Part 2, Foreclosure - a Red Hot Deal?

I looked at my own dribble in the last post and found I had more to say about foreclosed homes, REO's, bank owned properties, etc. Earlier, I was telling Lauren B that pre-foreclosed houses at the county foreclosure auction really aren't something a fledgling investor or bargain hunter might want to jump into. I still stand by that advice. There are too many dangers and unknowns for the inexperienced, short-of-pocket buyer. However, what I didn't really talk about were the bank owned homes that have been assigned to a broker for listing in the local listing service. There are indeed more than just a few needles in the haystack; with a little research you can find a smokin' deal AND keep from getting burned or burned out in the process. 

First, find an agent that can walk you through the analysis of a bank owned listing. You'll find the basics don't change. In fact, everything after this sentence will apply to nearly any purchase listed traditionally with a broker, bank owned or not. First and foremost is price, the main indicator of whether or not it's a good deal. Everything else in any analysis after that essentially will lead you back to price, namely (in no particular order, not limited to):

location

condition

type of construction

type of ownership

floor plan / layout

time on the market

size (living space/lot size)

number of rooms/baths

parking

laundry

utilities

appliances 

agent/broker

bank name (owner of property)

amenities (on property, complex or neighborhood)

shopping

schools

transportation

HOA fees

Mello-Roos fees

Seller (bank) concessions

demographics

number of drive by shootings per week

Just kidding, but not really. All buyers are as different as are the criteria in which they focus on to pick a home. Some attributes will matter while others will not. "So what are the specifics of why I should buy an REO?", you might ask. Again, one word - price. You might find some absolute pieces of junk out there and believe me, I've seen a few winners out there. But if a house comps out at 85%-95% of recent sales, (cool guy agent speak for "what is fair market value based on what comparable homes have sold for, recently?")  then you might want to take a closer look. "Marvin, does that exist?" (Funny how writers talk to themselves...). Sure, in some regions of the country you might find better, others not. Remember, bank asset managers aren't dumb, they know what the property is worth because they just went through the foreclosure process. During pre-foreclosure and after foreclosing, the banks will ask a local broker for his opinion. 

In San Diego while showing bank owned homes to a recent client, I've seen the whole gamut - homes priced equivalent to recent comps and sitting, while others are priced lower with multiple offers. I've seen water floating in a downstairs light fixture (from an upstairs bathroom, left running by Lord knows who) and I've seen granite, stainless steel kitchens with exotic tile and wood flooring, spectacular views, swimmin' pools, movie stars...I've seen it all owned by the bank. And guess what, they ALL will sell, given time. The banks really don't want to hold a non-performing asset. It just so happens that some homes, by buyer definition, are nicer than others.

"Marvin, you're not saying anything new...". You are so right. The only thing different in this market is who owns the house. And I'll bring it on home, guess what the banks care about (which is the same thing you should care about as a smart buyer)? PRICE. If it's overpriced, the bank can't unload it, take that money then lend it out again (oversimplified of course). With this thinking, most banks will price their homes a hair (a relative, oft used business term) below fair market value. If it's underpriced guess what you've got? A potential trampling death (or rather a retail, residential home sale in what many think is a bad market) by a frenzied herd of buyers and agents...

If you'd like to test my theoretical banter, let's run a scenario. I'm confident we'll find a few homes for your test. The San Diego inventory is so full of bank owned homes. There are deals out there, you just need to define it for yourself. 

Well, go ahead, give it a test...

Marvin

Foreclosure - A Red Hot Deal?

Marvin's $0.02 on foreclosures - they're all cheap and easy to buy, right?

Here's a recent conversation I had with a client (Lauren B. from Minnesota, interested in La Jolla condos); just my opinion and I'm sure there are many others out there. For those of you out of the area, La Jolla is a little above average in San Diego home pricing. Think of it as San Diego's "Beverly Hills By The Sea".

For now, be informed and judge for yourself:

92037 Foreclosures - Trulia.com

Lauren B (LB): Marvin, Is this site a real site and are these homes really in foreclosure? Or is this a gimmick site?

Marvin (Md): Well, there actually are a lot of answers. I'll be as brief and clear as I can.  As for gimmicks, this is a real site with pros and cons for the end users out there. As in most real estate sites they can be a lead gathering mechanism for the agents that advertise or post their opinions there. I looked at a few of the listings in the link. They want more of your info in order to give you more info. When you see the word "foreclosure" in real estate marketing there are two types: pre-foreclosure and actual foreclosed homes.

Pre-foreclosure. There are a few different ways to find out about homes in this phase. Homes listed proactively in the Multiple Listing Service with a broker (typically a short sale), notice of default lists (via public record), notice of trustee sale lists (public record), private individuals and 3rd party lists compiled by sites like Trulia and Realty Trac (input personal info and/or money in exchange for more property details).

Here is the process of how they become foreclosed, also known as bank owned or REO (real estate owned by the bank).  These properties were at the county courthouse auction but no one bought them at public sale, literally at the courthouse front steps, so ownership went back to the bank. What most people don't know is that the bank assigns a trustee to sell the property at the county courthouse long before they actually foreclose and take the property back. Banks don't want to foreclose - another lecture. A short sale can avert this catastrophe called foreclosure. The low prices you are seeing at the Trulia site are likely to be the default amount in public record notices (NOD = notice of default). Stay with me, this might be confusing. In some isolated cases if the property has gone to auction and the lender sets this super low price as the opening bid it will most likely be purchased in a bidding war. The reason why I say "isolated" is because the banks will know what the properties are worth and will set the opening bid higher than a low default amount, but lower than retail pricing just in case a smart buyer has been watching it. In many cases Trulia is reporting the estimated bid. This isn't always the opening bid because the bank does their homework before they set the opening bid. The bank can foreclose which wipes the 2nd lien holder out of the running so that when they own it and sell it as an REO, they don't have to share any proceeds with the non-existent 2nd (unless the 2nd is foreclosing - again, another complicated lecture). All proceeds go to the first lien holder. To summarize, a default amount is not always the same as the opening bid. You are looking at estimated bids which are not the same as opening bids.

So now it's foreclosed - bank owned, repo, REO. This is where the bank owns it and lists it with a local broker some you will see in the many sites listing foreclosures. It's a normal retail sale at this point. Homes everywhere else besides La Jolla are seen as super cheap (many are trashed). We've seen a few relative deals in 92037 but they're probably not near the water with a view. These properties listed elsewhere in the MLS can be easier to purchase. I wouldn't recommend a courthouse purchase. Personally I don't think foreclosures are a great deal unless you are open to buying the ugliest house in a so-so neighborhood for 70-95 cents (95 is common, 70 - rare) on the dollar at auction when one actually sells to a 3rd party. Expect to pay the leftover unpaid taxes, rehabbing it and either hanging on or flipping it. There are seasoned investors out there who know this process very well. I've been to the downtown foreclosure auction; La Jolla homes (as well as most coastal areas) rarely make it that far because it's La Jolla, the "jewel" of San Diego. But it does happen, most investors are jockeying for position on these if the price is low enough (again, low/cheap is rare in 92037). This might be as clear as mud but I'd be happy to explain this to you tomorrow on the phone.

LB: Thank you for your thoughts.  What you wrote makes a lot of sense and follows the old adage, if it sounds too good to be true, then it is. Obviously, I am still trying to see if I can make something work.  I am closer to the point of understanding that it is not possible, especially in La Jolla, which also makes sense. I especially appreciated your thoughts on the 'real' value of foreclosures.  You have saved me a lot of time with your knowledge.  Again, I am thankful.  

Md: I forgot to mention a major point. All purchases at the courthouse are cash (cashier's checks), no financing accepted, no due diligence period, no "cooling off" period or "I changed my mind"...you get what you get, as is, where it is plus the other baggage (trashed, liens, back taxes, former owners/tenants that don't want to move). I've got access to clean up crews, tax advisors, attorneys and title companies that can help with these issues.  Also, with regard to possibilities in La Jolla, it is possible to find a smokin' deal in La Jolla, just not as numerous and easy to procure. You have to be quick with your research and your cash/financing. I am helping other investors but they only look at the zip codes and short term return on investment - they're not afraid of ugly properties. There are many other subtle nuances I can share with you if you are really interested in this type of purchase, just ask. I hope all this helps.

LB: When you write 'they are not afraid of ugly properties', what do you mean?

Md: Ugly as in total cosmetic fixers, some needing roofs, kitchens, bathrooms and termite work, landscaping front and rear, general updating, etc. These are all over the county, typically east of I-5 and older construction. La Jolla properties are generally in pretty good shape, relatively speaking of course. Although I have seen a few coastal train wrecks. Remember, for purposes of this one real estate agent's illustration, ugly is in the eye and wallet of the beholder.

Like I said, be informed and judge for yourself.

I'll post a follow up, stay tuned. 

Md