Local real estate investors battling with new Goliaths

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Local investors are now competing against institutional money at the El Paso County Public Trustee’s foreclosure sales.

Two out-of-state investors have been bidding on foreclosures at the local sales. Colony American Homes, an Arizona-based unit of Colony Capital LLC, headquartered in Santa Monica, Calif., buys homes and rents them out while they appreciate. Granite Ranch Opportunities, a California company that remodels homes and resells them, made a splash when it bought nine properties at the Dec. 6 county foreclosure sale.

“The out-of-state people, when they bid, they usually seem to be successful,” said Public Trustee Thomas Mowle. “They’re rarely the ones to stop bidding. It’s almost surprising when they don’t win.”

The presence of these new institutional investors bidding against local buyers could change the investor market in Colorado Springs, says Rob Reinmuth, broker owner of Acquire Homes, who represents clients wanting to buy investment properties.

The local investor market was tough anyway, Reinmuth said. Attendance at foreclosure sales has swelled from about a dozen two years ago to nearly 100 at most sales since the beginning of 2012. New buyers have gotten into the game and people who have read a few books about flipping houses have been showing up to watch the actions and sometimes to bid.

Tougher opposition

While the amateurs crowding into sales made it harder to find a deal, that was nothing compared to going up against big business, Reinmuth said.

“They will win, no matter what,” he said.

That’s hard on local investors who make their living flipping houses. Reinmuth said he expects the auctions will start shrinking again, leaving fewer and fewer investors bidding on foreclosed properties.

“But there’s always going to be flipping,” he said. “People were flipping houses even during the bubble years when everything was overpriced.”

He said investors will just pay more and take smaller profits, which means they’ll need to work on higher volumes if they’re going to keep their contractors busy and turn livable profits.

As profits shrink, so will the investor pool.

“The better the housing market in general gets, the more the investor market shrinks,” he said.

Big-time investors

Colony American Homes has been buying properties under the name Colfin AI-CO 1 with Denver broker Jason Shepherd representing the company’s interests. He deferred comment on the company’s presence in Colorado Springs to corporate offices in Arizona, which did not respond to requests for comment.

The company is known for buying single-family homes and renting them out. In July, Bloomberg Businessweek reported that the company had bought 1,100 homes in Arizona, California, Nevada and Texas, plus a $330 million portfolio of 2,500 foreclosed properties auctioned off by Fannie Mae.

“Our view is there’s tons to buy and tons to buy attractively,” acting CEO of Colony American Homes Justin Chang told Bloomberg.

At that time, Colony didn’t have a presence in Colorado. Since Jan. 16, the company has bought seven properties at El Paso County foreclosure auctions. It’s also buying in the Denver area.

Granite Ranch Opportunities has bought more than 15 properties since it entered the market in December.

“Colorado appeared in our research as a growing market,” said Alan Dettelbach general counsel of Granite Ranch’s parent company, Wedgewood Enterprise Corporation. The company has been buying, rehabilitating and selling residential real estate in California for 30 years and expanded into Arizona and Nevada more recently.

“We’re pretty cautious in expanding into different markets,” Dettelbach said. “We certainly don’t look at Colorado as a one-off.”

He said Colorado foreclosure laws are favorable to investors, who only have to wait eight business days before they can take possession of a property after they buy it at auction. They could have to wait up to 100 days in other states.

“Our business model doesn’t allow us to buy property and wait four months to start working on it,” Dettelbach said.

He said the company has concentrated its initial efforts in the state in Colorado Springs rather than Denver or elsewhere. He said he didn’t know why.

Higher bids

With more activity at the auctions, it’s not surprising that a greater percentage of foreclosure sales have gone to investors. In a normal market, about 5 percent of sales go to investors, Mowle said, and the rest are sold back to the bank that previously loaned on them.

In October, nearly 10 percent of local foreclosure sales went to investors. In November and December, more than 15 percent went to investors. In January and the first two weeks of February, more than 20 percent sold to investors.

“That’s a lot,” Mowle said.

And that’s not all. As more properties are selling to investors, more investors are bidding and the purchase prices on good properties go high.

“The increments over the banks’ initial bids also seem to be a lot higher,” Mowle said. “And I’m seeing a lot more overbids.”

Overbids occur when an investor pays more than the bank is owed on the loan. The remaining money usually goes to pay junior lienholders. If there are no other liens, the remainder goes to the borrower (who had lost the home to foreclosure), something Mowle said he hadn’t seen much of at all up until the past couple months.

Since the beginning of the year, he said he’d seen at least 12 overbids of $3,000 or more, with most of them being more than $10,000.

“These are big chunks of money,” he said.

One homeowner is due $30,000 and another $40,000.

“Theoretically, they should have been able to sell,” Mowle said.

It’s hard to say why they couldn’t or didn’t.

“There are two possibilities,” said Ken Westfall, broker owner of Westfall & Company Marketing and Management Group. “Either the owners didn’t want to sell and held on to the bitter end, or the appetite of the investor who bid on it wasn’t in line with the actual market value of the property.”

A dwindling inventory of foreclosed properties is making it harder and harder for investors to find a deal at auction. Westfall predicts sale prices will continue to climb as bids go higher.