Banks appear to be resorting more often to a maneuver that helps them avoid acquiring property through foreclosure.
Before banks can acquire homes in foreclosure cases, there is a
public auction, often at a county courthouse. These auctions are
typically called trustee sales or sheriff sales. Normally, the lender
or loan servicer (an entity that collects payments and handles
administrative chores including foreclosure) makes a bid well above
what investors are willing to pay for the home, and in those cases the
bank ends up owning the property. It becomes part of the vast REO
(real-estate owned) inventory that banks must sell off.
But sometimes the lender or loan servicer makes a bid low enough to
tempt others to step in with a higher offer and win the auction. That
has been happening more often lately in some parts of the country.
Sean O’Toole, chief executive officer of ForeclosureRadar.com, a research firm in California, estimates that in August 19% of homes
sold in trustee sales in California went to investors rather than to a
foreclosing lender, up from just 4% a year earlier.
In Adams County, Colo., part of the Denver metropolitan area,
investors bought 16% of homes at trustee sales in the three months
ended Aug. 31, up from 5% a year earlier, according to Jon Goodman, a
lawyer in Boulder who invests in foreclosed properties. Mr. Goodman
says more investors are bidding at these auctions because of “a
shortage of regular inventory that works for fix and flips.” In
addition, he says, some lenders want to avoid the hassles of acquiring,
repairing and selling too many houses.
Andrew Katakis, a veteran investor based in Northern California, who
regularly buys homes at trustee sales, confirms that competition from
other investors is getting tougher. Lately it has been common for 15 to
30 investors to show up for such sales, compared with three or four at
typical sales a few years ago. “Prices are getting bid up,” he says.
When he acquires homes at trustee sales, Mr. Katakis aims to resell
them within three months, though that isn’t always possible.
Mr. Katakis believes banks have become less eager to acquire homes
partly because of new legal restrictions on evictions of owners or
tenants. For one thing, banks are reluctant to become landlords. The
banks also must consider the costs of acquiring and then selling the
homes, including commissions to real estate agents or auctioneers and
the costs of renovation, maintenance, insurance and taxes. All of those
might absorb 25% to 30% of the value of the property, Mr. Katakis says.
Most buyers at trustee sales are professional investors who aim to
resell the properties as soon as possible. So the house probably will
be up for resale whether the bank or the investor takes it. But Mr.
Katakis argues that professional investors typically are more nimble
and efficient than banks in reselling property. If so, that could help
us clear through the foreclosure mess a bit faster.
When banks do take possession of homes, selling them can take a long
time in some cases. MDA DataQuick, a research firm in La Jolla, Calif.,
looked at homes that were foreclosed between Oct. 1, 2007, and March
31, 2009, in various metropolitan areas. By late August of this year,
about 8% of those homes still hadn’t been sold in California’s
Sacramento County and 14% were unsold in San Bernardino County. In
Clark County, Nevada, which includes Las Vegas, 13% still hadn’t been
sold, and 15% were unsold in the Phoenix area.
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