Investors face stiff competition at foreclosure auctions

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

Tight foreclosure market could signal return of traditional residential sales

It’s Wednesday morning and the El Paso County Public trustee’s office is jam-packed with would-be investors looking for a deal at the weekly foreclosure auction.

Nine months ago, a smaller room in the trustee’s office building at 105 E. Vermijo Rd. rarely filled to capacity. But as the auctions grew more popular, the sales event had to be moved because people were spilling out into the hallway and causing distractions, said Public Trustee Tom Mowle.

In the fall, Mowle started having the auctions in his offices and set up rows of chairs for about 20 people. Even then, the auctions weren’t as full as they have been in recent weeks. At least 50 people fill the seats, line the walls and pour into the hall.

“I would have guessed it was more like 100 people,” said Wayne Pinegar, a broker who manages the North Springs group of Next Era Realty.

He’s been investing in, and helping other investors buy, foreclosed properties at the auction since 2007. And things have changed a lot since then, he said.

More people are coming to auctions, more people are bidding on properties and they’re bidding higher prices.

Most say the influx of activity at the auctions is due to shrinking inventory on the public listings. And some investors believe this is the beginning of the end for a lucrative investment market and that the shift might foreshadow the return of the traditional housing market.

The numbers

In 2006 and 2007, there were a lot of foreclosures in the first waves of bad mortgages.

“There were 90 foreclosures and just 10 or 11 guys in there bidding on them,” Pinegar said.

That’s compared to the 50 or more people in the room for 30 to 40 foreclosures on average that go to the sale now.

Historically, about 7 to 10 percent of foreclosures at the El Paso County Public Trustee’s auction sell to investors and the rest sell back to the banks, and then go on the open market, where investors and regular buyers can find them and where buyers can use borrowed money.

Investors who purchase property at the foreclosure sales have to bring cash — usually in the form of official checks or money orders — to the sale and pay on the spot.

At the March 7 foreclosure auction, seven of 28 properties sold to investors. That’s 25 percent.

“The percentages have definitely gone up lately,” Mowle said.

But he cautioned that it could be a coincidence, that perhaps all the investors were coming back to replenish their inventory at the same time.

CSBJ records indicate that between 3 and 12 percent of properties sold to investors at the sales between early July and late December, with about 6 percent on average going to investors. Investors bought 12 percent of the properties on March 14.

Since the new year started, more than 10 percent of the foreclosed properties have sold to investors at almost every auction, with a couple exceptions. There were also a few auctions where more than 20 percent of properties sold to investors.

The March 7 sale was the first where a full quarter of the properties went to investors. On top of more properties selling to investors, investors are paying more for them.

Why they’re bidding

More people bidding drive the bids higher, Pinegar said.

The influx of new bidders is a big change, one that’s got long-time investors like Pinegar and Broker Rob Reinmuth, who owns Acquire Properties, warming the bench at sales these days.

Reinmuth has been going to the auction since 2006.

He said there was one key difference in the foreclosures that came through early on.

“Banks weren’t declaring deficiencies,” he said.

As real estate values have depreciated, banks have started asking for less at auction than they’re owed and declaring deficiencies on the loans so they can sue the borrower for the difference at a later date, explained Ken Westfall, a Realtor who specializes in foreclosures.

“The banks are leaving money on the table,” he said.

And they’re doing it on purpose because it’s good in most markets to give investors a chance. If they aren’t buying a property to turn it into a rental, they fix it up and resell, raising comparable sales prices in neighborhoods and restoring value, Westfall said.

“We do have a lot of cash buyers in our market,” Westfall said. “We have a lot of retired wealthy people looking to take advantage of this downturn. They’re looking at a pretty big upswing when the market comes back.”

And all those cash investors are looking for a place to put their money, he said. But there aren’t that many properties available on the multiple listing service these days. There are about 25 percent fewer listings now than there were at this time last year, and the same number of sales.

“Every property I analyze on the MLS and bid on will have multiple offers,” Pinegar said. “That’s the way it is on good deals.”

He said banks are holding off on accepting offers and letting people bid against each other to drive the prices higher.

The increased competition makes the mainstream market a challenge for investors, so those with cash are moving over to the auction in hopes it will be less cutthroat, Reinmuth said.

“I think these people are all just trying to make a living,” he said.

He’s seen people come over to real estate investing after losing their jobs and leaving corporate America. He said he thinks the surge of extra bodies in the auctions are people with a little bit of retirement cash trying to find a way to make enough to live on.

While the 50-plus people in the auction weren’t all bidding, Reinmuth said he expects a lot of them will eventually. They’re coming now to check it out and get a feel for how it works.

What it might mean

Pete Vargas and Matt Gowler, who together own VG Holdings, started out by watching sales. They got into investing in 2010 and have bought and sold quite a few properties since.

“It wasn’t about timing in the market for us,” Vargas said. “We just knew we wanted to invest in property and that was when we were ready to do it.”

Though they’re new, they’ve become regulars.

They were prepared to buy four properties at the March 7 sale and got one of them. They both have other businesses. Vargas is in marketing and Gowler restores basements. They are able to outfit the properties they buy with new floors, paint and counters, and get them on the market within four to six weeks of the auction, Vargas said.

“The houses look amazing when they’re done,” he said.

The margins are getting tighter, he said. And it seems like some investors are willing to pay more these days.

That could be because they’re desperate and need something badly enough to overpay for it, said Dan Egan, a Realtor at Keller Williams who advises investors like VG Holdings. Or it could be because people see the residential market coming back, as he does, and think there might be room to ask for more on the open market.

Pinegar said that’s how he interprets it and he’ll keep analyzing the foreclosure listings each week, but he doesn’t expect to buy anything or advise any of his clients to buy anything as long as the sales remain this competitive.

“When inventory is down 25 percent with the same number of sales, that’s becoming a seller’s market,” Pinegar said. “I’m going to focus more on the traditional residential market on the North End.”

Westfall disagrees.

“I tend to think it’s just cyclical,” he said.