Foreclosures: Who steps in?

Filed under: Daily News,Print,Real Estate | Tags:

There are so many vacant houses on the market in El Paso County because of foreclosures that a full recovery is impossible until the market is rid of that inventory, local experts say.

“The number of foreclosed homes … represents a big obstacle to new home sales since homebuilders are in direct competition with the houses they built just two or three years ago,” said Kyle Campbell, President of the Housing and Building Association of Colorado Springs.

“Potential new homebuyers are also competing against the foreclosed homes, as they need to sell their homes before buying a new one,” Campbell said.

Fortunately for Colorado Springs, a cottage industry of realtors, builders and investors has sprouted up to work through the excess. But the process is slow and complex, and it could be years before the residential market here returns to a desirable balance of supply and demand.

In Colorado the final step of the foreclosure process is a property’s sale at public auction by the county trustee. In the bulk of these auctions the property is assigned to the bank, which is then responsible for the value of what is still owed on a loan. Following the auction, the home is called a Real Estate Owned property, or REO.

REO sales make up a high proportion of the total volume of home sales in the market and this trend is expected to continue. While it’s difficult to pin down an exact percentage, industry professionals estimate that REO sales make up 25 to 35 percent of total residential market activity, with sales of other distressed properties, such as short sales, contributing another 25 to 30 percent.

That means more than half of total home sales are being initiated by the foreclosure process.

“A lot of established economists are coming out with reports saying the market bottomed in 2009, but I’m not in agreement with that analysis,” said Ken Westfall, whose Springs-based Westfall & Co. is the largest REO realty presence in the region. “The housing market might be declining at a slower rate than it was, but the volume of REOs on the market has been steady and will probably increase this year.”

Because banks are not in the business of managing or marketing real estate, they’re turning to niche realtors like Westfall to help get the properties off their books. Further complicating the matter for banks is that REOs are special cases that typically require more work before a sale than just running a vacuum and sticking a sign in the front yard.

“Banks all over the country contact us to work on their foreclosed properties,” Westfall said. “We take over on their behalf to check the occupancy — is the person living there a tenant or the prior owner? We’ll work with the person who needs to get out of there. A lot of times the bank will offer financial assistance to speed up the move-out date.”

Once the property is vacant, Westfall assesses and establishes a value for it. The bank uses this assessment and valuation to determine if the property needs to be renovated or repaired before a sale, and to get some idea of what to expect at the foreclosure auction.

The repairs on an REO can be substantial, and this can mean an uptick in work for local contractors. With no incentive to care for the property, homeowners will sometimes stop cleaning, winterizing and mowing, or neglect maintenance. This can lead to health and safety problems, and in order to qualify for government-backed financing a home has to pass a rigorous inspection.

“We end up needing to do repairs on about half of the REOs,” Westfall said. “Sometimes the prior owner goes in and strips the place of the stove, dishwasher, microwave, lighting fixtures, cabinets and even the plumbing fixtures. The goal is to get it into shape to sell to an owner-occupant, which can help to stabilize a neighborhood.”

The run-down quality of many REOs leads to the misconception that they can be snapped up from the banks at a considerable discount. But the goal of the bank is to return the property at market value, as there are negative impacts for both buyers and sellers when a market is flooded with undervalued inventory.

Still, there are deals to be had for a property that is in less than ideal condition. That’s where speculators in Colorado Springs are stepping in.

Banks end up with most of the properties following a foreclosure auction. In El Paso County so far this year, banks have taken control of 413 of the 486 properties sold at auction. But the auction is open to the public, and some cash-rich investors have scooped up the balance of the properties with the hope of selling them at a profit.

“The bank typically bids fair market value up to the amount of what is owed,” said El Paso County Trustee Tom Mowle. “But the bank usually has only the vaguest idea of what a property is actually worth, and that’s where an investor with a lot of liquid cash can step in.”

Speculators do their research ahead of the auction. Sometimes the attraction is a property with a lot of equity already sunk into it. At other times, they might be able to buy one near fair market value where small improvements might lead to bigger gains down the road.

John Meyer of Single Track Properties is one of the few Springs-based companies bidding at foreclosure auctions.

“My wife is a realtor so she researches and tracks notices of election and demand,” he said. “We get that down to a shortlist and then look at potential profit margins on comparable properties based on square footage, yard size and other variables. If the comp looks good, we buy it at the auction and then take care of whatever renovations it needs. Our first priority is to make it a good house and the second is to sell it, that’s our business plan.”

This is not an industry for everyone. Investors must have cash for purchases made at the public auction, and may have to commit to pricey renovations, among other headaches.

“This is not something for the general public to get involved in,” Meyer said. “You need experience working with contractors, and between title work, liens, judgments, redeeming rights and other structural issues, the risks really start to add up.”

According to public trustee documents, Single Track Properties purchased a home at 512 W. San Miguel Street in Colorado Springs at the March 2 auction. The property was bought for $87,406.25 and has a principal balance of $154,549.46. Meyer would not speculate as to how much his improvements would cost or how much he hoped to sell the property for.

The high volume of REO-related work in the Springs is expected to continue. According to the Colorado Division of Housing, foreclosure filings are down, but this is likely due to the increased processing time taken by mortgage servicers in the wake of the “robo-signing” scandal.

Foreclosure inventory in the state actually increased in the fourth quarter of 2010 after three consecutive quarters of declines, and there’s a slew of shadow inventory set to hit the market.

“The banks are sitting on a backlog of REO inventory,” said Springs-based Re/Max Properties realtor Darryl Deighton. “Foreclosures might be trending down, but so many of these haven’t even been introduced to the market yet. It’s really going to weigh on housing prices.”