Four years after the collapse of the U.S. housing bubble, flipping homes is back in fashion.
Jeff Coga, a Los Angeles, California real-estate investor, learned late in the morning of Oct. 28 that a never-occupied custom house on the northern fringes of Los Angeles County a beautiful property was going up for auction around noon the same day. The six-bedroom home, built on a 15,000 square foot lot. The kitchen with two dishwashers, four ovens, “antibacterial” copper sinks, and a master “spa” bathroom with space for a flat-screen TV visible from the tub. Jeff, knew the area and knew the exact house that was being auctioned off that day.
Jeff, decided to go to that particular L.A. County auction to see if we might be able to purchase this luxury home.
The minimum bid, as set by a unit of Citigroup Inc., which had a $1.7 million mortgage on the home, was $389,900. After several minutes of bidding among investors and their representatives, some wearing shorts and flip-flops, Mr. Coga won the home for $549,900. A week later, he agreed to sell it for $698,000 to a woman who moved in this month.
During the housing boom, millions of Americans tried to make money by buying and then quickly reselling new houses and condominiums. That kind of flipping stopped several years ago as home sales stalled amid a surge in foreclosures and curtailed lending.
Now, a different breed of flipper is proliferating: one who seeks bargains at foreclosure auctions. Unlike the boom-time flippers, the latest generation needs cold cash, lots of local-market knowledge and strong nerves.
Investors compete mostly with other full-time professionals who monitor foreclosure auctions at county courthouses across the country. The bidders often haven’t had a chance to inspect the property or determine whether it’s occupied by tenants, who may be hard to evict.
Sometimes ‘you have half an hour to make a half-million-dollar decision,” says Jesus Yinh, another real estate investor at “That’s something most people can’t or aren’t willing to do.”
In the states where home prices have fallen the most, many local real-estate markets are dominated by foreclosed property, dragging down the value of neighboring homes. Barclays Capital estimates that banks and mortgage investors have 639,000 foreclosed homes for sale across the U.S., largely concentrated in Florida, California, Arizona and Nevada. That’s equivalent to more than 10% of expected U.S. home sales this year.
“Flippers swoop in at public auctions of foreclosed homes, known as trustee (California) or sheriff sales. In many states, the lender sets the minimum bid, and takes possession of the property only if no one bids more. In the past, the minimum generally was about equal to the mortgage balance due”. Susan Park, real estate investor in Southern California said” in today’s market, in which many home values have dropped far below the loan balance, lenders wouldn’t attract investors if they set the minimum at that level.
So lenders, or the loan-servicing firms that represent banks and investors, are increasingly likely to set the minimum much lower. Their goal is to tempt others to buy the house and spare banks the headaches and costs that come with taking possession”.
November about 21% of homes sold in trustee sales in California went to investors rather than to a foreclosing lender, up from 6% a year earlier. The trend is similar in some other areas with high foreclosure rates, including Phoenix and Miami.
The real advantage of such an outcome for the bank is that it gets money for the property right immediately, even if it isn’t enough to cover the loan balance due. The bank doesn’t need to make repairs to the home, cover the taxes and insurance, or pay real-estate-agent commissions. Is this a smart business decision for the banks?
The risk for banks is that if they set the minimum bid too low, the home might end up selling for much less than they could reap if they took ownership of it and sold it themselves; however with some 7.5 million U.S. households behind on their mortgage payments or in foreclosure, many lenders are overwhelmed, and over worked. They’re negotiating with distressed borrowers and figuring out how to sell the growing supply of foreclosed homes, and don’t see an end to this challenge for many years to come.
To help them set the minimum bid, banks often consult with local real-estate agents and use software that estimates housing values. American Home Mortgage Servicing Inc., which collects payments and handles foreclosures on behalf of banks and loan investors, uses a formula designed to “achieve a fair value for the property and induce third-party bidders,” says Christine Sullivan, a spokeswoman for the Coppell, Texas-based firm.
American Home starts with a broker’s estimate and subtracts the expected costs of taking ownership of the house and selling it. The minimum bid is above the net proceeds American Homes believes it could get by acquiring and selling the property itself, she says.
Outside the Los Angeles County court building in Norwalk, California trustees, companies that are hired to handle foreclosure auctions, offer as many as 800 – 1000 houses every weekday. A typical auction lasts only a few minutes. On a recent afternoon, a few dozen bidders and onlookers were clustered around a trustee employee seated on a lawn chair conducting auctions. He kept track of the bids on a laptop computer perched on one knee.
Many of the bidders are regulars at the sale, bidding for themselves or on behalf of investor clients. “We’re all kind of like a little dysfunctional family,” said Jeff.
Buying at these auctions is perilous. There are no public viewings, so bidders often can’t know how much damage may have been done inside a house by occupants facing foreclosure. We’ve seen people pour concrete down the toilets. Unless they’ve done their homework, bidders also don’t always know whether they’re buying a home subject to a lien from another lender, which can happen in cases where the borrower took out more than one home loan.
If you have the time, and our dilligent, you can really pick up some amazing deals at the court house steps, and turn around and sell those for some great profits.
We help struggling investors find their niche in today’s market place. Please feel free to email us at info@getsswb.com or call us directly at 310-776-5032.
Written By:
Bernie Germani
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