The Vegas Bubble News

http://blogs.wsj.com/developments/2009/09/25/shadow-market-part-ii-banks-avoid-acquiring-foreclosed-homes/

By James R. Hagerty

(This is the second installment of a series of posts on the shadow market.)

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.