The Foreclosure Sale Experience

A small crowd gathered near the trash and recycle bins of a pale yellow home on the corner of Whitney and Fern. Saturday at high noon is traditionally the time of reckoning for properties subject to foreclosure auctions, and the appointed hour grew near.

The group that was forming was an eclectic bunch. Investors walked with purpose as they evaluated the outside of the property, measuring the opportunity. They paced back and forth on the sidewalk, consulting via phone with business partners, contractors and any other experts they trusted to get a solid sense of what the building was worth to them.

2014-08-02 Auction 2Neighbors wandered in and out of the scene, at a more leisurely pace, trying to learn about a difficult situation that they had been monitoring for months. Those who wanted to take a look inside waited at an entrance for a guided tour one at a time. As the auction approached, it appeared that there were about fifteen groups in attendance.

The focus of everyone’s attention was a multi-family home a couple blocks from the UConn Law School. It was surrounded by more multi-family than single-family structures, but the immediate vicinity is a nice mixture of both residential uses. This particular building is currently configured as three apartments, with one on each level. As a corner lot, it has two sides facing a street, and is actually numbered with two separate addresses. There is a detached two car garage and a generous parking area that is a mix of pavement, former pavement and grass.

The outside of the home wasn’t much to look at. Grass and weeds stood more than a foot high in places, and the larger landscaping features were equally out of control. Sporadic exterior maintenance of the home created strange juxtapositions. An almost new green shingle roof adjacent to meaningful deterioration of the paint. A completely rebuilt front porch being taken over by aggressive vine-like plants

Despite the poor presentation, the home had many positives. The interior unit that we were able to tour was spacious and in good condition. We were told that the other main unit had a similar layout. The home had natural woodwork and high ceilings. Buildings from the early 1900s were well built, and the quality craftsmanship was still visible throughout the property.

The auctioneer called the proceedings to order and explained how the auction would be run. Nine bidders had formally registered and were issued bidder identification numbers. The bank holding the mortgage started things off with an opening bid of less than $175,000. It seemed very likely that someone would offer more than that.

2014-08-02 Auction 1

Bidding started slowly. The auctioneer always started by asking for $5,000 increases over the previous high. If nobody offered, he then opened it up to bids in any amount. The high offer rose in an erratic manner; $1,000 at a time for the most part, but with smaller increments mixed in and the occasional $5,000 jump. Four bidders were involved in the action early on, but as the price rose over the $200,000 mark it became a back and forth between two bidders.

While the auction was taking place, all eyes were on the action. Drivers passing by in the street stopped in the driving lane and leaned out their window to hear what was going on. The owner who was having the property taken away from him arrived midway through the auction and sat in his car in the driveway taking in the scene.

The current tenants, reluctant participants in the entire spectacle, watched the proceedings together from one of the porches. Not only did they have to deal with the auction and accompanying events, but they also were not sure whether they would be allowed to stay in their apartments after the sale since they were renting on a month-to-month basis. One had been researching tenant rights and believed that they would either get to stay as tenants for the new owner, or be offered an incentive to leave in compliance with the State’s “Cash for Keys” program. The challenge was the uncertainty of it all, waiting to learn the new owner’s intentions for the property.

When auctioneer finally yelled “Sold!,” the high bid stood at $230,000. The winner seemed pleased with the purchase and joined the auctioneer up front to hand over a bank check for the deposit and finalize the paperwork. The sign posted on the property announcing the auction stated that the balance of the funds must be paid within 30 days of the sale being approved by the bankruptcy court.

Just like that, a new owner was in line to take over the home. Sadly, this building is not the only one in distress in the neighborhood. They are sold in different ways, some more visible than others. Hopefully each will end up in the hands of new owners who will become contributing members of the West End community.

Haas Institute: Hartford Most Underwater in USA?

Yesterday a study originating from the Haas Institute for a Fair and Inclusive Society at the University of California, Berkeley began making the rounds through the media. Here is the full document.

Hartford Skyline From Morgan Street Garage

The report identified Hartford, CT as the city with the “Highest Incidence of Negative Equity” in the entire country. They found that 56% of Hartford homes are underwater, meaning that the owner owes more on their mortgage than the home is worth in the open market. The table of the top 100 cities can be found on page 23 in the report.

Although there are certainly underwater property owners in the City, and related financial distress, the methodology used in the study is very likely flawed – overstating the problem in Hartford.

Page 37 of the Haas Institute report notes that the negative equity analysis used for the rankings comes from Zillow, with the authors referring the reader to this page on Zillow. My understanding of the process is that Zillow used their “Zestimates” and as the current value of a home, and data from TransUnion for mortgage amounts. The Hass Institute study authors then used the resulting negative equity Zillow calculated as the primary variable to sort the country’s cities and metro regions.

Zillow Zestimates have been consistently inaccurate in the City of Hartford. We have written about this before, here and here, with a representative from Zillow even engaging in the discussion. There has been no resolution – Zillow values continue to be well below what buyers are willing to pay for non-distressed homes. Our theory is that Hartford’s split assessment ratio is mucking up the Zestimates. Residential properties in the City are assessed at about 30% of market value instead of the 70% that all the other towns/cities in the state use.

We will send this along to the authors of the study and encourage them to do their own research into the potential data problem. The methodology seems flawed when considering housing in the City of Hartford. The questionable conclusion that they reached, which has been trumpeted by the local and national press, reflects poorly on the city in a way that’s not really fair. Ideally we would like to see the authors edit the report if they reach the same conclusion that we do.

Distress in the 2011 Hartford County Market

Distress in 2011 Hartford County Real Estate Market

Our local MLS added two fields to denote distressed sales back in 2008. As with most new things, the fields were not immediately and uniformly adopted by the thousands of individual agents in the area. Now that they are widely used, we can begin to look at the level of distress in our local markets using the CTMLS database.

At the big picture level, it appears that distressed single-family homes and condominiums sales represented about the same percentage of total deals in 2011 – approximately 1 in 7. Multi-family sales were much more likely to be distressed – nearly 1 in 2.

The percentage of distressed sales was highest across all property types in the more urban towns of Hartford, New Britain, East Hartford and Bristol. Their total percentage of distressed sales was inflated because those are the towns with the most multi-family properties, but in general those towns had the highest levels of single-family and condominium distress too. Bloomfield had the second highest percentage of single-family distress, but a below average percentage of condominium distress and very few multi-family sales during the year.

Although this chart incorporates a lot of information, it only scratches the surface. We’re excited to have all this data available and will continue to look for other interesting questions that it may be able to address.

Buying Single-Family Homes in Bulk

Horse on the East Hartford RiverfrontWarning: What follows is a long, dry, stat-heavy summary without much original commentary or insight. It’s here because putting this together helped me think through the subject better. Proceed at your own risk. Hopefully at least one other person will find it interesting…

I came across an article a while back that I’m still trying to wrap my head around. It’s a wide-ranging piece on the Bloomberg site called Private Equity Has Too Much Money To Spend On Homes. The author/editors include quotes from a huge range of people, and the narrative bounces around to all different points of view. It’s a dizzying collection of factoids and thoughts that covers a market we have very little visibility to here in Greater Hartford.

The overriding theme is that investors have raised a lot of money to buy and operate distressed single-family homes as rentals, but so far they have not been able to acquire many properties at all. Below I’ve reorganized the points to first focus on the supply and then the demand side of the equation.

Supply of new distressed homes has been down in recent years, and is controlled by a limited number of mortgage lenders and government entities.

Fannie Mae is reviewing final bids on the bulk sale of 2,490 properties. A couple paragraphs later the author cites a Guggenheim Securities LLC note that said future REO-to-rental bulk sales by Fannie Mae and Freddie Mac may be delayed to “monitor the properties in the pilot program.”

Fannie Mae’s bulk sales will be based on regional pools – Atlanta, Chicago, three regions of Florida, Las Vegas, Southern California, and Phoenix. Pools will either be sold outright or used for joint ventures with Fannie Mae. 85% of the homes have rental tenants. Buyers will face restrictions on resales to prevent flipping and flooding a market. A March filing showed that Fannie owned 114,157 foreclosed homes and that 8% of them had tenants.

The FHA (Federal Housing Administration) manages about 35,000 repossessed homes, and “plans to sell 5,000 properties with delinquent loans.” (KB: It’s not clear if this would be a bulk sale or individual property sales. Also, how do you sell a property with a delinquent loan? I can understand selling a loan. Or foreclosing and selling the property. But not “properties with delinquent loans.”)

Bank of America is avoiding bulk sales with their REO inventory, preferring to approve short sales, sell properties through real estate agents or auction them off individually.

Foreclosure processing – the taking of homes – has not yet recovered after the robo-signing issue and related settlement.

Short sales are increasing, and RealtyTrac expects them to exceed the number of REO sales in the second quarter of 2012.

CoreLogic reports that there are 1.6 million homes that are either owned by banks and not yet for sale, or are more than 90 days delinquent on their mortgage. They refer to this as shadow inventory.

PIMCO (Pacific Investment Management Co) believes that 6 million homes will be lost through a distressed sale in the next five years, and that will create demand for 4 million new rental units. By their calculations, $6 billion spend on foreclosures, at an average price of $150,000, only equals 40,000 homes. So the opportunity is much larger than $6 billion.

On the other side of the equation, there are many different groups hoping to buy and rent single-family homes in the United States. Here is what they are seeing in this market.

Investors have committed at least $6.4 billion to this investment theme. A managing director in the real estate investment banking group of Jeffries Group Inc. is quoted as saying “less than $2 billion of institutional capital has been spent.”

A company called PropertyAccess currently manages about 10,000 single-family rentals for banks and investors, and is expecting to be able to buy 500 to 1,000 per month by the fourth quarter. The gentleman quoted from that firm thinks the ability to buy these types of properties is more of a challenge than the ability to operate them.

Private Equity firm Colony Capital hopes to buy $1.5 billion worth of single-family houses by April 2013, and believes the operation of the properties is more of a challenge than the acquisition. The gentleman quoted estimated that 7.5 million homes with a market value of $1 trillion will be lost to foreclosure by 2016.

Investors at Carrington Capital Management LLC, who received a $450 million commitment from an Oaktree opportunistic fund, believe the primary challenge is finding homes to buy.

GTIS Partners, another investment firm, hopes to buy $1 billion worth of single-family houses by 2016, but prefers not to buy in bulk. Their chairman is quoted as saying “if you buy by the pound, I think you’ll underperform” since you haven’t done your due diligence on the individual properties and will end up with a lot of junk.

Delavaco Properties Inc, an owner/operator that is planning to go public, focuses on single-family homes that generate a stable rental income. They own 450 homes and also like to be selective in their purchases.

The Phoenix area was specifically mentioned a couple of times, with the point being that investor demand for distressed home is outpacing supply.

Landsmith LP sold 75 homes they had previously bought in the Phoenix area for about 3.4x their purchase price. (KB: No information was provided about how much they spent improving the properties) They are now looking to other markets that are earlier in the foreclosure cycle.

American Residential Properties, Inc., a REIT that is planning to go public in 2013, also sees the Phoenix market as more competitive.

Finally, it was noted that real estate agents hate the idea of foreclosed homes selling in bulk. One reason is that brokers feel the buyer market is deep enough to absorb the coming inventory. Additionally, the Chairman of brokerage firm Realogy was quoted as saying that large-scale foreclosure sales “would put further downward pressure on home prices, take away local investment opportunities, and enrich Wall Street investment funds.” The author concludes by noting that real estate agents do not receive commissions for the bulk sales.

Since this article was published, Fannie Mae has put out this press release about the next step in their REO program.

Now that I’ve sorted through all that information…

There aren’t enough distressed situations in Greater Hartford to warrant bulk sales of repossessed homes. There are a handful of agents who seem to have relationships with the banks and government organizations and they handle all the REO sales. The rest of us – the vast majority of local real estate agents – work directly with owner/sellers who are not in distress. There are short sales periodically, but they are not overwhelming the system either.

A billion dollars is a lot of money. For example it would be almost enough to buy all of the single-family houses in the City of Hartford (about 7,100 of them), which the Assessor valued at $1.12 billion as of October 1, 2012 in the most recent revaluation. If another billion-ish dollars were laying around it could be used to buy all the two-family and three-family properties in the City (another 6,300 total), which were valued at $1.11 billion.

Six million homes (or 7.5 million) lost to distress is an even larger number. So they’re saying that nationally the problem is about 1,000 times worse than if every single-family home in the City of Hartford were lost to foreclosure.

According to this recent housing survey on, there are about 79.7 million detached single-family homes in the country and 125.5 million residential units in total. So somewhere between 5% and 10% of them are going to be lost, with much higher concentrations in some areas.

What does this mean for Connecticut real estate and for Greater Hartford in particular? Are we late to the foreclosure party, or was the housing boom and bust so tame in this area that we’re going to miss the mass foreclosures entirely?

Multi-Family Properties in Hartford County

We spend a lot of time talking about single-family homes and condominiums, but multi-family properties are another important part of the local housing scene.

Where are the the multi-families in Hartford County? As you can see by the number of contracts written on this type of property over the past two years, they are concentrated in just a few towns. Lots in Hartford and New Britain, and a solid number in Bristol, Manchester, and East Hartford. Beyond that you have to really keep a close eye on the market or the opportunities will sneak past.

The overall number of contracts in 2010 was actually up slightly versus 2009, which is a big difference from what we saw in the single-family and condo markets. Even more interesting, there was a slight decrease in activity in the two biggest markets, but nearly all the other towns added just a couple deals and made up the difference.

Inventory is on the high side for the towns with lots of multi-family housing stock. This is partially related to the higher rate of financial distress than with other types of properties. Many investor-owners felt the pain of the housing crisis first (uh oh, prices aren’t going to continue rising) and gave up their multis early in the game – sometimes it was voluntary, other times not. Either way, the distressed sales have increased the available inventory and pushed prices down for everyone, even quality properties.

Our main observation is that even with the bloated inventory, the best multi-families sell quickly. There are financially strong investors out there looking to add to their portfolios, and the cap rates are much more attractive now that prices have fallen. Buyers on the hunt for a top-quality multi need to (1) have their financing in order, (2) have an automatic MLS search set up to get the new listings ASAP, (3) have a flexible enough schedule that they can visit the home the first day or two, and (4) be comfortable making quick evaluations/decisions. The good stuff sells very quickly if it is priced right.