BSpend some time with Jerry Barth and it’s easy to get an understanding of the flip side of the housing bust.
Not much more than a year ago, it was the Realtors, mortgage brokers and lending agents who were all so busy they could barely find time for lunch.
These days it’s a guy like Barth, who as the owner of Foreclosure Strategies LLC buys cut-rate foreclosed homes on the steps of county courthouses, fixes them up and tries to sell them, dicey market and all.
“You got to figure out how to be in five places at one time,” said Barth, a real estate broker who figures he puts close to 75 miles on his car each work day. “Norwalk, Pomona and the Agoura courthouses do (auctions) every single day.”
Over the last two years, Barth said he has netted about $2 million on 50 homes he has bought and sold. But now he’s busier than ever, with foreclosure activity up three-fold as the housing market has begun to unravel.
It happens in every cycle. When there is a significant downturn in the residential market, a cottage industry pops up trying to make a buck on the slew of foreclosures bound to hit.
Now, with foreclosures rising each month as more homeowners lose their houses and condos to variable rate, exotic mortgages adjusting upward, the foreclosure sales market is set for a spike in volume.
From large companies that broker the sales of whole portfolios of homes at ballroom auctions to sole proprietors who snatch up houses from brokers, multiple players are getting in on the action.
“There is money today looking for this,” said Lew Feldman, a real estate attorney with Goodwin Proctor LLP. “There is public money looking to be deployed and take properties.”
There are traditionally two ways that people can buy a foreclosed home: in an auction, which is held on courthouse steps after a homeowner’s notice of trustee’s sale period expires; or from a real estate broker, who lists bank-owned homes that have failed to sell at courthouse auctions. Bank-owned properties are also sold off at formal ballroom auctions.
Working an angle
Everywhere in between there are individuals and companies working an angle.
Barth, who has been buying and selling foreclosed properties for more than 20 years, is one of those who actually bids at courthouse auctions. He also operates a Web site where interested parties can sign up for a $750, two-day seminar with Barth, who will teach students the ins and outs of auctions.
Companies like Real Estate Disposition Corp. of Irvine conduct formal auctions on behalf of financial institutions that want to quickly dispose of large portfolios of property. Then there is the Hermosa Beach-based company Catalist Homes Inc., a brokerage that lists foreclosed properties.
In the foreclosed home-sales business, buying a home at a county auction is a high-risk, high-reward game. The auctions take place immediately after homes are foreclosed, and buyers may not be able to learn much of homes’ conditions before placing bids.
It is possible that properties that seem like steals could need costly repair work or have other serious flaws. Barth bases his bidding decisions on data collected from county recorders. But he also employs old-fashioned detective work, checking out foreclosed homes in person before auctions.
And he often travels throughout several of the Southern California counties in one day in order to attend home auctions and pick up the best properties.
“You are going to have to search the (map) to find out what’s for sale,” said Barth, who usually puts in less than $100,000 to spruce up a home after buying it.
In these auctions, the opening bid is set at what the bank is owed. But because financing is currently difficult for many prospective buyers, homes don’t sell for much more than the opening bid. When homes do sell for more than what the financial institution is owed, the property owner receives the difference.
Barth said that given the stagnant housing market, he only buys about five homes a month. In fact, the majority of homes are not sold at the courthouse auctions, which means that financial institutions are forced to look to other methods to recoup on their loans.
Brokering deals
The financial institutions will often fix up the homes and then list them with brokerages or have them packaged in portfolios to be sold at auction. That can mean turning to companies such as Real Estate Disposition, which conducts formal ballroom auctions. These auctions are attended by both consumers and large real estate companies that will buy large packages of homes, repair them and then rent them.
Robert Friedman, chairman of the auction house, said business is up. In the last three months, his company has conducted 10 large real estate auctions on behalf of “major New York financial institutions.” These auctions have grossed over $250 million. What’s more, seven of the auctions have taken place in Southern California, including Los Angeles County.
“Business is good it is better recently,” said Friedman. “We were busy from 1990 to 1997 and when the market took off that company went on almost a 10-year hiatus and nine months ago some of our good banking clients called and said: ‘It’s time for you guys to get going again.'”
Friedman said that the banks are motivated. “They are willing to take a quick loss rather than a slow loss,” he said.
However, others say that banks that own foreclosed homes have not dropped their prices enough. And given the appreciation of home values over the past decade even many foreclosed homes don’t represent much of a bargain. Furthermore, credit tightening has kept some prospective buyers on the sidelines because they are unable to qualify for the necessary loans to buy foreclosed homes.
Still, for an entrepreneur such as Mike Davin, who co-founded and is chief marketing officer of Catalist Homes, there is still plenty of money to be made in the business.
Catalist Homes, an established real estate brokerage, has started a consumer-oriented Web site that lists foreclosed homes being sold by brokerages.
“People are calling asking, ‘How can I buy a great deal?’ And we say that going on down to the courthouse steps and tracking 200 properties is not something the general public should be doing,” Davin said. “What we are trying to do is point people to homes that they can buy safely from the bank.”
