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.

Art and/or Assault

Below is something that I came across in the garage of a bank owned home.

Bear With Ax

For those who can’t quite make out what the picture shows, it’s a wooden bear statue with an ax embedded in its head. The bear is a small version of the sorts of bears that are made by chainsaw, while the ax appears to be rather standard in size & design and well used.

Is the ax original to the piece? Or was it added after the fact?

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?

More on Short Sale Delays

Foreclosure SignThe Courant had an interesting article this morning about a family in Farmington that recently tried to sell their home as a short sale. They had an offer on their home and waited for 3 months for their bank to respond to the offer and authorize the short sale. The bank did not respond. The buyer eventually got tired of waiting and walked away. The house is currently in the process of being foreclosed upon.

Unfortunately this is very common and I was actually involved in more than one of these situations (representing a buyer) last year. Here’s what transpired with just one of the properties from then until now…

My buyer saw a short sale property last spring in Hartford that they liked and put in a bid about 10% off the asking price. We waited for 2 months to hear back from the bank. Repeated calls were made by me and the listing agent to try to get some response out of the bank. Nothing. Frustrated and needing to buy a place, my buyer walked away and pursued something else in Hartford.

Fast forward ahead several months from the spring of 2008. Still no offers accepted by the bank. The property goes under foreclosure and the bank becomes the owner.

This property is now currently listed for sale with the bank as the owner. The listing price is 10% below what my buyer offered last year. I recently showed this property to a current client. The home has been vacant for over a year. There is now water damage on one of the internal walls from a pipe that leaked/burst because no one was properly maintaining the property.

The bank’s inability to respond to legitimate short sale offers is driving down property values through decreased sale prices, as well as a slew of vacant homes. Buyers become frustrated with the short sale process and refuse to look or bid on these homes because they don’t want to waste their time waiting for the bank. Agents also grow frustrated as they try to help buyers successfully purchase short sale properties, but wait for months with no response. Neighbors are upset as they watch homes sit vacant and fall into disrepair, negatively affecting their own property values.

In my experience short sale response time has not decreased recently in our area. It’s unfortunate because if there are buyers willing to buy earlier in the process, it just drags things out unnecessarily for all those involved. The mortgage lender may not be in the immediate area, but they are affecting our property values. In addition, they are hurting their own balance sheets with these delays by incurring foreclosure and carrying costs before being willing to accept an offer for less than the mortgage amount.

Needless to say, it frustrating for all those involved and unfortunately there doesn’t seem to be an easy solution in the near term.