A frenzy over foreclosures

It's a buyers' market, but investors considering foreclosed properties should know the risks

September 12, 2010 

All real estate is local — even buyers searching for bargains in the aftermath of the housing collapse. In California, professional investors are flocking to the business of buying foreclosed homes at distressed prices. Some investor groups are doing the same here in the Lowcountry, local Realtors say.

The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions at local courthouses or through real estate agents. Some refurbish the properties and try to sell them for quick profits; other groups rent them out, hoping for more long term appreciation in home values.

Not long ago, the typical home flipper was an amateur tapping a home equity line or savings for an investment property. But professionals have rushed in, partly because of sparse investment opportunities elsewhere.

"In crisis there's opportunity," said Rick Hudson, president of investment firm Prosperity Group Real Estate in Irvine, Calif.

Chip Larkby of Brokers' Real Estate in Beaufort and Jasper counties said that because many wealthy people have seen their portfolios take a beating in the stock and bond markets, their expectations for returns on investments have become more realistic, even in real estate. He has represented several investment groups in their search for Lowcountry properties, typically dealing with professional money managers employed by the groups. Some of the investment groups are locally based; others aren't.

"Some have done their homework and are very familiar with our market; others just think they are," Larkby said, adding that now many investment groups are interested in purchasing unfinished new construction — both individual houses and defunct developments.

Nationwide, the influx of new players is pushing up auction prices and squeezing profits. The average discount at auctions — the difference between a home's sale price and its actual value — is 21.6 percent, down from 28 percent in January 2009, according to ForeclosureRadar.com.

By law, all foreclosed properties in Beaufort and Jasper counties must be auctioned off at the courthouse. Both Larkby and Randy Smith of Lancaster Real Estate Sales said an attorney representing the bank holding the first mortgage on the property is usually the winning bidder at courthouse auctions. Only in certain cases — usually when the mortgage is well below the property's market value and the bank doesn't want the property — does a buyer not affiliated with the bank triumph at auction.

Buying real estate at auction is risky business. Prospective buyers must do their homework on many potential properties and might not be able to get inside the homes, which means there is no way to gauge repair costs. People who have lost their homes through foreclosure sometimes vent their anger by smashing walls, knocking over water heaters or ripping out toilets.

"We've literally had people take $20,000 of cabinetry out and feel perfectly justified doing it," said Bruce Norris of Norris Group, a real estate investment firm in Riverside, Calif.

And despite being foreclosed on, the original owners often still live in the houses that are sold at courthouse auctions. That forces buyers to pay them to leave, a dynamic known as cash-for-keys.

Sometimes, all goes well: Larkby said he recently helped an investment group buy at auction a waterfront property in Beaufort with a house and dock on several acres. The investors paid about $300,000 for the property, which is worth about $500,000 now, Larkby said.

Realtors in the Lowcountry agree that most buyers who purchase foreclosures in Beaufort and Jasper counties do so after auction.

Typically, prospective buyers work with a local Realtor who specializes in foreclosure, while the listing agents in charge of selling the foreclosed properties are chosen by the banks. Lancaster, the broker-in-charge at Lancaster Real Estate Sales on Hilton Head Island, said that while many buyers have a pre-conceived notion that all foreclosures are bargains, some traditional resales can be better deals.

Many of the foreclosed homes and villas on the market today in Beaufort County were purchased with adjustable rate mortgages in 2004 and 2005—the very top of the market, Smith said. Banks that foreclosed on these properties and now own them want to sell them off quickly — so price them a bit below market value, he said.

In contrast, in a traditional sale, individual owners may be highly motivated to sell and thus accept offers well below market value, Smith said.

Some owners desperately need to sell due to job loss, divorce, death, needing to relocate to take a new job or other circumstances, Smith said, adding that if the owner bought the property before the real estate boom that started about seven years ago, the outstanding mortgage balance may be quite low. "They can make an outright sale for less than a foreclosure," Smith said. The amount owed on a property often dictates how low individual sellers are willing to go on the price, Realtors agree.

In addition, buyers are more apt to find exactly what they want in a resale, because a vast inventory exists. In contrast, foreclosures on Hilton Head Island are few and far between. Having more options to tour is particularly important to buyers who plan to use the house or villa as a second home for their family, Smith said.

The take away on the foreclosure frenzy: courthouse auctions aren't for amateurs, and don't set your heart on a foreclosure, because great deals also can be found in resales.

Walter Hamilton and Alejandro Lazo of the Los Angeles Times contributed to this report.

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