U.S. home foreclosures over the past few years has attracted mainstream interest and crowds of new bidders.
“We’ve seen a sea change over the last three years,” said Rick Sharga, senior vice president of marketing for California-based RealtyTrac, an Internet service aimed at participants in the real estate foreclosure market.
On track for 3 million?
Sharga’s company, one of the most oft-quoted sources of nationwide foreclosure data, predicts that up to 3 million U.S. homes will face foreclosure proceedings this year — three to four times the normal number. Properties in foreclosure, “a niche market for so long,” have become so numerous that “now, conservatively, at least 50 to 60 percent of people who are in the market to buy a house are at least considering a foreclosure purchase,” Sharga said. “Historically, that simply hasn’t been the case.”
Foreclosure, or the threat of it, can lead to the disposal of real estate in three basic ways: a pre-foreclosure sale, often done as a “short sale,” in which the lender is willing to accept less than what is owed on the note; a trustee’s sale at public auction on the proverbial “courthouse steps,” with the property going to the highest bidder, often the lender itself; or post-foreclosure sales of properties that have reverted to the lenders, sometimes called REOs for “real estate owned.” And trustee sales should not be confused with giant auditorium “foreclosure auctions,” in which banks and other property owners dispose of portfolios of land and homes that they have taken back in earlier foreclosure procedures.
There’s no way to know how many foreclosed homes nationwide are actually sold to third parties at trustee sale auctions, said Sharga, who is probably in a better position than anyone else to know. Conventional wisdom puts the figure at about 20 percent, but “everyone’s estimate right now is that there are a much smaller percentage of properties being bought that way and a huge number are being taken back by banks,” which are entitled to set a minimum bid of what they are owed on a foreclosed note.
Spot figures confirm the lower rate. In California last year, just 3.6 percent of 249,940 properties sold at trustee auctions went to third-party buyers, according to the Web site ForeclosureRadar.com. In King County, Wash., where Harrison was bidding last week, just seven of 125 properties scheduled for auction were bought by third parties.
While short sales and REO homes are often listed and advertised for sale in ways identical to non-distressed property, generating commissions for agents who list and sell them, such is not the case with property destined for a trustee-sale auction.
“Realtors have absolutely zero interest in a trustee sale,” Sharga said. And investors who have been attending auctions for years have little interest in new competition. As a result, the process often remains shrouded in mystery. “It’s sort of a secret society without formal membership dues,” Sharga said.
For most first-timers, uneducated in advance, the action at a typical public auction would be impossible to follow. At most, there are no signs, no official programs, no helpful public employees. The auction criers are nothing like the mile-a-minute-talking, spittle-spewing, gavel-banging auctioneers who preside over livestock sales. They generally speak calmly and softly, heard only by the crowd in their immediate vicinity. It can be hard to tell from just a few feet away when an auction has started or finished. The only clear signal is when money changes hands.
But the regulars — who often appear to be dressed more for a ballgame than a high-stakes financial transaction as they shuffle papers and communicate furtively with partners and investors via ubiquitous Bluetooth earpieces — know exactly what’s going on. They are bidding on houses to hold as rental properties, to renovate and resell, or, less often, to move into themselves. Some are bidding for clients who don’t want to attend the auctions in person.
The most important thing to understand is the terms of payment, said Duane Harden, a Manhattan-based investor who has bought a couple of dozen foreclosed properties at auctions in several states since 2001. In New York, winning bidders must immediately fork over 10 percent of the purchase price and pay the balance within 30 to 45 days, he said.
“Do your homework,” he stressed in an interview with msnbc.com. “Know if they are going to deliver a clear title, know your redemption rules” which protect the foreclosed homeowner’s right, if any, to buy the auctioned property back. In Washington state, bidders must pay the full purchase price on the spot with cash or a cashier’s check. In fact, they must “qualify” for a maximum amount for each property they want to bid for by showing the auctioneer their money.
There are plenty of other potential pitfalls when it comes to buying real estate at auction, which Sharga of RealtyTrac called “the highest-risk way” of obtaining distressed property. Bidders must be sure of what they’re getting, or they’ll “wind up buying a lemon,” he said. “There’s no recourse once you buy a property at an auction. If you didn’t realize all the wiring had been ripped out, if you didn’t find out there were two tax liens and three mechanics’ liens, that’s your problem, too.”
Hundreds of specialized firms
To help investors avoid those problems and deal with many other challenges of buying distressed property, both at auction and not, hundreds of specialized companies have sprung up, from local real estate offices to RealtyTrac and its 1.9 million foreclosure listings at the national level.
“There’s traditional real estate, which is 99.9 percent of what’s out there, and then there’s us,” said Harley Dufek, 34, a partner in Real Estate Investment Firm of Redmond, Wash. A key part of the small company’s business is advising clients on buying at auction. These days, the company is using the public auctions as a marketing opportunity, handing out free packets of information on the properties that will be offered as a means of enticing auction newcomers to a weekly seminar where they can sign up as clients.
At the seminar, company founder Matthew Steel explains how his partners and employees pore over lists of homes scheduled for auction, drive through neighborhoods, peer into back yards, try to legally see inside houses wherever they can, and research mortgages, title status, tax liens, building permits and zoning.
He shows off the Web site where the firm’s registered clients can access all the data if they are willing to agree to pay a 3 percent commission on any properties they buy at foreclosure auctions. Becoming a client also gives an investor access to short-term financing and the luxury of having someone with Steel’s firm handle the actual bidding. Since investors often must bid on many properties to actually buy just one, such services can eliminate the need to shuffle funds from one cashier’s check to another and take time away from other tasks to attend the auctions.
Big risks, big rewards
Steel, 32, who has operated his own businesses since he was a high school senior, exudes enthusiasm about foreclosure auctions but cautions that “it takes work.
“There are extra liabilities. That’s why at a foreclosure auction you can get such good deals,” he said.
To Steele, a good deal at a foreclosure auction means buying a property for about 70 percent to 80 percent of its current value.
Christopher Hall, founder of Vestus, which he says buys 40 percent of all properties that sell to third parties at Washington state foreclosure auctions, said the prices paid by his firm at recent auctions range from 67 percent to 71 percent, down from 78 percent to 82 percent a year ago.
RealtyTrac advises its members that “a reasonable purchase amount at auction is at least 20 percent below full market value, and much better deals are often possible,” but Sharga notes that some buyers have unreasonable expectations. A recent survey by his firm found that 30 percent of consumers think they ought to get a 50 percent discount on a home bought at auctionPeople pay too much attention to infomercials,” Sharga said. “There is a myth and a misperception that you’re going to go to these auctions and buy properties for nothing. There are those properties. Go to Cleveland, you can buy a property for a few hundred dollars, but it’s in Cleveland, probably a part of Cleveland you don’t want to live in, and you’re not going to move your family there.”
Still, every serious player in the foreclosure auction game has stories about deals that seem almost too good to be true. For Harden, the Manhattan investor, it was a property mistakenly listed as a single unit. “It was two,” he said. “I got two for the price of one.” Likewise, Harrison, the Bellevue bidder, learned through extra homework that a house on an island in Puget Sound sat on two acres, not one, as listed in foreclosure documents. He was the only bidder who knew that.
And the insiders also have plenty of auction horror stories.
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Recently, Steel said, an auction newcomer bought a home in a neighboring Washington county for $200,000. By all appearances, the home was easily worth twice that amount on the open market. However, “he bought a second-mortgage position,” said Steel, which meant that there was a first mortgage, likely for more than $200,000, still owing on the home. To make matters worse, the buyer was probably the only person at the auction who didn’t realize what he was doing. Some of the regular auction-goers were happy to see new competition so quickly derailed.
“If we see that kind of thing, we point it out,” Steel said, but “if you’re at an auction and think you’re getting something for 50 cents on the dollar and everybody else is standing around watching, something is wrong.”
That’s why Steel and everyone else on the bidding side who spoke with msnbc.com stressed education, information and patience when asked how they would advise newcomers to prepare for auctions.
A ringside seat
When Manhattan investor Duane Harden’s mother, Rose, wanted to try her hand at foreclosure auctions, her son “told me, ‘Mom, just go to the courthouse and learn how to do it.’” So Rose Harden, a resident of Georgia at the time, did just that: “I took me a folding chair, and I learned the rhythm and the recipe of it.” A short time later, she and her son bought three homes at an auction in Savannah, Ga.
Some auction participants said newcomers should be aware of the stigma associated with being a party to proceedings that can ultimately force families from their homes, whether they were owners or renters. In some cases, the new owner must actually evict them. But Dufek points out that his firm works with troubled sellers just as earnestly as with opportunistic buyers, and he said win-win situations can sometimes be created through short sales or leasebacks.
Dufek said it is important for bidders to know their “exit strategies” when buying foreclosed homes. While more and more auction buyers are seeking a one-time good deal on a primary residence for themselves, many regulars are still looking for rental properties or “flips,” homes they can quickly resell.
.
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Steel finds current conditions unattractive for flipping, although his firm still works with clients who want to speculate that way. “I’m absolutely against it,” he said. “This is a great time to buy and hold.”
The Hardens strictly seek rentals, meaning any properties they buy have to “cash flow” immediately. “Equity investing” in real estate these days, or counting on appreciation, “is gambling,” Duane Harden said. “You might as well go to Atlantic City.”
But Harrison, who bowed out of the bidding on the big vacant house in Auburn, Wash., still sees lots of room for cautious speculation, especially for a contractor like himself who can accurately size up what a house needs to make it market-ready and then get the work done quickly.
The value of uncertainty
“I personally like massively trashed places,” he said. “They really scare people. The look horrible, but I’m going to strip all that out anyway. A vacant house that has little fix-up goes for a premium. The houses that are occupied, trashed or with question marks or permits or zoning, those are very intimidating to people.”
After losing the first house, Harrison bid on and picked up another on a good street in the popular Greenlake neighborhood of Seattle. He paid $330,000 for a 1,740-square-foot, three-bedroom home that was built in 2000 and is valued by the county at $509,000.
Far from “massively trashed,” the biggest problem with the house is that “it’s really plain.” He’ll fix that with some stone work outside and paint and carpet on the inside and quickly have it on the market.
Asking price? “Around $425,000,” Harrison said with a smile
BELLEVUE, Wash. - Opportunity is knocking in the chilly winter air of this Seattle suburb, and Rock Harrison intends to answer it.
Built like a linebacker and sporting a mustache-goatee combo, Harrison, 37, is one of three dozen people who have gathered around an aluminum picnic table outside an office building in a strip mall for one of two weekly public foreclosure auctions in Washington’s King County.
Harrison and four competitors have qualified to bid on a 3,300-square-foot McMansion on an acre lot in the south county town of Auburn. The house last sold for $470,450 more than four years ago, the county assesses it at $577,000, and well over $600,000 is owed against it on a pair of loans.
But the foreclosing lender, trying to recoup what it can in an area of plummeting real estate prices, has set the opening bid at just $267,000. Interest is high because most would-be buyers figure the house, currently vacant and in decent shape, can be quickly resold for about $500,000.
A short, bespectacled crier presides over the auction from one end of the picnic table.
--------------------------------------------------------------------------------
The bidding quickly leaps over $300,000, going up $3,000 and $4,000 at a pop, with offers from all participants. Above $320,000, where Harrison drops out, it becomes a two-man contest, each new bid often just $100 or $200 above the last. After more than 10 minutes and 75 bids, the property finally sells for just under $371,000.
Harrison tosses his bidding card on the table, tugs on his baseball cap with its Skidoo logo and awaits his next prospect.
The Bellevue bidders are participating in what is one of the few growth areas in the battered U.S. real estate industry. While savvy investors have long profited from dealing in distressed properties, the soaring rate of U.S. home foreclosures over the past few years has attracted mainstream interest and crowds of new bidders.
“We’ve seen a sea change over the last three years,” said Rick Sharga, senior vice president of marketing for California-based RealtyTrac, an Internet service aimed at participants in the real estate foreclosure market.
On track for 3 million?
Sharga’s company, one of the most oft-quoted sources of nationwide foreclosure data, predicts that up to 3 million U.S. homes will face foreclosure proceedings this year — three to four times the normal number. Properties in foreclosure, “a niche market for so long,” have become so numerous that “now, conservatively, at least 50 to 60 percent of people who are in the market to buy a house are at least considering a foreclosure purchase,” Sharga said. “Historically, that simply hasn’t been the case.”
Foreclosure, or the threat of it, can lead to the disposal of real estate in three basic ways: a pre-foreclosure sale, often done as a “short sale,” in which the lender is willing to accept less than what is owed on the note; a trustee’s sale at public auction on the proverbial “courthouse steps,” with the property going to the highest bidder, often the lender itself; or post-foreclosure sales of properties that have reverted to the lenders, sometimes called REOs for “real estate owned.” And trustee sales should not be confused with giant auditorium “foreclosure auctions,” in which banks and other property owners dispose of portfolios of land and homes that they have taken back in earlier foreclosure procedures.
There’s no way to know how many foreclosed homes nationwide are actually sold to third parties at trustee sale auctions, said Sharga, who is probably in a better position than anyone else to know. Conventional wisdom puts the figure at about 20 percent, but “everyone’s estimate right now is that there are a much smaller percentage of properties being bought that way and a huge number are being taken back by banks,” which are entitled to set a minimum bid of what they are owed on a foreclosed note.
Spot figures confirm the lower rate. In California last year, just 3.6 percent of 249,940 properties sold at trustee auctions went to third-party buyers, according to the Web site ForeclosureRadar.com. In King County, Wash., where Harrison was bidding last week, just seven of 125 properties scheduled for auction were bought by third parties.
While short sales and REO homes are often listed and advertised for sale in ways identical to non-distressed property, generating commissions for agents who list and sell them, such is not the case with property destined for a trustee-sale auction.
“Realtors have absolutely zero interest in a trustee sale,” Sharga said. And investors who have been attending auctions for years have little interest in new competition. As a result, the process often remains shrouded in mystery. “It’s sort of a secret society without formal membership dues,” Sharga said.
For most first-timers, uneducated in advance, the action at a typical public auction would be impossible to follow. At most, there are no signs, no official programs, no helpful public employees. The auction criers are nothing like the mile-a-minute-talking, spittle-spewing, gavel-banging auctioneers who preside over livestock sales. They generally speak calmly and softly, heard only by the crowd in their immediate vicinity. It can be hard to tell from just a few feet away when an auction has started or finished. The only clear signal is when money changes hands.
But the regulars — who often appear to be dressed more for a ballgame than a high-stakes financial transaction as they shuffle papers and communicate furtively with partners and investors via ubiquitous Bluetooth earpieces — know exactly what’s going on. They are bidding on houses to hold as rental properties, to renovate and resell, or, less often, to move into themselves. Some are bidding for clients who don’t want to attend the auctions in person.
The most important thing to understand is the terms of payment, said Duane Harden, a Manhattan-based investor who has bought a couple of dozen foreclosed properties at auctions in several states since 2001. In New York, winning bidders must immediately fork over 10 percent of the purchase price and pay the balance within 30 to 45 days, he said.
“Do your homework,” he stressed in an interview with msnbc.com. “Know if they are going to deliver a clear title, know your redemption rules” which protect the foreclosed homeowner’s right, if any, to buy the auctioned property back. In Washington state, bidders must pay the full purchase price on the spot with cash or a cashier’s check. In fact, they must “qualify” for a maximum amount for each property they want to bid for by showing the auctioneer their money.
There are plenty of other potential pitfalls when it comes to buying real estate at auction, which Sharga of RealtyTrac called “the highest-risk way” of obtaining distressed property. Bidders must be sure of what they’re getting, or they’ll “wind up buying a lemon,” he said. “There’s no recourse once you buy a property at an auction. If you didn’t realize all the wiring had been ripped out, if you didn’t find out there were two tax liens and three mechanics’ liens, that’s your problem, too.”
Hundreds of specialized firms
To help investors avoid those problems and deal with many other challenges of buying distressed property, both at auction and not, hundreds of specialized companies have sprung up, from local real estate offices to RealtyTrac and its 1.9 million foreclosure listings at the national level.
“There’s traditional real estate, which is 99.9 percent of what’s out there, and then there’s us,” said Harley Dufek, 34, a partner in Real Estate Investment Firm of Redmond, Wash. A key part of the small company’s business is advising clients on buying at auction. These days, the company is using the public auctions as a marketing opportunity, handing out free packets of information on the properties that will be offered as a means of enticing auction newcomers to a weekly seminar where they can sign up as clients.
At the seminar, company founder Matthew Steel explains how his partners and employees pore over lists of homes scheduled for auction, drive through neighborhoods, peer into back yards, try to legally see inside houses wherever they can, and research mortgages, title status, tax liens, building permits and zoning.
He shows off the Web site where the firm’s registered clients can access all the data if they are willing to agree to pay a 3 percent commission on any properties they buy at foreclosure auctions. Becoming a client also gives an investor access to short-term financing and the luxury of having someone with Steel’s firm handle the actual bidding. Since investors often must bid on many properties to actually buy just one, such services can eliminate the need to shuffle funds from one cashier’s check to another and take time away from other tasks to attend the auctions.
Big risks, big rewards
Steel, 32, who has operated his own businesses since he was a high school senior, exudes enthusiasm about foreclosure auctions but cautions that “it takes work.
“There are extra liabilities. That’s why at a foreclosure auction you can get such good deals,” he said.
To Steele, a good deal at a foreclosure auction means buying a property for about 70 percent to 80 percent of its current value.
Christopher Hall, founder of Vestus, which he says buys 40 percent of all properties that sell to third parties at Washington state foreclosure auctions, said the prices paid by his firm at recent auctions range from 67 percent to 71 percent, down from 78 percent to 82 percent a year ago.
RealtyTrac advises its members that “a reasonable purchase amount at auction is at least 20 percent below full market value, and much better deals are often possible,” but Sharga notes that some buyers have unreasonable expectations. A recent survey by his firm found that 30 percent of consumers think they ought to get a 50 percent discount on a home bought at auctionPeople pay too much attention to infomercials,” Sharga said. “There is a myth and a misperception that you’re going to go to these auctions and buy properties for nothing. There are those properties. Go to Cleveland, you can buy a property for a few hundred dollars, but it’s in Cleveland, probably a part of Cleveland you don’t want to live in, and you’re not going to move your family there.”
Still, every serious player in the foreclosure auction game has stories about deals that seem almost too good to be true. For Harden, the Manhattan investor, it was a property mistakenly listed as a single unit. “It was two,” he said. “I got two for the price of one.” Likewise, Harrison, the Bellevue bidder, learned through extra homework that a house on an island in Puget Sound sat on two acres, not one, as listed in foreclosure documents. He was the only bidder who knew that.
And the insiders also have plenty of auction horror stories.
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Recently, Steel said, an auction newcomer bought a home in a neighboring Washington county for $200,000. By all appearances, the home was easily worth twice that amount on the open market. However, “he bought a second-mortgage position,” said Steel, which meant that there was a first mortgage, likely for more than $200,000, still owing on the home. To make matters worse, the buyer was probably the only person at the auction who didn’t realize what he was doing. Some of the regular auction-goers were happy to see new competition so quickly derailed.
“If we see that kind of thing, we point it out,” Steel said, but “if you’re at an auction and think you’re getting something for 50 cents on the dollar and everybody else is standing around watching, something is wrong.”
That’s why Steel and everyone else on the bidding side who spoke with msnbc.com stressed education, information and patience when asked how they would advise newcomers to prepare for auctions.
A ringside seat
When Manhattan investor Duane Harden’s mother, Rose, wanted to try her hand at foreclosure auctions, her son “told me, ‘Mom, just go to the courthouse and learn how to do it.’” So Rose Harden, a resident of Georgia at the time, did just that: “I took me a folding chair, and I learned the rhythm and the recipe of it.” A short time later, she and her son bought three homes at an auction in Savannah, Ga.
Some auction participants said newcomers should be aware of the stigma associated with being a party to proceedings that can ultimately force families from their homes, whether they were owners or renters. In some cases, the new owner must actually evict them. But Dufek points out that his firm works with troubled sellers just as earnestly as with opportunistic buyers, and he said win-win situations can sometimes be created through short sales or leasebacks.
Dufek said it is important for bidders to know their “exit strategies” when buying foreclosed homes. While more and more auction buyers are seeking a one-time good deal on a primary residence for themselves, many regulars are still looking for rental properties or “flips,” homes they can quickly resell.
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Steel finds current conditions unattractive for flipping, although his firm still works with clients who want to speculate that way. “I’m absolutely against it,” he said. “This is a great time to buy and hold.”
The Hardens strictly seek rentals, meaning any properties they buy have to “cash flow” immediately. “Equity investing” in real estate these days, or counting on appreciation, “is gambling,” Duane Harden said. “You might as well go to Atlantic City.”
But Harrison, who bowed out of the bidding on the big vacant house in Auburn, Wash., still sees lots of room for cautious speculation, especially for a contractor like himself who can accurately size up what a house needs to make it market-ready and then get the work done quickly.
The value of uncertainty
“I personally like massively trashed places,” he said. “They really scare people. The look horrible, but I’m going to strip all that out anyway. A vacant house that has little fix-up goes for a premium. The houses that are occupied, trashed or with question marks or permits or zoning, those are very intimidating to people.”
After losing the first house, Harrison bid on and picked up another on a good street in the popular Greenlake neighborhood of Seattle. He paid $330,000 for a 1,740-square-foot, three-bedroom home that was built in 2000 and is valued by the county at $509,000.
Far from “massively trashed,” the biggest problem with the house is that “it’s really plain.” He’ll fix that with some stone work outside and paint and carpet on the inside and quickly have it on the market.
Asking price? “Around $425,000,” Harrison said with a smile
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