Bank-Owned / REO Sales - Boulder Foreclosures, Part III

When most people think of investing in foreclosure properties, this is what they have in mind. As we discussed in Part I, most homes sold by the public trustee at foreclosure auction are bought by the lender holding the mortgage. Because banks are in the business of lending money, not owning real estate, they want to sell them as fast as possible and unload their "REO" (Real Estate Owned) properties. So, they find a broker who will list them in the MLS.

This is where, in my opinion, the REAL bargains are to be had because the banks are so motivated to sell. Consider a cute 1920s bungalow near 6th and Hawthorne in North Boulder that sold last September for $400,000. It was small, less than 700 square feet, but had a detached studio in the backyard. Plus, the lot was 6,738 square feet -- most likely big enough to build on. The same property sold in 2004 for $579,000, and it's been a long time since homes on build-able lots west of Broadway sold for less than $400,000.

Bank-owned homes are not limited to the lower end of the market here. A unique, architect-designed home on Linden Avenue sold last November for $953,000. It had been appraised at $1.75 million just a few months prior.

However, (you knew that was coming, right?) there are plenty of bank-owned properties that fit the stereotype of the foreclosure -- overgrown yard, holes in the roof, nasty carpets, missing appliances, or "needs TLC," to use a common real estate euphemism. They will be vacant and often "winterized," with the water and heat turned off. The ones that are in good condition and priced well generally sell fast, often with multiple offers at once. So, you need to be ready to make an offer quickly, but also do your due diligence and careful inspections.

Bank-owned or REO transactions are similar to traditional real estate sales, except that a representative from the lender, not a homeowner, will be on the seller's side. They don't take as long to close as short sales, and sometimes the lender/seller will offer the buyer a new loan on the home at an attractive interest rate. There's not much of a Seller's Disclosure in this case because the bank has no knowledge of the condition of the home (they didn't live there, after all). Also, they generally deliver a different type of deed -- a "special," rather than "general," warranty deed, which offers fewer guarantees to the buyer, necessitating a good title insurance policy.

You never know when you might find a diamond in the rough, disguised as a bank-owned property. Peel back the nasty carpets and there might be oak floors underneath. If the home has "good bones" and you have the wherewithal and financing to fix it up, it can be a great investment, or a great home. There are seven bank-owned homes currently on the market in Boulder, ranging in price from $429,000 to $1.6 million, and 20 in Longmont between $145,000 and $629,000. Let me know if you'd like more information or if you'd like me to create a custom search for you, so you can start tracking bank-owned homes. Just call me at 303-449-2959.

At the Auction - Boulder Foreclosures, Part I

Last Wednesday at 10 am, I found myself in the office of the Boulder County Trustee, awaiting the foreclosure auction. It was a packed house with about 30 people crowded into the small space, most of whom, by the looks of their Carhart jackets, were contractors.

The atmosphere was casual and I got the sense a lot of the attendees were regulars. Two men near me chatted about a great deal one of them got on a home recently.

On Monday afternoon I had printed out the pre-sale list from the trustee’s website, which includes the bid by the lender on the property. The bank must make their bid by noon on Monday, and the list is posted that afternoon.

On this particular Wednesday, 13 of the 14 homes up for auction were sold to the lenders. Things got exciting with one home on Sumner Street in Longmont with two parties bidding. The bank’s opening bid was just over $100,000, and the two parties drove the price up to $120,000 in increments of $1-$5,000.

The winning bidder had a deadline of 1:00 pm that day to deliver funds – in cash, cashier’s check or wire transfer -- in order to receive the Certificate of Purchase. However, a CP is not the same thing as a deed. Holders of liens, including second mortgages and home equity loans, have the right to redeem the property by paying the holder of the Certificate of Purchase what they paid, plus interest.

This redemption period can be tricky for investors, and it can drag on for months. The shortest period is 15 days. The itch to get started on the fix and flip is strong, but purchasers will not be paid for any improvements if a lien holder redeems the property. A Boulder County Trustee representative told me there’s a lawsuit underway right now over $3,000 worth of HVAC work done by a Certificate of Purchase holder, before the bank redeemed the property.

So, back to the Sumner Street property. Was it a good deal? Maybe. The 2-bedroom, 1.5-bath home sold in 2003 for $180,172, but then foreclosed and sold to the bank for $153,000 in 2005. The bank sold the home for $164,500 in 2006, before it was foreclosed again. Remember, the winning bid was $120,000.

I think we can assume the winning bidder knew what she was doing. Just the day before her holding company had sold another home in Longmont for $169,900 that they had bought at auction last June for $101,500. They have another home in Greeley under contract with a list price of $94,900 that they bought at auction last July for just under $61,000.

Still, once you factor in improvement costs, broker commissions, and closing costs, the profit margin is, well, marginal. Before jumping in, I would recommend considering the hassles of buying at foreclosure auction:

• Can’t inspect the home before purchase -- what if there are foundation problems?
• Need to have total purchase price in cash that day by 1:00 pm
  
• Have to honor any leases, giving month-to-month renters 60-day notice
• Home might be redeemed by lien holders
• Homeowners may need to be evicted

Next week, I’ll write about other opportunities to invest in “distressed” real estate, including bank-owned or REO properties and short sales.